NEORX CORP - 10-K Annual Report

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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-16614

NEORX CORPORATION
(Exact name of Registrant as specified in its charter)

Washington 91-1261311
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

410 West Harrison Street, Seattle, Washington 98119-4007
(Address of principal executive offices)

Registrant's telephone number, including area code: (206) 281-7001

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 Par Value
9 3/4 % Convertible Subordinated Debentures, due 2014
$2.4375 Convertible Exchangeable Preferred Stock, Series 1
Series 2 Convertible Preferred Stock
Series 3 Convertible Preferred Stock

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 3, 1998 was approximately $105.0 million.

As of March 3, 1998, approximately 20.7 million shares of the Registrant's
Common Stock, $.02 par value per share, were outstanding.

Documents Incorporated by Reference

(1) Portions of the Registrant's 1998 Notice of Annual Meeting and Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on May
13, 1998 are incorporated by reference in Part III of this Form 10-K.
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PART I

ITEM 1. BUSINESS

This document includes certain forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
All statements in this document that are not historical facts are considered
forward-looking statements. Sentences or phrases that use words such as
"believes", "anticipates", "plans", "may", "hopes", "can", "will", "expects",
"is designed to", "with the intent", and other similar terms are often used to
identify such statements, but their absence does not mean a statement is not
forward-looking. Such statements reflect management's current opinion and are
designed to help readers understand management's thinking. By their very nature,
however, such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See "Risk
Factors." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

PRODUCTS

NeoRx Corporation ("NeoRx" or the "Company") develops innovative therapeutic
biopharmaceuticals primarily for the treatment of cancer and cardiovascular
disease. As part of its cancer treatment program, NeoRx is developing a
proprietary PRETARGET(TM) platform for the delivery of therapeutic products
directly to tumor sites. The Company's first PRETARGET(TM) cancer product,
AVICIDIN(R), is entering Phase II clinical trials for the treatment of solid
tumors such as prostate and colorectal cancer. The Company expects to begin
Phase I trials this year with a second PRETARGET(TM) cancer product for the
treatment of lymphoma. The Company's product portfolio also includes the
VERLUMA(R) small cell lung cancer imaging kit that was cleared for marketing by
the United States Food and Drug Administration (the "FDA") in August 1996.

The Company's first cardiovascular product, BIOSTENT(R), is scheduled to begin
Phase II patient accrual in 1998. BIOSTENT(R) is a pharmaceutical delivered
through a catheter that is designed to reduce restenosis following balloon
angioplasty. NeoRx is also investigating the role of Transforming Growth Factor
Beta (TGF(beta)) for the treatment of certain inflammatory and cardiovascular
diseases. The Company has conducted a Phase I study to investigate the safety
and impact on TGF(beta) levels of a certain drug. The results of this study are
being analyzed.

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VERLUMA(R) is a registered trademark of DuPont Merck Pharmaceutical Company.

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CANCER AND ITS TREATMENT

Cancer is second only to cardiovascular disease as a cause of death in the
United States. The American Cancer Society estimates that approximately
1,229,000 new cases of cancer will be diagnosed in the United States in 1998, of
which 50% are expected to be tumors of the lung, colon, breast and prostate.
Cancer is a large group of diseases characterized by uncontrolled cell
proliferation. Cancer cells have the tendency to dislodge from the sites where
the tumors originate and metastasize, spreading to other parts of the body, and
invading and destroying the organs in which they are growing.

Current regimens for the treatment of cancer include surgery, external-beam
radiation, chemotherapy, hormone therapy for some tumors and, more recently,
certain biological agents such as interferons and antibodies. With some
exceptions, chemotherapy is the primary therapy for tumors that have spread
throughout the body. However, chemotherapy provides only modest benefits to
patients with the most frequently occurring malignancies, such as lung, colon
and breast cancers. Generally, existing cancer therapy for these high-incidence
tumors is characterized by relatively low efficacy and considerable toxicity.

Chemotherapy drugs are usually administered intravenously so that the drug can
circulate throughout the body to reach the metastases. As chemotherapy drugs
circulate, they kill cancer cells, but are also toxic to normal cells.
Consequently, cancer patients receiving chemotherapy often suffer severe,
sometimes life-threatening side effects, such as damage to bone marrow, lungs,
heart, kidneys and nerves. Therefore, the optimal drug dose for killing cancer
cells must often be reduced to avoid intolerable toxicities.

PRETARGET(TM): NEORX'S APPROACH TO CANCER THERAPY. NeoRx's cancer therapeutic
products under development employ proprietary monoclonal antibody-based
technology. Antibodies are proteins produced by certain white blood cells in the
body's immune system in response to antigens (foreign substances) such as
viruses, bacteria, toxins and specific types of cancer cells. An antibody will
recognize and bind specifically only to a single type of antigen. This quality
makes antibodies potentially useful as "targeting vehicles" for the delivery of
imaging and therapeutic products to disease sites.

Radiation is known to kill cancer cells that are exposed to sufficiently large
doses. In the conventional approach to radioimmunotherapy ("RIT"), the radiation
is linked to the antibody which is then administered to patients. Because the
antibody is a large molecule, the antibody and the linked radiation circulate
for a long time through the bloodstream before eventually reaching the tumors.
This prolonged circulation can cause "innocent bystander" toxicity to normal
organs such as the bone marrow.

NeoRx's PRETARGET(TM) technology takes advantage of the high binding affinity of
two molecules: biotin and streptavidin. Since biotin is a small molecule it
travels rapidly through the bloodstream and penetrates the tumor site much
faster than a large molecule such as an antibody. The problem is that biotin
does not bind at the tumor site. If streptavidin could be "targeted" to the
surface of a tumor, then the biotin molecules would bind to the streptavidin on
the tumor's surface and thus deliver whatever therapeutic molecule it was
carrying.

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With PRETARGET(TM), an antibody that will bind to antigen markers on the surface
of particular tumor cells is linked to streptavidin. This antibody-streptavidin
conjugate (the "conjugate") is then administered to the patient and over a 24-48
hour period will accumulate on the surface of the tumor cells. Since no
radiation is attached to the conjugate, there is no "innocent bystander"
toxicity during this period of circulation. Depending on the antibody, different
tumors will be targeted in different amounts. Because almost all antibodies also
bind to some normal tissues, the display of streptavidin on normal tissues will
also depend on the particular antibody.

Because conjugate continues to circulate, an injection of biotin linked to
radiation could first bind to the conjugate before reaching the tumor. To reduce
the conjugate in the circulation, a "clearing agent" is injected to clear the
conjugate to the liver where it is metabolized. The therapy (e.g., radiation),
linked to biotin, is then administered to the patient. The biotin-radiation
molecule rapidly passes through the bloodstream and attaches to the
pre-localized antibody-streptavidin conjugate. The remainder that does not bind
to the streptavidin is rapidly eliminated through the kidneys, thereby reducing
the radiation dose to the bone marrow and other normal organs resulting from
circulating radioactivity. Thus the PRETARGET(TM) technology more efficiently
locates the radiation on the tumor, reduces "innocent bystander" toxicity, and
has allowed higher radiation doses to be safely administered than with
conventional RIT.

AVICIDIN(R): THE FIRST NEORX PRODUCT TO USE THE PRETARGET(TM) PLATFORM.

The Company's first PRETARGET(TM) product, AVICIDIN(R), links the therapeutic
radionuclide yttrium-90 to the biotin molecule. Yttrium-90 emits a beta particle
(a high energy electron) that can kill cancer cells. AVICIDIN(R) completed the
Phase I clinical trials in 1997. The purpose of the Phase I study was to
determine the maximum tolerated dose ("MTD") of radiation, to determine the
optimal timing and dosing of each component, and to observe anti-tumor effects.
The Company believes that the dose-limiting toxicity determined in Phase I
trials was exhibited by diarrhea that the Company believes is caused by some
binding of the antibody to the large intestine. Previous preclinical and
clinical trials have demonstrated that, compared to conventional RIT, the MTD
for AVICIDIN(R) is more than 5-fold what the Company believes to be the MTD of
conventional therapy using yttrium-90. It is generally held that the more
radiation to which the tumor is exposed, the more likely the tumor is to
regress, and the longer that the tumor regression will last. In the Phase I
trials tumor regression has been observed in some patients following a single
AVICIDIN(R) dose, including patients with advanced, bulky tumors.

The Company expects Phase II trials to study the efficacy of AVICIDIN(R) in
patients with cancers of the lung, colon, and prostate who have failed standard
therapy to begin early in 1998. These trials will be conducted with the current
murine antibody. Because human anti-mouse antibodies (HAMA) are usually created
when a murine antibody is used, only one dose of AVICIDIN(R) will be
administered to each patient in the early stage of the Phase II trials. The
Company believes that a product that can be administered more than once to each
patient is more likely to achieve a greater rate of response as well as more
significant responses than a product that is given only once.

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During 1997, the Company began testing of its "humanized" version of the
antibody that is designed to reduce the HAMA response. During 1998, the Company
expects to incorporate this humanized antibody into its therapeutic studies to
determine if the reduction of HAMA also reduces antibodies to streptavidin to
levels sufficiently low to enable multiple doses to be administered.

LYMPHOMA: Lymphomas are tumors of the lymph cells in the body, and represent a
variety of different disease entities. In general, lymphomas may be divided into
Hodgkins Disease and Non-Hodgkins Lymphoma (NHL), with the latter further
divided into T-cell and B-cell NHL depending on their cell of origin. Most NHLs
are derived from B-cells, and thus referred to as B-cell Lymphomas. The
incidence of B-cell lymphomas is rising (50% in the last fifteen years) due in
part to the improved longevity of patients with AIDS and to the aging of the
population. There is common consensus that the low and intermediate-grade
lymphomas are generally responsive to chemotherapy and that these diseases
represent the majority of the lymphoma cases. While responsive to chemotherapy,
low-grade lymphomas are rarely cured and intermediate-grade lymphomas that are
not cured by intensive chemotherapy (~50%) are also rarely cured. Therefore the
need exists for additional and improved therapies.

Patients with recurrent low-grade lymphoma treated at the Fred Hutchinson Cancer
Research Center and the University of Washington using conventional
radioimmunotherapy (RIT) at doses requiring a bone marrow transplant
demonstrated a very high complete response rate (~80%) with long median duration
of response. The Company believes its PRETARGET(TM) technology might be able to
deliver high tumor doses without requiring a bone marrow transplant. If so, this
would constitute a major improvement in the cost and treatment of this disease.

Accordingly, the Company began a project in the latter part of 1997 to create a
product for the treatment of lymphoma. This product is based on the AVICIDIN(R)
product, except that a "lymphoma-seeking" antibody is substituted for the
AVICIDIN(R) antibody. As soon as the lymphoma antibody-streptavidin conjugate
can be constructed, and the IND (Investigational New Drug Application) filed
with and cleared by the FDA, the Company will begin Phase I trials to study
whether such doses may be safely administered. The Company anticipates this
study will begin in the first half of 1998.

NeoRx is also testing the delivery of additional therapeutic products such as
other forms of radiation, and immune response modifiers (e.g. tumor necrosis
factor). The PRETARGET(TM) platform may offer the first practical opportunity to
deliver alpha emitters, a form of radiation significantly more potent than
yttrium-90, effectively and safely to solid tumors. NeoRx has received two Small
Business Innovative Research ("SBIR") grants to study alpha emitters with
PRETARGETTM technology.

VERLUMA(R) KIT: IMAGING FOR SMALL CELL LUNG CANCER. The VERLUMA(R) kit is the
Company's diagnostic imaging product that is indicated to detect extensive
disease in patients with biopsy-confirmed, previously untreated small cell lung
cancer. Boehringer Ingelheim International GmbH ("Boehringer Ingelheim") holds
world-wide manufacturing rights. The DuPont Merck Pharmaceutical Company
("DuPont Merck") markets the VERLUMA(R) kit in the United States and holds

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exclusive North American rights to market the VERLUMA(R) kit. In addition to
paying NeoRx $4.5 million upon the FDA marketing clearance in the United States,
DuPont Merck is required to pay NeoRx royalties on sales of the VERLUMA(R) Kit
in North America. The VERLUMA(R) kit is approved only in the United States, and
royalties to NeoRx thus far have been negligible; significant increases in those
royalties are not anticipated. No applications for foreign approvals have been
filed or planned.

CARDIOVASCULAR DISEASE AND ITS TREATMENT

The American Heart Association estimates that approximately 60 million Americans
have one or more types of cardiovascular disease, and that the cost of
cardiovascular diseases and stroke in 1997 will be approximately $250 billion.
Nearly one million people die of cardiovascular disease each year in the United
States, making it the leading cause of death.

Cardiovascular disease is divided into four main categories: high blood
pressure, coronary artery disease, stroke and valvular heart disease. Medical
procedures to treat coronary artery disease include percutaneous transluminal
coronary angioplasty and coronary artery bypass surgery. Heart transplantation
is reserved for patients with intractable heart failure or arrhythmia, which is
usually the result of coronary artery disease or cardiomyopathy (muscle damage
due to environmental or infectious agents). NeoRx's cardiovascular product
development program is focused on coronary artery disease (restenosis,
atherosclerosis, and inflammation).

RESTENOSIS: Angioplasty is a medical procedure used to increase blood flow
through coronary arteries that have been partially blocked by the build-up of
plaque on the interior of the arterial wall. Restenosis is the recurrent
narrowing of an artery following angioplasty. This narrowing, which reduces
blood flow through the artery, is believed to be caused by a combination of at
least three distinct but interrelated factors: (1) vascular remodeling, or
chronic constriction of the artery, (2) blood clot formation and (3) the
migration and proliferation of smooth muscle cells at the site of the
angioplasty procedure that encroach upon the flow of blood. Data from human
studies suggests that vascular remodeling accounts for the majority of the
restenosis following balloon angioplasty.

The Company believes that over 500,000 angioplasties were performed in the
United States in 1996, and that approximately 30 - 40% of these patients will
experience restenosis following the angioplasty procedure. If restenosis occurs,
it may necessitate open heart surgery (coronary artery bypass graft), sometimes
on an emergency basis, or additional coronary angioplasty procedures, such as
repeat angioplasty and/or the placement of a metal stent in the artery
("stenting"). The Company believes that metal stenting is becoming a more
frequently used procedure with the initial angioplasty.

BIOSTENT(R): NEORX'S APPROACH TO TREATING RESTENOSIS. The Company's BIOSTENT(R)
product under development is designed to inhibit vascular remodeling following
balloon angioplasty. By addressing remodeling, BIOSTENT(R) may be complementary
to the anti-thrombotics currently on the market or under development by other
companies for the treatment of restenosis. The drug is delivered via catheter to
the angioplasty site immediately following the procedure.

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NeoRx's preclinical studies have shown that administering BIOSTENT(R)
immediately after angioplasty inhibits chronic constriction of the artery wall
and thus helps maintain its dilated position. As a normal response to injury
caused by angioplasty, the muscle cells in the ballooned arterial wall secrete a
biological "cement" called collagen, a supportive protein of the body. The
Company believes that the collagen forms a rigid matrix, thereby biologically
supporting or "stenting" the arterial wall during the period that treatment with
BIOSTENT(R) inhibits arterial constriction.

NeoRx scientists assessed the effects of the BIOSTENT(R) treatment method in a
swine femoral artery model that was then extended to swine coronary arteries.
Analysis of swine femoral arteries for as long as eight weeks, and of swine
coronary arteries for as long as three weeks, following a single exposure to the
BIOSTENT(R) product suggests that the treatment sustains the increase in the
luminal area following balloon trauma compared to the ballooned, but untreated,
arteries.

The BIOSTENT(R) treatment method consists of the cytoskeletal inhibiting agent,
cytochalasin B, delivered through a specialized intracoronary delivery catheter.
The catheter is an over-the-wire design that allows rapid placement of the agent
using the same guidewire used for balloon dilation. Commercialization of
BIOSTENT(R) will depend, in part, on obtaining FDA approval of the catheter,
which is manufactured by a third party. NeoRx completed and analyzed a
multicenter, randomized, double-blinded Phase I trial of BIOSTENT(R) in 1997.
There was no evidence of drug-related toxicity and 5 of 13 (38%) placebo-treated
patients, as compared to 6 of 30 (20%) BIOSTENT(R)-treated patients, experienced
clinical restenosis by the end of six months. Patient numbers were too small to
achieve statistical significance. During 1997 NeoRx completed a second Phase I
study with a different catheter. The second Phase I study, consistent with the
first, did not demonstrate any drug related side effects. The side effects
observed in either Phase I study involved dissections (tears) in the inner
layers of the artery wall that frequently occur with balloon angioplasty. The
delivery procedure resulted in some new, or worsening of some existing,
dissections. Patient accrual for a large (300-400) Phase II trial is expected to
commence in 1998.

ATHEROSCLEROSIS AND INFLAMMATION: Atherosclerosis is a complex disease of blood
vessels commonly understood as clogging of arteries with cholesterol. It is a
leading cause of death from heart attack and stroke. Clogged arteries do not
deliver oxygen-carrying blood to organs as well as normal arteries and are more
likely to become completely restricted with blood clots that shut off blood
flow. The result is that the affected organ receives insufficient oxygen and may
die if flow is not restored rapidly, leading to conditions such as heart attack
and stroke. Surgery and/or angioplasty (as described above) can improve blood
flow, but prevention or reduction in the disease progression would be preferred.

RAISING TGF(BETA) LEVELS: NEORX'S APPROACH TO TREATING ATHEROSCLEROSIS.
Scientists at University of Cambridge in the United Kingdom ("Cambridge"),
working with NeoRx, have discovered that patients with advanced coronary artery
disease have low levels of active TGF(beta), a protein that regulates the growth
of certain cell types such as those found in the lining of arteries. They have
reported that segments of arteries prone to atherosclerosis are low in active
TGF(beta) and that the elevation of active TGF(beta) can prevent the development
of lesions in arteries of a mouse animal model that express the human apo(a)
gene associated with atherosclerosis lesions in humans.

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A Phase I dosing study has been conducted to determine the safety and the
appropriate dose of a drug that is believed to increase activated TGF(beta) in
patients with advanced coronary artery disease. The results of that study are
currently being evaluated. This drug has been provisionally licensed from a
third party.

CARDIOVASCULAR AND INFLAMMATORY DISEASES. TGF(beta) research that began with
investigations in atherosclerosis has since led to observations that may be
relevant to the treatment of other inflammatory diseases such as rheumatoid
arthritis and asthma. NeoRx has established an exclusive relationship with a
University of Cambridge scientist wherein NeoRx will have exclusive rights to
all of his laboratory's research for the next three years.

PRODUCTS UNDER DEVELOPMENT

The following table summarizes products under development by NeoRx:

PRODUCT INDICATION Q1 1998 STATUS
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CANCER THERAPY:

AVICIDIN(R) Prostate Cancer Phase II clinical trials*
Colon Cancer Phase II clinical trials*
Lung Cancer Phase I clinical trials*

PRETARGET(TM) Lymphoma Relapsed B-cell Lymphoma Preclinical

* with murine antibody at single dose; final formulation expected to use
humanized antibody.

CARDIOVASCULAR THERAPY:

ANTI-RESTENOSIS
BIOSTENT(R) Inhibition of restenosis Phase I clinical trials
complete.

ATHEROSCLEROSIS
TGF(beta) upregulation Treatment of atherosclerosis Phase I clinical trials -under
analysis

RELATIONSHIP WITH JANSSEN PHARMACEUTICA

In 1997 NeoRx granted Janssen Pharmaceutica NV ("Janssen"), a subsidiary of
Johnson & Johnson, Inc., an exclusive worldwide license for the development,
manufacture, and distribution of NeoRx's AVICIDIN(R) cancer therapy product.
Under this agreement NeoRx received $5 million in 1997 for the license fee and
$5 million for the purchase of NeoRx Series 4 Convertible Preferred Stock, which
was acquired by Johnson & Johnson Development Corporation, and then converted to
833,334 shares of common stock. In addition to royalties on any future sales,

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NeoRx may receive additional payments up to $50 million upon achieving certain
development milestones. In January 1998, the Company received a $7 million
milestone payment from Janssen, reflecting Janssen's decision to begin Phase II
trials of AVICIDIN(R) cancer therapy. Under this agreement, Janssen assumed
responsibility for worldwide registration and commercialization of the product,
and agreed to fund an estimated 95% of the remaining costs for product
development and clinical trials. Janssen also received the right of first
negotiation to subsequent oncology products employing the Company's
PRETARGET(TM) technology. Additional oncology products that fall under the
Janssen agreement will trigger royalty obligations to the Company and may result
in additional milestones to NeoRx.

RELATIONSHIP WITH SCHWARZ PHARMA

In 1997, the Company granted Schwarz Pharma AG ("Schwarz Pharma") a license that
provides Schwarz Pharma with exclusive North American and European marketing
rights to distribute NeoRx's BIOSTENT(R) restenosis treatment product. Under
this agreement NeoRx received $8 million for the license fee and the purchase of
NeoRx Common Stock, par value $.02 per share (the "Common Stock"), and may
receive additional milestone payments up to $22 million in addition to
royalties. The $1.3 million excess received over the $6.7 million fair market
value of the Common Stock was recorded as license revenue. Under the agreement,
Schwarz Pharma is responsible for all of the remaining BIOSTENT(R) development
costs, milestone payments and payments for the purchase of manufactured
products. NeoRx has retained manufacturing rights on a world-wide basis and
marketing rights outside of North America and Europe.

PATENTS AND PROPRIETARY RIGHTS

The Company's policy is to protect its proprietary technology aggressively. It
has filed applications for U.S. and foreign patents issued in its portfolio,
covering numerous aspects of its technology. The Company currently has in excess
of 100 issued and allowed U.S. patents.

NeoRx has been awarded 15 U.S. patents related to its PRETARGET(TM) technology,
and has additional U.S. and foreign applications pending. The Company also is
the exclusive licensee of Stanford University patents issued in the U.S., Europe
and Japan related to the underlying technology used in NeoRx's AVICIDIN(R)
product currently in clinical trials. The Company holds a co-exclusive license
for the monoclonal antibody used in its cancer imaging and treatment products,
and has obtained U.S. and foreign patent protection for its cancer imaging
technology, including its VERLUMA(R) small cell lung cancer imaging product.

The Company has received a notice of allowance for a U.S. patent covering its
BIOSTENT(R) product, and has additional pending U.S. and foreign applications
related to the product. In addition, NeoRx holds seven issued U.S. patents, with
additional U.S. and foreign applications pending, relating to the use of
TGF(beta) elevating agents to treat cardiovascular indications. NeoRx is also
the exclusive assignee of the rights of its Cambridge collaborators to this
technology.

There can be no assurance that any of the pending or future applications of the
Company or its collaborators will result in issued patents. Moreover, there can
be no assurance that the patents owned by or licensed to the Company will
provide substantial protection or commercial benefit. In addition to patent

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protection, the Company relies upon trade secrets, unpatented proprietary
know-how and continuing technological innovation to develop and maintain its
competitive position. There can be no assurance that others will not acquire or
independently develop the same or similar technology, or that the Company's
issued patents or those it has licensed will not be circumvented, invalidated or
rendered obsolete by new technology. Moreover, there can be no assurance that
others will not gain access to the Company's proprietary technology, or disclose
such technology, or that the Company can meaningfully protect its rights in such
unpatented proprietary technology.

The rapid rate of development and the intense research efforts throughout the
world in biotechnology, the significant lag time between the filing of a patent
application and its review by appropriate authorities and the lack of
significant legal precedent involving biotechnology inventions make it difficult
to predict accurately the breadth or degree of protection that patents will
afford the Company's or its licensees' biotechnology products or their
underlying technology. It is also difficult to predict whether valid patents
will be granted based on biotechnology patent applications or, if such patents
are granted, to predict the nature and scope of the claims of such patents or
the extent to which they may be enforceable.

Under U.S. law, although a patent has a statutory presumption of validity, the
issuance of a patent is not conclusive as to validity or as to the enforceable
scope of its claims. Accordingly, there can be no assurance that the patents
owned or licensed by the Company will not be infringed or designed around by
others or that others will not obtain patents that the Company would need to
license or design around.

It is the Company's policy to respect the valid patent rights of others. NeoRx
has obtained patent licenses from various parties covering technologies relating
to its products. The Company, however, may need to acquire additional licenses
or, if such licenses are denied or are not available on commercially reasonable
terms, successfully prevail in the event that litigation is commenced by patent
owners to interfere with the development or commercialization of the Company's
products.

COMPETITION

NeoRx faces significant competition from emerging companies and established
biotechnology, pharmaceutical and chemical companies. Many emerging companies
have corporate partnership arrangements with large, established companies to
support research, development and commercialization efforts of products that may
be competitive with those being developed by the Company. In addition, a number
of established pharmaceutical companies are developing proprietary technologies
or have enhanced their capabilities by entering into arrangements with, or
acquiring, companies with proprietary monoclonal antibody-based technology or
other technologies applicable to cancer therapy, the prevention of restenosis or
the treatment of atherosclerosis and inflammatory diseases. Many of the
Company's existing or potential competitors have or have access to substantially
greater financial, research and development, marketing and production resources
than those of the Company.

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The Company's cancer therapy products under development are designed for the
treatment of metastatic cancer or where there is a very high statistical risk
that the cancer has spread. The Company anticipates that the principal
competition in this type of cancer treatment will come from existing
chemotherapy, hormone therapy and biological therapies that are designed to
treat the same cancer stage. Many pharmaceutical, emerging pharmaceutical and
biotechnology companies are testing a large array of alternative cancer
treatments. If any of these proves to be more effective, safer or less expensive
than the Company's products under development, the Company's competitive
position could be materially adversely affected.

The Company's anti-restenosis product under development is designed to prevent
restenosis of blood vessels following angioplasty where such narrowing is due to
vascular remodeling. Due to the incidence and severity of cardiovascular
diseases, the market for therapeutic products that address such diseases as
restenosis and atherosclerosis is large, and competition is intense and expected
to increase. Many pharmaceutical, emerging pharmaceutical and biotechnology
companies are testing a large array of alternative heart disease treatments. If
any of these proves to be more effective, safer or less expensive than the
Company's products under development, the Company's competitive position could
be materially adversely affected.

Other companies may develop and introduce products and processes competitive
with or superior to those of the Company. Further, the development by others of
new cancer treatment, anti-restenosis, atherosclerosis or inflammatory disease
treatment products or prevention products could render the Company's technology
and products under development less competitive, uneconomical or obsolete.

Timing of market introduction and health care reform, both uncertainties, will
affect the competitive position of the Company's products. The Company believes
that competition among products approved for sale will be based, among other
things, on product safety, efficacy, reliability, availability, price and patent
protection.

GOVERNMENT REGULATION AND PRODUCT TESTING

The manufacture and marketing of the Company's proposed products and its
research and development activities are subject to extensive regulation for
safety, efficacy and quality by numerous government authorities in the United
States and other countries. In the United States, drugs and biologics are
subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic
Act of 1976, as amended, and the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. Product
development and approval within this regulatory framework take a number of years
to accomplish and involve the expenditure of substantial resources.

The steps required before a pharmaceutical product may be marketed in the United
States include (i) preclinical laboratory tests, IN VIVO preclinical studies and
formulation studies, (ii) the submission to the FDA of an Investigational New
Drug Application ("IND"), which must become effective before clinical trials can
commence, (iii) adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug, (iv) the submission of a Biologic License

10

Application ("BLA") or New Drug Application ("NDA") to the FDA, and (v) FDA
approval of the BLA or NDA prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and inspected by, the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with current Good Manufacturing Practice ("cGMP")
regulations enforced by the FDA through its facilities inspection program for
biologics, drugs and devices. To supply products for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies in such
countries under reciprocal agreements with the FDA.

Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Preclinical safety tests must be conducted by
laboratories that comply with the FDA regulations regarding Good Laboratory
Practice. The results of the preclinical studies are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to commencement of clinical
trials. Unless the FDA provides comments to an IND, the IND will become
effective 30 days following its receipt by the FDA. There can be no assurance
that submission of an IND will result in the FDA authorization to commence
clinical trials.

Clinical trials involve the administration of the investigational new drug to
healthy volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with the FDA's
Protection of Human Subjects regulations and Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.

Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the drug is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacodynamics
(clinical pharmacology). Phase II involves studies in a limited patient
population to (i) determine the efficacy of the drug for specific, targeted
indications, (ii) determine dosage tolerance and optimal dosage, and (iii)
identify possible adverse effects and safety risks. When a compound is found to
have potential efficacy and to have an acceptable safety profile in Phase II
clinical trials, Phase III clinical trials are undertaken to further evaluate
clinical efficacy and to further test for safety within an expanded patient
population at geographically dispersed clinical study sites. There can be no
assurance that Phase I, Phase II or Phase III clinical trials will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's products subject to such trials. Furthermore, the Company or the
FDA may suspend clinical trials at any time if it is determined that the
subjects or patients are being exposed to an unacceptable health risk.

11

The results of the pharmaceutical development, preclinical studies and clinical
trials are submitted to the FDA in the form of a BLA or NDA for approval of the
marketing and commercial shipment of the drug. The testing and approval
processes are likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny a BLA or NDA if applicable regulatory criteria are not satisfied,
may require additional testing or information, or may require postmarketing
testing and surveillance to monitor the safety of the Company's products if it
does not view the BLA or NDA as containing adequate evidence of the safety and
efficacy of the drug.

Notwithstanding the submission of such data, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for approval. Moreover,
if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.

Among the conditions for BLA or NDA approval is the requirement that the
prospective manufacturers' quality control and manufacturing procedures conform
to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the areas of
production and quality control to ensure full technical compliance.

EMPLOYEES

As of March 2, 1998, the Company had 71 full-time employees and 8 part-time
employees, 17 of whom hold Ph.D. degrees and 3 of whom hold M.D. degrees. Of
this number, 60 employees were engaged in research, development and
manufacturing activities and 19 were employed in finance and administration.

The Company considers its relations with its employees to be good. None of the
Company's employees is covered by a collective bargaining agreement.

RISK FACTORS

This document includes certain forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The words "believes", "anticipates", "plans", "may", "hopes", "can", "will",
"expects", "is designed to", "with the intent", and other similar terms are
intended to identify such forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated by the statements made by the Company.
Factors which could affect the Company's actual results are described in this
section. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

12

NO ASSURANCE THAT NEW PRODUCTS WILL BE SUCCESSFULLY DEVELOPED

The Company's realization of its long-term potential will be dependent upon the
successful development and commercialization of products currently under
development. There can be no assurance that these products will be developed
successfully or receive regulatory approval. Furthermore, there can be no
assurance that these products, if developed and approved, can be successfully
manufactured in quantities necessary for commercialization or that such products
will receive market acceptance.

UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING

Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential new products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily indicative of results that will
be obtained from subsequent or more extensive preclinical and clinical testing.
Furthermore, there can be no assurance that clinical trials of products under
development will be completed or will demonstrate the safety and efficacy of
such products at all, or to the extent necessary to obtain regulatory approvals.
Companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after achieving promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product under development could delay or prevent regulatory approval
of such products.

The rate of completion of clinical trials depends on, among other factors, the
enrollment of patients. Patient accrual is a function of many factors, including
the size of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the study, and the existence of competitive
clinical trials. Delays in planned patient enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs, program
delays or both.

GOVERNMENTAL REGULATIONS: NO ASSURANCE OF PRODUCT APPROVAL

The manufacture and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous government authorities in the United States and
other countries. Clinical trials, manufacturing and marketing of products are
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory authorities. Clinical trials and regulatory approval can take
a number of years to accomplish and require the expenditure of substantial
resources. There can be no assurance that clinical trials will be started or
completed successfully within any specified time period. Delays in approval can
occur for a number of reasons, including the Company's failure to obtain
necessary supplies of monoclonal antibodies or other materials or to obtain a
sufficient number of available patients to support the claims necessary for
regulatory approval. There can be no assurance that requisite FDA approvals will
be obtained on a timely basis, if at all, or that any approvals granted will
cover all the clinical indications for which the Company may seek approval.
Delays or failure to obtain regulatory approval would adversely affect or
prevent the marketing of products developed by the Company and its ability to
receive royalty or other product revenues. The manufacture and marketing of

13

drugs are subject to continuing FDA review and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions, including withdrawal of the product from the market. Marketing the
Company's products abroad will require similar regulatory approvals and is
subject to similar risks. In addition, federal and state agencies and
congressional committees have expressed interest in further regulation of
biotechnology. The Company is unable to estimate the extent and impact of
regulation in the biotechnology field resulting from any future federal, state
or local legislation or administrative action.

For clinical investigation and marketing outside the United States, the Company
or its collaborative partners also are subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely for European countries both within and
outside the European Community.

HISTORY OF OPERATING LOSSES AND UNCERTAINITY OF FINANCIAL RESULTS

The Company has been unprofitable since inception and expects to incur
additional operating losses over the next several years. These operating losses
may fluctuate from period to period. The Company's existing capital resources
and interest income thereon are currently expected to be sufficient to fund the
Company's operations through the year 1999. The Company's actual expenditures
will depend on numerous factors, including results of research and development
activities, clinical trials, the levels of resources that the Company devotes to
establishing and expanding marketing and manufacturing capabilities, competitive
and technological developments and the timing of revenues and expense
reimbursements resulting from relationships with parties to collaborative
agreements. The Company will require substantial additional funds to complete
the development of its therapeutic products. Adequate funds for these purposes,
whether through additional financings, collaborative arrangements with corporate
sponsors or other sources, may not be available on terms favorable to the
Company, if at all. If funding is insufficient, the Company will be required to
delay, reduce or eliminate some or all of its research and development
activities, clinical trials and manufacturing programs.

DEPENDENCE ON SUPPLIERS

The Company depends on the timely delivery from suppliers of certain materials
and services. In connection with its research, preclinical studies and clinical
trials, the Company has periodically experienced interruption in the supply of
monoclonal antibodies. Interruptions in these and other supplies could occur in
the future. The Company, or its partners, will need to develop sources for
commercial quantities of yttrium-90, the radionuclide used in its proposed
cancer therapeutic products, and for the antibody, streptavidin and clearing
agent used in the AVICIDIN(R) product. There is no assurance that the Company or
its partners will be able to develop such sources. The catheter used to deliver
the Company's proposed BIOSTENT(R) product has not yet been approved for sale by
the FDA; commercial use of such catheter depends on receiving such approval. In
addition, the Company depends on a supply of the catheter from its manufacturer;
any failure by the manufacturer to supply catheters timely and adequately would

14

have a material adverse effect on the Company's or its partners' ability to
commercialize BIOSTENT(R). The drug used in the atherosclerosis clinical trial
to raise activated TGF(beta) levels is only provisionally licensed from a third
party and is dependent on that third party for supply.

DEPENDENCE ON OTHERS FOR COMMERCIAL MANUFACTURING AND MARKETING

The Company has entered into two collaborative commercial manufacturing and
marketing agreements. There can be no assurance that the Company will be able to
negotiate additional collaborative arrangements in the future, or that its
current or future collaborative arrangements will be successful. The Company has
no manufacturing facilities for commercial production of its products under
development. The Company also has no experience in sales, marketing or
distribution. In most cases, the Company's strategy for commercialization of its
potential products requires entering into various arrangements with corporate
collaborators, licensors, licensees and others to manufacture, distribute and
market such products; the Company will depend on the successful performance of
these third parties. Although the Company believes that parties to its existing
and any future arrangements will have an economic incentive to perform their
contractual responsibilities successfully, these activities will not be within
the Company's control. There can be no assurance that such parties will perform
their obligations, that the Company will derive any revenues from such
arrangements, or that the Company's reliance on others for manufacturing
products will not result in unforeseen problems with product supply.

Pursuant to the Janssen AVICIDIN(R) agreement, Janssen has certain rights to
manufacture AVICIDIN(R) and some or all of the components of certain other
PRETARGET(TM) products. If Janssen should decide to cease development of
AVICIDIN(R), there can be no assurance that the Company will be able to secure
alternative commercial scale manufacturing for the AVICIDIN(R) components on a
timely basis or for a reasonable price. Schwarz Pharma has been granted
marketing rights in North America and Europe for BIOSTENT(R). NeoRx has the
responsibility for commercial manufacturing of the BIOSTENT(R) drug. The Company
has no history of manufacturing a product on a commercial scale with acceptable
quality for human use, and there can be no assurance that such manufacturing
capacity can be developed.

TECHNOLOGICAL CHANGE AND COMPETITION

The competition for development of cancer therapies and cardiovascular products
is intense. There are numerous competitors developing products to treat each of
the diseases for which the Company is seeking to develop products. Some
competitors have adopted product development strategies targeting cancer cells
with monoclonal antibodies. Many emerging companies have corporate partnership
arrangements with large, established companies to support research, development
and commercialization efforts of products that may be competitive with those
being developed by the Company. In addition, a number of established
pharmaceutical companies are developing proprietary technologies or have
enhanced their capabilities by entering into arrangements with, or acquiring,
companies with proprietary monoclonal antibody-based technology or other
technologies applicable to the treatment of cancer and cardiovascular diseases.
Many major pharmaceutical companies, either alone or through collaboration with
smaller companies, have active programs in anti-restenosis therapy. Metal stents

15

are now being used routinely to hold open the arteries after angioplasty by
mechanical means, preventing chronic remodeling; however, the presence of a
"foreign body" has created other problems. Several major pharmaceutical
companies market HMG CoA-reductase inhibitor drugs that reduce the risk of
atherosclerosis and heart attack. Many of the Company's existing or potential
competitors have or have access to substantially greater financial, research and
development, marketing and production resources than those of the Company and
may be better equipped than NeoRx to develop, manufacture and market competing
products. The Company's competitors may have, or may develop and introduce, new
products that would render the Company's technology and products under
development less competitive, uneconomical or obsolete.

TECHNOLOGICAL UNCERTAINTIES REGARDING HUMAN IMMUNE RESPONSE TO FOREIGN PROTEINS

The Company's AVICIDIN(R) cancer therapy product currently uses a monoclonal
antibody of murine (mouse) origin coupled to streptavidin, a protein of
bacterial origin. These molecules appear as foreign proteins to the human immune
system that develops its own antibody in response. The "human anti-mouse
antibody" ("HAMA") or the "human anti-streptavidin antibody" ("HASA") responses
may limit the number of doses that may be safely or effectively administered to
a patient, thereby limiting a product's efficacy. The Company believes that
humanized antibodies may reduce HAMA and that modification of streptavidin may
reduce HASA. Gene cloning technology permits splicing of human and murine
antibody portions together, thereby yielding humanized molecules. Although the
Company has produced a humanized version of the murine antibody used in
AVICIDIN(R) and has initiated a collaboration to modify streptavidin, there can
be no assurance that either would reduce the extent to which HAMA or HASA may
limit the effectiveness of the Company's cancer therapy products or that the
Company and its partners will successfully develop and commercialize products
incorporating the humanized antibody.

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS

The patent position of biotechnology firms is generally highly uncertain and
involves complex legal and factual questions. Currently, no consistent policy
has emerged regarding the breadth of claims allowed in biotechnology patents.
Products and processes important to NeoRx are subject to this uncertainty.
Accordingly, there can be no assurance that the Company's patent applications
will result in additional patents being issued or that, if issued, patents will
afford protection against competitors with similar technology, nor can there be
any assurance that any patents issued to the Company will not be infringed by or
designed around by others or that others will not obtain patents that the
Company would need to license or design around. Moreover, the technology
applicable to the Company's products is developing rapidly. Research institutes,
universities and biotechnology companies, including the Company's competitors,
have filed applications for, or have been issued, numerous patents and may
obtain additional patents and proprietary rights relating to products or
processes competitive with or relating to those of the Company. The scope and
validity of such patents, the extent to which the Company may be required to
obtain licenses thereunder or under other proprietary rights and the cost and
availability of licenses are unknown. To the extent licenses are required, there
can be no assurance that they will be available on commercially reasonable

16

terms, if at all. The Company also relies on unpatented proprietary technology.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques, that others
will not otherwise gain access to the Company's proprietary technology, or
disclose such technology, or that the Company can meaningfully protect its
rights in such unpatented proprietary technology.

RISK OF PRODUCT LIABILITY

The testing, manufacturing, marketing and sale of human healthcare products
under development by the Company entail an inherent risk that product liability
claims will be asserted against the Company. Although the Company is insured
against such risks up to a $10 million annual aggregate limit in connection with
clinical trials and commercial sales of its products under development, there
can be no assurance that the Company's present product liability insurance is
adequate. A product liability claim in excess of the Company's insurance
coverage could have a material adverse effect on the Company and may prevent the
Company from obtaining adequate product liability insurance in the future on
affordable terms. In addition, there can be no assurance that product liability
coverage will continue to be available in sufficient amounts or at an acceptable
cost.

UNCERTAINTY OF PHARMACEUTICAL PRICING, HEALTHCARE REFORM AND REIMBURSEMENT

The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of government and third-party payors to
contain or reduce the costs of healthcare through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to governmental control. In the United States, there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to implement similar governmental control. It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for healthcare goods and services may take in response to any healthcare
reform proposals or legislation. Even in the absence of statutory change, market
forces are changing the healthcare sector. The Company cannot predict the effect
healthcare reforms may have on its business, and there can be no assurance that
any such reforms will not have a material adverse effect on the Company.
Further, to the extent that such proposals or reforms have a material adverse
effect on the business, financial condition and profitability of other
pharmaceutical companies that are prospective collaborators for certain of the
Company's potential products, the Company's ability to commercialize its
products under development may be adversely affected. In addition, both in the
United States and elsewhere, sales of prescription pharmaceuticals depend in
part on the availability of reimbursement to the consumer from third-party
payors, such as governmental and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services.
If the Company succeeds in bringing one or more products to market, there can be
no assurance that these products will be considered cost-effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.

17

RELIANCE ON KEY PERSONNEL

The Company's success will depend in part on the efforts of certain key
scientists and management personnel. Because of the specialized nature of the
Company's business, the Company's ability to maintain its competitive position
will depend in part on its ability to attract and retain qualified personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
retain such personnel. The loss of key management or scientific personnel could
have a material adverse effect on the Company's business. The Company does not
maintain key person insurance on any of its scientists or management personnel.

COMPLIANCE WITH ENVIRONMENTAL REGULATIONS; HAZARDOUS MATERIALS

The Company is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes in
connection with its research and development activities and its manufacturing of
clinical trial materials. Although the Company believes that it has complied
with these laws and regulations in all material respects, there can be no
assurance that it will not be required to incur significant costs to comply with
environmental and health and safety regulations in the future.

The Company's research and development and clinical manufacturing processes
involve the controlled use of small amounts of hazardous and radioactive
materials. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages, and any such liability
could exceed the Company's resources.

ITEM 2. PROPERTIES

The Company occupies approximately 36,000 square feet of office, laboratory and
manufacturing space at 410 West Harrison Street, Seattle, Washington, under a
lease that expires May 31, 2001. The lease is renewable through May 31, 2006.
The Company anticipates leasing additional space during the next two years,
after which it may either enlarge its current space or move to a new facility.
Such additional leases and/or moves would require additional investments.

NeoRx believes its facilities are in good condition and are adequate for all
present uses. A portion of its facilities is used for pilot manufacturing to
produce certain of its products under development for clinical trials. The
Company believes that the production capacity of its pilot facility is adequate
to satisfy the Company's Phase I clinical trial requirements, and it passed an
FDA inspection for these purposes in 1993 and a Washington State Board of
Pharmacy inspection in 1996.

18

The Company is obligated to manufacture the BIOSTENT(R) drug for Schwarz Pharma.
Such production may be carried out contractually, but the Company may decide to
produce the drug itself. Such production would require a further investment in
facilities and equipment, the cost of which is not expected to exceed several
million dollars, but there can be no guarantees that the estimated costs are
accurate. Such cost would not be incurred for at least two years.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending against the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol NERX. The following table sets forth, for the periods indicated, the high
and low sales price for Common Stock as reported by Nasdaq. These quotations
reflect inter-dealer prices without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.

HIGH LOW
---- ---
1997:

First Quarter...................... $6 5/16 $4 1/16
Second Quarter..................... 5 5/8 3 3/16
Third Quarter...................... 7 9/16 3 9/16
Fourth Quarter..................... 8 1/2 4 7/16

1996:
First Quarter...................... $9 13/16 $6 3/16
Second Quarter..................... 8 1/4 4 5/8
Third Quarter...................... 6 3/8 4 3/8
Fourth Quarter..................... 6 13/16 4

There were approximately 1,013 shareholders of record as of March 3, 1998.
This figure does not include the number of shareholders whose shares are held on
record by a broker or clearing agency, but includes such a brokerage house or
clearing agency as one holder of record.

The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay cash dividends on the Common Stock in the
foreseeable future.

In May 1997 the Company received $4 million from Schwarz Pharma for 698,702
shares of unregistered Common Stock. The $1.3 million excess received over the
$6.7 million fair market value of the Common Stock was recorded as license
revenue. In connection with the Janssen AVICIDIN(R) Agreement, Johnson & Johnson
Development Corporation ("JJDC") purchased 1,000 shares of Series 4 Preferred
Stock at a stated value of $5,000 per share and with a dividend rate of 7% per
annum. In accordance with the JJDC Stock Purchase Agreement, the Series 4
Preferred Stock automatically converted into 833,333 shares of Common Stock on
September 12, 1997, when the Common Stock attained an average closing price of
at least $6.00 per share. These converted shares of Common Stock are not
tradable for one year and are subject to volume limitations in the second year.
At December 31, 1997, none of the Series 4 Preferred Stock remained outstanding.

20

ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)

YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----

STATEMENT OF OPERATIONS DATA:

Revenue............................ $10,352 $ 4,784 $ 307 $ 1,568 $ 3,676

Operating expenses................. 14,647 14,763 13,343 12,605 12,334

Loss from operations............... (4,295) (9,979) (13,036) (11,037) (8,658)

Net loss........................... (2,550) (9,001) (12,271) (11,144) (8,536)

Net loss per common share -
basic and diluted............... $ (0.31) $ (0.68) $ (0.98) $ (1.02) $ (1.10)

Weighted average common
shares outstanding -
basic and diluted............... 18,065 15,604 13,142 11,616 8,449

BALANCE SHEET DATA:

Cash and cash equivalents.......... $ 1,949 $ 2,945 $ 7,182 $ 2,428 $14,347

Short term investments............. 31,760 15,322 8,937 14,723 13,421

Working capital.................... 33,775 17,523 15,245 15,992 26,934

Total assets....................... 36,321 20,510 18,518 20,035 29,848

Long-term debt..................... 1,199 1,242 1,283 1,212 1,222

Shareholders' equity............... $33,368 $17,079 $14,892 $15,841 $26,776

- ---------------------

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following discussion of results of operations, liquidity and capital
resources includes certain forward-looking statements. The words "believes",
"anticipates", "plans, "may", "hopes", "can", "will", "expects", "is designed
to", "with the intent", and other similar terms are intended to identify such
forward-looking statements. Such statements are based on current expectations
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those anticipated by the statements made by
the Company. Certain risk factors have been identified which could affect the
Company's actual results and are described in Item I above.

OVERVIEW

NeoRx develops biopharmaceutical products primarily for the treatment of
cancer and cardiovascular disease. The Company completed Phase I trials in 1997
for AVICIDIN(R), a cancer therapy product, and BIOSTENT(R), a product designed
to reduce restenosis. The Company's revenues have consisted principally of
license fees from Janssen, Schwarz Pharma, DuPont Merck, and from federal
government research contracts. In 1997 the Company entered into two new
licensing agreements with corporate partners (Janssen and Schwarz Pharma) and
plans to pursue additional agreements in the future. Expenses incurred have been
primarily for research and development activities and administration.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

The Company's revenues in 1997, 1996 and 1995 were $10.4 million, $4.8
million and $0.3 million, respectively, and consisted of license fees and
payments received under its licensing agreements. Revenues for 1997 increased
significantly over 1996, as the result of two new licensing agreements during
the year. In the third quarter of 1997, NeoRx entered into an agreement with
Janssen for the worldwide development, manufacture and distribution of NeoRx's
AVICIDIN(R) cancer therapy product. As a part of this agreement, NeoRx received
$5 million in revenue (license fees) and $5 million for the purchase of Series 4
Convertible Preferred Stock. In January 1998, NeoRx received a $7 million
milestone payment from Janssen, reflecting Janssen's decision to begin Phase II
trials of AVICIDIN(R).

During the second quarter of 1997, NeoRx entered into an agreement with
Schwarz Pharma to license the North American and European marketing rights to
NeoRx's BIOSTENT(R) product. The Company received $4.0 million in licensing fees
and $4.0 million for the purchase of NeoRx Common Stock. The excess amount paid
($1.3 million) over the fair market value of Common Stock was recorded as
revenue. Revenues in 1996 consisted primarily of license fees of $4.5 million
from DuPont Merck for exclusive North American rights to market NeoRx's
VERLUMA(R) lung cancer imaging products.

The Company's total operating expenses were $14.6 million, $14.8 million and
$13.3 million in 1997, 1996 and 1995, respectively. Of these amounts, research
and development expenditures were $11.0 million, $10.7 million and $9.3 million
in 1997, 1996 and 1995, respectively. Research and development expenses
increased 3% in 1997 and 14% in 1996. The increase in research and development
expenses in 1997 is attributed to expenditures relating to antibody
humanization, clinical trial activities and royalty costs. Research and
development expenses are shown net of reimbursements for payments made to third
parties received under collaborative agreements. During 1997 the Company
received $3.4 million from corporate partners and government research grants
under such collaborative agreements.

22

In 1996 the increase in research and development was primarily due to
activities relating to antibody humanization, increased clinical trial
activities, patent filing costs, and a one-time payment to sublicense
PRETARGET(TM) technology. In 1996 and 1995, amounts received from corporate
partners and government grants were insignificant.

General and administrative expenses were $3.7 million, $4.1 million and $4.0
million in 1997, 1996 and 1995, respectively. General and administrative
expenses decreased 10% in 1997 and increased 2% in 1996. The decrease in general
and administrative expenses in 1997 was primarily due to reduced costs for
compensation, as well as reduced costs for legal and professional services. In
1996 the increase in general and administrative expenses was primarily due to
legal costs associated with collaborative agreements.

Investment and interest income was $1.9 million, $1.1 million and $1.0
million in 1997, 1996 and 1995, respectively. The increase in 1997 and 1996 was
primarily due to higher average cash balances resulting from sales of Common and
Preferred Stock. Interest expense was $0.1 million in 1997, 1996 and 1995.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments totaled $33.7 million and
$18.3 million at December 31, 1997 and 1996 respectively. During 1997 the
Company increased cash, cash equivalents and short-term investments by $15.4
million.

Cash used in operating activities for 1997 totaled $2.9 million. 1997 Revenue
derived mainly from the two new licensing agreements (Janssen and Schwarz
Pharma) and investment and interest income of $1.9 million were used to fund
total operating expenses of $14.6 million.

Cash provided by financing activities for 1997 totaled $18.7 million. The
majority of the funds were raised from three stock transactions: the JJDC Stock
Purchase agreement ($5.0 million), the Schwarz Pharma agreement ($2.6 million),
and the private placement transactions $(11.4 million).

Cash used in investing activities for 1997 totaled $16.8 million. During 1997
the Company invested excess cash in short-term investments that will be used to
fund future operating costs. During 1997 the Company also invested $0.3 million
in equipment, furniture and leasehold improvements, primarily to support its
research and manufacturing activities. As of December 31, 1997, the Company was
committed to spending approximately $1.8 million pursuant to operating and
capital lease obligations.

In August 1997, the Company received $5.0 million from the sale of Series 4
Convertible Preferred Stock to JJDC. In March and April of 1997 the Company
received $11.4 million from the sale to private investors of 120,000 shares of
Series 3 Preferred Stock convertible at a discount. In accordance with an SEC
accounting interpretation, the associated discount of $2.1 million was recorded
as a one time non-cash dividend. In May 1997, the Company received $4 million
from Schwarz Pharma for 699,000 shares of unregistered stock, representing a 50%
premium over the fair value of the stock. The associated premium of $1.3 million
was recorded as revenue.

In January 1996, the Company sold 370,000 shares of Common Stock and 47,000
shares of Series 2 Convertible Preferred Stock in private transactions and
received $6.6 million. During 1996, the Company sold 464,000 common stock and
preferred stock and received $3.8 million, and during 1995, the Company sold
186,000 shares of common stock and received $1.2 million. Also during 1995,
NeoRx received $8.3 million from the sale of 1.4 million units consisting of
Common Stock and three-year warrants.

23

The Company's cash investment policy is to earn a market rate of interest on
its marketable securities while assuming minimal risk of principal. The
investment portfolio must meet the following objectives: preservation of
principal, fulfillment of liquidity needs, reasonable yield and avoidance of
inappropriate concentrations. All investments must carry an investment grade
rating and no single non-Federal government issue may represent more than 10% of
portfolio assets.

The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements through at least the second quarter of 1999. The Company's working
capital and capital requirements will depend upon numerous factors, including
results of research and development activities, clinical trials, the levels of
resources that the Company devotes to establishing and expanding marketing and
manufacturing capabilities, competitive and technological developments and the
timing and cost of relationships with parties to collaborative agreements. The
Company will need to raise substantial additional funds to conduct research and
development activities, preclinical studies and clinical trials necessary to
bring its products to market, and to establish marketing and limited
manufacturing capabilities. The Company intends to seek additional funding
through public or private equity financings, arrangements with corporate
collaborators or other sources. Adequate funds may not be available when needed
or on terms acceptable to the Company.

IMPACT OF THE YEAR 2000

In 1997 the Company initiated the installation of a new accounting system
that is compliant with the year 2000 requirements and is currently evaluating
other systems for Year 2000 concerns. The Company has not initiated formal
communications with its significant suppliers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. There can be no guarantee that the systems of other companies
on which the Company relies will be timely converted, or that a failure to
convert by another company would not have a material adverse effect on the
Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
Number
--------

Reports of Independent Public Accountants............................. 26 - 27
Balance Sheets - December 31, 1997 and 1996........................... 28
Statements of Operations - For the Years Ended
December 31, 1997, 1996 AND 1995................................... 29
Statements of Shareholders' Equity - For the Years
Ended December 31, 1997, 1996 AND 1995............................. 30
Statements of Cash Flows - For the Years Ended
December 31, 1997, 1996 AND 1995................................... 31
Notes to Financial Statements......................................... 32

All other financial schedules are omitted since the required information is
not applicable or has been presented in the financial statements and the notes
thereto.

25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders of NeoRx Corporation:

We have audited the accompanying balance sheet of NeoRx Corporation as of
December 31, 1997, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoRx Corporation as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Seattle, Washington
January 30, 1998

26

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of NeoRx Corporation:

We have audited the accompanying balance sheet of NeoRx Corporation, a
Washington corporation, as of December 31, 1996 and the related statements of
operations, cash flows and shareholders' equity for each of the years ended
December 31, 1996 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoRx Corporation as of
December 31, 1996 and the results of its operations and its cash flows for each
of the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles

ARTHUR ANDERSEN LLP

Seattle, Washington
February 25, 1997

27

NEORX CORPORATION
BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
---------------------
ASSETS 1997 1996
--------- --------
CURRENT ASSETS:

Cash and cash equivalents....................................................... $ 1,949 $ 2,945
Short-term investments .......................................................... 31,760 15,322
Prepaids and other .............................................................. 1,820 1,445
-------- --------
Total current assets ................................................... 35,529 19,712
-------- --------
FACILITIES AND EQUIPMENT, AT COST:
Leasehold improvements .......................................................... 3,300 3,237
Equipment and furniture ......................................................... 4,023 3,744
-------- --------
7,323 6,981
Less: accumulated depreciation and amortization ................................. (6,642) (6,295)
-------- --------
Facilities and equipment, net .............................................. 681 686
-------- --------
Other assets .................................................................... 111 112
-------- --------
TOTAL ASSETS ........................................................... $ 36,321 $ 20,510
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 800 $ 1,235
Accrued liabilities ............................................................. 911 910
Current portion of capital leases ............................................... 43 44
-------- --------
Total current liabilities .............................................. 1,754 2,189

LONG-TERM LIABILITIES:
Convertible subordinated debentures ............................................. 1,195 1,195
Capital leases, less current portion ............................................ 4 47
-------- --------
TOTAL LIABILITIES ...................................................... 2,953 3,431
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.02 par value, 3,000,000 shares authorized: Convertible
exchangeable preferred stock, Series 1, 208,240 shares issued
and outstanding at December 31, 1997 and 1996 (entitled in liquidation to
$5,248 at December 31, 1997 and $5,245 at December 31,1996)
Convertible preferred stock, Series 2, 5,167 and 6,667 shares issued and
outstanding at December 31, 1997 and 1996, respectively (entitled in
liquidation to $517 at December 31, 1997 and $667 at December 31, 1996)
Convertible preferred stock, Series 3, 1,000 and -0- shares issued and
outstanding at December 31, 1997 and 1996, respectively (entitled in
liquidation to $100 at December 31, 1997 and $0 at December 31, 1996)........ 4 4
Common stock, $.02 par value, 60,000,000 shares authorized,
20,707,251 and 16,450,565 shares issued and outstanding, at
December 31, 1997 and 1996, respectively..................................... 414 329
Additional paid-in capital....................................................... 162,612 140,789
Accumulated deficit.............................................................. (129,662) (124,043)
--------- ---------
Total shareholders' equity.............................................. 33,368 17,079
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,321 $ 20,510
========= =========

See accompanying notes to the financial statements.

28

NEORX CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)

YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------

Revenue ......................................................................... $ 10,352 $ 4,784 $ 307
-------- -------- --------
OPERATING EXPENSES:
Research and development ........................................................ 10,961 10,682 9,349
General and administrative ...................................................... 3,686 4,081 3,994
-------- -------- --------
Total operating expenses .............................................. 14,647 14,763 13,343
-------- -------- --------
Loss from operations ............................................... ............ (4,295) (9,979) (13,036)
OTHER INCOME (EXPENSE):
Investment and interest income, net .......................................... 1,881 1,120 1,002
Interest expense ............................................................. (136) (142) (140)
Litigation expense, net ...................................................... -- -- (97)
-------- -------- --------
Net loss ........................................................................ $ (2,550) $ (9,001) $(12,271)
======== ======== ========
Preferred stock dividends ....................................................... (3,069) (1,684) (597)
-------- -------- --------
Net loss applicable to common shares ............................................ $ (5,619) $(10,685) $(12,868)
======== ======== ========
Net loss per common share -
basic and diluted ........................................................ $ (.31) $ (.68) $ (.98)
======== ======== ========
Weighted average common shares
outstanding - basic and diluted .......................................... 18,065 15,604 13,142
======== ======== ========

See accompanying notes to the financial statements.

29

NEORX CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)

PREFERRED STOCK COMMON STOCK
--------------- --------------
NUMBER NUMBER ADDITIONAL TOTAL
OF PAR OF PAR PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL COMPENSATION DEFICIT EQUITY
------ ----- ------ ----- ---------- ------------ ----------- -------------

BALANCE, DECEMBER 31, 1994 ..... 298 $ 6 11,865 $237 $115,614 $(232) $ (99,784) $15,841
Sale of common stock
and warrants ................ -- -- 1,700 34 9,181 -- -- 9,215
Exercise of stock options ...... -- -- 219 4 419 -- -- 423
Issuance of common stock in
payment of expenses ......... -- -- 321 6 1,932 -- -- 1,938
Exchange of preferred stock for
common stock ................ (90) (2) 225 5 703 -- (706) --
Issuance of compensatory stock
options ..................... -- -- -- -- 91 -- -- 91
Amortization of deferred
compensation ................ -- -- -- -- -- 93 -- 93
Preferred stock dividends ...... -- -- 29 1 158 -- (597) (438)
Net loss ....................... -- -- -- -- -- -- (12,271) (12,271)
---- ---- ------ ---- -------- ----- --------- --------
BALANCE, DECEMBER 31, 1995 ..... 208 4 14,359 287 128,098 (139) (113,358) 14,892

Sale of common stock ........... -- -- 803 16 5,751 -- -- 5,767
Sale of preferred stock ........ 47 1 -- -- 4,417 -- -- 4,418
Exercise of stock options ...... -- -- 281 6 719 -- -- 725
Issuance of common stock in
payment of expenses .......... -- -- 116 2 691 -- -- 693
Exchange of preferred stock for
common stock ................. (40) (1) 860 17 (16) -- -- --
Amortization of deferred
compensation ................. -- -- -- -- -- 139 -- 139
Preferred stock dividends ...... -- -- 32 1 1,129 -- (1,684) (554)
Net loss ....................... -- -- -- -- -- -- (9,001) (9,001)
---- ---- ------ ---- -------- ----- --------- -------
BALANCE, DECEMBER 31, 1996 .... 215 4 16,451 329 14,789 -- (124,043) 17,079

Sale of common stock ........... -- -- 699 14 2,633 -- -- 2,647
Sale of preferred stock ........ 121 2 -- -- 16,396 -- -- 16,398
Exercise of stock options ...... -- -- 114 2 376 -- -- 378
Issuance of common stock in
payment of expenses .......... -- -- 22 1 100 -- -- 101
Exchange of preferred stock for
common stock ................. (122) (2) 3,366 67 (65) -- -- --
Preferred stock dividends ...... -- -- 55 1 2,383 -- (3,069) (685)
Net loss ....................... -- -- -- -- -- -- (2,550) (2,550)
---- ---- ------ ---- -------- ----- --------- -------
BALANCE, DECEMBER 31, 1997 ..... 214 $ 4 20,707 $414 $162,612 $ -- $(129,662) $33,368
==== ==== ====== ==== ======== ===== ========= =======

See accompanying notes to the financial statements.

30

NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)

YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ...................................................................... $ (2,550) $ (9,001) $(12,271)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 348 381 402
Compensation expense on stock awards
and options ................................................................. -- 167 184
Common stock for services ..................................................... 101 290 239
(Increase) decrease in prepaids ............................................... (375) 57 554
Increase (decrease) in accounts payable ....................................... (435) (276) 908
Increase (decrease) in accrued liabilities .................................... (38) 708 (64)
Decrease in deferred revenue ................................................. -- (250) --
-------- -------- --------
Net cash used in operating activities ......................................... (2,949) (7,924) (10,048)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investment............................. ..... 59,987 36,989 43,213
Purchases of short-term investments ........................................... (76,425) (43,374) (37,427)
Facilities and equipment purchases ............................................ (343) (250) (129)
-------- -------- --------
Net cash provided by (used in) investing activities (16,781) (6,635) 5,657
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations ....................................... (44) (48) (35)
Proceeds from sale of common stock and warrants ............................... 2,647 5,767 9,215
Proceeds from sale of preferred stock ......................................... 16,398 4,418 --
Proceeds from stock options exercised ......................................... 378 693 423
Preferred stock dividends ..................................................... (645) (508) (458)
-------- -------- --------
Net cash provided by financing activities ..................................... 18,734 10,322 9,145
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................................... (996) (4,237) 4,754
CASH AND CASH EQUIVALENTS:
Beginning of year ............................................................. 2,945 7,182 2,428
-------- -------- --------
End of year ................................................................... $ 1,949 $ 2,945 $ 7,182
======== ======== ========

See accompanying notes to the financial statements.

31

NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS

NOTE 1. THE COMPANY

NeoRx Corporation (the "Company") develops biopharmaceutical products
primarily for the treatment of cancer and cardiovascular disease. The Company
operates in a highly regulated and competitive environment. The development and
manufacturing of pharmaceutical products requires approval from, and is subject
to, ongoing oversight by the Food and Drug Administration ("FDA") in the United
States and by comparable agencies in other countries. Obtaining approval for a
new therapeutic product is never certain and may take several years and involve
expenditure of substantial resources. Competition in researching, developing and
marketing pharmaceutical products is intense. Any of the technologies covering
the Company's existing products or products under development could become
obsolete or diminished in value by discoveries and developments of other
organizations.

The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel, availability of raw
materials, determination of the patentability of the Company's products and
processes and approval by the FDA before the Company's products may be sold
domestically. Expenses incurred have been primarily for research and development
activities and administration. Successful future operations depend upon the
Company's ability to develop, obtain regulatory approval for, and commercialize
its products. The Company will require a substantial amount of additional funds
to complete the development of most of its products and to fund additional
operating losses which the Company expects to incur during the next several
years.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS. All highly liquid investments with a remaining
maturity of three months or less when purchased, are considered to be cash
equivalents.

ESTIMATES AND UNCERTAINTIES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES. Revenues from collaborative
agreements are recognized as earned as the Company performs research activities
under the terms of each agreement. Billings in excess of amounts earned are
classified as deferred revenue. License fees earned are recognized as revenue
unless subject to a contingency, which results in a deferral of revenue until
the contingency is satisfied. Research and development costs are expensed as
incurred. It is the Company's practice to offset third party collaborative
reimbursements received as a reduction of research and development expenses.
Third party reimbursements for 1997 were $3,448,286. In 1996 and 1995, third
party reimbursements were insignificant.

INCOME TAXES. The Company computes income taxes using the asset and
liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has financial instruments
consisting of cash, cash equivalents, short-term investments, note from officer,
accounts payable, capital leases and convertible subordinated debentures. All of
the Company's financial instruments, based on current market indicators or
quotes from brokers, approximate their carrying amount.

32

FACILITIES AND EQUIPMENT. Facilities and equipment, including equipment
under capital leases, are stated at cost. Depreciation is provided using the
straight-line method over an estimated useful life of five years for equipment
and furniture. Leasehold improvements and equipment under capital leases are
amortized using the straight-line method over the shorter of the assets'
estimated useful lives or the terms of the leases.

NET LOSS PER COMMON SHARE. In 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"), that establishes standards for the computation, presentation
and disclosure of earnings per share ("EPS"), replacing the presentation of
Primary EPS with a presentation of Basic EPS. It also requires dual presentation
of Basic EPS and Diluted EPS on the face of the income statement for entities
with complex capital structures. Basic EPS is based on the weighted average
number of common shares outstanding during the period. Diluted EPS is based on
the potential dilution that would occur on exercise or conversion of securities
into common stock using the treasury stock method. The adoption of this
statement did not result in a change in previously reported EPS.

RECLASSIFICATIONS. Certain reclassifications were made to the 1996 and 1995
financial statements to make them comparable with the 1997 presentation.

NOTE 3. SHORT-TERM INVESTMENTS

Short-term investments consisted of the following (in thousands):

DECEMBER 31,
-----------------------
1997 1996
------- -------

Federal government and agency securities....... $ 4,997 $ 9,485
Corporate debt securities...................... 26,763 5,837
------- -------
$31,760 $15,322
======= =======

The Company considers all short-term investments as available-for-sale
securities. All securities mature within one year of the date of issuance and
are carried at fair value. The fair value of the securities approximates
amortized cost at December 31, 1997 and 1996.

NOTE 4. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

DECEMBER 31,
---------------------
1997 1996
----- -----

Compensation................................... $ 743 $ 781
Other.......................................... 168 129
----- -----
$ 911 $ 910
===== =====

33

NOTE 5. LEASES

The Company leases certain equipment under capital leases which expire on
various dates through 1999. The total cost of equipment under capital leases
included in facilities and equipment on the accompanying balance sheet was
$293,966 at December 31, 1997 and 1996, and accumulated amortization applicable
to such leases was $243,284 and $183,861 respectively.

The lease for the Company's principal location expires in 2001 and contains
one five-year renewal option. Total rent payments under operating leases were
$535,812, $515,412 and $449,755 for 1997, 1996 and 1995, respectively.

Minimum lease payments and the present value of capital lease obligations
as of December 31, 1997, were as follows (in thousands):

OPERATING CAPITAL
YEAR LEASES LEASES
--------- -------

1998 ............................................................. $ 518 $44
1999 ............................................................. 518 5
2000 ............................................................. 494 -
2001 ............................................................. 177 -
------ ---
Total minimum lease payments ................................ $1,707 49
======
Less: amount representing interest (5% - 9% annual interest rates) (2)
---
Present value of capital lease obligations ................. 47
Less: current portion of capital leases .......................... (43)
---
Obligations under capital leases, non-current .............. $ 4
===

NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES

The Company has $1,195,000 in principal of Convertible Subordinated
Debentures (the "Debentures") outstanding, that will be retired in June 2000.
The Debentures are convertible at the option of the holder into the Company's
Common Stock at a conversion price of $25.80 per share, subject to adjustment
under certain conditions. Interest at 93/4% is payable semi-annually on June 1
and December 1. The Debentures are redeemable, in whole or in part, at any time,
at the option of the Company at 101.95% of par, reducing to par by 1999,
together with accrued interest. The Debentures are subordinated in right of
payment to any outstanding senior indebtedness of the Company, as defined in the
indenture.

NOTE 7. SHAREHOLDERS' EQUITY

COMMON STOCK TRANSACTIONS. During 1997, the Company issued 720,862 shares
of Common Stock and received net proceeds and services valued at $2,748,542.
During 1996, the Company issued 919,632 shares of Common Stock and received net
proceeds and services valued at $6,459,701. During 1995, the Company issued
464,502 shares of common stock and received net proceeds and services valued at
$2,845,858. Also in 1995, the Company sold in separate transactions 1,557,048
shares of Common Stock and 1,634,907 three-year warrants to purchase 408,727
shares of Common Stock, exercisable at a price of $5.31 per share. Net proceeds
amounted to $8,308,746.

34

During 1997, the Company also issued 3,366,690 shares of Common Stock in
exchange for 1,500 shares of Series 2 Preferred Stock, 119,000 shares of Series
3 Preferred Stock and 1,000 shares of Series 4 Preferred Stock. Dividends of
$266,448 were also paid on the Series 2 Preferred Shares by issuing 54,769
shares of Common Stock.

In 1996, the Company issued 859,861 shares of Common Stock in exchange for
40,000 shares of Series 2 Preferred Stock. Dividends of $173,783 were paid on
the shares of Series 2 Preferred Stock by issuing 32,252 shares of Common Stock.

In 1995, the Company issued 225,000 shares of Common Stock in exchange for
90,000 shares of Series 1 Preferred Stock. Dividends of $158,925 were paid on
the shares of Series 1 Preferred Stock by issuing 29,186 shares of Common Stock.

PREFERRED STOCK TRANSACTIONS. Holders of Series 1 Preferred Stock are
entitled to receive an annual cash dividend of $2.4375 per share if declared by
the Board of Directors (the "Board"), payable semi-annually on June 1 and
December 1. Dividends are cumulative. Each share of Series 1 Preferred Stock is
convertible into approximately 1.14 shares of Common Stock, subject to
adjustment in certain events. The Series 1 Preferred Stock is redeemable at the
option of the Company at $25.49 per share, decreasing to $25.00 per share by
1999. Holders of Series 1 Preferred Stock have no voting rights, except in
limited circumstances.

In 1996, the Company issued 46,667 shares of Series 2 Preferred Stock and
received net proceeds of $4,418,037. During 1996, 40,000 shares of Series 2
Preferred Stock were converted to 859,861 shares of Common Stock. In February
1997, 1,500 shares of Series 2 Preferred Stock were converted to 32,934 shares
of Common Stock.

Holders of Series 2 Preferred Stock are entitled to receive cumulative
dividends at the rate of 8% per annum compounded quarterly on the $100 per share
stated value of the Series 2 Preferred Stock. The dividend is payable, in cash
or Common Stock at the Company's option, at the time the Series 2 Preferred
Stock is redeemed or converted into Common Stock. The Series 2 Preferred Stock
is redeemable at the option of the Company at $120.50 per share. Each share of
the Series 2 Preferred Stock is convertible at the option of the holder into the
number of shares of Common Stock determined by dividing $120.50 by the average
stock market closing bid price of the Common Stock for the five trading days
prior to the day of conversion, but not less than $4.41 nor more than $8.36 per
share. The discount to be realized by the difference between the conversion
value and the stated value of the Series 2 Preferred Stock issued was recognized
by the Company as a non-cash dividend charge of $955,830 in 1996. The holders of
the Series 2 Preferred Stock have no voting rights, except in limited
circumstances. The Series 2 Preferred Stock ranks junior to the Company's Series
1 Preferred Stock, as to dividends, distributions and payments in liquidation.

In 1997, the Company sold 120,000 shares of Series 3 Preferred Stock in
private transactions and received net proceeds of $11,441,012. Also during 1997,
119,000 shares of Series 3 Preferred Stock were converted into 2,500,423 shares
of Common Stock.

Holders of the Series 3 Preferred Stock are entitled to receive cumulative
dividends at the rate of 7% per annum compounded quarterly on the $100 per share
stated value of the Series 3 Preferred Stock. The dividend is payable, in cash
or Common Stock at the Company's option, quarterly or at the time the Series 3
Preferred Stock is redeemed or converted into Common Stock. The Series 3

35

Preferred Stock is redeemable at the option of the Company in the first two
years following issuance at $117.65 per share plus accrued dividends and
interest. Each share of the Series 3 Preferred Stock is convertible in the first
two years following issuance at the option of the holder, and is mandatorily
convertible two years after the date of issuance, into the number of shares of
Common Stock determined by dividing the $100 stated value of the Series 3
Preferred Stock by 85% of the average stock market closing bid price of the
Common Stock for the five trading days ending one day prior to the day of
conversion, but not less than $4.41 nor more than $6.42 per share, plus accrued
dividends and interest. A non-cash dividend charge of $2,117,647 was recognized
by the Company during 1997 for the amount of the excess of the conversion value
over the stated value. The holders of the Series 3 Preferred Stock have no
voting rights except in limited circumstances. The Series 3 Preferred Stock
ranks junior to the Company's Convertible Exchangeable Preferred Stock, Series
1, and on parity with the Company's Series 2 Preferred Stock as to dividends,
distributions and payments in liquidation.

In connection with a 1997 agreement with Janssen Pharmaceutica NV
("Janssen"), a subsidiary of Johnson & Johnson, Inc, Johnson & Johnson
Development Corporation ("JJDC"), also a subsidiary of Johnson & Johnson,
purchased 1,000 shares of Series 4 Preferred Stock, $.02 par value per share, at
a stated value of $5,000 per share with a dividend rate of 7% per annum. In
September 1997, the Series 4 Preferred Stock automatically converted into
833,333 shares of Common Stock, in accordance with the JJDC agreement, when the
Common Stock attained an average closing price of $6.00 per share. These
converted shares of Common Stock are not freely tradable for one year and are
subject to volume limitations in the second year. At December 31, 1997, none of
the Series 4 Preferred Stock remained outstanding.

SHAREHOLDERS' RIGHTS PLAN. On April 10, 1996, the Board adopted a
Shareholders' Rights Plan intended to protect the rights of shareholders by
deterring coercive or unfair takeover tactics. The Board declared a dividend to
holders of the Company's Common Stock, payable on April 19, 1996, to
shareholders of record on that date, of one preferred share purchase right (the
"Right") for each outstanding share of the Common Stock. The Right is
exercisable 10 days following the offer to purchase or acquisition of beneficial
ownership of 20% of the outstanding Common Stock by a person or group of
affiliated persons. Each Right entitles the registered holder, other than the
acquiring person or group, to purchase from the Company one-hundredth of one
share of Series A Junior Participating Preferred Stock ("Series A Preferred
Stock") at a price of $40, subject to adjustment. The Rights expire in 2006. The
Series A Preferred Stock will be entitled to a minimum preferential quarterly
dividend of $1 per share and has liquidation provisions. Each share of Series A
Preferred Stock has 100 votes, and will vote with the Common Stock. Prior to the
acquisition by a person or group of 20% of the outstanding Common Stock, the
Board may redeem each Right at a price of $.001.

In lieu of exercising the Right by purchasing one one-hundredth of one share
of Series A Preferred Stock, the holder of the Right, other than the acquiring
person or group, may purchase for $40, that number of the Company's Common Stock
having a market value of twice that price.

The Board may, without further action by the shareholders of the Company,
issue preferred stock in one or more series and fix the rights and preferences
thereof, including dividend rights, dividend rates, conversion rates, voting
rights, terms of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designations of such
series.

36

STOCK OPTIONS. The Company has two stock option plans with options
available for grant: the 1994 Stock Option Plan (the "1994 Plan") and the 1991
Stock Option Plan for Non-Employee Directors (the "Directors Plan").

The 1994 Plan authorizes the Board or an Option Committee appointed by the
Board to grant options to purchase a maximum of 2,500,000 shares of Common
Stock. In May 1997 the Board of Directors and shareholders authorized an
increase of 1,500,000 shares to the 1994 Plan for a maximum of 4,000,000 shares
of Common Stock. The 1994 Plan allows for the issuance of incentive stock
options and nonqualified stock options to employees, officers, Directors,
agents, consultants, advisors and independent contractors of the Company,
subject to certain restrictions. All option grants expire ten years from the
date of grant. In general, two-thirds of the option grants become exercisable in
increments at a rate of 25% per year over a four-year period from the grant
date, and the remaining one-third becomes exercisable over a period of one to
six years from the grant date at the discretion of the Option Committee. The
exercise price of options granted under the 1994 Plan is equal to the fair
market value of the Common Stock at the date of grant. As of December 31, 1997,
there were 1,465,073 shares of Common Stock available for issuance under the
1994 Plan.

In 1996, the Company canceled and reissued at an exercise price range of
$5.13 - $5.25 per share, the fair market value of the Common Stock on the date
of cancellation, all options held by non-executive employees with exercise
prices greater than the price range of $5.13 - $5.25 per share.

The Directors Plan authorizes the grant of stock options to non-employee
Directors to purchase a maximum of 250,000 shares of Common Stock. Under the
terms of the amended plan, each eligible Director receives annually, concurrent
with the annual election of Directors, an option to purchase 5,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. The options become exercisable in two equal annual
installments beginning with the first annual meeting of shareholders after the
date of grant. In addition, each newly appointed non-employee Director receives
a one-time initial option to purchase 10,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options expire on the earlier of ten years from the date of grant or five
years after the Director's termination of service as a Director. As of December
31, 1997, there were 109,375 shares of Common Stock available for issuance under
the Directors Plan.

Effective in 1998, the number of shares purchasable under options granted to
each Director under the Directors Plan was increased to 10,000 shares of Common
Stock concurrent with annual election as a Director and to 20,000 shares for a
Directors' initial appointment to the Board.

37

Information relating to activity under the Company's stock option plans is
as follows (in thousands, except per share data):

1997 1996 1995
----------------------- ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES SHARE PRICE OF SHARES SHARE PRICE OF SHARES SHARE PRICE
--------- ----------- --------- ----------- --------- -----------

Outstanding at beginning of year .... 2,809 $5.11 2,911 $4.85 2,985 $4.61
Granted ............................. 600 5.09 994 6.19 174 5.35
Exercised ........................... (114) 3.32 (281) 2.62 (219) 1.93
Canceled ............................ (147) 5.87 (815) 6.35 (29) 4.98
----- ----- ----- ----- ----- -----
Outstanding at end of year .......... 3,148 $5.14 2,809 $5.11 2,911 $4.85
===== ===== ===== ===== ===== =====
Exercisable at end of year .......... 1,679 $5.54 1,267 $6.03 1,104 $6.86
===== ===== ===== ===== ===== =====

Information relating to stock options outstanding and exercisable at
December 31, 1997 is as follows (in thousands, except per share data):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OF SHARES LIFE IN YEARS SHARE PRICE OF SHARES SHARE PRICE
- ------------------------ --------- ------------- ----------- --------- -----------

$1.50 - $3.75 1,398 6.40 $ 2.93 928 $ 2.89
$4.74 - $6.38 1,141 8.41 5.23 341 5.54
$6.75 - $21.75 609 6.35 10.05 410 11.54
----- ---- ----- ----- ------
3,148 7.12 $ 5.14 1,679 $ 5.54
===== ==== ===== ===== ======

The fair value of each stock option granted is valued on the date of grant
using the Black-Scholes option pricing model. The weighted average grant-date
fair value of stock options granted during 1997 was $3.73 per share using the
assumptions of expected volatility of 66%, expected option lives of five to ten
years and risk-free rates of interest of 5.7 - 6.8%. During 1996, the weighted
average grant-date fair value of stock options granted was $3.66 per share using
the assumptions of expected volatility of 70%, expected option lives of five to
ten years and risk-free rates of interest of 6.5 - 6.7%. During 1995, the
weighted average grant-date fair value of stock options granted was $3.74 per
share using assumptions of expected volatility of 70%, expected option lives of
five to ten years and risk-free rates of interest of 6.0 - 6.7 %. The Company
assumed a dividend yield of zero for all years.

38

In 1996, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective for years beginning after December 15, 1995. The
Company has continued to measure compensation cost for employee stock
compensation plans under the guidelines of APB 25, as allowed by SFAS 123. No
compensation cost has been recognized for options issued to employees under the
plans. Had compensation cost for these stock option plans been determined in
accordance with SFAS 123, the Company's "Net Loss" and "Net Loss Per Common
Share" would have increased to the following pro forma amounts for 1997, 1996
and 1995 (in thousands, except per share data):

1997 1996 1995
------- ------- --------

Net loss..................... As reported................ $(2,550) $(9,001) $(12,271)
Pro forma.................. (3,777) (9,503) (12,364)

Net loss per common share, As reported................ $(.31) $(.68) $(.98)
basic and diluted........ Pro forma.................. (.38) (.72) (.99)

Because the SFAS 123 method of accounting has not been applied to stock
options granted before January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

RESTRICTED STOCK. The Company also has a Restricted Stock Plan (the
"Restricted Stock Plan") under which restricted stock may be granted or sold to
selected employees, officers, agents, consultants, advisors and independent
contractors of the Company. Under the Restricted Stock Plan, adopted in 1991,
250,000 shares are authorized for grant, of which 194,000 remain available for
grant at December 31, 1997.

WARRANTS. In connection with financing transactions in 1995, the Company
issued 1,634,907 three-year warrants to purchase 408,727 shares of Common Stock,
exercisable at a price of $5.31 per share. The warrants expire in 1998.

In 1992, the Company issued Common Stock purchase warrants to Boehringer
Ingelheim to acquire 625,000 shares of Common Stock at a per share exercise
price ranging from $15.84 to $21.12. The warrants expired in 1997.

NOTE 8. REVENUES

The Company entered into an agreement in 1997, with Janssen for the
worldwide development, manufacture and distribution of NeoRx's AVICIDIN(R)
cancer therapy product. The Company received a $5,000,000 license fee, which was
recorded as revenue, and rights to potential future milestone payments and
royalties on product sales.

Also in 1997, the Company received a $4,000,000 license fee from Schwarz
Pharma for marketing rights to NeoRx's BIOSTENT(R) product in North America and
Europe and $4,000,000 for 698,702 unregistered shares of NeoRx Common Stock
representing a 50% premium over the fair value of the stock. The $4,000,000
license fee and the excess amount received over the fair market value of the
Common Stock ($1,333,334) were recorded as revenue.

39

In 1996, the Company recorded as revenue a $4,500,000 milestone payment
from DuPont Merck upon FDA approval to market VERLUMA(R) in the United States.
The Company does not anticipate further material revenue from this product.

NOTE 9. CASH FLOW

No capital lease obligations were incurred during 1997 and 1996. Capital
lease obligations incurred to acquire equipment were $143,312 in 1995.

Interest paid by the Company was $134,955, $142,613 and $140,511 for 1997,
1996 and 1995, respectively.

NOTE 10. FEDERAL INCOME TAXES

Temporary differences and carryforwards giving rise to deferred tax assets
were as follows (in thousands):

DECEMBER 31,
-------------------
1997 1996
------- -------

Net operating loss carryforwards ....................... $19,900 $18,900
Research and experimentation credit carryforwards....... 1,600 900
Depreciation and amortization........................... 630 600
Other .................................................. 340 500
------- -------
Deferred tax assets ............................... 22,470 20,900
Deferred tax asset valuation allowance ................. (22,470) (20,900)
------- -------
Net deferred taxes ................................ $ -- $ --
======= =======

The Company has established a valuation allowance equal to the amount of
deferred tax assets because the Company has not had taxable income since its
inception and significant uncertainty exists regarding the ultimate realization
of the deferred tax asset. Accordingly, no tax benefits have been recorded in
the accompanying statements of operations. The valuation allowance increased by
2,400,000 and 3,700,000 in 1996 and 1995, respectively.

The Company's net operating loss carryforwards expire beginning in 1999
through 2011. Research and experimentation credits expire from 2006 to 2018.

NOTE 11. SUBSEQUENT EVENTS

In January 1998, the Company received a $7,000,000 milestone payment from
Janssen, reflecting Janssen's decision to begin phase II trials of AVICIDIN(R)
cancer therapy as part of the agreement entered into with Janssen in August
1997.

NOTE 12. RELATED PARTY TRANSACTIONS

The Company's Chairman of the Board of Directors, has a consulting
agreement with the Company that provides that he shall be retained as a general
advisor and consultant to the Company's management on all matters pertaining to
the Company's business. In exchange for such services, he is compensated $30,000
for each calendar quarter of services, plus reasonable travel and other

40

expenses. In addition, under the agreement, in 1993 the Company granted him
options to purchase, at a 15% discount, a total of up to 125,000 shares of
Common Stock over four years. In 1996, the Board accelerated vesting of his
remaining 40,000 unvested shares for his assistance in the Company's 1996
financing. On February 21, 1997, the Board granted him, under the Restated 1994
Stock Option Plan, options to purchase 60,000 of the Company's Common Stock for
his services as Chairman of the Board of Directors. The options were granted at
the then current market price of the Common Stock, and vest and are exercisable
in two equal installments beginning one year after the date of grant.

The Company has a demand note receivable from an officer with a balance of
$111,938 at December 31, 1997 and $131,219 at December 31, 1996.

41

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In April 1997, the Board of Directors, at the recommendation of the Audit
Committee, terminated the engagement of Arthur Andersen LLP as the Company's
certifying accountants.

The report of Arthur Andersen LLP on the Company's financial statements for
either of the last two fiscal years did not contain any adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.

During the Company's two most recent fiscal years and subsequent interim
periods preceding the date of termination of the engagement of Arthur Andersen
LLP, the Company was not in disagreement with Arthur Andersen LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP to
make reference to the subject matter of the disagreement in connection with its
report.

The required letter from Arthur Andersen LLP with respect to the above
statements made by the Company is filed as an exhibit hereto.

Also in April 1997, the Board of Directors, at the recommendation of the
Audit Committee, engaged KPMG Peat Marwick LLP as the Company's certifying
accountants. The Company had not consulted with KPMG Peat Marwick LLP during its
previous two most recent fiscal years or during any subsequent interim period
prior to its engagement regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit option
that might be rendered on the Company's financial statements.

42

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) DIRECTORS. The information required by this item is incorporated herein
by reference to the section captioned "Election of Directors" in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 13,
1998, filed with the Securities and Exchange Commission (the "Commission")
pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").

(b) EXECUTIVE OFFICERS. Information with respect to the Company's executive
officers is set forth below.

NAME AGE POSITION WITH THE COMPANY

Paul G. Abrams, M.D., J.D. 50 President, Chief Executive Officer
and Director

Richard L. Anderson. 58 Senior Vice President, Finance
and Operations, and Chief Financial Officer

Becky J. Bottino 49 Vice President, Operations

John M. Reno, Ph.D. 51 Vice President, Research and Development

Robert W. Schroff, Ph.D., M.B.A. 43 Vice President and General Manager,
Cardiovascular Products

Bruce H. Walters 54 Vice President, Human Resources

BUSINESS EXPERIENCE

DR. PAUL G. ABRAMS is a co-founder of the Company, has been a Director
since January 1985 and has been President and Chief Executive Officer since May
1990. Dr. Abrams holds M.D., J.D. and B.A. degrees from Yale University. He is a
board-certified internist and medical oncologist and is an Affiliate Associate
Professor in the Department of Radiology at the University of Washington.

RICHARD L. ANDERSON has been Senior Vice President, Finance and Operations
and Chief Financial Officer since September 1997. He was Senior Vice President
and Chief Financial Officer from January 1996 to August 1997. From November 1994
to January 1997, Mr. Anderson was Vice President and Controller at Mosaix Inc.,
a provider of computer telephony integration products and services. From
September 1993 to October 1994, Mr. Anderson was Vice President of Finance,
Chief Financial Officer and Secretary of Merix Corporation (formerly a division
of Tektronix), a manufacturer of printed circuit boards. Mr. Anderson holds an
M.S. degree in Management from Johns Hopkins University, a M.S. degree in Solid
State Physics from the University of Maryland, a B.S. in Physics from Bucknell
University and is a Certified Public Accountant.

BECKY J. BOTTINO has been Vice President of Operations since September
1997. She was the Company's Director of Manufacturing and Product Development
from October 1996 through September 1997, Director of Product Development from
1992 to 1994 and Manager of Product Development from 1989 to 1992. Ms. Bottino
joined NeoRx in 1985 as a Research Technologist. She holds a M.S. degree in
Chemistry from the University of Washington and a B.S. degree from the
University of Utah.

43

DR. JOHN M. RENO has been Vice President, Research and Development since
January 1993. He was the Company's Director, Research and Development from May
1991 until December 1992. He holds a Ph.D. degree in Biochemistry from Michigan
State University. DR. ROBERT W. SCHROFF has been Vice President and General
Manager, Cardiovascular Products since January 1993. He was the Company's
Director, Business Development and Analytical Labs from September 1991 to
December 1992. Dr. Schroff holds a Ph.D. degree in Immunology from the Bowman
Gray School of Medicine of Wake Forest University. He performed postdoctoral
studies at the University of California at Los Angeles. Dr. Schroff also holds
an M.B.A. degree from the University of Washington. BRUCE H. WALTERS has been
Vice President, Human Resources since May 1989. From April 1987 to April 1989,
he was the Company's Director, Human Resources. Mr. Walters holds a B.A. degree
in Bacteriology from the University of California at Los Angeles.

(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information
required by this item is incorporated herein by reference to the section
captioned "Compliance With Section 16(a) of the Securities Exchange Act of 1934"
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 13, 1998, filed with the Commission pursuant to Section 14(a) of the
Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to
the sections captioned "Executive Compensation" in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 13, 1998, filed with
the Commission pursuant to Section 14(a) of the Exchange Act.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 13, 1998, filed with the Commission pursuant to
Section 14(a) of the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is detailed in the Notes to Financial
Statements contained herein in the section captioned "Related Party
Transactions".

44

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1) Financial Statements -- See Index to Financial Statements.

(a) (2) Financial Statement Schedules -- Not applicable.

(a) (3) Exhibits -- See Exhibit Index filed herewith.

(b) Reports on Form 8-K -- Not applicable.

(c) Exhibits -- See Exhibit Index filed herewith.

45

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

NEORX CORPORATION
(Registrant)

/s/ RICHARD L. ANDERSON
--------------------------------------------------
Richard L. Anderson
Senior Vice President Finance and Operations, Chief
Financial Officer, Secretary

Date: March 25, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

/s/ PAUL G. ABRAMS
- -------------------------------------------------------
Paul G. Abrams President, Chief Executive March 25, 1998
Officer and Director
(Principal Executive Officer)

/s/ RICHARD L. ANDERSON
- -------------------------------------------------------
Richard L. Anderson Senior Vice President, March 25, 1998
Finance and Operations,
Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ FRED B. CRAVES
- -------------------------------------------------------
Fred B. Craves Chairman of the Board of March 25, 1998
Directors

/s/ JAMES G. ANDRESS
- -------------------------------------------------------
James G. Andress Director March 25, 1998

/s/ JACK L. BOWMAN
- -------------------------------------------------------
Jack L. Bowman Director March 25, 1998

/s/ LAWRENCE H. N. KINET
- -------------------------------------------------------
Lawrence H.N. Kinet Director March 25, 1998

/s/ CARL-HEINZ POMMER
- -------------------------------------------------------
Carl-Heinz Pommer Director March 25, 1998

EXHIBIT INDEX

INCORPORATION
EXHIBIT DESCRIPTION BY REFERENCE TO
------- ----------- ---------------

3.1(a) Restated Articles of Incorporation, dated April 29, 1996 *

3.1(b Articles of Amendment, dated March 31, 1997, to Restated Articles
of Incorporation **
3.1(c) Articles of Amendment, dated August 8, 1997, to Restated Articles
of Incorporation Filed herewith
3.2 Bylaws, as amended, of the registrant Filed herewith
4.1 Form of Indenture, dated as of June 1, 1989, between NeoRx
Corporation and First Interstate Bank of Washington, N.A., as
Trustee ***
4.2 Specimen Warrant Certificate +++
4.3 Form of Purchase Agreements dated as of April 18, 1995 between
NeoRx Corporation and the Purchasers +++
4.4 Form of Purchase Agreements dated as of January 30, 1996 between
NeoRx Corporation and the Purchasers ++++
4.5 Rights Agreement, dated April 10, 1996, between NeoRx Corporation
and First Interstate Bank of Washington, N.A. ++++++
10.1 Restated 1994 Stock Option Plan (^) &
10.2 Lease Agreement for 410 West Harrison facility, dated February 15,
1996, between NeoRx Corporation and Diamond Parking, Inc #
10.3 1991 Stock Option Plan for Non-Employee Directors, as amended (^) ++
10.4 1991 Restricted Stock Option Plan (^) ******
10.5 Stock and Warrant Purchase Agreement, dated as of September 11,
1992, between NeoRx Corporation and Boehringer Ingelheim
International GmbH ****
10.6 Amendment to Stock and Warrant Purchase Agreement, dated as of
September 17, 1992, between NeoRx Corporation and Boehringer
Ingelheim International GmbH +
10.7 Second Amendment to Stock and Warrant Purchase Agreement, dated
as of September 29, 1993, between NeoRx Corporation and Boehringer
Ingelheim International GmbH +
10.8 Development and License Agreement, dated as of September 11, 1992,
between NeoRx Corporation and Boehringer Ingelheim International
GmbH ****
10.9 First Amendment to Development and License Agreement, dated
September 22, 1994, between NeoRx Corporation and Boehringer
Ingelheim International GmbH ++
10.10 Second Amendment to Development and License Agreement,
dated October 31, 1994, between NeoRx Corporation and
Boehringer Ingelheim International GmbH ++
10.11 Technology License Agreement, dated as of September 11, 1992,
between NeoRx Corporation and Boehringer Ingelheim International
GmbH ****
10.12 License Agreement, dated as of September 18, 1992, between NeoRx
Corporation and Sterling Winthrop Inc ****
10.13 Agreement, dated as of December 15, 1995 +++++
10.14 License Option Agreement, dated June 1, 1991, between NeoRx
Corporation and the UAB Research Foundation +
10.15 Research Agreement (With Option to License), dated February 8,
1993, between NeoRx Corporation and Southern Research
Institute +
10.16 Consulting Agreement, effective March 15, 1993,
between NeoRx Corporation and Oxford Molecular Inc +
10.17 Agreement, dated as of August 1, 1993, between NeoRx Corporation
and Avalon Medical Partners +
10.18 Registration Rights Agreement, dated September 1993, between NeoRx
Corporation and Avalon Medical Partners +
10.19 Consulting Agreement, dated as of July 7, 1993, between NeoRx
Corporation and Dr. Fred Craves (^) +
Amendment to consulting agreement, dated May 9,1995 between NeoRx
10.20 Corporation and Dr. Fred Craves (^) +++++
10.21 Engagement letter, dated as of June 22, 1993, between NeoRx
Corporation and the Placement Agents *****
10.22 Purchase Agreements, dated May 19, 1993, between NeoRx Corporation
and the Purchasers or representatives thereof *****

i

10.23 Stock Purchase Agreement, dated as of October 5, 1994, between
NeoRx Corporation and The DuPont Merck Pharmaceutical
Company ++
10.24 License Agreement, dated as of October 5, 1994, between NeoRx
Corporation and The DuPont Merck Pharmaceutical Company ++
10.25 Supply Agreement, dated November 10, 1994, between Cordis
Corporation and NeoRx Corporation ++
10.26 License Agreement, effective as of October 12, 1994, between
Indiana University Foundation and NeoRx Corporation, as amended ++
10.27 Agreement, dated as of June 1, 1987, between NeoRx Corporation
and the Board of Trustees of the Leland Stanford Junior
University, as amended ++
10.28 Amendment No.3, dated November 15, 1995, to Contract between
Corporation and the Board of Trustees of the Leland Stanford
Junior University +++++
10.29 Form of Registration Rights Agreement, dated January 30, 1996, by
and among NeoRx Corporation and Grace Brothers, Ltd., Genesee Fund,
Ltd. and SBSF Biotechnology Partners ++++
10.30 Indemnification Agreement (^) #
10.31 Change of Control Agreement (^) ##
10.32 Form of Key Executive Severance Agreement (^) ##
10.33 Development, Distribution and Supply Agreement between NeoRx
Corporation and Schwarz Pharma AG, dated March 31, 1997 X
10.34 Stock Purchase Agreement, dated May 24, 1997, between Schwarz
Pharma AG and NeoRx Corporation XXX
10.35 Preferred Stock Purchase Agreement, dated August 8, 1997, between
Johnson & Johnson Development Corporation and NeoRx Corporation XXXX
10.36 Agreement, entered into as of July 1, 1997,
between Janssen Pharmaceutica, N.V. and NoeRx Corporation XXXX
16.1 Letter Regarding Change in Certifying Accountants XX
23.1 Consent of KPMG Peat Marwick LLP Filed herewith
23.2 Consent of Arthur Andersen LLP Filed herewith

* Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
** Filed as an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 333-25161), filed April 14, 1997 and incorporated herein
by reference.
*** Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-28545)effective May 31, 1989 and incorporated herein
by reference.
**** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992 and incorporated herein by reference.
***** Filed as an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-64992) effective August 25, 1993 and incorporated herein
by reference.
****** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1991 and incorporated herein by reference.
+ Filed as an exhibit to the Company's Registration Statement on Form S-2
(Registration No. 33-71164) effective December 13, 1993 and incorporated herein
by reference.
++ Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
+++ Filed as an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-60029) effective August 8, 1995 and incorporated herein
by reference.
Filed as an exhibit to the Company's Registration Statement on Form S-3
++++ (Registration No. 333-00785) effective February 7, 1996 and incorporated herein
by reference.
+++++ Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
++++++ Filed as an exhibit to the Company's Registration Statement on Form 8-A,
dated April 15, 1996 and incorporated herein by reference.
& Filed as an exhibit to the Company's Registration Statement on Form S-8,
filed July 31, 1997 and incorporated herein by reference.

ii

# Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended March 31, 1996 and incorporated herein by reference.
## Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended June 30, 1996 and incorporated herein by reference.
X Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended March 31, 1997 and incorporated herein by reference.
XX Filed as an exhibit to the Company's Form 8-K dated April 11, 1997 and
incorporated herein by reference.
XXX Filed as an exhibit to the Company's Form 8-K dated June 11, 1997 and
incorporated herein by reference.
XXXX Filed as an exhibit to the Company's Form 8-K dated October 7, 1997 and
incorporated herein by reference.
^ Management contract or compensatory plan.

iii