UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission File No. 0-16614

NEORX CORPORATION

(Exact name of Registrant as specified in its charter)

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

300 Elliott Avenue West, Suite 500, Seattle, Washington 98119-4077
(Address of principal executive offices)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.

Yes

As of August 14, 2003, 27,320,414 shares of the Registrant’s common stock, $.02 par value per share, were outstanding.

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders

Item 6.	Exhibits and Reports on Form 8-K

	Signatures

	Exhibit Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

	June 30, 2003			December 31, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	6,713		$	6,564
Investment securities	11,879			9,572
Prepaid expenses and other current assets	410			1,269
Total current assets	19,002			17,405

Facilities and equipment, net	8,297			8,509
Other assets, net	67			79

Total assets	$	27,366		$	25,993

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	686		$	1,024
Accrued liabilities	715			1,674
Current portion of note payable	345			512
Total current liabilities	1,746			3,210

Long-term liabilities:
Note payable, net of current portion	5,148			5,182
Asset retirement obligation	497			—
Other	—			25
Total long-term liabilities	5,645			5,207

Shareholders’ equity:
Preferred stock, $.02 par value, 3,000,000 shares authorized:
Convertible preferred stock, Series 1, 205,340 shares issued and outstanding at June 30, 2003 and December 31, 2002 (entitled in liquidation to $5,175 at June 30, 2003 and December 31, 2002)	4			4
Common stock, $.02 par value, 60,000,000 shares authorized, 27,150,542 and 26,765,082 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively	543			535
Accumulated other comprehensive income - unrealized loss on investment securities	(42		)	(101		)
Additional paid-in capital	225,406			224,035
Accumulated deficit	(205,936		)	(206,897		)
Total shareholders’ equity	19,975			17,576
Total liabilities and shareholders’ equity	$	27,366		$	25,993

See accompanying notes to the condensed consolidated financial statements.

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Revenues	$	10,190		$	1,219		$	10,306		$	1,529
Operating expenses:
Research and development	2,728			6,993			5,339			13,034
General and administrative	2,168			1,863			3,600			3,602
Total operating expenses	4,896			8,856			8,939			16,636
Income (loss) from operations	5,294			(7,637		)	1,367			(15,107		)
Other income (expense):
Realized gain (loss) on sale of securities	—			12			—			122
Gain on disposal of equipment	10			—			—			—
Interest income	83			312			153			708
Interest expense	(59		)	(103		)	(119		)	(206		)
Total other income	34			221			34			624
Net income (loss) before cumulative effect of change in accounting principle	5,328			(7,416		)	1,401			(14,483		)
Cumulative effect of change in accounting principle	—			—			190			—
Net income (loss)	5,328			(7,416		)	1,211			(14,483		)
Preferred stock dividends	(125		)	(125		)	(250		)	(250		)
Net income (loss) applicable to common shares	$	5,203		$	(7,541	)	$	961		$	(14,733	)

Earnings (loss) per share:
Basic:
Before cumulative effect of change in accounting principle	$	0.19		$	(0.28	)	$	0.04		$	(0.55	)
Cumulative effect of change in accounting principle	—			—			—			—
Net income (loss)	$	0.19		$	(0.28	)	$	0.04		$	(0.55	)

Diluted:
Before cumulative effect of change in accounting principle	$	0.18		$	(0.28	)	$	0.04		$	(0.55	)
Cumulative effect of change in accounting principle	—			—			(0.01		)	—
Net income (loss)	$	0.18		$	(0.28	)	$	0.03		$	(0.55	)

Weighted average common shares:
Basic	27,009			26,602			26,913			26,589
Diluted	28,420			26,602			27,777			26,589

Pro forma amounts had accounting principle been applied retroactively:
Net loss				$	(7,444	)				$	(14,538	)
Preferred stock dividends				(125		)				(250		)
Loss applicable to common shares				$	(7,569	)				$	(14,788	)

Loss per share:
Basic and diluted				$	(0.28	)				$	(0.56	)

See accompanying notes to the condensed consolidated financial statements.

NEORX CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Six Months ended June 30,
	2003			2002

Cash flows from operating activities:
Net income (loss)	$	1,211		$	(14,483	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	434			836
Gain on sale of securities	—			(122		)
Loss on disposal of equipment	121			—
Cumulative effect of change in accounting principle	190			—
Accretion of asset retirement obligation liability	33			—
Common stock issued for services	4			—
Stock options and warrants issued for services	272			43
Stock-based employee compensation	590			—
Change in operating assets and liabilities:
Prepaid expenses and other assets	661			(82		)
Accounts payable	(338		)	(271		)
Accrued liabilities	(901		)	33
Net cash provided by (used in) operating activities	2,277			(14,046		)

Cash flows from investing activities:
Proceeds from sales and maturities of investment securities	11,867			14,608
Purchases of investment securities	(14,115		)	(2,051		)
Facilities and equipment purchases	(47		)	(641		)
Proceeds from sales of equipment	188			—
Net cash (used in) provided by investing activities	(2,107		)	11,916

Cash flows from financing activities:
Proceeds from stock options and warrants exercised	480			18
Receipt of note receivable principal				91
Repayment of note payable principal	(201		)	(70		)
Repayment of capital lease obligation	(50		)	(50		)
Preferred stock dividends	(250		)	(250		)
Net cash used in provided by financing activities	(21		)	(261		)

Net increase (decrease) in cash and cash equivalents	149			(2,391		)

Cash and cash equivalents:
Beginning of period	6,564			4,097
End of period	$	6,713		$	1,706

See accompanying notes to the condensed consolidated financial statements.

NEORX CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of NeoRx Corporation and subsidiary (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.

The interim financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2002.

In the opinion of management, the interim financial statements reflect all adjustments, consisting only of normal recurring accruals necessary to present fairly the Company’s financial position as of June 30, 2003 and the results of its operations and cash flows for the periods ended June 30, 2003 and 2002.

The results of operations for the periods ended June 30, 2003 and 2002 are not necessarily indicative of the expected operating results for the full year.

The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company applies the disclosure-only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and to provide pro forma results of operations disclosures for employee stock option grants as if the fair-value based method of accounting in SFAS No. 123 had been applied to these transactions. Stock compensation costs related to fixed employee awards with pro rata vesting are recognized on a straight-line basis over the period of benefit, generally the vesting period of the options. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology prescribed in SFAS No. 123 over the related period of benefit.

Had compensation cost for these stock option plans for employees been determined using the fair value based method of accounting under SFAS 123, “Accounting for Stock-Based Compensation,” the Company’s net loss applicable to common shares and net loss per share would have been the pro forma amounts indicated below (in thousands, except per share data):

	Quarter ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net income (loss) applicable to common shares:
As reported	$	5,203		$	(7,541	)	$	961		$	(14,733	)
Add: Stock-based employee compensation expense included in reported net loss	590			—			590			—
Deduct: Stock-based employee compensation determined under fair value based method for all awards	(1,255		)	(949		)	(1,737		)	(1,897		)
Pro forma	$	4,538		$	(8,490	)	$	(186	)	$	(16,630	)

Net earnings (loss) per common share, basic and diluted:
As reported:
Basic	$	0.19	$	(0.28	)	$	0.04		$	(0.55	)
Diluted	$	0.18	$	(0.28	)	$	0.03		$	(0.55	)
Pro forma:
Basic	$	0.17	$	(0.32	)	$	(0.01	)	$	(0.63	)
Diluted	$	0.16	$	(0.32	)	$	(0.01	)	$	(0.63	)

The per share weighted-average fair value of stock options granted during the quarters ended and six months ended June 30, 2003 and 2002 was $2.25, $1.95, $0.87, and $2.03, respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions:

	Quarter ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Expected dividend rate	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate	2.06	%	3.83	%	2.29	%	3.83	%
Expected volatility	134.4	%	105.0	%	135.3	%	105.0	%
Expected life in years	4.00		4.00		4.00		4.00

Note 2. Net Earnings or Loss Per Common Share

Basic and diluted earnings or loss per share are based on net income or loss applicable to common shares, which is comprised of net income or loss and preferred stock dividends in all periods presented. Shares used to calculate basic earnings or loss per share are based on the weighted average number of common shares outstanding during the period. Shares used to calculate diluted earnings or loss per share are based on the potential dilution that would occur upon the exercise or conversion of securities into common stock using the treasury stock method. Calculations of basic and diluted earnings or loss per share for the quarters and six months ended June 30, 2003 and 2002 exclude the effect of warrants to purchase additional shares of common stock because the share increments would not be dilutive.

The computation of diluted net earnings or loss per share excludes the following options and warrants to acquire shares of common stock for the periods indicated because their effect would not be dilutive:

	Quarter ended June 30,				Six Months ended June 30,
	2003		2002		2003		2002

Common stock options	2,717,260		4,636,129		3,620,030		4,636,129
Weighted average exercise price per share	$	5.61	$	5.05	$	4.65	$	5.05
Common stock warrants	890,000		1,051,000		890,000		1,051,000
Weighted average exercise price per share	$	9.62	$	8.85	$	9.62	$	8.85

In addition, 234,088 shares of common stock that would be issuable upon conversion of the Company’s preferred stock are not included in the calculation of diluted earnings (loss) per share for the periods ended June 30, 2003 and 2002 because the effect of including such shares would not be dilutive.

Note 3. Comprehensive Loss

The Company’s comprehensive income (loss) for the quarters ended June 30, 2003 and 2002 was $5,340,000 and $(7,530,000), respectively. The comprehensive income (loss) for the quarters ended June 30, 2003 and 2002 consisted of net income (loss) of $5,328,000 and $(7,416,000), respectively, and a net unrealized gain (loss) on investment securities of $12,000 and $(114,000) for the quarters ended June 30, 2003 and 2002, respectively. The comprehensive income (loss) for the six months ended June 30, 2003 and 2002 was $1,270,000 and $(14,925,000), respectively. The comprehensive income (loss) for the six months ended June 30, 2003 and 2002 consisted of net income (loss) of $1,211,000 and $(14,483,000), respectively, and a net unrealized gain (loss) on investment securities of $59,000 and $(442,000) for the six months ended June 30, 2003 and 2002, respectively.

Note 4. Asset Retirement Obligation

The Company recorded a $0.2 million cumulative effect of change in accounting principle during the first six months of 2003 as a result of the Company’s adoption of SFAS 143, Accounting for Asset Retirement Obligations. Under SFAS 143, the Company recorded an asset and liability in the amount of $0.4 million related to estimated fair value of future decommissioning costs associated with the Denton radiopharmaceutical manufacturing facility. This estimate will be depreciated over the seven year estimated useful life of the asset and the asset retirement obligation will be accreted over the thirty years that represents the expected time that will elapse prior to the settlement of the obligation. The Company adopted SFAS 143 on January 1, 2003. A reconciliation of the asset retirement obligation follows (in 000’s):

Asset retirement obligation calculated as of date of Denton facility purchase (April 1, 2001)	$	364
Accretion-2001	40
Balance at December 31, 2001	404
Accretion-2002	60
Balance at December 31, 2002	464
Accretion-January 1, 2003 to June 30, 2003	33
Balance at June 30, 2003	$	497

In addition, had the Company applied the provisions of SFAS 143 as of the date of acquisition of the Denton facility, and using current January 1, 2003 assumptions for interest rates and decommissioning costs, depreciation expense would have increased by $51,000 and $39,000, respectively, for the years ended December 31, 2002 and 2001.

Had this change been applied retroactively, operating expenses would have increased $28,000 and $55,000, respectively, for the quarter and six months ended June 30, 2002. Net loss and net loss per share applicable to common shares, as reported, was $7,541,000, $14,733,000, $0.28 and $0.55, respectively, for the quarter and six months ended June 30, 2002. Had this change been applied retroactively, net loss and net loss per share applicable to common shares would have been $7,569,000, $14,788,000, $0.28, and $0.56, respectively, for the quarter and six months ended June 30, 2002.

Note 5. Boston Scientific Corporation Intellectual Property Sale

On April 17, 2003, the Company entered into agreements with Boston Scientific Corporation relating to the sale to Boston Scientific of certain non-core NeoRx intellectual property and the grant to Boston Scientific of certain license rights. Under the first agreement, the Company assigned to Boston Scientific certain NeoRx intellectual property in exchange for a cash payment of $9 million. The intellectual property assigned to Boston Scientific included a portfolio of NeoRx patents and patent applications in the cardiovascular field.

Under a second agreement, NeoRx granted to Boston Scientific an exclusive license to use certain other NeoRx intellectual property, for which NeoRx received a one-time cash payment of $1 million. The exclusive

license grants Boston Scientific the right to use, in certain medical device fields, a separate portfolio of NeoRx patents and patent applications resulting from a collaboration with University of Cambridge investigators.

Note 6. New Accounting Pronouncements

In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company adopted this Statement on January 1, 2003. The cumulative effect of adopting this change in accounting principle in the first quarter of 2003 is discussed in Note 5.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. Statement No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between Statement No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003. Management cannot determine the impact of adopting this Statement on its consolidated financial statements, as its effects will be prospective.

In November 2002, the Financial Accounting Standards Board Emerging Issues Task Force issued its consensus concerning Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverables should be divided into separate units of accounting, and, if separation is appropriate, how the arrangement consideration should be measured and allocated to the identified accounting units. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not anticipate that adoption of EITF 00-21 will have a material impact on its consolidated financial statements.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which addresses financial accounting and reporting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously many of those financial instruments were classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of the Statement to have a material impact on its operating results or financial position.

Note 7. Liquidity

The Company will need to raise additional capital to fund its proposed Skeletal Targeted Radiotherapy (STR™) pivotal clinical trial program and its future operating cash needs. In April 2003 the Company received $10 million from the sale to Boston Scientific Corporation of certain non-core NeoRx intellectual property and the grant to Boston Scientific Corporation of certain license rights. The Company expects that its present cash, cash equivalents, investment securities and expected interest income will be sufficient to fund its anticipated working capital and capital requirements through the third quarter of 2004.

During 2002, the Company discontinued all PretargetÒ technology activities, reduced staffing by 67% and terminated the lease for its facilities at 410 West Harrison Street in Seattle, effective in April 2003. PretargetÒ technology is a development platform for targeted therapeutics that deliver intense doses of anti-cancer agents to tumor cells while largely sparing healthy tissues.

In connection with its 2001 purchase of the radiopharmaceutical manufacturing plant and other assets located in Denton, TX, the Company assumed $6,000,000 principal amount of restructured debt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assets acquired in the transaction. During 2002 and early 2003, the Company reduced the staff at the Denton facility to four employees and has been operating the facility in standby mode. The Company currently is in the process of recruiting and hiring personnel and otherwise gearing up the manufacturing plant for production of clinical material for its planned STR pivotal program. The Company also is seeking a buyer or partner interested in continuing the facility’s radiopharmaceutical manufacturing operations and producing the STR compound. Under the terms of the Texas State Bank loan, the Denton facility and the assets used in the facility cannot be transferred without the written approval of the bank.

The Company is addressing its need for additional capital by pursuing opportunities for the licensing, sale or divestiture of certain non-core intellectual property and other assets, including its STR program and Pretarget^® technology platform. The Company also is addressing its need for additional capital by seeking a buyer or partner for its manufacturing facility who is interested in continuing the facility’s radiopharmaceutical manufacturing operations and producing the STR compound. The Company also may seek to raise capital through the sale of equity and/or debt securities or the establishment of other funding facilities. In the event that sufficient additional funds are not obtained through asset sales, licensing arrangements, strategic partnering opportunities and/or sales of securities on a timely basis, the Company plans to reduce expenses through the delay, reduction or curtailment of its STR development activities and/or further reduction of costs for facilities and administration.

The Company’s actual capital requirements will depend upon numerous factors, including:

• the rate of progress and costs of its clinical trial and research and development activities, including costs of procuring clinical materials;

• actions taken by the US Food and Drug Administration (FDA) and other regulatory authorities;

• the costs of discontinuing projects and technologies or decommissioning existing facilities, if the Company undertakes those activities;

• the timing and amount of milestone or other payments the Company might receive from potential strategic partners;

• the timing and amount of payments the Company might receive from potential licenses;

• the Company’s degree of success in commercializing its STR product candidate or other cancer therapy product candidates;

• the emergence of competing technologies and products, and other adverse market developments; and

• the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

There can be no assurance that the Company will be able to obtain needed additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. Conditions in the capital markets in general and the life science capital market specifically may affect the Company’s potential financing sources and opportunities for strategic partnering.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “propose” or “continue,” the negative of these terms or other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors described below in the section entitled “Additional factors that may affect results.” These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on our forward-looking statements, which speak only as of the date of this report.

Critical Accounting Policies and Estimates

Basis of Revenue Recognition: To date, the Company does not have any significant ongoing revenue sources. On occasion, the Company derives significant revenue from licensing its patented technologies and from government grants. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 and Emerging Issues Task Force Consensus No. 00-21, 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. Non-refundable upfront technology license fees, where the Company is providing continuing services related to product development, are deferred. Such fees are recognized as revenue over the product development periods based on estimated total development costs.

Quarter and six months ended June 30, 2003 compared to quarter and six months ended June 30, 2002

Revenue for the second quarter of 2003 was $10.2 million, compared to $1.2 million for the second quarter of 2002. Revenue for the six months ended June 30, 2003 was $10.3 million compared to $1.5 million for the six months ended June 30, 2002. Revenue for the second quarter and the first six months of 2003 consisted of $10.0 million from the sale to Boston Scientific Corporation of certain non-core NeoRx intellectual property, the grant to Boston Scientific Corporation of certain license rights, and revenue from a facilities lease agreement. Revenue for the second quarter and first six months of 2002 consisted of a milestone payment of $1.0 million from Angiotech Pharmaceuticals, Inc., along with revenue from government grants and a facilities lease agreement.

Total operating expenses for the second quarter of 2003 decreased 45% to $4.9 million from $8.9 million for the second quarter of 2002 and decreased 46% to $8.9 million for the six months ended June 30, 2003 from $16.6 million for the same period in 2002.

Research and development expenses decreased 61% to $2.7 million for the second quarter of 2003 from $7.0 million for the second quarter of 2002 and decreased 59% to $5.3 million for the six months ended June 30, 2003 from $13.0 million for the same period in 2002. The decrease in research and development expenses for the second quarter of 2003 is the result of significantly reduced staffing, curtailment of the Company’s PretargetÒ program, and other cost reduction measures taken in 2002 and 2003.

General and administrative expenses increased 16% to $2.2 million for the second quarter of 2003 from $1.9 million for the second quarter of 2002, and remained level at $3.6 million for the six months ended June 30, 2003 compared to the same time period in 2002. The increase in general and administrative costs for second quarter ended June 30, 2003 was due primarily to a non-cash expense of $0.6 million taken by the Company in connection with the amendment of stock options held by the former Chief Executive Officer, who resigned on June 30, 2003.

Cash and investment securities as of June 30, 2003 were $18.6 million compared to $16.1 million at December 31, 2002. NeoRx achieved an average cash expenditure rate for the second quarter of 2003 of $1.3 million per month and believes that its cash will be sufficient to fund its anticipated working capital and capital requirements through the third quarter of 2004.

Liquidity and capital resources

The Company has financed its operations primarily through the sale of equity securities, technology licensing, collaborative agreements and debt instruments. We invest excess cash in investment securities that will be used to fund future operating costs. Cash, cash equivalents and investment securities totaled $18,592,000 at June 30, 2003 compared to $16,136,000 at December 31, 2002. We primarily fund current operations with our existing cash and investments. Cash provided by operating activities for the six months ended June 30, 2003 totaled $2,277,000. Revenues and other income sources for the first quarter of 2003 were not sufficient to cover operating expenses.

We currently maintain a line of credit with Pharmaceutical Product Development, Inc. (PPD) of up to $5.0 million to assist in funding the pivotal phase III trial of our STR product in development. This line of credit is available to us only upon the successful resumption and subject to conditions related to the specific design of the STR phase III trials, and the proceeds can only be applied to the expenses related to the phase III trials. We have not drawn funds on this line of credit to date, which carries an annual interest rate of 16%.

On November 12, 2002, we entered into an agreement with IDEC Pharmaceuticals Corp. relating to the sale to IDEC of certain non-core NeoRx intellectual property and the grant to IDEC of certain license rights. We received $7.9 million in cash and may receive in the future royalty payments with respect to certain products. The intellectual property addressed by the agreement included a portfolio of US and international patents and certain associated technology and know-how relating to antibody-based therapeutics and ligand-linker technology. The intellectual property rights transferred to IDEC did not include rights to our STR or Pretarget programs. With respect to the patents involved in the sale, we retained a license for the development of certain NeoRx products.

On April 17, 2003, we entered into agreements with Boston Scientific Corporation relating to the sale to Boston Scientific of certain non-core NeoRx intellectual property and the grant to Boston Scientific of certain license rights. Under the first agreement, the Company assigned to Boston Scientific certain NeoRx intellectual property in exchange for a cash payment of $9 million. The intellectual property assigned to Boston Scientific included a portfolio of NeoRx patents and patent applications in the cardiovascular field. Under a second agreement, NeoRx granted to Boston Scientific an exclusive license to use certain other NeoRx intellectual property, for which NeoRx received a one-time cash payment of $1 million. The exclusive license grants Boston Scientific the right to use, in certain medical device fields, a separate portfolio of NeoRx patents and patent applications resulting from our collaboration with University of Cambridge investigators.

We will need to raise additional capital to fund our proposed STR pivotal clinical trial program and our future operating cash needs. We expect that our present cash, cash equivalents, investment securities and expected interest income will be sufficient to fund our anticipated working capital and capital requirements through the third quarter of 2004.

During 2002, we discontinued all Pretarget technology activities, reduced staffing by 67% and terminated the facilities lease at the 410 West Harrison Street location in Seattle, effective in April 2003. Pretarget® technology is a development platform for targeted therapeutics that deliver intense doses of anti-cancer agents to tumor cells while largely sparing healthy tissues.

In connection with our 2001 purchase of the radiopharmaceutical manufacturing plant and other assets located in Denton, TX, we assumed $6,000,000 principal amount of restructured debt held by Texas State Bank, McAllen, TX. The loan, which matures in April 2009, is secured by the assets acquired in the transaction. During 2002 and early 2003, we reduced the staff at the Denton facility to four employees and have been operating the facility in standby mode. We currently are in the process of recruiting and hiring personnel and otherwise gearing up the manufacturing plant for production of clinical material for our planned STR pivotal program. We are also seeking a buyer or partner interested in continuing the facility’s radiopharmaceutical manufacturing operations and producing the STR compound. Under the terms of the Texas State Bank loan, the Denton facility and the assets used in the facility cannot be transferred without the written approval of the bank.

We are addressing our need for additional capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other assets, including our STR program and Pretarget^® technology platform. We also are addressing our need for additional capital by seeking a buyer or partner for our manufacturing facility in Denton, TX who is interested in continuing the facility’s radiopharmaceutical manufacturing operations

and producing the STR compound. We also may seek to raise capital through the sale of equity and/or debt securities or the establishment of other funding facilities. In the event that sufficient additional funds are not obtained through asset sales, licensing arrangements, strategic partnering opportunities and/or sales of securities on a timely basis, we plan to reduce expenses through the delay, reduction or curtailment of our STR development activities and/or further reduction of costs for facilities and administration.

Our actual capital requirements will depend upon numerous factors, including:

• the rate of progress and costs of our clinical trial and research and development activities, including costs of procuring clinical materials;

• actions taken by the FDA and other regulatory authorities;

• the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities;

• the timing and amount of milestone or other payments we might receive from potential strategic partners;

• the timing and amount of payments we might receive from potential licenses;

• our degree of success in commercializing our STR product candidate or other cancer therapy product candidates;

• the emergence of competing technologies and products, and other adverse market developments; and

• the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

There can be no assurance that we will be able to obtain needed additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. Conditions in the capital markets in general and the life science capital market specifically may affect our potential financing sources and opportunities for strategic partnering. Our financial statements are prepared on a going concern basis; however, if we are forced to liquidate our assets, we may not recover the carrying amount of such assets.

Related party transactions

The Company’s Vice Chairman of the Board of Directors, Dr. Frederick Craves, is a founder of Bay City Capital, LLC, also known as BCC, a merchant bank focused on the life sciences industry. NeoRx’s Chief Executive Officer and Chairman of the Board of Directors, Jack Bowman, is on the business advisory board of BCC. The Company and BCC entered into an agreement whereby BCC acts as the Company’s advisor for the purpose of identifying opportunities to enter into strategic alliances and provide assistance relating to structuring and negotiating such transaction. The Company paid a retainer fee of $80,000 for each calendar quarter of 2002. The Company renewed the agreement for one additional year from January 1, 2003 and paid retainer fees of $26,667 and $25,000 for the quarters ended March 31, 2003 and June 30, 2003, respectively, and will pay $25,000 per quarter thereafter, plus reasonable travel and other expenses. The agreement also includes a percentage of gross value of cash, securities, property or other consideration derived from a transaction, ranging from one to five percent, depending on the ultimate amount of consideration raised. BCC agreed to exclude the Boston Scientific Corporation sale and assignment of intellectual property from this provision of their agreement with the Company, and, therefore, received no commission or other compensation related to the Boston Scientific transaction.

In connection with consulting services performed in 2003 and 2002, Dr. Paul G. Abrams, a former Chief Executive Officer of the Company, received consulting fees of approximately $76,600 for each of the quarters ended June 30, 2003 and 2002, respectively.

The Company had a demand note receivable from an officer with a balance of approximately $90,700 that

was recorded in other assets at March 31, 2002. This note was paid in full on May 24, 2002. There were no demand note receivables from related parties outstanding at June 30, 2003.

Additional factors that may affect results

In addition to the other information contained in this report, the following factors could affect the Company’s actual results and could cause our actual results to differ materially from those achieved in the past or expressed or implied by our forward-looking statements.

We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.

We have not been profitable since our formation in 1984. As of June 30, 2003, we had an accumulated deficit of $205.9 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative activities. To date, we have been engaged only in research and development activities and have not generated any significant revenues from product sales. We do not anticipate that our proposed STR product will be commercially available for several years, if at all. We expect to incur additional operating losses in the future. These losses may increase significantly if we expand clinical development and commercialization efforts.

Our ability to achieve long-term profitability is dependent upon obtaining regulatory approvals for our STR product candidate or any other proposed products and successfully commercializing our products alone or with third parties.

We will need to raise additional capital, and our future access to capital is uncertain.

It is expensive to develop cancer therapy products and conduct clinical trials for these products. Although we currently are focusing on our STR product candidate, we may in the future simultaneously conduct clinical trials and preclinical research for a number of different indications and cancer therapy products, which is costly. Our future revenues may not be sufficient to support the expense of our operations and the conduct of our clinical trials and preclinical research. We will need to raise additional capital:

• to fund operations;

• to continue the research and development of our STR and any other product candidates; and

• to commercialize our STR product candidate or any other proposed products.

We believe that our present cash, cash equivalents, investment securities and expected interest income will be sufficient to fund our anticipated working capital and capital requirements only through the third quarter of 2004.

We are addressing our need for additional capital by pursuing opportunities for the licensing, sale or divestiture of certain non-core intellectual property and other assets, including our STR program and our Pretarget^® technology platform. In addition, we are seeking a buyer or partner for our manufacturing facility in Denton, TX, interested in continuing the facility’s radiopharmaceutical manufacturing operations and producing the STR compound. We also may seek to raise capital through the sale of equity and/or debt securities, or the establishment of other funding facilities.

The amount of additional financing we need will depend on a number of factors, including the following:

• the rate of progress and costs of our clinical trial and research and development activities, including costs of procuring clinical materials;

• actions taken by the FDA and other regulatory authorities;

• the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities;

• the timing and amount of milestone or other payments we might receive from potential strategic

partners;

• the timing and amount of payments we might receive from potential licenses;

• our degree of success in commercializing our STR product candidate or other cancer therapy product candidates;

• the emergence of competing technologies and products, and other adverse market developments; and

• the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

We may not be able to obtain additional financing on a timely basis, on favorable terms, or at all. If we are unable to raise additional funds when we need them, we may be required to delay, reduce or eliminate some or all of our development programs and some or all of our clinical trials. We also may be forced to partner with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently. Such relationships may not be on terms as commercially favorable to us as might otherwise be the case. If we raise additional funds by issuing equity securities, further dilution to shareholders may result, and new investors could have rights superior to current security holders.

Our current debt obligations may restrict our operating and financing flexibility and could, in an event of default, impair our cash resources and assets.

Our potential products must undergo rigorous clinical testing and regulatory approvals, which could be costly, time consuming, and subject us to unanticipated delays or prevent us from marketing any products.

The manufacture and marketing of our proposed STR product and our research and development activities are subject to regulation for safety, efficacy and quality by the FDA in the United States and comparable authorities in other countries.

The process of obtaining FDA and other required regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially depending on the type, complexity and novelty of the products involved. Our STR product candidate is novel; therefore, regulatory agencies lack direct experience with it. This may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our STR product candidate.

The FDA placed our earlier phase III study of our proposed STR product in multiple myeloma on clinical hold after some patients in our phase I/II trials developed a serious delayed toxicity. The FDA requested that we collect additional radiation dosimetry data from a small number of multiple myeloma patients to validate the patient-specific dosing method we had used in earlier studies of STR and proposed to use in our planned pivotal trial program. The study also used an adjusted radiation dose and a revised administration regimen. We completed patient enrollment in this dosimetry study in late 2002. We are conducting on-going follow-up evaluations that include assessments of STR safety and efficacy. In February 2003, we submitted to the FDA data from our dosimetry study. We also submitted to the FDA a proposal for further clinical development of our STR product candidate in patients with primary refractory or relapsed multiple myeloma, using a revised dosing method. In April 2003, the FDA lifted the clinical hold on our STR product candidate. In June 2003 we submitted to the FDA a proposed pivotal clinical program to register our STR product candidate for marketing. Subject to authorization from the FDA, of which there can be no assurance, we plan to begin patient enrollment in the pivotal program in early 2004.

No cancer product using our technologies has been approved for marketing. Consequently, there is no precedent for the successful commercialization of products based on our technologies. In addition, we have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. This may impede our ability to obtain timely approvals from the FDA or foreign regulatory agencies. We will not be able to commercialize our STR product candidate until we obtain regulatory approval, and consequently any delay in obtaining, or inability to obtain, regulatory approval could harm our business.

If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined, forced to remove a product from the market or experience other adverse consequences, including delay, which could materially harm our financial results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for product promotion. We also may be required to undertake post-marketing trials. In addition, if we or other parties identify side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products, and/or additional marketing applications may be required.

The requirements governing the conduct of clinical trials and manufacturing and marketing of our proposed STR product outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can involve additional testing. Foreign regulatory approval processes include all of the risks associated with the FDA approval processes. Also, approval of a product by the FDA does not ensure approval of the same product by the health authorities of other countries.

We may take longer to complete our clinical trials than we project, or we may be unable to complete them at all.

Although for planning purposes we project the commencement, continuation and completion of our clinical trials, the time to initiation and completion of our STR clinical trial program depends upon numerous factors, including:

• our ability to obtain adequate additional funding;

• our receipt of approvals by the FDA and other regulatory agencies and the timing thereof;

• other actions by regulators;

• the rate of progress and costs of our clinical trial and research and development activities;

• our ability to access sufficient, reliable and affordable supplies of the STR compound for clinical studies, including third-party supplies of holmium-166, the radionuclide used in our STR product candidate, as well as other materials used in the manufacture of the STR compound;

• the costs of ramping up and maintaining manufacturing operations, should we determine this to be necessary;

• the extent of scheduling conflicts with participating clinicians and clinical institutions; and

• our ability to identify and enroll patients who meet trial eligibility criteria.

We may not commence or complete our proposed clinical trial program for our STR product candidate as projected, may not conduct it successfully, or may not conduct it at all.

We currently rely on academic institutions and clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our proposed STR product. Further, we are seeking to enter into license agreements, partnerships or other collaborative arrangements to support financing and development of our STR product candidate. To the extent that we now or in the future participate in such collaborative arrangements, we will have less control over the timing, planning and other aspects of our clinical trials. If we fail to commence or complete, or experience delays in or are forced to curtail our proposed clinical program, our stock price and our ability to conduct our business could be harmed.

If testing of a particular product does not yield successful results, we will be unable to commercialize that product.

Our research and development programs are designed to test the safety and efficacy of our proposed products in humans through extensive preclinical and clinical testing. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our proposed STR product or any other proposed products, including the following:

• safety and efficacy results obtained in early human clinical trials may not be indicative of results obtained in later clinical trials;

• the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;

• after reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising;

• our potential collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and

• the effects of our potential products may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

Clinical testing is very expensive, can take many years, and the outcome is uncertain. We cannot currently predict if, when, or under what conditions, we will undertake further clinical studies, including initiating a revised pivotal program, for our STR product candidate. The data collected from our clinical trials may not be sufficient to support regulatory approval of our proposed STR product or any other proposed products. The clinical trials of our proposed STR product and other proposed products may not be completed on schedule, and the FDA or foreign regulatory agencies may not ultimately approve any of our product candidates for commercial sale. Our failure to adequately demonstrate the safety and efficacy of a cancer therapy product under development would delay or prevent regulatory approval of the product, which could prevent us from achieving profitability.

We are dependent on suppliers for the timely delivery of materials and services and may experience in the future interruptions in supply.

For our STR product to be successful, we need access to sufficient, reliable and affordable supplies of the STR compound for clinical studies. This also requires developing and maintaining reliable and affordable third-party suppliers of commercial quantities of the radionuclide holmium-166, and the targeting agent, DOTMP, used in our STR product candidate. Sources of these materials may be limited, and we, or potential third-party suppliers of the STR compound, may be unable to obtain these materials in amounts and at prices necessary to successfully commercialize our STR product. Timely delivery of the holmium-166 component material and of the finished STR compound is critical. For example, holmium-166 loses its effectiveness for treating patients within a short period of time. As a result, the STR product must be shipped within 24 hours of its manufacture to the site where the patient is to be treated. Failures or delays in the manufacturing and shipping processes could compromise the quality and effectiveness of our product.

There are, in general, relatively few sources of the holmium-166 component of our STR product. Historically, we have depended on a single source vendor, the University of Missouri Research Reactor facility group (MURR). In December 2001, we entered into a contract, under which MURR was responsible for the manufacture of holmium-166, including process qualification, quality control, packaging and shipping, from its Columbia, MO reactor facility. That supply contract expired in December 2002. We are in discussions with MURR to supply holmium-166 for our planned STR pivotal program. While MURR generally has provided us materials with acceptable quality, quantity and cost in the past, it may be unable or unwilling to meet our future demands, or demands of potential third-party suppliers of our STR compound. If MURR or an alternate supplier is unable or unwilling to provide supplies of holmium-166 at a cost and on other terms acceptable to us, the manufacture and delivery of our STR product could be impaired, and we may suffer delays in, or be prevented from, initiating or completing further clinical trials of our STR product candidate.

If we fail to negotiate and maintain collaborative arrangements with third parties, our research, development, manufacturing, clinical testing, sales and marketing activities may be delayed or reduced.

We rely in part on third parties to perform for us or assist us with a variety of important functions, including research and development, manufacturing and clinical trials management. We also license technology from others to enhance or supplement our technologies. We may not be able to locate suppliers to manufacture our product components or any proposed products at a cost or in quantities necessary to make them commercially viable. We may rely on third-party contract manufacturers to produce large quantities of certain materials, potentially including the STR compound, for clinical trials and product commercialization. Third-party manufacturers may not be able to meet our needs with respect to timing, quantity, quality or cost. If we are unable to contract for a sufficient supply of needed materials or products on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our clinical testing may be delayed, thereby delaying the submission of products for regulatory approval or market introduction and subsequent sales. Any such delay may reduce our revenues and potential profitability.

Moreover, any potential third-party manufacturers must continually adhere to current Good Manufacturing Practices (cGMP) regulations enforced by the FDA through its facilities inspection program. If our facilities or the facilities of these manufacturers cannot pass a pre-approval plant inspection, the FDA will not grant pre-market approval of our proposed products. In complying with cGMP and foreign regulatory requirements, we and any of our third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our products meet applicable specifications and other requirements. If we, or any of our third-party manufacturers, fail to comply with these requirements, we may be subject to regulatory action.

In April 2001, we purchased a radiopharmaceutical manufacturing facility and certain other assets located in Denton, TX. In addition to the manufacturing facility, we purchased existing equipment, documentation and certain processes. The facility achieved cGMP status and was issued appropriate radiation permits by the State of Texas. This radiopharmaceutical manufacturing facility assumed responsibility for all aspects of the manufacture of the STR compound, including process qualification, quality control, packaging and shipping, and production of the clinical material for the completed STR dosimetry study. We believe that the Denton facility has the capabilities and capacity to serve as the principal manufacturing site for the STR compound for our proposed pivotal program, and for potential commercial manufacture. We are in the process of restarting STR manufacturing operations at the facility to prepare for our proposed STR pivotal program. We plan to operate the Denton facility ourselves while seeking to engage a buyer or partner interested in continuing the facility’s radiopharmaceutical manufacturing operations and producing the STR compound. Acceptable manufacturing alternatives may not be available to us on a timely or cost-effective basis. Our decision whether to continue to utilize the Denton facility as our primary manufacturing site for the STR compound in the future will depend on a number of factors, including:

• actions taken by the FDA and the timing thereof;

• our ability to obtain adequate additional funding and the timing thereof;

• our ability to access sufficient, reliable and affordable third-party supplies of holmium-166;

• the costs of ramping up and maintaining manufacturing operations;

• the availability of qualified personnel;

• the availability and nature of strategic partnering opportunities; and

• the availability and cost of potential third-party suppliers of STR.

In connection with operation of the Denton facility to produce the STR compound for our proposed pivotal program, we may be required to re-certify the facility with the FDA. The ramp-up and re-certification processes at the Denton facility could take up to six months or more. If in the future we decide to transition the STR production process to a third-party supplier, such third-party supplier also could require significant start-up time to qualify and implement the manufacturing process. In either case, our ability to move forward with further STR clinical and commercial development could be adversely affected and we may incur significant additional costs in connection with manufacturing operations.

We face substantial competition in the development of cancer therapies and may not be able to compete successfully, and our potential products may be rendered obsolete by rapid technological change.

The competition for development of cancer therapies is intense. There are numerous competitors developing products to treat the diseases for which we are seeking to develop products. We initially are focusing clinical development of our STR product candidate on the treatment of multiple myeloma. Several companies, including Celgene Corp. and Millennium Pharmaceuticals, Inc., also are developing and testing therapeutics for multiple myeloma. In May 2003 Millennium obtained approval for its Velcade™ therapeutic for treatment of multiple myeloma patients who have received at least two prior therapies and demonstrated disease progression on the last therapy. In addition, a number of established pharmaceutical companies, including GlaxoSmithKline, Novartis AG and Bristol-Myers Squibb Co., are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with technologies applicable to the treatment of cancer. Many of our existing or potential competitors have, or have access to, substantially greater financial, research and development, marketing and production resources than we do and may be better equipped than we are to develop, manufacture and market competing products. Our competitors may have, or may develop and introduce, new products that would render our technology and proposed STR product less competitive, uneconomical or obsolete.

We also expect to face increasing competition from universities and other non-profit research organizations. These institutions, which carry out a significant amount of cancer research and development, are becoming increasingly aware of the commercial value of their findings and more active in seeking patent and other proprietary rights, as well as licensing revenues.

If we are unable to protect our proprietary rights, we may not be able to compete effectively, or operate profitably.

Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights and our ability to avoid infringing the proprietary rights of others. Patent law relating to the scope of claims in the biotechnology field in which we operate is still evolving and, consequently, patent positions in our industry may not be as strong as in other, better-established fields. Accordingly, the United States Patent and Trademark Office (USPTO) may not issue patents from the patent applications owned by or licensed to us. If issued, the patents may not give us an advantage over competitors with similar technologies.

We own approximately 100 issued United States patents and have licenses to additional patents. However, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings, such as oppositions, which may be brought in foreign jurisdictions to challenge the validity of a patent. A third party may challenge the validity or enforceability of a patent after its issuance by the USPTO. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting their coverage. Moreover, the cost of litigation to uphold the validity of patents and to prevent infringement can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without payment to us. Moreover, it is possible that competitors may infringe our patents or successfully avoid them through design innovation. We may need to file lawsuits to stop these activities. These lawsuits can be expensive and would consume time and other resources, even if we were successful in stopping the violation of our patent rights. In addition, there is a risk that a court would decide that our patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of our patents were upheld, a court would refuse to stop the other party on the ground that its activities do not infringe our patents.

In addition to the intellectual property rights described above, we rely on unpatented technology, trade secrets and confidential information. Therefore, others may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We may not be able to effectively protect our rights in unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. However, these agreements may not provide effective protection of our information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

The use of our technologies could potentially conflict with the rights of others.

Our competitors or others may have or acquire patent rights that they could enforce against us. In such case, we may be required to alter our products, pay licensing fees or cease activities. If our products conflict with patent rights of others, third parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any legal action and a required license under the patent may not be available on acceptable terms.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. If there is litigation against us, we may not be able to continue our operations. If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the USPTO to determine priority of invention. We may be required to participate in interference proceedings involving our issued patents and pending applications. We may be required to cease using the technology or license rights from prevailing third parties as a result of an unfavorable outcome in an interference proceeding. A prevailing party in that case may not offer us a license on commercially acceptable terms.

Product liability claims in excess of the amount of our insurance would adversely affect our financial condition.

The testing, manufacturing, marketing and sale of STR and any other proposed cancer therapy products may subject us to product liability claims. We are insured against such risks up to a $10 million annual aggregate limit in connection with clinical trials of our products under development and intend to obtain product liability coverage in the future. However, insurance coverage may not be available to us at an acceptable cost. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material.

Our use of radioactive and other hazardous materials exposes us to the risk of material environmental liabilities, and we may incur significant additional costs to comply with environmental laws in the future.

Our research and development and manufacturing processes, as well as the manufacturing processes that may be used by our collaborators, involve the controlled use of hazardous and radioactive materials. As a result, we are subject to foreign, 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 our use of these materials. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. In the event that we discontinue operations in facilities that have had past research and manufacturing processes where hazardous or radioactive materials have been in use, we may have significant decommissioning costs associated with the termination of operation of these facilities. These potential decommissioning costs also may reduce the market value of the facilities and may limit our ability to sell or otherwise dispose of these facilities in a timely and cost-effective manner. In addition, the risk of accidental contamination or injury from hazardous or radioactive materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources.

Even if we bring products to market, changes in healthcare reimbursement could adversely affect our ability to effectively price our products or obtain adequate reimbursement for sales of our products.

The levels of revenues and profitability of biotechnology 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 we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls. 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. We cannot predict the effect healthcare reforms may have on the development, testing, commercialization and marketability of our proposed cancer therapy products. Further, to the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of other companies that are prospective collaborators for certain of our potential products, our ability to commercialize our 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 we succeed in bringing one or more products to market, we cannot be certain that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive or profitable basis.

The loss of key employees could adversely affect our operations.

Since July 2002, we have implemented three reductions in force. Also in January 2003, we accepted the resignations of Richard Ghalie, MD, Vice President, Medical and Regulatory Affairs, and Les Sabo, Vice President, Manufacturing. Jack L. Bowman was named Executive Chairman and became Chairman of our Board of Directors on March 11, 2003. Douglass B. Given, MD, PhD resigned as President, Chief Executive Officer and a Director of the Company on June 30, 2003. On that date, Mr. Bowman was named Chief Executive Officer and Karen Auditore-Hargreaves, PhD was promoted to Chief Operating Officer of the Company. As of June 30, 2003, we had a total work force of 34 full-time employees and one part-time employee. Our success depends, to a significant extent, on the continued contributions of our principal management and scientific personnel. The loss of the services of one or more of the principal members of our scientific and management staff could delay our STR product development activities or other programs and research and development efforts. We do not maintain key-person life insurance on any of our officers, employees or consultants.

Competition for qualified employees among companies in the biotechnology and biopharmaceutical industry is intense. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our proposed products successfully, we will in the future, be required to expand substantially our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. Our current financial situation may make it more difficult to attract and retain key employees.

Our common stock listing was transferred from The Nasdaq National Market to The Nasdaq SmallCap Market; failure to maintain continued listing on Nasdaq could affect its market price and liquidity.

Our common stock listing was transferred from The Nasdaq National Market to The Nasdaq SmallCap Market on March 20, 2003. We elected to seek a transfer to The Nasdaq SmallCap Market because we had been unable to regain compliance with The Nasdaq National Market minimum $1.00 bid price requirement for continued listing. By transferring to The SmallCap Market, we were afforded an extended grace period in which to satisfy the The SmallCap Market $1.00 minimum bid price requirement. On May 6, 2003, we received notice from Nasdaq confirming that we are now in compliance with the $1.00 SmallCap minimum bid price requirement. As a result of rule changes adopted by Nasdaq in March 2003, we will not be eligible to relist our common stock on The Nasdaq National Market unless and until our common stock maintains a minimum bid price of $5.00 per share and we otherwise comply with the initial listing requirements for The Nasdaq National Market. Trading on the Nasdaq SmallCap Market may have a negative impact on the value of our common stock, because securities trading on the Nasdaq SmallCap Market typically are less liquid than those traded on The Nasdaq National Market.

Our stock price is volatile and, as a result, you could lose some or all of your investment.

There has been a history of significant volatility in the market prices of securities of biotechnology companies, including our common stock, and it is likely that the market price of our common stock will continue to

be highly volatile. Our business and the relative price of our common stock may be influenced by a large variety of industry factors, including:

• announcements by us or our competitors concerning acquisitions, strategic alliances, technological innovations and new commercial products;

• the availability of critical materials used in developing and manufacturing our proposed STR product;

• the progress and results of clinical trials;

• developments concerning patents, proprietary rights and potential infringement; and

• the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals.

In addition, potential public concern about the safety of our proposed STR product and any other products we develop, comments by securities analysts, our ability to maintain the listing of our common stock on the Nasdaq system and conditions in the capital markets in general and in the life science capital market specifically, may have a significant effect on the market price of our common stock. The realization of any of the risks described in this report, as well as other factors, could have a material adverse impact on the market price of our common stock and may result in a loss of some or all of your investment.

In the past, securities class action litigation often has been brought against companies following periods of volatility in their stock prices. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert our management’s time and resources, which could cause our business to suffer.

Certain provisions in our articles of incorporation and Washington state law could discourage a change of control.

Our articles of incorporation authorize our Board of Directors to issue up to 3,000,000 shares of preferred stock and to determine the price, rights, preference, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control, even if this change would benefit our shareholders. In addition, the issuance of preferred stock may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

We have adopted a shareholders’ rights plan, which is intended to protect the rights of shareholders by deterring coercive or unfair takeover tactics. The Board of Directors declared a dividend to holders of our common stock of one preferred share purchase right for each outstanding share of common stock. The right is exercisable ten 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 NeoRx one-hundredth of one share of Series A Junior Participating Preferred Stock at the price of $40, subject to adjustment. The rights expire April 10, 2006. 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 shares of our common stock having a market value of twice that price.

Washington law imposes restrictions on certain transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the acquisition. Prohibited transactions include, among other things:

• a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person;

• termination of 5% or more of the employees of the target corporation; or

• receipt by the acquiring person of any disproportionate benefit as a shareholder.

A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of NeoRx or limiting future investment in NeoRx by significant shareholders and their affiliates and associates.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to the impact of interest rate changes and changes in the market values of its investments.

Interest Rate Risk

The Company’s exposure to market rate risk for changes in interest rates relates primarily to the Company’s debt securities included in its investment portfolio. The Company does not have any derivative financial instruments. The Company invests in debt instruments of the US Government and its agencies and high-quality corporate issuers. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company’s future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. At June 30, 2003, the Company owned $4.3 million in government debt instruments and owned corporate debt securities in the amount of $9.0 million. The Company’s exposure to losses as a result of interest rate changes is managed through investing primarily in securities with relatively short maturities of up to three years and securities with variable interest rates. The Company had no corporate debt securities that had maturity dates greater than one year at June 30, 2003.

Item 4. Controls and Procedures

Under the supervision of and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Vice President, Finance, the Company has evaluated the effectiveness and design and operation of its disclosure controls and procedures as of the end of the quarter and, based on their evaluation, the Chief Executive Officer and the Vice President, Finance, have concluded that these disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 have been made known to them in a timely fashion. There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of shareholders was held on May 9, 2003. The following nominees were elected as directors, each to hold office until his or her successor is elected and qualified, by the vote set forth below:

Nominee	For	Withheld

Douglass B. Given	24,655,140	255,194
Jack L. Bowman	24,069,663	840,671
Frederick B. Craves	24,531,481	378,853
E. Rolland Dickson	24,678,755	231,579
Carl S. Goldfischer	24,071,378	838,956
Alan A. Steigrod	24,647,712	262,622

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits - See Exhibit Index below.

(b) Reports on Form 8-K:

Form 8-K dated April 17, 2003, relating to the sale to Boston Scientific Corporation of certain non-core NeoRx intellectual property and announcing that the FDA lifted the clinical hold on the Company’s Skeletal Targeted Radiotherapy (STR™) product candidate for multiple myeloma.

Form 8-K dated May 6, 2003, announcing the Company’s earnings for the quarter ended March 31, 2003.

Form 8-K dated June 1, 2003, announcing the presentation on the Company’s Skeletal Targeted Radiotherapy (STR™) product candidate at the 2003 Annual Meeting of the American Society of Clinical Oncology by William Bensinger, MD.

Form 8-K dated June 30, 2003, announcing the appointment of Jack L. Bowman as Chief Executive Officer and Karen Auditore-Hargreaves, PhD as Chief Operating Officer of the Company and the resignation of Douglass B. Given, MD, PhD as President, Chief Executive Officer and a Director of the Company. The Company also announced its submission to the FDA of a plan for its proposed STR pivotal clinical program.

SIGNATURES

Pursuant to the requirements 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)


	By:	/s/ MELINDA G. KILE
		Melinda G. Kile
		Vice President, Finance and Chief Accounting Officer

Date: August 14, 2003

EXHIBIT INDEX

Exhibit	Description
3.1(a)	Restated Articles of Incorporation, dated April 29, 1996	(B)
3.1(b)	Articles of Amendment, dated March 31, 1997, to Restated Articles of Incorporation	(C)
3.1(c)	Articles of Amendment, dated August 8, 1997, to Restated Articles of Incorporation	(K)
3.2	Bylaws, as amended, of the registrant	(K)
10.1	Restated 1994 Stock Option Plan (‡)	(F)
10.2	Lease Agreement for 410 West Harrison facility, dated February 15, 1996, between NeoRx Corporation and Diamond Parking, Inc	(H)
10.3	Amendment No. 1, dated August 14, 2000, to Lease Agreement between NeoRx Corporation and Dina Corporation	(J)
10.4	1991 Stock Option Plan for Non-Employee Directors, as amended (‡)	(E)
10.5	1991 Restricted Stock Plan (‡)	(D)
10.6	Agreement, dated as of December 15, 1995	(F)
10.7	Stock Option Agreement, dated July 30, 2001, between NeoRx Corporation and Douglass B. Given (‡)	(G)
10.8	Indemnification Agreement (‡)	(H)
10.9	Form of Key Executive Severance Agreement (‡)	(I)
10.10	Officer Change in Control Agreement (‡)	(K)
10.11	Key Executive Severance Agreement (‡)	(K)
10.12	License Agreement, dated June 30, 1999, between NeoRx and The Dow Chemical Company	(L)
10.13	Credit Facility Agreement, dated February 3, 2000, between NeoRx Corporation and Pharmaceutical Product Development, Inc.	(M)
10.14	Facilities Lease, dated July 24, 2000, between NeoRx Corporation and F5 Networks	(N)
10.15	Stock Option Agreement, dated December 19, 2000, between NeoRx Corporation and Carl S. Goldfischer (‡)	(J)
10.16	Stock Option Agreement, dated January 17, 2001, between NeoRx Corporation and Carl S. Goldfischer (‡)	(J)
10.17	Stock Option Agreement, dated November 16, 2000, between NeoRx Corporation and Douglass B. Given (‡)	(J)
10.18	Sublicense Agreement, dated May 15, 1997, between NeoRx Corporation and Roche Molecular Biochemicals. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.	(O)
10.19	Stock Option Grant Program for Nonemployee Directors under the NeoRx Corporation 1994 Restated Stock Option Plan (‡)	(P)
10.20	First Amendment to Sublease Agreement, dated March 30, 2001, between NeoRx Corporation and F5 Networks	(O)
10.21	Amendment No. 3 to Consulting Agreement, dated January 1, 2002, between NeoRx Corporation and Bay City Capital BD, LLC	(A)
10.22	Separation Agreement, dated September 13, 2001, between NeoRx Corporation and Richard L. Anderson (‡)	(A)
10.23	Form of VP Change in Control Agreements (‡)	(A)
10.24	Clinical Manufacture and Supply Agreement, dated December 1, 2001, between NeoRx Corporation and MURR. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.	(A)
10.25	Facilities Lease, dated February 15, 2002, between NeoRx Corporation and Selig Real Estate Holdings Six	(A)
10.26	Form of VP Severance Agreements (‡)	(A)
10.27	Lease Termination/Continuation Agreement between NeoRx Corporation and Dina Corporation	(R)
10.28	Purchase Agreement dated as of November 12, 2002, between NeoRx Corporation and IDEC Pharmaceutical Corporation	(S)
10.29	Change in Control Agreement, dated February 12, 2003, between NeoRx Corporation and Douglass B. Given	(T)
10.30	Patent License Agreement dated April 17, 2003 between NeoRx Corporation and SciMed Life Sciences, Inc.	(Q)

10.31	Patent Assignment Agreement dated April 17, 2003 between NeoRx Corporation and Boston Scientific Corporation	(Q)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14a	(U)
31.2	Certification of Principal Accounting Officer pursuant to Rule 13a-14a	(U)
32.1	Certification of Chief Executive Officer pursuant to 18 USC Section 1350	(U)
32.2	Certification of Principal Accounting Officer pursuant to 18 USC Section 1350	(U)

‡		Management contract or compensatory plan.


(A)		Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference.

(B)		Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference.

(C)		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.

(D)		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.

(E)		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.

(F)		Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference.

(G)		Filed as an exhibit to the Company’s Registration Statement on Form S-8 (Registration No. 333-71368), filed October 10, 2001 and incorporated herein by reference.

(H)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 1996 and incorporated herein by reference.

(I)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 1996 and incorporated herein by reference.

(J)		Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference.

(K)		Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference.

(L)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.

(M)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.

(N)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2000 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.

(O)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2001 and incorporated herein by reference.

(P)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2002 and incorporated herein by reference.

(Q)		Filed as an exhibit to the Company’s Form 8-K dated April 17, 2003 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.

(R)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by reference.

(S)		Filed as an exhibit to the Company’s Current Report on Form 8-K filed as of November 27, 2002 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment.

(T)		Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by reference.

(U)		Filed herewith.