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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                          COMMISSION FILE NO. 0-16614

                               NEORX CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                              <C>
                  WASHINGTON                                       91-1261311
        (STATE OR OTHER JURISDICTION OF                 (IRS EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)
</TABLE>

            410 WEST HARRISON STREET, SEATTLE, WASHINGTON 98119-4007
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 281-7001

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          COMMON STOCK, $.02 PAR VALUE
           $2.4375 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, SERIES 1

     Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                               Yes  X      No

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

     The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 28, 2001 was approximately $337 million (based on the
closing price for shares of the Registrant's Common Stock as reported by the
NASDAQ National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

     As of February 28, 2001, approximately 26.2 million shares of the
Registrant's Common Stock, $.02 par value per share, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     (1) Portions of the Registrant's 2001 Notice of Annual Meeting and Proxy
         Statement for the Registrant's Annual Meeting of Shareholders to be
         held on May 22, 2001 are incorporated by reference in Part III of this
         Form 10-K.

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                                     PART I

           IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     This annual report on Form 10-K 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 reflect our current views
with respect to future events and are based on assumptions and are subject to
risks and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. We discuss many of these risks in
greater detail under the heading "Risk Factors" below. Also, these
forward-looking statements represent our estimates and assumptions only as of
the date of this Form 10-K.

     You should read this Form 10-K and the documents that we incorporate by
reference completely and with the understanding that our actual results,
performance and achievements may be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements.

                                  RISK FACTORS

     This section briefly discusses certain risks that should be considered by
shareholders and prospective investors in NeoRx. Many of these risks are
discussed in other contexts in other sections of this report.

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 for any year since our formation in 1984. As of
December 31, 2000, we had an accumulated deficit of $159 million. These losses
have resulted principally from costs incurred in our research and development
programs and from our general and administrative costs. 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 any of our
proposed products will be commercially available for several years. We expect to
incur additional operating losses in the future. These losses may increase
significantly as we expand development and clinical trial efforts. Our ability
to achieve long-term profitability is dependent upon obtaining regulatory
approvals for our proposed products and successfully commercializing our
products alone or with third parties. However, our operations may not be
profitable even if we succeed in commercializing any of our products under
development.

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. We plan to continue to simultaneously conduct
clinical trials and preclinical research for a number of different 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 therapeutic products; and

     - to commercialize our proposed products.

     We believe that our existing funds will be sufficient to satisfy our
financing requirements through at least the second quarter of 2002. However, we
may need additional financing within this time frame depending on a number of
factors, including the following:

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

     - the costs of developing manufacturing operations;
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     - the costs of developing marketing operations, if we undertake those
       activities;

     - the amount of milestone payments we might receive from potential
       collaborators;

     - our degree of success in commercializing our cancer therapy products;

     - the emergence of competing technologies and other adverse market
       developments;

     - changes in or terminations of our existing collaborations and licensing
       arrangements; 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 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. 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 POTENTIAL PRODUCTS MUST UNDERGO RIGOROUS CLINICAL TESTING AND REGULATORY
APPROVALS, WHICH COULD BE COSTLY, TIME CONSUMING, SUBJECT US TO UNANTICIPATED
DELAYS OR PREVENT US FROM MARKETING ANY PRODUCTS.

     The manufacture and marketing of our proposed products and our research and
development activities are subject to regulation for safety, efficacy and
quality by the U.S. Food and Drug Administration 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 and often takes many years and can
vary substantially based upon the type, complexity and novelty of the products
involved. Our Skeletal Targeted Radiation, which we call STR, and PRETARGET(R)
products are novel; therefore, regulatory agencies lack experience with them.
This may lengthen the regulatory review process, increase our development costs
and delay or prevent commercialization of our STR and PRETARGET(R) products. Our
current STR studies were placed on clinical hold after some phase I/II patients
in our STR multiple myeloma trials developed a serious late toxicity. The FDA
has requested that we collect additional dosimetry data from patients to
demonstrate the accuracy of the method we propose to use to calculate dose in
our phase III trial. Our phase III STR trials may be delayed until the dosimetry
trial is completed. The FDA has also suggested that we analyze our patient data
to determine the relevant factors for selecting a radiation dose likely to
produce an appropriate safety profile. Our current STR phase III protocol could
be modified based on this analysis. Our trials cannot begin until we receive
authorization from the FDA.

     No cancer products using our STR or PRETARGET(R) technologies have 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 FDA
approvals, if at all. We will not be able to commercialize any of our potential
products until we obtain FDA approval, and consequently any delay in obtaining,
or inability to obtain, FDA 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 and 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 the promotion of our
proposed products. We may also be required to undertake post-marketing trials.
In addition, if others or we 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 additional marketing applications may be
required.

     The requirements governing the conduct of clinical trials, manufacturing
and marketing of our proposed products outside the United States vary widely
from country to country. Foreign approvals may take longer to

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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, a number of factors, including scheduling
conflicts with participating clinicians and clinical institutions and
difficulties in identifying and enrolling patients who meet trial eligibility
criteria, may cause significant delays. We may not commence or complete clinical
trials involving any of our products as projected or may not conduct them
successfully.

     We rely on academic institutions or clinical research organizations to
conduct, supervise or monitor some or all aspects of clinical trials involving
our proposed products. We will have less control over the timing and other
aspects of those clinical trials than if we conducted them entirely on our own.
If we fail to commence or complete, or experience delays in, any of our planned
clinical trials, our stock price and our ability to conduct our business as
currently planned 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 products, including the following:

     - safety and efficacy results attained in early human clinical trials may
       not be indicative of results that are 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 our potential products have 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 at this time predict if, when or under what conditions we
will be permitted to restart our STR phase III trial or our other STR clinical
trials. The data collected from our clinical trials may not be sufficient to
support approval by the FDA of our proposed STR multiple myeloma product, or any
of our other proposed products. The clinical trials of our proposed STR multiple
myeloma product, and our other products under development, may not be completed
on schedule and the FDA 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.

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WE ARE DEPENDENT ON SUPPLIERS FOR THE TIMELY DELIVERY OF MATERIALS AND SERVICES
AND MAY EXPERIENCE IN THE FUTURE INTERRUPTIONS IN SUPPLY.

     To be successful, we need to develop and maintain reliable and affordable
third party suppliers of:

     - commercial quantities of holmium-166, the form of radiation used in our
       STR product, and yttrium-90, the form of radiation used in our
       PRETARGET(R) program;

     - the chemical agent used in our STR product to deliver holmium-166 to the
       bone; and

     - the antibodies and proteins used in our PRETARGET(R) program.

     Sources of some of these materials are limited, and we may be unable to
obtain these materials in amounts and at prices necessary to successfully
commercialize our proposed products. Timely delivery of materials is critical to
our success. For example, holmium-166, the form of radiation used in our STR
product, loses its effectiveness for treating patients within a short period of
time. As a result, our suppliers must ship the STR product to the patient within
24-hours after it is manufactured. Failures or delays in the manufacturing and
shipping processes could compromise the quality and effectiveness of our
products. We currently depend on a single source vendor for the holmium-166
component of our STR product. We plan to establish an additional supplier for
this material, but this may take several years. There are, in general,
relatively few alternative sources of holmium-166. While the current vendor
generally has provided us these materials with acceptable quality, quantity and
cost in the past, it may be unable or unwilling to meet out future demands. If
we have to switch to a replacement vendor, the manufacture and delivery of our
products could be interrupted for an extended period.

     We have entered into an arrangement with the University of Missouri
research reactor facility group, also known as MURR, to produce holmium-166.
MURR currently is responsible for the manufacture of holmium-166, including
process qualification, quality control, packaging and shipping, from its
Columbia, Missouri reactor facility. Our business and operations could be
materially adversely affected if MURR does not perform satisfactorily under this
arrangement. We plan to negotiate a long-term supply contract with MURR. If we
are unable to negotiate a long-term contract in a timely fashion upon favorable
terms, or if MURR is unable or unwilling to provide supplies of holmium-166
under such contract in a satisfactory manner, we may suffer delays in, or be
prevented from, initiating or completing clinical trials of our STR product.

IF WE FAIL TO NEGOTIATE AND MAINTAIN COLLABORATIVE ARRANGEMENTS WITH THIRD
PARTIES, OUR MANUFACTURING, CLINICAL TESTING, SALES AND MARKETING ACTIVITIES MAY
BE DELAYED OR REDUCED.

     We rely in part on collaborators and other 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 products at a cost or in quantities
necessary to make them commercially viable. We intend to rely on third party
contract manufacturers to produce large quantities of materials needed for
clinical trials and product commercialization. Third party manufacturers may not
be able to meet our needs with respect to timing, quantity or quality. If we are
unable to contract for a sufficient supply of needed materials 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 the market introduction and
subsequent sales of our products. Any such delay may lower our revenues and
potential profitability.

     Moreover, any potential third-party manufacturers and we must continually
adhere to current Good Manufacturing Practices, or 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 cancer therapy 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

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specifications and other requirements. If any of our third-party manufacturers
or we fail to comply with these requirements, we may be subject to regulatory
action.

     ABC Laboratories, Inc., which we call ABC, currently is our sole
collaborator manufacturing STR for our pending multiple myeloma clinical trials.
As such, ABC Labs would be responsible for all aspects of the manufacture of
STR, including process qualification, quality control, packaging and shipping.
We believe that ABC's manufacturing facilities will be sufficient to meet our
initial needs for the planned STR multiple myeloma and other STR clinical
trials. In the past, we have experienced interruptions in ABC Labs' STR
manufacturing processes, which if they occur in the future, could result in
material delays in, or prevent us from completing, our clinical trials and
otherwise commercializing our STR product. To help protect against such future
interruptions or delays in supply, on March 20, 2001, we entered into an
agreement with International Isotopes Inc. to purchase International Isotopes'
radiopharmceutical manufacturing facility and certain other assets, located in
Denton, Texas. To acquire these assets, we have agreed to pay $6 million in
cash, assume $6 million of restructured debt of International Isotopes and issue
to International Isotopes a three-year warrant to purchase 800,000 shares of
NeoRx common stock. Completion of the purchase is subject to a number of
conditions of closing, including the sale by International Isotopes of certain
of its other assets to third parties, settlement by International Isotopes of
claims of certain creditors, receipt by International Isotopes of bank financing
for its proposed future operations and delivery by International Isotopes of the
assets free and clear of material liens. Many of the conditions of closing of
the proposed transaction with International Isotopes depend on actions of
parties over which we have no control. The asset purchase agreement can be
terminated by us or by International Isotopes if the closing does not occur by
April 30, 2001. If the purchase is completed by April 30, 2001, we currently
expect this manufacturing facility to be operational in the third quarter of
2001. In this case, the manufacture of STR for clinical trials would be shared
by ABC Labs and NeoRx.

     If we lose or are unable to secure collaborators, or if we are not
successful in acquiring the International Isotopes facility, or if our current
collaborators, including ABC Labs, do not apply adequate resources to their
collaboration with us, our product development and potential for profitability
may suffer. We intend to enter into collaborations for one or more of the
research, development, manufacturing, marketing and other commercialization
activities relating to some of our products under development. If any
collaborator breaches or terminates its agreement with us, or fails to conduct
its collaborative activities in a timely manner, the commercialization of our
products under development could be slowed down or blocked completely. Disputes
may arise between us and ABC Labs or other collaborators on a variety of
matters, including financial or other obligations under our agreements. These
disputes may be both expensive and time consuming and may result in delays in
the development and commercialization of our proposed products.

WE FACE SUBSTANTIAL COMPETITION IN THE DEVELOPMENT OF CANCER THERAPIES AND MAY
NOT BE ABLE TO SUCCESSFULLY COMPETE 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 are initially focusing our STR product on the
treatment of multiple myeloma. Celgene Corporation's thalidomide product is
being sold for multiple myeloma, and Cell Therapeutics, Inc.'s arsenic trioxide
also is being tested in that disease. Some competitors have adopted product
development strategies targeting cancer cells with antibodies. Many emerging
companies, including IDEC Pharmaceuticals, Cytogen Corp. and Coulter
Pharmaceuticals, have corporate partnership arrangements with large, established
companies to support the research, development and commercialization of products
that may be competitive with ours. In addition, a number of established
pharmaceutical companies, including SmithKline Beecham, Nycomed Amersham,
Mallinkrodt, Inc. and Bristol-Myers Squibb, are developing proprietary
technologies or have enhanced their capabilities by entering into arrangements
with, or acquiring, companies with proprietary antibody-based technology or
other 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 us to develop, manufacture and market
competing products. Our

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competitors may have, or may develop and introduce, new products that would
render our technology and products under development less competitive,
uneconomical or obsolete.

     We also expect to face increasing competition from universities and other
non-profit research organizations. These institutions carry out a significant
amount of cancer research and development. These institutions 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 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 technology.

     We own more than 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 Patent and Technology Office. 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. To
stop these activities we may need to file a lawsuit. These lawsuits are
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 was 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 also
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. If they do so, 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 or at all.

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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 Patent and Trademark Office 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 to 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 the cancer therapy
products that we have under development 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, if at all. 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 clinical manufacturing processes, as well
as the manufacturing processes 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
and the safety procedures utilized by our collaborative partners 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 addition,
the risk of accidental contamination or injury from hazardous and 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 cancer therapy products. Further, to the extent that such
proposals or reforms have a material adverse effect on the business,
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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.

     We are a small company with fewer than 70 employees. 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
our key personnel, including Paul G. Abrams, Chief Executive Officer of the
Company, and other principal members of our scientific and management staff,
could delay our product development programs and our 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 may 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 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 prices 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 our products;

     - the 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 government approvals.

     In addition, public concern about the safety of the products we develop,
comments by securities analysts, and general market conditions 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 has often been brought
against companies following periods of volatility in their stock prices. We may
in the future be the targets 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.

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CERTAIN PROVISIONS IN OUR ARTICLES OF INCORPORATION AND WASHINGTON STATE LAW
COULD DISCOURAGE A CHANGE OF CONTROL OF NEORX.

     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 or delaying, deferring or preventing a
change of control of NeoRx, 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 the 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 some 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.

ITEM 1. BUSINESS

THE COMPANY

     NeoRx is developing innovative products designed to provide improved,
cost-effective treatments for patients with cancer. Our lead product candidate
is named Skeletal Targeted Radiotherapy, which we call STR. We completed
enrollment of the phase I/II clinical trials of STR in multiple myeloma in 2000.
In September 2000, we initiated phase III clinical trials of our STR product
combined with chemotherapy for the treatment of multiple myeloma. In November
2000, we received a letter from the FDA suspending enrollment and treatment
under our phase III trials in multiple myeloma and other STR studies after a
serious delayed side effect appeared in a number of phase I/II patients who
received STR. We are in continuing communications with the FDA regarding the
removal of our proposed STR product from clinical hold. Communications with the
FDA to date have focused on:

     - the relevant factors for selecting a safe radiation dose, and

     - the accuracy of radiation dose calculations.

     The FDA has requested that we collect additional dosimetry data from
patients to demonstrate the accuracy of the method we propose to use to
calculate dose in our phase III STR trial. We expect to file a

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protocol for this study with the FDA shortly involving a limited number of
patients. Our STR trials may be delayed until this study is completed. The FDA
has suggested that we analyze our patient data to determine the relevant factors
for selecting a radiation dose that is likely to have the appropriate safety
profile. Our current STR phase III protocol may be modified based upon this
analysis. We currently cannot predict if, when or under what conditions we will
be permitted to start our phase III STR trials. Our STR trials cannot begin
until we receive authorization from the FDA.

     We also are developing a proprietary PRETARGET(R) program to deliver
radiation therapy, and potentially other anti-cancer agents, directly to tumor
sites. This program employs antibody fragments that target cancer cells.
Antibodies are proteins produced by certain white blood cells in the body's
immune system in response to foreign substances (antigens), such as viruses,
bacteria, toxins and specific types of cancer cells. An antibody will recognize
and bond specifically only to a single type of antigen. With PRETARGET(R)
technology, a fragment of an antibody that will bond with tumor cells is
administered to the patient prior to radiation therapy. A radioactive drug is
subsequently administered to the patient. The radioactive drug is formulated to
attach to the antibody fragment that has already bonded to the patient's tumor.
Any drug that does not attach to the antibody fragment is rapidly eliminated in
the patient's urine.

     We began phase I clinical trials of our PRETARGET(R) technology in patients
with cancers of the lymph cells (lymphomas) in December 2000. A competitive
award from the Small Business Innovative Research program of the National
Institutes of Health sponsors development of this lymphoma product, in part. We
also are developing PRETARGET(R) therapeutics that may be useful for the
treatment of cancers of the lung, breast, ovary, colon, rectum and pancreas.
Phase I PRETARGET(R) clinical trials in patients with pancreatic and other
cancers of the gastrointestinal tract are expected to begin in 2001.

PRODUCTS

  Cancer and Its Treatment

     Cancer is second only to cardiovascular disease as a cause of death in the
United States. The American Cancer Society estimates that approximately
1,220,000 new cases of cancer will be diagnosed in the United States in 2000, of
which more than 50% are expected to be tumors of the lung, colon, breast and
prostate. Cancer is a large group of diseases characterized by uncontrolled cell
proliferation. Cancer cells have the tendency to dislodge from the sites where
the tumors originate and spread to other parts of the body (a process called
metastasis), where they invade and destroy the organs in which they are growing.

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

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

     We believe that improved cancer therapies will arise from one of two
approaches:

     - inhibiting a process that is both unique and critical to the tumor; or

     - targeting more generally toxic agents preferentially to tumors.

     NeoRx's proposed STR and PRETARGET(R) product focus on the second approach.

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  Skeletal Targeted Radiotherapy (STR)

     Multiple myeloma is a cancer involving the malignancy of plasma cells,
which are found in the bone marrow. Current treatments for this disease have had
limited success. With conventional chemotherapy, disease disappears completely
(a complete response) in only about 15% of patients. The median survival of all
myeloma patients is approximately 2-3 years from treatment. Over the last
decade, high-dose chemotherapy with stem cell transplantation has been shown to
be superior to conventional chemotherapy for multiple myeloma.

     Our proposed STR product uses a targeting principle to deliver a specific
kind of radiation, holmium-166, to bone where it is designed to destroy both
tumor cells and normal cells in the marrow. The patient then receives an
infusion of cells harvested from the patient prior to exposure to treatment.
These cells are designed to repopulate the bone marrow so that the patient can
make normal red cells, white cells and platelets. We believe that STR may
represent an important advancement in cancer therapy to deliver high doses of
radiation to the bone and marrow cavity without simultaneously causing
significant damage to multiple organs outside the bone.

     In mid-1998 NeoRx began phase I studies of STR combined with standard
therapies in patients with multiple myeloma. In mid-2000 the Company completed
patient enrollment on the phase I/II studies combining the highest STR dose
tested with high dose melphalan, a chemotherapy drug. As of the end of 2000, 28
of 65 patients who had been evaluated achieved complete remission, defined as
the absence of cancer cells in the bone marrow and the elimination of all signs
of the characteristic mycelia protein as assessed by sensitive biochemical
techniques.

     Two methods were used to calculate the average dosage to marrow in the
phase I/II trials. Using the more conservative calculation, some patents in the
high-dose STR groups received 40Gy and others received 48Gy. Of the 32 patients
treated in these high-dose groups, 10 of 18 evaluated as of the end of 2000 had
complete remission: three of six at the 40Gy does and seven of 12 at the 48 Gy
dose. Our current phase III trial protocol uses the more conservative method
(40Gy) to calculate average dose to marrow.

     In September 2000, we initiated phase III clinical trials of our STR
product for multiple myeloma. In November 2000, we suspended enrollment and
treatment on our STR trials pending FDA review and receipt of FDA approval to
proceed with those trials. Our STR trials were suspended because a delayed side
effect, referred to as TTP/HUS (thrombotic thrombocytopenic purpura/hemolytic
uremic syndrome), appeared in a number of phase I/II patients who received STR.
TTP/HUS involves a combination of symptoms, including abnormal clotting of blood
in small blood vessels. This can lead to anemia, a low platelet count that can
result in bleeding, and potential damage to organs. Although relatively
uncommon, TTP/HUS has many potential triggering causes, including food
contamination, toxic shock syndrome, post-viral infection, bone marrow
transplantation and drug effects. Each of the affected patients had at least two
known potential triggers of TTP/HUS.

     We are in continuing communications with the FDA regarding the removal of
our proposed STR product from clinical hold. Communications with the FDA to date
have focused on:

     - the relevant factors for selecting a safe radiation dose, and

     - the accuracy of radiation dose calculations.

     The FDA has requested that we collect additional dosimetry data from
patients to demonstrate the accuracy of the method we propose to use to
calculate dose in our phase III STR trial. We expect to file a protocol for this
study with the FDA shortly involving a limited number of patients. Our phase III
STR trials may be delayed until this study is completed. The FDA has suggested
that we analyze our patient data to determine the relevant factors for selecting
a radiation dose that is likely to have the appropriate safety profile. Our
current STR phase III protocol may be modified based upon this analysis. We
currently cannot predict if, when or under what conditions we will be permitted
to start our phase III STR trials.

     The actual period of the delay of our phase III clinical trials will depend
on the additional time, if any, that the Company requires to conduct additional
studies and institute any protocol changes requested by the
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<PAGE>   13

FDA. We cannot at this time predict the extent and potential costs of the delay
or its effect on the Company's financial condition and results of operations or
if, when and under what conditions the FDA will remove our STR product from
clinical hold. See the discussion above under in the heading "Risk Factors" for
additional discussion of this and other risks.

     As currently proposed, our pending STR phase III clinical trials are
designed to compare the effectiveness and safety of STR combined with
chemotherapy to chemotherapy alone. The proposed phase III study would be a
multi-center, randomized open-label trial. The studies are designed to explore
whether the addition of STR to high dose therapy will increase the number of
complete responses without adding significant toxicity. The goal is to improve
patient responses without increasing the side effects associated with high-dose
therapy.

     In January 2000, we entered into an agreement with Pharmaceutical Product
Development, Inc., which we call PPD, pursuant to which PPD will monitor our
proposed STR phase III clinical study. As part of the agreement, PPD will
provide NeoRx a $5 million credit line to help fund our phase III trial. We must
repay any principal and interest for any credit drawn, but we are not under an
obligation to use the credit line. If the credit line is used, principal and
interest is not due until the STR product is approved by the FDA or abandoned by
NeoRx. In return for the line of credit, we issued PPD a warrant to purchase
NeoRx common stock at a premium to the price on the date of issue. As of March
30, 2001, no funds have been drawn on this line of credit.

     In January 2001, the Company and ABC Laboratories (Columbia, MO) extended
their existing agreement for ABC Laboratories to manufacture NeoRx's STR product
for the proposed phase III clinical trials in multiple myeloma. ABC Laboratories
had supplied doses of STR for the phase I/II clinical trials and will continue
to supply the doses needed for phase III. We have also entered into an
arrangement with the University of Missouri research reactor facility group,
also known as MURR, to produce holmium-166, the radioactive component of the STR
product. MURR currently is responsible for the manufacture of holmium-166,
including process qualification, quality control, packaging and shipping, from
its Columbia, Missouri reactor facility.

     On March 20, 2001, we entered into an agreement to purchase certain
radiopharmaceutical manufacturing assets of International Isotopes Inc. in
Denton, Texas. Completion of the purchase is subject to a number of conditions
of closing, including the settlement by International Isotopes of claims of
certain creditors, receipt by International Isotopes of bank financing for its
proposed future operations and delivery by International Isotopes of the assets
free and clear of liens. To acquire the assets, we have agreed to pay $6 million
in cash and to assume $6 million of restructured debt of International Isotopes.
In addition, we have agreed to issue to International Isotopes a three-year
warrant to purchase, at an exercise price of $10 per share, up to 800,000 shares
of NeoRx common stock (the "warrant shares"). We have agreed to file a
registration statement to register the warrant shares for resale after closing.
In addition, we have committed to hire key employees of International Isotopes
to assist us with our proposed operations in Denton. Many of the conditions of
closing of the proposed transaction with International Isotopes depend upon
actions of parties over which NeoRx has no control. As a result, there can be no
assurance that such conditions will be satisfied on the date of closing, if at
all. The asset purchase agreement can be terminated by either NeoRx or
International Isotopes if the closing does not occur by April 30, 2001.

     The Denton facility is inspected and approved by the FDA, carries the
required radiation licenses and access to technical expertise. As a result, we
believe that acquiring the facility will address our manufacturing needs more
quickly and efficiently than building our own plant.

     Subject to the receipt of FDA approval to restart our STR studies, we
intend to explore additional uses for STR in cancer therapy. Most patients with
metastatic prostate cancer, for example, have most of their tumor in the bone.
For those patients in whom standard therapies with hormones no longer work,
tumor in the bone results in pain, declining performance status, and death. We
believe that administering STR, with or without additional chemotherapy, may
cause a regression of the prostate cancer in the bone. A pilot phase I study to
determine the feasibility of this approach is currently planned for 2002.

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  Market Opportunity for STR

     There are approximately 15,000 new cases of multiple myeloma annually in
North America, and an equal number in Europe. We estimate that about half these
patients will not be appropriate candidates for our therapy due to overall
health status. The Company believes that, at the Multiple Myeloma Workshop held
in Stockholm (Sweden) in 1999, the consensus of the experts was that high-dose
therapy requiring re-infusion of bone marrow stem cells is the preferred
treatment for those multiple myeloma patients who can tolerate it.

     We believe that, if approved by the FDA for commercial sale, STR will
principally be used in clinical centers conducting stem cell transplants. In
North America, the majority of the transplants are performed at approximately 80
transplant centers. We currently estimate that approximately 25% (or twenty) of
these centers will participate in the phase III clinical trials. Thus, multiple
myeloma represents a concentrated market, allowing a small sales force and
focused marketing effort to reach the eighty major transplant centers in the
United States.

  PRETARGET(R) proprietary drug delivery platform for cancer therapies

     NeoRx is also developing a proprietary PRETARGET(R) technology program to
deliver radiation therapy, and potentially other anti-cancer agents (such as
drugs and cytokines), to tumor sites. This program employs monoclonal antibodies
to target cancer cells. Antibodies are proteins produced by certain white blood
cells in the body's immune system in response to antigens (foreign substances)
such as viruses, bacteria, toxins and specific types of cancer cells. An
antibody will recognize and bind specifically only to a single type of antigen.
This quality makes antibodies potentially useful as "targeting vehicles" for the
delivery of products to image or treat sites of disease.

     Radiation is known to kill cancer cells that are exposed to sufficiently
large doses. In the conventional approach to radioimmunotherapy, the radiation
is linked to the antibody that is then administered to patients. Because the
antibody is a large molecule, the antibody and the linked radiation circulate
for a long time through the bloodstream before eventually reaching the tumor.
This prolonged circulation can cause "innocent bystander" toxicity to normal
organs such as the bone marrow. Our PRETARGET(R) technology is designed to more
efficiently locate the radiation on the tumor, reduce "innocent bystander"
toxicity, and allow higher radiation doses to be safely administered than in
conventional radioimmunetherapy.

     Our PRETARGET(R) technology takes advantage of the high binding affinity of
two molecules: biotin and streptavidin. Because biotin is a small molecule, it
travels rapidly through the bloodstream and penetrates the tumor site much
faster than a large molecule such as an antibody. As a small molecule, it also
exits the body rapidly. To endow biotin with selectivity for tumor tissue, we
have genetically engineered fusion proteins consisting of an antibody fragment
specific to the tumor of interest fused to streptavidin. The fusion protein is
administered to the patient and allowed to accumulate at the tumor over a period
of 24 - 48 hours. Since no radiation is attached to the fusion protein, there is
no "innocent bystander" toxicity during this period of circulation. Binding of
the fusion protein to tumor via the antibody portion results in the display of
streptavidin on the tumor surface. Subsequent injection of a radioisotope linked
to biotin results in rapid attachment to the pre-localized fusion protein and
selective radiation of the patient's tumor. Any unbound radiation is rapidly
eliminated through the kidneys. The selectivity of the PRETARGET(R) technology
is further improved by injecting a "clearing agent" into the patient between the
fusion protein and the radiobiotin. The clearing agent scavenges the fusion
protein that is still in the bloodstream and removes it to the liver where it is
metabolized and excreted. In January 2001, we received a US patent that covers
our clearing agent.

  Lymphoma

     Lymphomas are cancers of the white blood cells (lymphocytes) in the body,
and represent a variety of different disease entities. Non-Hodgkin's Lymphoma
(NHL) is one type of lymphoma. In 2000, there were about 57,000 new cases of NHL
in the United States. The frequency of this disease is increasing at a rate of
about 3% per year. NHL is a radiation-sensitive tumor, which is rarely curable
with conventional chemotherapy. Recently developed immunotherapy products for
the treatment of lymphoma have enjoyed considerable commercial success, despite
the fact that they have not changed the natural history of the disease. NeoRx
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believes its PRETARGET(R) technology may be able to deliver high doses of
radiation to NHL without requiring a bone marrow transplant. If so, this could
constitute a major improvement in both the efficacy and cost of treatment for
this disease.

     In 1998 and 1999, the Company conducted a clinical proof-of-concept in
which we used an antibody selective for B-lymphocytes (the cells most often
affected by NHL) in our PRETARGET(R) format to deliver a beta-emitting isotope,
yttrium-90, to patients with NHL. This study, which was reported in 2000 in the
journal Cancer Biotherapy and Radiopharmaceuticals, indicated that radiation
doses up to at least three times the maximum tolerated dose of other radio
labeled antibodies could be delivered safely using our PRETARGET(R) approach. We
were also encouraged that six of the seven patients treated in this study
demonstrated objective responses, including three complete responses.

     Based on these results, we proceeded to develop a proprietary fusion
protein for NHL, and in December 2000, we began phase I clinical studies with
this new agent. Preclinical data concerning this fusion molecule were published
in the December 1, 2000 edition of the journal Cancer Research. A total of
approximately 20 patients will be treated in the first group of patients, in
which the dosage and timing of the different components of the product will be
studied. Subsequently, groups of patients will receive escalating doses of the
radiation component to determine the maximum tolerated dose. Development of the
NHL fusion protein was partially funded by a competitive award from the Small
Business Innovation Research program of the National Cancer Institute. We also
expect to receive an additional $1.1 million over 2001 - 2002 from this program
to fund part of the clinical development of the product.

  Carcinomas

     Carcinomas are solid tumors that arise from the epithelial cells lining
such organs as lung, colon, breast, prostate and pancreas. Although these tumors
are generally less sensitive to radiation than blood cell cancers (such as NHL),
carcinomas are far more common. We began our application of PRETARGET(R)
technology to carcinomas with the AVICIDIN(R) product. AVICIDIN(R) completed the
phase I clinical trials in 1997. In these phase I trials tumor regression was
observed in some patients following a single AVICIDIN(R) dose, including
patients with advanced, bulky tumors. Phase II studies of AVICIDIN(R) were
terminated when it became clear that the antibody used in that product was not
sufficiently selective for tumor tissue relative to normal tissue, especially
gut epithelium. We were unable to make this determination earlier because of the
absence of an animal model expressing the antigen recognized by AVICIDIN(R).

     We believe, however, that the "PRETARGET(R) principle" was validated in
these earlier studies inasmuch as radiation was successfully targeted to those
tissues that expressed the antigen recognized by AVICIDIN(R), and not to tissues
that lacked the antigen and that higher radiation doses were tolerated by
patients than had been previously using the conventional approach described
above. To improve the performance of PRETARGET(R) for treatment of carcinomas,
we began acquiring a library of antibodies from which to construct fusion
proteins with better selectivity toward tumors. Although we believe that we have
identified several appropriate fusion proteins, the lack of antigen-expressing
animal models continues to make evaluation difficult outside of a clinical
setting.

     We currently expect to begin phase I clinical trials of one of these fusion
proteins in 2001 in patients with pancreatic and other cancers of the
gastrointestinal tract. We believe that PRETARGET(R) will be best applied to the
treatment of carcinomas, not as a single agent, but in combination with
radiation-sensitizing chemotherapy. Many of the chemotherapy agents commonly
used to treat pancreatic and gastrointestinal cancers are also
radiation-sensitizing agents, such as gemcitabine, 5-fluorouracil, irinotecan,
and paclitaxel. In 2000 there were almost 30,000 new cases of pancreatic cancer
and 130,000 new cases of colorectal cancer in the United States.

PATENTS AND PROPRIETARY RIGHTS

     The Company's policy is to protect its proprietary technology aggressively.
We have filed applications for U.S. and foreign patents issued in our portfolio,
covering numerous aspects of our technology. We currently have in excess of 100
issued U.S. patents.
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     NeoRx has been awarded over 20 U.S. patents related to its PRETARGET(R)
technology, and has additional U.S. and foreign applications pending. We also
are the exclusive licensee of Stanford University's U.S., European and Japanese
patents, which expand our PRETARGET(R) proprietary position.

     In addition, we are the exclusive worldwide licensee, except in Australia,
of The Dow Chemical Company for NeoRx's STR product. Our STR portfolio includes
the U.S. patents covering the STR product composition and its uses and
corresponding patent coverage in most jurisdictions in the world.

     Risks associated with the protection of our patents and other proprietary
technologies are described under the heading "Risk Factors" above. Pending or
future applications of the Company or its collaborators will not necessarily
result in issued patents. Moreover, the current patents owned by or licensed to
the Company may not provide substantial protection or commercial benefit. In
addition to patent protection, we rely upon trade secrets, un-patented
proprietary know-how and continuing technological innovation to develop and
maintain our competitive position. Third parties could acquire or independently
develop the same or similar technology, or our issued patents or those licensed
could be circumvented, invalidated or rendered obsolete by new technology. Third
parties also could gain access to or disclose our proprietary technology, and we
may be unable to meaningfully protect our rights in such unpatented proprietary
technology.

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

     Under U.S. law, although a patent has a statutory presumption of validity,
the issuance of a patent is not conclusive as to validity or as to the
enforceable scope of its claims. Accordingly, the patents owned or licensed by
the Company could be infringed or designed around by third parties, and third
parties could obtain patents that the Company would need to license or design
around.

     It is the Company's policy to respect the valid patent rights of others. We
have obtained patent licenses from various parties covering technologies
relating to our proposed products. We expect to enter into additional license
agreements in the future with third parties for technologies that may be useful
or necessary for the development and or manufacture of the our products. We
anticipate that such licenses, if any, will be available on commercially
reasonable terms. If such licenses are not available, we may be unable to design
around necessary technology patented by others in a cost-effective manner, if at
all.

COMPETITION

     We face significant competition from emerging companies and established
biotechnology, pharmaceutical and chemical companies. Many emerging companies,
including IDEC Pharmaceuticals, Cytogen Corp. and Coulter Pharmaceuticals, have
corporate partnership arrangements with large, established companies to support
research, development and commercialization efforts of products that may be
competitive with those being developed by the Company. In addition, a number of
established pharmaceutical companies, including SmithKline Beecham, Nycomed
Amersham, Mallinkrodt, Inc. and Bristol-Myers Squibb, are developing proprietary
technologies or have enhanced their capabilities by entering into arrangements
with, or acquiring, companies with proprietary monoclonal antibody-based
technology or other technologies applicable to cancer therapy. Many of our
existing or potential competitors have or have access to substantially greater
financial, research and development, marketing and production resources than
those of the Company.

     We also expect to face increasing competition from universities and other
non-profit research organizations. These institutions carry out a significant
amount of research and development in the field of antibody-based technology.
These institutions 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.

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     Our cancer therapy products under development are designed for the
treatment of metastatic cancer or where there is a very high statistical risk
that the cancer has spread. We anticipate that the principal competition in this
type of cancer treatment will come from existing chemotherapy, hormone therapy
and biological therapies that are designed to treat the same cancer stage. We
are initially focusing our STR product on the treatment of multiple myeloma.
Celgene Corporation's thalidomide product is being sold for multiple myeloma,
and Cell Therapeutics, Inc.'s arsenic trioxide also is being tested in that
disease.

     Other companies may develop and introduce products and processes
competitive with or superior to those of the Company. Further, the development
by others of new disease treatment or prevention products could render our
technology and products under development less competitive, uneconomical or
obsolete.

     Timing of market introduction and health care reform, both uncertainties,
will affect the competitive position of our potential products. We believe that
competition among products approved for sale will be based, among other things,
on product safety, efficacy, reliability, availability, third party
reimbursement, price, and patent protection.

GOVERNMENT REGULATION AND PRODUCT TESTING

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

     The steps required before a pharmaceutical product may be marketed in the
United States include:

     - preclinical laboratory tests, in vivo preclinical studies and formulation
       studies;

     - The submission to the FDA of an Investigational New Drug Application,
       commonly referred to an IND, which must become effective before clinical
       trials can commence;

     - Adequate and well-controlled clinical trials to establish the safety and
       efficacy of the drug;

     - The submission of a Biologic License Application or New Drug Application
       to the FDA; and

     - FDA approval of the Biologic License Application or New Drug Application
       prior to any commercial sale or shipment of the drug.

     In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with, and inspected by, the
FDA. Domestic manufacturing establishments are subject to biennial inspections
by the FDA and must comply with current Good Manufacturing Practice regulations,
also called cGMP, which are enforced by the FDA through its facilities
inspection program for biologics, drugs and devices. To supply products for use
in the United States, foreign manufacturing establishments must comply with cGMP
and are subject to periodic inspection by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the FDA.

     Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the proposed product. Laboratories that comply with the FDA
regulations regarding Good Laboratory Practice must conduct preclinical safety
tests. The results of the preclinical studies are submitted to the FDA as part
of an IND and are reviewed by the FDA prior to commencement of clinical trials.
Unless the FDA provides comments to an IND, the IND will become effective 30
days following its receipt by the FDA. Submission of an IND does not assure FDA
authorization to commence clinical trials.

     Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance
                                        16
<PAGE>   18

with the FDA's Protection of Human Subjects regulations and Good Clinical
Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board at the institution where the study will
be conducted. The Institutional Review Board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution.

     Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In phase I, the drug is tested for:

     - safety (adverse effects);

     - dosage tolerance;

     - metabolism;

     - distribution;

     - excretion; and

     - pharmaco dynamics (clinical pharmacology).

     In phase II, a limited patient population is studied to:

     - determine the efficacy of the drug for specific, targeted indications;

     - determine dosage tolerance and optimal dosage; and

     - identify possible adverse effects and safety risks.

     If a compound is found to have potential efficacy and to have an acceptable
safety profile in phase II clinical trials, phase III clinical trials are
undertaken to further evaluate clinical efficacy and to further test for safety
within an expanded patient population at geographically dispersed clinical study
sites. With respect to any of our proposed products subject to clinical trials,
there can be no assurance that phase I, phase II or phase III studies will be
completed successfully within any specific time period, if at all. Furthermore,
the Company or the FDA may suspend clinical trials at any time if it determines
that the subjects or patients are being exposed to an unacceptable health risk.

     The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a Biologic License
Application, also called a BLA, or a New Drug Application, also called an NDA,
for approval of the marketing and commercial shipment of the drug. The testing
and approval processes are likely to require substantial cost, time and effort,
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The FDA may deny a BLA or an NDA if applicable regulatory
criteria are not satisfied, may require additional testing or information, or
may require post market testing and surveillance to monitor the safety of the
product. If regulatory approval is granted, such approval may entail limitations
on the indicated uses for which the product may be marketed. The FDA may
withdraw product approvals if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.

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

EMPLOYEES

     As of March 23, 2001, the Company had 68 full-time employees and four
part-time employees, 13 of whom hold Ph.D. degrees and one of whom holds an M.D.
degree. Of this number, 57 employees were engaged in research, development and
manufacturing activities and 15 were employed in general administration.

                                        17
<PAGE>   19

     We consider our relations with employees to be good. None of the Company's
employees are covered by a collective bargaining agreement.

ITEM 2. PROPERTIES

     The Company occupies approximately 36,000 square feet of office, laboratory
and manufacturing space at 410 West Harrison Street, Seattle, Washington, under
a lease that expires May 31, 2006. In July 2000, we entered into a facilities
sublease agreement with F-5 Networks for approximately 28,854 additional square
feet of office space located at 501 Elliot Avenue West Building 3, Floor 2,
under a lease agreement that expires November 30, 2003.

     We believe that our facilities are in good condition and are adequate for
all present uses. A portion of our facilities is used for pilot manufacturing to
produce certain of our products under development for clinical trials. We
believe that the production capacity of our pilot facility is adequate to
satisfy our phase I/II clinical trial requirements. The facility passed an FDA
inspection for these purposes in 1993 and a Washington State Board of Pharmacy
inspection in 1996.

ITEM 3. LEGAL PROCEEDINGS

     There are no legal proceedings pending against the Company.

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

     Not Applicable.

                                        18
<PAGE>   20

                                    PART II

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

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

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                             ------    ------
<S>                                                          <C>       <C>
2000
First Quarter..............................................  $70.00    $ 3.50
Second Quarter.............................................   20.25      9.63
Third Quarter..............................................   26.25     14.63
Fourth Quarter.............................................   25.81      4.25
1999
First Quarter..............................................  $ 2.75    $ 1.34
Second Quarter.............................................    2.38      1.00
Third Quarter..............................................    2.19      1.50
Fourth Quarter.............................................    4.88      1.13
</TABLE>

     There were approximately 861 shareholders of record as of February 28,
2001. This figure does not include the number of shareholders whose shares are
held on record by a broker or clearing agency, but includes such a brokerage
house or clearing agency as one holder of record.

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

     Warrants. In connection with an agreement with a company for investor
relations services, the Company on February 1, 2000, issued four two-year
warrants to purchase an aggregate of 80,000 shares of common stock at exercise
prices ranging from $6.00 to $9.00. The warrants expire in 2002. In connection
with a line of credit agreement, the Company on February 2, 2000, issued one
four-year warrant to purchase 75,000 shares of common stock at an exercise price
of $6.7734. The warrant will expire in 2004. In connection with an agreement
with a company for investor relations services, the Company on October 14, 1999,
issued one five-year warrant to purchase 150,000 shares of common stock at an
exercise price of $1.6875. The warrant will expire in 2004. In each case above,
the warrant was issued in reliance on Section 4(2) of the Securities Act of
1933. The purchaser represented, in connection with the purchase of the warrant,
that it was an accredited investor as defined in Regulation D under the
Securities Act.

     Private Placements of Common Stock. On April 14, 2000, NeoRx issued a total
of 1,727,045 shares of its common stock to a total of 11 purchasers and received
net proceeds of $17,978,967. On August 25, 2000, NeoRx issued a total of
2,450,000 shares of its common stock to a total of 8 purchasers and received net
proceeds of $35,627,500. The shares in both of these transactions were issued in
reliance on Section 4(2) of the Securities Act. All purchasers in each
transaction represented, in connection with the purchase of its shares, that it
was an accredited investor as defined in Regulation D under the Securities Act.
The Company has filed Registration Statements on Form S-3 to register the shares
issued for resale by the purchaser. Adams Harkness & Hill acted as the placement
agent in both of these offerings and received aggregate commissions of
$1,814,406. In addition, Roth Capital acted as a placement agent in the April
14, 2000 private placement and received commissions of $237,469.

     The Company intends to use the net proceeds from the transactions described
above to advance its research and development programs, including its STR and
PRETARGET(R) product candidates, as well as for other general corporate
purposes.

                                        19
<PAGE>   21

ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                --------------------------------------------------
                                                  2000       1999      1998      1997       1996
                                                --------   --------   -------   -------   --------
<S>                                             <C>        <C>        <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................  $  3,549   $    591   $ 9,087   $10,352   $  4,784
Operating expenses............................    21,594     15,354    15,378    14,647     14,763
Loss from operations..........................   (18,045)   (14,763)   (6,291)   (4,295)    (9,979)
Net loss......................................   (11,402)   (11,951)   (4,449)   (2,550)    (9,001)
Net loss applicable to common shareholders....   (11,905)   (12,459)   (4,975)   (5,619)   (10,685)
Net loss per common share -- basic and
  diluted.....................................  $  (0.50)  $  (0.59)  $ (0.24)  $ (0.31)  $  (0.68)
Weighted average common shares outstanding --
  basic and diluted...........................    23,853     21,009    20,907    18,065     15,604
BALANCE SHEET DATA:
Cash and cash equivalents.....................  $  8,389   $  3,752   $ 1,910   $ 1,949   $  2,945
Investment securities.........................    49,189     15,289    28,242    31,760     15,322
Working capital...............................    59,315     16,664    28,807    33,775     17,523
Total assets..................................    64,458     20,765    32,441    36,321     20,510
Long-term debt................................        --         --     1,195     1,199      1,242
Shareholders' equity..........................  $ 62,245   $ 17,822   $29,044   $33,368   $ 17,079
</TABLE>

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

INTRODUCTION

     The following discussion of results of operations, liquidity and capital
resources, contains forward-looking statements that involve risks and
uncertainties. As described in the "Cautionary Statement Regarding Forward
Looking Statements" at the beginning of this report, NeoRx's actual results may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause or contribute to such differences include those
discussed herein and in the section entitled "Risk Factors."

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH DECEMBER 31, 1999

     The Company's revenues for 2000 totaled $3.5 million, which included $3.1
million from licensing agreements and $0.4 million from government grants. The
majority of the revenue in 2000 is from Theseus Corporation and Angiotech
Pharmaceuticals, Inc. for non-strategic patent licensing agreements entered into
in 1998. The Company's revenues for 1999 totaled $0.6 million, which consisted
primarily of license fees. The Company does not have any significant revenue
sources that will continue into 2001.

     The Company's total operating expenses were $21.6 million for 2000 and
$15.4 million for 1999. Research and development expenses increased 39% from
$11.5 million in 1999 to $16.0 million in 2000. The increase in research and
development expenses was primarily due to increased costs for patient therapy,
clinical trial expenses and manufacturing development relating to the Company's
Skeletal Targeted Radiotherapy project, which we call STR. Research and
development expenses for the Company's PRETARGET(R) project also increased in
2000, primarily due to costs associated with our PRETARGET(R) Lymphoma phase
I/II study. Research and development expenses are shown net of reimbursements
received under collaborative agreements for payments made by NeoRx to third
parties. During 2000, the Company received $0.4 million in reimbursements. In
1999, reimbursements from collaborative agreements totaled $0.3 million. General
and administrative expenses increased 44% to $5.6 million in 2000 compared to
$3.9 million in 1999. The increase in general and administrative expenses is
principally due to increased expenses for personnel, outside consulting
services, recruiting and legal services.

     Other income in 2000 included a $2.9 million gain on the sale of the
Company's shares of Angiotech Pharmaceuticals, Inc. during the first quarter of
2000 and a $0.5 million gain recorded from the receipt of

                                        20
<PAGE>   22

stock of North American Scientific, Inc. from their acquisition of Theseus LTD.
Other income for 1999 included $1.9 million from final payments under a prior
agreement. Other income also included interest income for 2000 of $3.0 million
compared to $1.0 million in 1999. The increase in interest income was primarily
due to higher cash and investment balances due to the private sales of 4.2
million shares of newly issued common shares of the Company that generated $54
million in net proceeds.

     Preferred dividends were $0.5 million in 2000 and 1999. Preferred dividends
in 2000 and 1999 are related to payment of dividends on Series 1 preferred
stock.

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998

     The Company's revenues for 1999 totaled $0.6 million, and primarily
consisted of license fees of $0.6 million from Theseus LTD. The Company's
revenues for 1998 totaled $9.1 million, and consisted primarily of a milestone
payment of $7.0 million from Janssen Pharmaceutica NV, also known as Janssen, a
wholly owned subsidiary of Johnson & Johnson Inc., reflecting Janssen's decision
to begin phase II trials of AVICIDIN(R), and license fees paid in the form of
$1.4 million in cash and $0.7 million in stock from Nycomed Imaging AS, Theseus
LTD, and Angiotech Pharmaceuticals, Inc. for the license of parts of NeoRx's
non-strategic technology.

     The Company's total operating expenses for 1999 and 1998 were $15.4
million. In 1999, research and development expenses increased 11% from $10.3
million in 1998 to $11.5 million. The increase in research and development
expenses was primarily due to increased costs for clinical trials for STR.
Research and development expenses are shown net of reimbursements received under
collaborative agreements for payments made by NeoRx to third parties. During
1999 the Company received $0.3 million in reimbursements. In 1998,
reimbursements from collaborative agreements totaled $2.2 million. The decrease
in reimbursements from collaborative agreements was caused by the termination of
the Janssen agreement in the fourth quarter of 1998. General and administrative
expenses decreased 11% to $3.9 million in 1999 compared to 1998. The decrease in
general and administrative expenses is principally due to lower costs for
recruiting and administrative personnel as a result of the Company's
restructuring effort during the fourth quarter of 1998.

     Other income for 1999 included $1.9 million from final payments under a
prior agreement. Other income also included interest income for 1999 of $1.0
million compared to $2.0 million in 1998. The decrease in interest income was
primarily due to lower average cash and investment balances.

     Preferred dividends were $0.5 million in 1999 and 1998. Preferred dividends
in 1999 and 1998 are related to payment of dividends primarily on Series 1
preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

     Cash, cash equivalents and investment securities totaled $57.6 million at
December 31, 2000. Cash increased during the second and third quarters of 2000
from the private sales of 4.2 million newly issued NeoRx common shares that
generated approximately $53.6 million in net proceeds. Cash used in operating
activities for 2000 totaled $17.0 million. Revenues and other income sources
were not sufficient in 2000 to cover operating expenses.

     Cash used in investing activities for 2000 totaled $32.4 million. The
Company invests excess cash in investment securities that will be used to fund
future operating costs. During 2000, the Company also invested $2.0 million in
equipment, furniture and leasehold improvements, primarily to support its
research activities. As of December 31, 2000, the Company was committed to
spending approximately $5.6 million pursuant to operating lease obligations
through 2005.

     In February 2000, the Company sold the majority of its investment in
Angiotech Pharmaceuticals, Inc. for $4.0 million. The carrying value of the
investment was $1.1 million at December 31, 1999. In the first quarter of 2000,
the Company established a line of credit with PPD, Inc., of up to $5.0 million
to assist in funding its phase III trial of its STR product in development. The
Company has not drawn funds on this line of credit to date.

                                        21
<PAGE>   23

     The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements through at least the second quarter of 2002. The Company's actual
capital requirements will depend on numerous factors, including results of
research and development activities, clinical trials, the levels of resources
that the Company devotes to establishing and expanding marketing and
manufacturing capabilities (including whether our proposed acquisition of the
International Isotopes facility is successful), competitive and technological
developments and the timing of revenues and expense reimbursements resulting
from relationships with third parties or collaborative agreements. The Company
intends to seek additional funding through arrangements with corporate partners,
public or private equity financing, or other sources. There can be no assurance
that the Company will be able to obtain such additional capital or enter into
relationships with corporate partners on a timely basis, on favorable terms, or
at all. If adequate funds are not available, the Company may be required to
delay, reduce or eliminate expenditures for certain of its programs or products
or enter into relationships with corporate partners to develop or commercialize
products or technologies that the Company would otherwise seek to develop or
commercialize itself.

RECENT DEVELOPMENTS

     On March 20, 2001, we entered into an agreement to purchase certain
radiopharmaceutical manufacturing assets of International Isotopes Inc. in
Denton, Texas. Completion of the purchase is subject to a number of conditions
of closing, including the settlement by International Isotopes of claims of
certain creditors, receipt by International Isotopes of bank financing for its
proposed future operations and delivery by International Isotopes of the assets
free and clear of liens. To acquire the assets, we have agreed to pay $6 million
in cash and to assume $6 million of restructured debt of International Isotopes.
In addition, we have agreed to issue to International Isotopes a warrant to
purchase, at an exercise price of $10 per share, up to 800,000 shares of NeoRx
common stock (the "warrant shares"). The warrants will expire in three years. We
have agreed to file a registration statement to register the warrant shares for
resale after closing. In addition, we have committed to hire key employees of
International Isotopes to assist us with our proposed operations in Denton. Many
of the conditions of closing of the proposed transaction with International
Isotopes depend upon actions of parties over which NeoRx has no control. As a
result, there can be no assurance that such conditions will be satisfied on the
date of closing, if at all. The asset purchase agreement can be terminated by
either NeoRx or International Isotopes if the closing does not occur by April
30, 2001.

     On March 21, 2001, we announced that we are in continuing discussions with
the FDA regarding our proposed STR product. Our phase III multiple myeloma and
other STR studies were placed on clinical hold in November 2000 by the FDA after
some patients developed a serious delayed toxicity. Communications with the FDA
have focused on the relevant factors for selecting a safe radiation dose and the
accuracy of radiation calculations. The FDA has requested that we collect
additional dosimetry data from patients to demonstrate the accuracy of the
method we propose to use to calculate dose in our phase III STR trial. We expect
to file a protocol for this study with the FDA shortly involving a limited
number of patients. Our phase III STR trials may be delayed pending the
completion of this study. The FDA suggested that we analyze the relevant factors
to select a radiation dose with the appropriate safety profile. Our current STR
phase III protocol may be modified by this analysis. We intend to continue to
work diligently with the FDA to move development of the STR product forward.

     We also announced on March 21, 2001, that Douglas Given, MD, PhD, formerly
the Chief Technology Officer of Mallinckrodt, Oye Olukoton, MD, formerly the
Chief Medical Officer of Mallinckrodt, and Ray Schmelter, PhD, formerly Senior
Director of Medical Affairs and Operations of Mallinckrodt, are consulting with
the Company to support our operations, medical and regulatory functions. On that
same date, we announced that Richard Anderson announced his intention to retire
in twelve months. Mr. Anderson has stepped down from his positions as President
and Chief Operating Officer of NeoRx and will focus on the proposed acquisition,
transition and integration of the International Isotopes radiopharmaceutical
facility.

     In addition, Carl Goldfischer, MD, formerly Chief Financial Officer of
ImClone, Inc. and currently a director of NeoRx, has agreed to serve as a
strategic and financial consultant to NeoRx.

                                        22
<PAGE>   24

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, also known as SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and amends
existing accounting standards and is required to be adopted on January 1, 2001.
SFAS 133 requires that all derivatives be recognized in the balance sheet at
their fair market value, and the corresponding derivative gains or losses be
either reported in the statement of operations or as a component of other
comprehensive income depending on the type of hedge relationship that exists
with respect to such derivative. The adoption of SFAS 133 on January 1, 2001
will not have a material impact on our financial statements.

ITEM 7A. 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 U.S. 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 which have declined in market value due to changes in interest rates.
At December 31, 2000, the Company owns government debt instruments in the amount
of $15.3 million and corporate debt securities in the amount of $40.5 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. The Company has approximately $19,400,000 of corporate debt
securities and $6,000,000 of federal government and agency securities that had
maturity dates greater than one year at December 31, 2000. Of the investments
with maturity dates greater than one year at December 31, 2000, $24,400,000
mature in 2002 and $1,000,000 mature in 2003.

INVESTMENT RISK

     The Company has received equity instruments under licensing agreements.
These instruments are included in investment securities and are accounted for at
fair value with unrealized gains and losses reported as a component of
comprehensive loss and classified as accumulated other comprehensive income --
unrealized gain on investment securities in shareholders' equity. Such
investments are subject to significant fluctuations in fair market value due to
the volatility of the stock market. At December 31, 2000, the Company owned such
corporate equity securities in the amount of $0.3 million.

                                        23
<PAGE>   25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                               PAGE
                                                              NUMBER
                                                              ------
<S>                                                           <C>
Report of Independent Public Accountants....................    25
Balance Sheets -- December 31, 2000 and 1999................    26
Statements of Operations -- For the Years Ended December 31,
  2000, 1999 and 1998.......................................    27
Statements of Shareholders' Equity -- For the Years Ended
  December 31, 2000, 1999 and 1998..........................    28
Statements of Cash Flows -- For the Years Ended December 31,
  2000, 1999 and 1998.......................................    29
Notes to Financial Statements...............................    30
</TABLE>

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

                                        24
<PAGE>   26

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders
NeoRx Corporation

     We have audited the accompanying balance sheets of NeoRx Corporation as of
December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoRx Corporation as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.

KPMG LLP

Seattle, Washington
January 26, 2001,
except as to note 18, which is as of March 20, 2001

                                        25
<PAGE>   27

                               NEORX CORPORATION

                                 BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
Cash and cash equivalents...................................  $   8,389    $   3,752
Investment securities.......................................     49,189       15,289
Notes receivable............................................      2,617          134
Prepaid expenses and other current assets...................      1,333          432
                                                              ---------    ---------
          Total current assets..............................     61,528       19,607
                                                              ---------    ---------
Facilities and equipment, at cost:
Leasehold improvements......................................      3,283        3,283
Equipment and furniture.....................................      6,152        5,040
                                                              ---------    ---------
                                                                  9,435        8,323
Less: accumulated depreciation and amortization.............     (7,791)      (7,405)
                                                              ---------    ---------
  Facilities and equipment, net.............................      1,644          918
                                                              ---------    ---------
Other assets, net...........................................      1,286          240
                                                              ---------    ---------
          Total assets......................................  $  64,458    $  20,765
                                                              =========    =========

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................  $   1,702    $     819
Accrued liabilities.........................................        511          929
Current portion of convertible subordinated debentures......         --        1,195
                                                              ---------    ---------
          Total current liabilities.........................      2,213        2,943
                                                              ---------    ---------
Commitments, contingencies and subsequent event
Shareholders' equity:
Preferred stock, $.02 par value, 3,000,000 shares
  authorized:
  Convertible preferred stock, Series 1, 205,340 and 208,240
     shares issued and outstanding at December 31, 2000 and
     1999, respectively (entitled in liquidation to $5,176
     and $5,248 at December 31, 2000 and 1999,
     respectively)..........................................          4            4
Common stock, $.02 par value, 60,000,000 shares authorized,
  26,197,699 and 21,073,235 shares issued and outstanding,
  at December 31, 2000 and 1999, respectively...............        524          421
Additional paid-in capital..................................    220,702      164,151
Accumulated deficit.........................................   (159,001)    (147,096)
Accumulated other comprehensive income -- unrealized gain on
  investment securities.....................................         16          342
                                                              ---------    ---------
          Total shareholders' equity........................     62,245       17,822
                                                              ---------    ---------
          Total liabilities and shareholders' equity........  $  64,458    $  20,765
                                                              =========    =========
</TABLE>

              See accompanying notes to the financial statements.
                                        26
<PAGE>   28

                               NEORX CORPORATION

                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2000        1999       1998
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Revenues....................................................  $  3,549    $    591    $ 9,087
                                                              --------    --------    -------
Operating expenses:
Research and development....................................    15,989      11,462     10,325
General and administrative..................................     5,605       3,892      4,394
Restructuring expense.......................................        --          --        659
                                                              --------    --------    -------
          Total operating expenses..........................    21,594      15,354     15,378
                                                              --------    --------    -------
Loss from operations........................................   (18,045)    (14,763)    (6,291)
                                                              --------    --------    -------
Other income (expense):
  Other income..............................................       471       1,900         --
  Realized gain on sale of securities.......................     3,353          --         --
  Interest income...........................................     2,986       1,029      1,972
  Interest expense..........................................      (167)       (117)      (130)
                                                              --------    --------    -------
Net loss....................................................   (11,402)    (11,951)    (4,449)
Preferred stock dividends...................................      (503)       (508)      (526)
                                                              --------    --------    -------
Net loss applicable to common shares........................  $(11,905)   $(12,459)   $(4,975)
                                                              ========    ========    =======
Net loss per common share -- basic and diluted..............  $   (.50)   $   (.59)   $  (.24)
                                                              ========    ========    =======
Weighted average common shares outstanding -- basic and
  diluted...................................................    23,853      21,009     20,907
                                                              ========    ========    =======
</TABLE>

              See accompanying notes to the financial statements.
                                        27
<PAGE>   29

                               NEORX CORPORATION

                       STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          PREFERRED STOCK     COMMON STOCK
                                          ----------------   --------------                               ACCUMULATED
                                          NUMBER             NUMBER           ADDITIONAL                     OTHER        SHARE-
                                            OF       PAR       OF      PAR     PAID-IN     ACCUMULATED   COMPREHENSIVE   HOLDERS'
                                          SHARES    VALUE    SHARES   VALUE    CAPITAL       DEFICIT        INCOME        EQUITY
                                          -------   ------   ------   -----   ----------   -----------   -------------   --------
<S>                                       <C>       <C>      <C>      <C>     <C>          <C>           <C>             <C>
BALANCE, DECEMBER 31, 1997..............    214        4     20,707    414      162,612      (129,662)          --         33,368
Exercise of stock options and
  warrants..............................     --       --        141      3          479            --           --            482
Exchange of preferred stock for common
  stock.................................     (6)      --        138      3           (3)           --           --             --
Comprehensive loss:
  Net loss..............................     --       --         --     --           --        (4,449)          --         (4,449)
  Unrealized gain on investment
    securities..........................     --       --         --     --           --            --           68             68
                                                                                                                         --------
Total comprehensive loss................     --       --         --     --           --            --           --         (4,381)
                                                                                                                         --------
Preferred stock dividends...............     --       --         21     --          101          (526)          --           (425)
                                            ---       --     ------   ----     --------     ---------        -----       --------
BALANCE, DECEMBER 31, 1998..............    208        4     21,007    420      163,189      (134,637)          68         29,044
Exercise of stock options...............     --       --         66      1          105            --           --            106
Stock warrants issued for services......     --       --         --     --          450            --           --            450
Compensation expense on stock options...     --       --         --     --          407            --           --            407
Comprehensive loss:
  Net loss..............................     --       --         --     --           --       (11,951)          --        (11,951)
  Unrealized gain on investment
    securities..........................     --       --         --     --           --            --          274            274
                                                                                                                         --------
Total comprehensive loss................     --       --         --     --           --            --           --        (11,677)
                                                                                                                         --------
Preferred stock dividends...............     --       --         --     --           --          (508)          --           (508)
                                            ---       --     ------   ----     --------     ---------        -----       --------
BALANCE, DECEMBER 31, 1999..............    208        4     21,073    421      164,151      (147,096)         342         17,822
Common stock issued, net of offering
  costs of $2,141.......................     --       --      4,177     84       53,523            --           --         53,607
Common stock issued for services........     --       --          4     --           81            --           --             81
Exercise of stock options...............     --       --        940     19        2,138            --           --          2,157
Stock options and warrants issued for
  services and credit arrangement.......     --       --         --     --          786            --           --            786
Conversion of preferred stock...........     (3)      --          3     --           --            --           --             --
Conversion of subordinated debentures...     --       --          1     --           23            --           --             23
Comprehensive loss:
  Net loss..............................     --       --         --     --           --       (11,402)          --        (11,402)
  Unrealized gain on investment
    securities..........................     --       --         --     --           --            --           60             60
  Less: reclassification adjustment for
    gains included in income............     --       --         --     --           --            --         (386)          (386)
                                                                                                                         --------
Total comprehensive loss................     --       --         --     --           --            --           --        (11,728)
                                                                                                                         --------
Preferred stock dividends...............     --       --         --     --           --          (503)          --           (503)
                                            ---       --     ------   ----     --------     ---------        -----       --------
BALANCE, DECEMBER 31, 2000..............    205       $4     26,198   $524     $220,702     $(159,001)       $  16       $ 62,245
                                            ===       ==     ======   ====     ========     =========        =====       ========
</TABLE>

              See accompanying notes to the financial statements.
                                        28
<PAGE>   30

                               NEORX CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2000        1999       1998
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(11,402)   $(11,951)   $(4,449)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
  Depreciation and amortization.............................       514         356        427
  Gain on sale of securities................................    (3,353)         --         --
  Stock and warrants received for license fees..............      (471)         --       (690)
  Common stock issued for services..........................        81          --         --
  Stock options and warrants issued for services............       486         450         --
  Compensation expense on employee stock options............        --         407         --
  (Increase) decrease in notes receivable...................    (2,483)        (42)        20
  (Increase) decrease in prepaid expenses and other
     assets.................................................      (875)        405        742
  Increase (decrease) in accounts payable...................       883          63        (44)
  Increase (decrease) in accrued liabilities................      (418)       (263)       281
  Increase (decrease) in deferred revenue...................        --        (250)       250
                                                              --------    --------    -------
  Net cash used in operating activities.....................   (17,038)    (10,825)    (3,463)
                                                              --------    --------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sales and maturities of investment
     securities.............................................    54,431      27,662     70,820
  Purchases of investment securities........................   (84,833)    (14,435)   (66,544)
  Facilities and equipment purchases........................    (2,012)       (154)      (866)
                                                              --------    --------    -------
  Net cash provided by (used in) investing activities.......   (32,414)     13,073      3,410
                                                              --------    --------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of capital lease obligations....................        --          (4)       (43)
  Repayment of subordinated debentures......................    (1,172)         --         --
  Proceeds from stock options exercised.....................     2,157         106        482
  Preferred stock dividends.................................      (503)       (508)      (425)
  Proceeds from issuance of common stock....................    53,607          --         --
                                                              --------    --------    -------
  Net cash provided by (used in) financing activities.......    54,089        (406)        14
                                                              --------    --------    -------
Net increase (decrease) in cash and cash equivalents........     4,637       1,842        (39)
CASH AND CASH EQUIVALENTS:
  Beginning of year.........................................     3,752       1,910      1,949
                                                              --------    --------    -------
  End of year...............................................  $  8,389    $  3,752    $ 1,910
                                                              ========    ========    =======
</TABLE>

            See the accompanying notes to the financial statements.
                                        29
<PAGE>   31

                               NEORX CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1. THE COMPANY

     NeoRx Corporation develops innovative biopharmaceutical products designed
to improve treatments for patients with cancer.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Cash and Cash Equivalents. All highly liquid investments with a remaining
maturity of three months or less when purchased, are considered to be cash
equivalents. At December 31, 2000 and 1999, cash equivalents consisted primarily
of federal government and agency securities and corporate debt securities
totaling $6,906,000 and $1,736,000, respectively.

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

     Research and Development Revenues and Expenses. Revenues from collaborative
agreements are recognized as earned as the Company performs research activities
under the terms of each agreement. Billings in excess of amounts earned are
classified as deferred revenue. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 101, also known as SAB 101, "Revenue
Recognition in Financial Statements," 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.

     Milestone payments are recognized as revenue at the time such payments are
due, based on the ratio of cumulative costs incurred to date, to total estimated
development costs. Any remaining balance is deferred and recognized as revenue
over the remaining development period. The Company adopted SAB 101 on October 1,
2000. The adoption of SAB 101 did not have a material impact on the Company's
financial statements. Prior to the adoption of SAB 101, revenue was recognized
for milestone payments upon the attainment of a specified event. Other payments
for technology or licensing fees were recognized as revenue when payment was
received, unless subject to a contingency, which resulted in the deferral of
revenue. Research and development costs are expensed as incurred. It is the
Company's practice to offset third party collaborative reimbursements received
as a reduction of research and development expenses. Third party reimbursements
for 2000, 1999 and 1998 were $367,640, $276,127, and $2,186,616, respectively.

     Income Taxes. The Company computes income taxes using the asset and
liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and for operating loss and tax credit carry
forwards. A valuation allowance is established when necessary to reduce deferred
tax assets to the amount, if any, which is more likely than not expected to be
realized.

     Fair Value of Financial Instruments. The Company has financial instruments
consisting of cash, cash equivalents, investment securities, notes receivable,
note from officer and accounts payable. All of the Company's financial
instruments, based on current market indicators or quotes from brokers,
approximate their carrying amount.

     Investment Securities. The Company considers all investment securities as
available-for-sale. All securities are carried at fair value. The Company does
not invest in derivative financial instruments. Unrealized gains and losses on
investment securities are reported as a component of comprehensive income or
loss and classified as accumulated other comprehensive income or
loss -- unrealized gain on investment securities in shareholders' equity.

                                        30
<PAGE>   32
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Segment Reporting. The Company has one operating business segment. Revenues
consist almost entirely of fees received under license agreements. Expenses
incurred are reported according to their nature. No further segment segregation
is considered meaningful.

     Comprehensive Loss. The Company's comprehensive loss for 2000, 1999, and
1998 consisted of net loss and unrealized gain on investment securities.

     Facilities and Equipment. Facilities and equipment are stated at cost.
Depreciation is provided using the straight-line method over an estimated useful
life of five to seven years for equipment and furniture and three years for
computer equipment and software. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets' estimated useful lives or
the terms of the leases.

     Net Loss Per Common Share. Basic and diluted loss per share are based on
net loss applicable to common shares, which is comprised of net loss and
preferred stock dividends in all periods presented. Shares used to calculate
basic loss per share are based on the weighted average number of common shares
outstanding during the period. Shares used to calculate diluted 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 loss per share for 2000, 1999 and 1998 were
the same, because including the effect of potential common shares would be
antidilutive. The computation of diluted net loss per share excludes the
following options and warrants to acquire shares of common stock for the years
indicated because their effect would be antidilutive.

<TABLE>
<CAPTION>
                                            2000          1999          1998
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Common stock options...................   3,156,050     3,629,133     3,334,916
Weighted average exercise price per
  share................................  $     5.16    $     2.56    $     2.81
Common stock warrants..................     305,000       150,000            --
Weighted average exercise price per
  share................................  $     4.46    $     1.69            --
</TABLE>

     In addition, 234,088 aggregate shares issuable upon conversion of the
Company's preferred stock are not included in the calculation of diluted loss
per share for 2000, and 283,712 aggregate shares issuable upon conversion of the
Company's convertible subordinated debentures and its preferred stock are not
included in the calculation of diluted loss per share for 1999 and 1998 because
the effect of including such shares would have been antidilutive.

     Stock Issued to Employees. 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. 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 amortizes compensation expense on fixed
awards with pro rata vesting based on the straight-line method. 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 provide pro
forma net income and pro forma earnings per share disclosures as if the
fair-value based method of accounting in SFAS No. 123 had been applied to
employee stock option grants.

     Reclassifications. Certain reclassifications were made to the 1999
financial statements to make them comparable with the 2000 presentation.

                                        31
<PAGE>   33
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Concentration in the Available Sources of Supply of Materials. The Company
is dependent on suppliers for the timely delivery of materials and services and
may experience interruptions in supply. The Company has limited suppliers of the
following materials at December 31, 2000:

     - commercial quantities of holmium-166, the form of radiation used in the
       Company's STR product, and yttrium-90, the form of radiation used in the
       Company's PRETARGET(R) program;

     - the chemical agent used in the Company's STR product to deliver
       holmium-166 to the bone; and

     - the antibodies and proteins used in the Company's PRETARGET(R) program.

     Sources of some of these materials are limited, and the Company may be
unable to obtain these materials in amounts and at prices necessary to
successfully commercialize our proposed products.

     New Accounting Pronouncement. In March 2000, the Financial Accounting
Standards Board issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation". Interpretation No. 44 clarifies the
application of APB 25, "Accounting for Stock Issued to Employees" effective July
1, 2000. The adoption of Interpretation No. 44 did not have a material impact on
the Company's financial statements.

NOTE 3. INVESTMENT SECURITIES

     Investment securities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Federal government and agency securities.................  $15,340    $ 7,985
Corporate debt securities................................   33,595      6,227
Corporate equity securities..............................      254      1,077
                                                           -------    -------
                                                           $49,189    $15,289
                                                           =======    =======
</TABLE>

     Unrealized gains and losses at December 31, 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                          FAIR
                                           AMORTIZED     MARKET     UNREALIZED    UNREALIZED
                                           COST BASIS     VALUE       GAINS         LOSSES
                                           ----------    -------    ----------    ----------
<S>                                        <C>           <C>        <C>           <C>
Federal government and agency
  securities.............................   $15,287      $15,340       $ 53         $  --
Corporate debt securities................    33,415       33,595        183            (3)
Corporate equity securities..............       471          254         --          (217)
                                            -------      -------       ----         -----
                                            $49,173      $49,189       $236         $(220)
                                            =======      =======       ====         =====
Net unrealized gains.....................                              $ 16
                                                                       ====
</TABLE>

                                        32
<PAGE>   34
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Unrealized gains and losses at December 31, 1999 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                          FAIR
                                           AMORTIZED     MARKET     UNREALIZED    UNREALIZED
                                           COST BASIS     VALUE       GAINS         LOSSES
                                           ----------    -------    ----------    ----------
<S>                                        <C>           <C>        <C>           <C>
Federal government and agency
  securities.............................   $ 8,012      $ 7,985       $ --          $(27)
Corporate debt securities................     6,244        6,227         --           (17)
Corporate equity securities..............       691        1,077        386            --
                                            -------      -------       ----          ----
                                            $14,947      $15,289       $386          $(44)
                                            =======      =======       ====          ====
Net unrealized gains.....................                              $342
                                                                       ====
</TABLE>

     Approximately $19,400,000 of corporate debt securities and $6,000,000 of
federal government and agency securities had maturity dates greater than one
year at December 31, 2000. Of the investments with maturity dates greater than
one year at December 31, 2000, $24,400,000 mature in 2002 and $1,000,000 mature
in 2003. All corporate debt securities and federal government and agency
securities at December 31, 1999 matured within one year.

NOTE 4. NOTES RECEIVABLE

     The Company has various unsecured notes receivable resulting from licensing
agreements, which includes a note for $2,500,000 bearing interest at 10% due in
August 2001.

NOTE 5. ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              ------------
                                                              2000    1999
                                                              ----    ----
<S>                                                           <C>     <C>
Compensation................................................  $437    $529
Severance...................................................     7     312
Other.......................................................    67      88
                                                              ----    ----
                                                              $511    $929
                                                              ====    ====
</TABLE>

NOTE 6. LINE OF CREDIT

     In 2000, the Company established a line of credit with Pharmaceutical
Product Development, Inc., also known as PPD, of up to $5,000,000 to assist in
funding the Company's phase III trials of its STR product. Funds may be drawn at
any time for clinical trial services and interest is payable on any unpaid
balances at 16%. Principal and interest are payable in full in twenty-four equal
monthly installments beginning thirty days after funds are drawn. The Company
has not drawn funds on this line of credit to date. The line of credit
terminates on the earlier of the second anniversary of the first draw date or on
various other dates related to commitments completed or change in control of the
Company. In connection with this line of credit agreement the Company issued a
warrant to purchase 75,000 shares of Common Stock at an exercise price of
$6.7734. The Company recorded the fair value of the warrants as a deferred cost
within other assets, which will be amortized over the expected term of the line
of credit. Based upon the Black-Scholes option-pricing model, the grant-date
fair value of the warrant was $5.32 per share using assumptions of expected
volatility of 112%, contractual warrant term of four years, expected dividend
rate of zero and a risk-free rate of interest of 6.1%. The warrant expires in
2004.

                                        33
<PAGE>   35
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. LEASES

     The lease agreements for the Company's principal locations expire in 2003
and 2006. Total rent expense under operating leases was approximately $613,000,
$591,000, and $555,000, for 2000, 1999 and 1998, respectively.

     Minimum lease payments as of December 31, 2000, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                             OPERATING
                           YEAR                               LEASES
                           ----                              ---------
<S>                                                          <C>
2001.......................................................   $1,611
2002.......................................................    1,601
2003.......................................................    1,420
2004.......................................................      401
2005.......................................................      382
Thereafter.................................................      153
                                                              ------
          Total minimum lease payments.....................   $5,568
                                                              ======
</TABLE>

NOTE 8. CONVERTIBLE SUBORDINATED DEBENTURES

     At December 31, 1999, the Company had $1,195,000 in principal of
convertible subordinated debentures outstanding. The debentures were convertible
at the option of the holder into the Company's common stock at a conversion
price of $25.80 per share (par), subject to adjustment under certain conditions.
Interest at 9 3/4% was payable semi-annually on June 1 and December 1. The
debentures were redeemable, in whole or in part, at any time, at the option of
the Company at par, together with accrued interest. The debentures were
subordinated in right of payment to any outstanding senior indebtedness of the
Company, as defined in the indenture. At the option of the holders of the
debentures, $23,000 of debentures were converted into 890 common shares in 2000.
In June 2000, the Company retired the remaining balance of $1,172,000 of the
outstanding convertible subordinated debentures.

NOTE 9. SHAREHOLDERS' EQUITY

     Common Stock Transactions. During 2000, the Company generated approximately
$53,607,000 in net proceeds from the private sales of 4,177,045 newly issued
common shares of the Company. Also during 2000, the Company generated $2,157,278
in net proceeds from the issuance of 939,485 common shares related to the
exercises of employee stock options. The Company issued 3,294 shares of common
stock in exchange for 2,900 shares of Series 1 Convertible Preferred Stock, also
known as Series 1 Preferred Stock, and issued 890 shares of common stock upon
conversion of $23,000 of the Company's convertible subordinated debentures. The
Company also issued 3,750 common shares for consulting services.

     During 1998, the Company issued 138,422 shares of common stock in exchange
for 5,167 shares of Series 2 Convertible Preferred Stock, also known as Series 2
Preferred Stock, and 1,000 shares of Series 3 Convertible Preferred Stock, also
known as Series 3 Preferred Stock. Dividends of $101,240 were also paid on the
Series 2 Preferred Stock by issuing 21,038 shares of common stock.

     Preferred Stock Transactions. Holders of Series 1 Preferred Stock are
entitled to receive an annual cash dividend of $2.4375 per share if declared by
the Board of Directors, also known as the Board, payable semi-annually on June 1
and December 1. Dividends are cumulative. Each share of Series 1 Preferred Stock
is convertible into approximately 1.14 shares of common stock, subject to
adjustment in certain events. The Series 1 Preferred Stock is redeemable at the
option of the Company at $25.00 per share. Holders of Series 1 Preferred Stock
have no voting rights, except in limited circumstances.

                                        34
<PAGE>   36
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     During 1998, 5,167 shares of Series 2 Preferred Stock were converted into
115,747 shares of Common Stock. As of December 31, 2000 and 1999, no Series 2
Preferred Stock remained outstanding.

     During 1998, 1,000 shares of Series 3 Preferred Stock were converted into
22,675 shares of common stock. As of December 31, 2000 and 1999, no Series 3
Preferred Stock remained outstanding.

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

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

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

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

     The 1994 Plan, as amended in 2000, authorizes the Board or an Option
Committee appointed by the Board to grant options to purchase a maximum of
4,500,000 shares of common stock. The 1994 Plan allows for the issuance of
incentive stock options and nonqualified stock options to employees, officers,
Directors, agents, consultants, advisors and independent contractors of the
Company, subject to certain restrictions. All option grants expire ten years
from the date of grant. Beginning in May 2000, option grants for employees with
at least one year of service become exercisable in monthly increments over a
four-year period from the grant date. Option grants for employees with less than
one year of service and employees receiving promotions beginning in May 2000
become exercisable at a rate of 25% after one year from the grant date and then
in monthly increments at a rate of 1/48 per month over the following three
years. As of December 31, 2000, there were 529,788 shares of common stock
available for grant under the 1994 Plan.

     In connection with an agreement with a consultant in 2000 for clinical
consulting services, the Company granted stock options to purchase 100,000
shares of Common Stock at an exercise price of $9.1875. The options vest 25%
immediately, and 25% every six months thereafter. The fair value of the grant is
being recorded as compensation expense over the period the services are provided
by the consultant. Based upon the Black Scholes option-pricing model, the
grant-date fair value of the options ranged from $7.81 to $7.93 per share using
assumptions of expected volatility of 144%, expected option life of two years,
expected dividend rate of zero and risk-free rates of interest of 6.5% to 6.6%.
The fair value of the options with future vesting dates will not be known until
the earlier of the vesting of the options or the completion of the services
being provided.

                                        35
<PAGE>   37
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     In May 2000, the Company amended its stock option plan to provide that an
employee will have two years to exercise the vested portion of an option upon
retirement from the Company, whereas the employee previously had three months to
exercise such option. Compensation expense equal to the intrinsic value of an
employee's option at the modification date will be recorded for employees that
receive an extension of their options upon retirement.

     On December 14, 1998, the Company canceled and reissued 1,904,927 employee
stock options at a price of $1.60 per share, which was greater than the fair
market value of $1.25 per share of the common stock on the reissue date. Except
for the exercise price, the options had terms identical to the cancelled
options. Employees agreed to a one-year moratorium on exercise of these options
to qualify for the exchange. During this "black-out period" any employee
resigning from the Company was not able to exercise these options. The exercise
price of the cancelled options ranged from $2.94 - $12.25.

     In December 1999, the Company extended the term of 211,000 vested stock
options for certain employees. At the time of the extension of the term, the
fair value of the Company's common stock was greater than the exercise price of
the stock options. The Company recorded $407,000 in compensation expense for the
difference between the fair value of the Company's common stock on the date the
exercise period was extended and the exercise price of the stock options.

     The Directors Plan authorizes the grant of stock options to non-employee
Directors to purchase a maximum of 250,000 shares of Common Stock. Under the
terms of the amended plan, each eligible Director receives annually, concurrent
with the annual election of Directors, an option to purchase 10,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. The options become exercisable in two equal annual
installments beginning with the first annual meeting of shareholders after the
date of grant. In addition, each newly appointed non-employee Director receives
a one-time initial option to purchase 20,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options expire on the earlier of ten years from the date of grant or five
years after the Director's termination of service as a Director. As of December
31, 2000, there were no shares of Common Stock available for grant under the
Directors Plan. Information relating to activity under the Company's stock
option plans is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                            2000                         1999                         1998
                                 --------------------------   --------------------------   --------------------------
                                                WEIGHTED                     WEIGHTED                     WEIGHTED
                                  NUMBER        AVERAGE        NUMBER        AVERAGE        NUMBER        AVERAGE
                                 OF SHARES   EXERCISE PRICE   OF SHARES   EXERCISE PRICE   OF SHARES   EXERCISE PRICE
                                 ---------   --------------   ---------   --------------   ---------   --------------
<S>                              <C>         <C>              <C>         <C>              <C>         <C>
Outstanding at beginning of
  year.........................    3,629         $ 2.56         3,335         $2.81          3,148         $5.14
Granted........................      810          13.57           598          1.49          2,589          1.97
Exercised......................     (939)          2.30           (66)         1.60           (127)         3.25
Cancelled......................     (344)          5.38          (238)         3.70         (2,275)         5.06
                                   -----         ------         -----         -----         ------         -----
Outstanding at end of year.....    3,156         $ 5.16         3,629         $2.56          3,335         $2.81
                                   =====         ======         =====         =====         ======         =====
Exercisable at end of year.....    1,705         $ 3.51         2,118         $3.22            887         $5.31
                                   =====         ======         =====         =====         ======         =====
</TABLE>

                                        36
<PAGE>   38
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Information relating to stock options outstanding and exercisable at
December 31, 2000 is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING
                                          ------------------------------------------      OPTIONS EXERCISABLE
                                                        WEIGHTED                       --------------------------
                                                         AVERAGE         WEIGHTED                     WEIGHTED
                                           NUMBER       REMAINING        AVERAGE        NUMBER        AVERAGE
        RANGE OF EXERCISE PRICES          OF SHARES   LIFE IN YEARS   EXERCISE PRICE   OF SHARES   EXERCISE PRICE
        ------------------------          ---------   -------------   --------------   ---------   --------------
<S>                                       <C>         <C>             <C>              <C>         <C>
$1.25 - $ 1.44..........................      474         8.11            $ 1.36           245         $ 1.36
        $ 1.60..........................    1,176         5.06              1.60           802           1.60
$1.63 - $ 9.19..........................      869         6.29              5.02           565           5.37
$9.25 - $21.75..........................      637         9.03             14.73            93          14.30
                                            -----         ----            ------         -----         ------
                                            3,156         6.66            $ 5.16         1,705         $ 3.51
                                            =====         ====            ======         =====         ======
</TABLE>

     The fair value of each stock option granted is valued on the date of grant
using the Black Scholes option-pricing model. During 2000, the weighted average
grant-date fair value of stock options granted was $11.50 per share using
assumptions of expected volatility of 144%, expected option lives of three
years, expected dividend rate of zero and a risk-free rate of interest of 5.1%.
During 1999, the weighted average grant-date fair value of stock options granted
was $1.16 per share using assumptions of expected volatility of 112%, expected
option lives of four years, expected dividend rate of zero and a risk-free rate
of interest of 6.6%. During 1998, the weighted average grant-date fair value of
stock options granted with an exercise price equal to the fair market value of
the common stock was $2.01 per share using assumptions of expected volatility of
105%, expected option lives of four to six years, expected dividend rate of zero
and a risk-free rate of interest of 4.7%. The weighted average grant-date fair
value of repriced stock options in 1998 was $.89 per share using assumptions of
expected volatility of 105%, expected option lives of four to five years,
expected dividend rate of zero and a risk-free rate of interest of 4.7%.

     Had compensation cost for these stock option plans been determined in
accordance with SFAS 123, the Company's "Net Loss", "Net Loss Applicable to
Common Shares" and "Net Loss Per Common Share" would have increased to the
following pro forma amounts for 2000, 1999 and 1998 (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                        2000        1999       1998
                                                      --------    --------    -------
<S>                                                   <C>         <C>         <C>
Net loss
  As reported.......................................  $(11,402)   $(11,951)   $(4,449)
  Pro forma.........................................   (13,799)    (13,967)    (5,819)
Net loss applicable to common shares
  As reported.......................................  $(11,905)   $(12,459)   $(4,975)
  Pro forma.........................................   (14,302)    (14,475)    (6,345)
Net loss per common share, basic and diluted
  As reported.......................................  $   (.50)   $   (.59)   $  (.24)
  Pro forma.........................................      (.60)       (.69)      (.30)
</TABLE>

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

     Restricted Stock. The Company also has a Restricted Stock Plan (the
"Restricted Stock Plan") under which restricted stock may be granted or sold to
selected employees, officers, agents, consultants, advisors and independent
contractors of the Company. Under the Restricted Stock Plan, adopted in 1991,
250,000 shares are authorized for grant, of which 190,250 remain available for
grant at December 31, 2000. There were 3,750

                                        37
<PAGE>   39
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

shares granted without restrictions during 2000 for services. No restricted
shares were granted in 1999 and 1998.

     Warrants. In connection with an agreement with a company in 2000 for
investor relations services, the Company issued warrants to purchase 80,000
shares of Common Stock at exercise prices ranging from $6.00 to $9.00. The
Company recorded an expense in the amount of $205,000 for the fair value of the
warrants on the date the services were completed. Based upon the Black Scholes
option pricing model, the grant-date fair values of the warrants ranged from
$5.32 to $7.97 per share using assumptions of expected volatility of 112%,
expected warrant lives of two years, expected dividend rate of zero and a
risk-free rate of interest of 6.1%. The warrants expire in 2002.

     In connection with an agreement with a company in 1999 for investor
relations services, the Company issued a warrant to purchase 150,000 shares of
Common Stock at an exercise price of $1.6875. The Company recorded an expense in
the amount of $450,000 for the fair value of the warrant on the date the
services were completed. Based upon the Black Scholes option pricing model, the
grant-date fair value of the warrant was $1.22 per share using assumptions of
expected volatility of 112%, expected warrant life of five years, expected
dividend rate of zero and a risk-free rate of interest of 6.6%. The warrant
expires in 2004.

NOTE 10. REVENUES

     The Company recorded $1,975,000 of revenue in 2000 from a licensing
agreement entered in 1998 with Theseus LTD concurrent with Theseus LTD's
acquisition by North American Scientific, Inc. and management's determination
that collectibility of contractual amounts due was reasonably assured.

     The Company entered into an agreement in August 1997 with Janssen
Pharmaceutica NV, also known as Janssen, a wholly owned subsidiary of Johnson &
Johnson Inc., for the worldwide development, manufacture and distribution of
NeoRx's AVICIDIN(R) cancer therapy product. The Company received a $5,000,000
license fee in 1997, which was recorded as revenue in 1997, and rights to
potential future milestone payments and royalties on product sales. In January
1998, the Company received a $7,000,000 milestone payment from Janssen,
reflecting Janssen's decision to begin phase II trials of AVICIDIN(R) cancer
therapy as part of the agreement entered into with Janssen in 1997. Janssen
terminated this agreement on December 29, 1998.

     The Company received $1,900,000 in 1999 from final payments under a
previous licensing agreement, which was recorded as other income.

NOTE 11. CASH FLOWS

     Interest paid by the Company was $49,000, $117,000, and $130,000, for 2000,
1999 and 1998, respectively. During 2000, $23,000 of subordinated debentures
were converted into 890 shares of common stock. During 2000, the Company issued
warrants valued at $300,000 in connection with the line of credit, which have
been recorded as deferred costs within other assets.

                                        38
<PAGE>   40
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 12. FEDERAL INCOME TAXES

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

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Net operating loss carryforwards.......................  $ 26,865    $ 23,318
Research and experimentation credit carryforwards......     6,220       5,814
Capitalized research and development...................     5,732       1,725
Depreciation and amortization..........................       425         503
Other..................................................       748         727
                                                         --------    --------
  Deferred tax assets..................................    39,990      32,087
                                                         --------    --------
Deferred tax asset valuation allowance.................   (39,990)    (32,087)
                                                         --------    --------
  Net deferred taxes...................................  $     --    $     --
                                                         ========    ========
</TABLE>

     The Company has established a valuation allowance equal to the amount of
deferred tax assets because the Company has not had taxable income since its
inception and significant uncertainty exists regarding the ultimate realization
of the deferred tax assets. Accordingly, no tax benefits have been recorded in
the accompanying statements of operations. The valuation allowance increased by
$7,903,000, $4,000,000, and $5,617,000 in 2000, 1999 and 1998, respectively.

     The Company has net operating loss carryforwards of approximately
$79,000,000 which expire from 2001 through 2020. Research and experimentation
credits expire from 2001 to 2020. As a result of changes in ownership, the
utilization of the Company's net operating loss carry forwards may be limited.

NOTE 13. RELATED PARTY TRANSACTIONS

     The Company's Chairman of the Board of Directors, Dr. Fred Craves, has a
consulting agreement with the Company that provides that he shall be retained as
a general advisor and consultant to the Company's management on all matters
pertaining to the Company's business. In exchange for such services, he is
compensated $30,000 for each calendar quarter of services, plus reasonable
travel and other expenses. Compensation payments under this agreement totaled
$120,000 for each of the years 2000, 1999 and 1998. In addition, payments for
travel and other expenses totaled approximately $29,900, $22,500 and $21,175 for
2000, 1999 and 1998, respectively.

     Dr. Craves is a founder of Bay City Capital BD, LLC, also known as BCC, a
merchant bank focused on the life sciences industry. Another NeoRx director is
on the business advisory board of BCC. The Company and BCC entered into an
agreement whereby BCC will act as the Company's advisor for the purpose of
identifying opportunities to enter into strategic alliances. The Company pays a
retainer fee of $50,000 in cash for each calendar quarter. The agreement also
includes a percentage of consideration, ranging from one to five percent,
depending on the ultimate amount of consideration raised. Payments under this
agreement totaled $50,000 for 2000. The balance payable at December 31, 2000 was
$100,000.

     In connection with financial consulting services to be performed in 2001, a
board director received stock option grants of 10,000 shares in December 2000
and 150,000 shares in January 2001. The 10,000 options granted in December 2000
vest in three monthly increments beginning in January 2001. The 150,000 options
granted in January 2001 vest in eighteen monthly increments beginning in
February 2001. Fair value of the option grants will be recorded as an expense
over the period the services are to be performed.

     The Company has a demand note receivable from an officer with a balance of
$60,875, and $82,338 at December 31, 2000 and 1999, respectively.

                                        39
<PAGE>   41
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. RESTRUCTURING EXPENSE

     In December 1998, the Company restructured its operations and reduced its
workforce in all departments by 20 employees. The Company incurred a severance
charge of $659,000 as a result of the restructuring. The accrued severance
payable at December 31, 1998 was $504,000, which was paid in 1999.

NOTE 15. 401(k) PLAN

     The Company sponsors a 401(k) plan that covers substantially all employees.
At its own discretion, the Company may make contributions to the plan on a
percentage of participants' contributions. The Company made contributions of
$18,112, $19,367 and $24,386 for the years ended December 31, 2000, 1999 and
1998, respectively. The Company has no other post employment or postretirement
benefit plans.

NOTE 16. UNAUDITED QUARTERLY DATA

     The following table presents summarized unaudited quarterly financial data
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                               FIRST     SECOND      THIRD     FOURTH
                                              QUARTER    QUARTER    QUARTER    QUARTER
                                              -------    -------    -------    -------
<S>                                           <C>        <C>        <C>        <C>
2000
Revenues....................................  $   149    $   727    $   684    $ 1,989
Operating expenses..........................    6,063      5,062      4,852      5,617
Net loss....................................   (2,366)    (3,855)    (3,450)    (1,731)
Net loss applicable to common shares........   (2,493)    (3,982)    (3,575)    (1,855)
Net loss per common share -- basic and
  diluted...................................     (.12)      (.17)      (.15)      (.06)
1999
Revenues....................................  $   413    $    47    $     3    $   128
Operating expenses..........................    3,346      3,721      3,779      4,508
Net loss....................................   (2,708)    (3,457)    (3,508)    (2,278)
Net loss applicable to common shares........   (2,835)    (3,584)    (3,635)    (2,405)
Net loss per common share -- basic and
  diluted...................................     (.13)      (.17)      (.17)      (.12)
</TABLE>

NOTE 17. CONTINGENCY

     The Company is in continuing discussions with the FDA regarding their
proposed STR product. The Company's phase III multiple myeloma and other STR
studies were placed on clinical hold in November 2000 by the FDA after some
patients developed a serious delayed toxicity. Communications with the FDA have
focused on (1) the relevant factors for selecting a safe radiation dose and (2)
the accuracy of radiation calculations. The FDA has requested that the Company
collect additional dosimetry data from patients to demonstrate the accuracy of
the method the Company proposed to use to calculate dose in the phase III STR
trial.

NOTE 18. SUBSEQUENT EVENT

     On March 20, 2001, the Company entered into an agreement to purchase
certain radiopharmaceutical manufacturing assets of International Isotopes Inc.
in Denton, Texas. Completion of the purchase is subject to a number of
conditions of closing, including the sale by International Isotopes of certain
of its other assets to third parties, settlement by International Isotopes of
claims of certain creditors, receipt by International Isotopes of bank financing
for its proposed future operations and delivery by International Isotopes of the
assets free and clear of liens. To acquire the assets, we have agreed to pay $6
million in cash and to assume

                                        40
<PAGE>   42
                               NEORX CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

$6 million of restructured debt of International Isotopes. In addition, the
Company has agreed to issue to International Isotopes a warrant to purchase, at
an exercise price of $10 per share, up to 800,000 shares of NeoRx common stock
(the "warrant shares"). The warrant will expire in 3 years. The Company has
agreed to file a registration statement to register the warrant shares for
resale after closing. The asset purchase agreement can be terminated by either
NeoRx or International Isotopes if the closing does not occur by April 30, 2001.

                                        41
<PAGE>   43

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) Directors. The information required by this item is incorporated herein
by reference to the section captioned "Election of Directors" in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 22,
2001, filed with the Securities and Exchange Commission (the "Commission")
pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").

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

<TABLE>
<CAPTION>
                   NAME                     AGE            POSITION WITH THE COMPANY
                   ----                     ---            -------------------------
<S>                                         <C>   <C>
Paul G. Abrams, M.D., J.D. ...............  53    President, Chief Executive Officer and
                                                  Director
Karen Auditore-Hargreaves, Ph.D. .........  48    Vice-President, Research and Development
Becky J. Bottino..........................  52    Vice President, Operations
Melinda G. Kile...........................  44    Controller, Secretary and Chief Accounting
                                                  Officer
</TABLE>

BUSINESS EXPERIENCE

     Dr. Paul G. Abrams is a co-founder of the Company, has been a Director
since January 1985 and has been Chief Executive Officer since May 1990 and has
been President since March 2001. Dr. Abrams holds M.D., J.D. and B.A. degrees
from Yale University. He is a board-certified internist and medical oncologist
and is an Affiliate Associate Professor in the Department of Radiology at the
University of Washington.

     Karen Auditore-Hargreaves has been Vice President of Research and
Development since May 1999. Prior to joining the Company, she was Vice President
of Research, at CellPro, Inc and responsible for the development of products for
the selection, activation and expansion of human hematopoietic cells. Prior to
joining CellPro, Dr. Hargreaves held research management positions with Oculon
Corporation, PATH and Genetic Systems Corporation. Dr. Hargreaves holds a Ph.D.
in Genetics from the University of California, Davis and received her
postdoctoral training at the Massachusetts Institute of Technology Center for
Cancer Research. Her twenty years experience in the biotechnology industry
includes drug and device development as well as in vitro diagnostics.

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

     Melinda G. Kile has been the Controller since January 1998, has been Chief
Accounting Officer since February 2001, and has been Secretary since March 2001.
She joined NeoRx from Perstorp Xytec, Inc., where she was Vice President and
Chief Financial Officer from March 1996 to January 1998. Prior to joining
Perstorp Xytec, Ms. Kile was Controller at Tree Top, Inc., and held a number of
positions in finance and marketing from April 1983 through March 1996. Ms. Kile
is a CPA and received a B.S. in Accounting from Central Washington University.

     (c) Compliance with Section 16(a) of the Exchange Act. The information
required by this item is incorporated herein by reference to the section
captioned "Compliance With Section 16(a) of the Securities Exchange Act of 1934"
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 22, 2001 filed with the Commission pursuant to Section 14(a) of the
Exchange Act.

                                        42
<PAGE>   44

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated herein by reference
to the sections captioned "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 22, 2001,
filed with the Commission pursuant to Section 14(a) of the Exchange Act.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 22, 2001, filed with the Commission pursuant to
Section 14(a) of the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

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

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

     (b) Reports on Form 8-K --

        Form 8-K dated October 2, 2000, announcing initiation of STR phase III
        clinical trials in multiple myeloma

        Form 8-K dated November 8, 2000, relating to suspension of STR trials

        Form 8-K dated December 5, 2000, updating efficacy data on phase I/II
        STR trials.

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

                                        43
<PAGE>   45

                                   SIGNATURES

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

                                          NEORX CORPORATION
                                          (Registrant)

                                                  /s/ MELINDA G. KILE
                                          --------------------------------------
                                                     Melinda G. Kile
                                                        Controller
                                                 (Principal Financial and
                                              Accounting Officer, Secretary)

Date: March 30, 2001

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

<TABLE>
<C>                                                    <C>                              <S>

                 /s/ PAUL G. ABRAMS                      President, Chief Executive     March 30, 2001
-----------------------------------------------------       Officer and Director
                   Paul G. Abrams                       (Principal Executive Officer)

                 /s/ FRED B. CRAVES                       Chairman of the Board of      March 30, 2001
-----------------------------------------------------             Directors
                   Fred B. Craves

                 /s/ JACK L. BOWMAN                               Director              March 30, 2001
-----------------------------------------------------
                   Jack L. Bowman

               /s/ E. ROLLAND DICKSON                             Director              March 30, 2001
-----------------------------------------------------
                 E. Rolland Dickson

               /s/ CARL S. GOLDFISCHER                            Director              March 30, 2001
-----------------------------------------------------
                 Carl S. Goldfischer

                /s/ ALAN A. STEIGROD                              Director              March 30, 2001
-----------------------------------------------------
                  Alan A. Steigrod
</TABLE>

                                        44
<PAGE>   46

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                           INCORPORATION
EXHIBIT                           DESCRIPTION                             BY REFERENCE TO
-------                           -----------                             ---------------
<C>       <S>                                                             <C>
 3.1(a)   Restated Articles of Incorporation, dated April 29, 1996....        *
 3.1(b)   Articles of Amendment, dated March 31, 1997, to Restated
          Articles of Incorporation...................................        **
 3.1(c)   Articles of Amendment, dated August 8, 1997, to Restated
          Articles of Incorporation...................................      XXXXX
 3.2      Bylaws, as amended, of the registrant.......................      XXXXX
 4.1      Form of Indenture, dated as of June 1, 1989, between NeoRx
          Corporation and First Interstate Bank of Washington, N.A.,
          as Trustee..................................................       ***
10.1      Restated 1994 Stock Option Plan(++).........................        @
10.2      Lease Agreement for 410 West Harrison facility, dated
          February 15, 1996, between NeoRx Corporation and Diamond
          Parking, Inc................................................        #
10.3      Amendment No. 1, dated August 14, 2000, to Lease Agreement
          between NeoRx Corporation and Dina Corporation..............        X
10.4      1991 Stock Option Plan for Non-Employee Directors, as
          amended(++).................................................        =
10.5      1991 Restricted Stock Option Plan(++).......................      ******
10.6      Agreement, dated as of December 15, 1995....................    = = = = =
10.7      Consulting Agreement, dated as of July 7, 1993, between
          NeoRx Corporation and Dr. Fred Craves(++)...................        =
10.8      Amendment No. 4 to consulting agreement, dated July 1, 2000
          between NeoRx Corporation and Dr. Fred Craves(++)...........        X
10.9      Agreement, dated as of June 1, 1987, between NeoRx
          Corporation and the Board of Trustees of the Leland Stanford
          Junior University, as amended...............................       = =
10.10     Amendment No. 4, dated July 11, 1997, to Contract between
          NeoRx Corporation and the Board of Trustees of the Leland
          Stanford Junior University..................................        X
10.11     Indemnification Agreement(++)...............................        #
10.12     Form of Key Executive Severance Agreement(++)...............        ##
10.13     Officer Change in Control Agreement(++).....................      XXXXX
10.14     Key Executive Severance Agreement(++).......................      XXXXX
10.15     License Agreement, dated June 30, 1999, between NeoRx and
          The Dow Chemical Company....................................        ~
10.16     Credit Facility Agreement, dated February 3, 2000, between
          NeoRx Corporation and PPD...................................        ~~
10.17     Clinical Manufacture and Supply Agreement, dated February
          21, 2000, between NeoRx Corporation and International
          Isotopes, Inc. .............................................        ~~
10.18     Clinical Manufacture and Supply Agreement, dated September
          1, 2000, between NeoRx Corporation and ABC Labs.............       ~~~
10.19     Facilities Lease, dated July 24, 2000, between NeoRx
          Corporation and F5 Networks.................................       ~~~
10.20     Stock Option Agreement, dated December 19, 2000, between
          NeoRx Corporation and Carl S. Goldfischer(++)...............        X
10.21     Asset Purchase Agreement, dated March 20, 2001, between
          International Isotopes Inc. and NeoRx Corporation...........        X
10.22     Stock Option Agreement, dated January 17, 2001, between
          NeoRx Corporation and Carl S. Goldfischer(++)...............        X
10.23     Consulting Agreement, dated December 19, 2000, between NeoRx
          Corporation and Carl S. Goldfischer(++).....................        X
10.24     Consulting Agreement, dated November 6, 2000, between NeoRx
          Corporation and Douglass Given(++)..........................        X
</TABLE>
<PAGE>   47

<TABLE>
<CAPTION>
                                                                           INCORPORATION
EXHIBIT                           DESCRIPTION                             BY REFERENCE TO
-------                           -----------                             ---------------
<C>       <S>                                                             <C>
10.25     Stock Option Agreement, dated November 16, 2000, between
          NeoRx Corporation and Douglass Given(++)....................        X
23.1      Consent of KPMG LLP.........................................        X
</TABLE>

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

<TABLE>
<S>          <C>
*            Filed as an exhibit to the Company's Form 10-K for the
             fiscal year ended December 31, 1996 and incorporated herein
             by reference.

**           Filed as an exhibit to the Company's Registration Statement
             on Form S-3 (Registration No. 333-25161), filed April 14,
             1997 and incorporated herein by reference.

***          Filed as an exhibit to the Company's Registration Statement
             on Form S-1 (Registration No. 33-28545), effective May 31,
             1989 and incorporated herein by reference.

******       Filed as an exhibit to the Company's Annual Report on Form
             10-K for the fiscal year ended September 30, 1991 and
             incorporated herein by reference.

=            Filed as an exhibit to the Company's Registration Statement
             on Form S-2 (Registration No. 33-71164) effective December
             13, 1993 and incorporated herein by reference.

==           Filed as an exhibit to the Company's Form 10-K for the
             fiscal year ended December 31, 1994 and incorporated herein
             by reference.

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

@            Filed as an exhibit to the Company's Registration Statement
             on Form S-8, filed July 31, 1997 and incorporated herein by
             reference.

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

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

X            Filed as an exhibit to the Company's Form 10-K for the
             fiscal year ended December 31, 2000.

XXXXX        Filed as an exhibit to the Company's Form 10-K for the
             fiscal year ended December 31, 1998.

~            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.

~~           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.

~~~          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.

++           Management contract or compensatory plan.
</TABLE>