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                      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, 1996

|_|         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

                         Commission File No. 0-14116

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

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


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

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

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

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



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

                             Yes    X            No

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

 The  aggregate  market  value  of voting  stock  held by  nonaffiliates  of the
Registrant  as of March 7, 1997 was  approximately  $76.8  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 March 7, 1997,  approximately  16.5 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  1996  Notice of Annual  Meeting and Proxy
Statement for the Registrant's  Annual Meeting of Shareholders to be held on May
13, 1997 are incorporated by reference in Part III of this Form 10-K.

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<PAGE>



                                  PART I

Item 1. Business

    NeoRx   Corporation   ("NeoRx"  or  the   "Company")   develops   innovative
biopharmaceuticals  for the diagnosis and treatment of cancer and cardiovascular
disease.  As part  of its  cancer  treatment  program,  NeoRx  is  developing  a
proprietary  pretargeting  platform  for  the  delivery  of  therapeutic  agents
directly to tumor sites.

    The Company's portfolio of products include  VERLUMA(TM),  a small cell lung
cancer imaging kit, that was cleared for marketing by the United States Food and
Drug Administration (the "FDA") in August 1996. The Company's AVICIDIN(R) cancer
therapy  agent is currently in Phase I/II  clinical  trials for the treatment of
solid  tumors.   Phase  I  patient  accrual  for  the  BIOSTENT(R)   product,  a
pharmaceutical agent designed to reduce restenosis following balloon angioplasty
through the inhibition of vascular remodeling, was completed in 1996 and data on
the final  patients to complete  the six month  follow-up  are being  collected.
NeoRx is also conducting  investigations into atherosclerosis in a Phase I study
to  determine  safety  and dosage of a  pharmaceutical  agent with the intent of
inhibiting atherosclerosis.

    All statements in this document that are not historical facts are considered
forward-looking  statements.  Sentences  or  phrases  that  use  words  such  as
"believes,"  "anticipates,"  "hopes,"  "plans," "may," "can," "will," and others
are  often  used to flag such  statements,  but  their  absence  does not mean a
statement is not  forward-looking.  Such statements reflect management's current
opinion and are designed to help readers understand  management's  thinking.  By
their very nature,  however,  such  statements  are subject to certain risks and
uncertainties  that could cause actual results to differ  materially  from those
projected. See "Important Factors Regarding Forward-Looking Statements." Readers
are cautioned not to place undue reliance on these  forward-looking  statements,
which speak only as of the date hereof.  The Company undertakes no obligation to
release publicly any revisions to these  forward-looking  statements that may be
made to reflect events or circumstances  after the date hereof or to reflect the
occurrence of unanticipated events.

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
1,382,000 new cases of cancer will be diagnosed in the United States in 1997, of
which 60% are  expected to be tumors of the lung,  colon,  breast and  prostate.
Cancer  is  a  large  group  of  diseases   characterized  by  uncontrolled  and
proliferative cell division. Cancer cells have the tendency to dislodge from the
sites where the tumors  originate and  metastasize  (spread from one part of the
body to another).

    Current   regimens  for  the  treatment  of  cancer  include   chemotherapy,
external-beam  radiation and surgical intervention.  Generally,  existing cancer
therapy  for   high-incidence   tumors  such  as  lung,   colon  and  breast  is
characterized  by  both  relatively  low  efficacy  and  considerable  toxicity.
Chemotherapy drugs are generally administered intravenously so that the drug can
circulate  throughout the body. With rare  exceptions,  chemotherapy is the only
available  treatment  for tumors that have spread  throughout  the body,  but it
provides only modest  benefits for patients with the most  frequently  occurring
malignancies,  such as lung,  colon or  breast  cancer.  As  chemotherapy  drugs
circulate  throughout  the body,  they kill cancer cells,  but are also toxic to
normal cells. Consequently,  cancer patients receiving chemotherapy often suffer
severe,  sometimes  life-  threatening,  side  effects,  such as  damage to bone
marrow,  lungs,  heart,  kidneys and nerves.  The optimal  drug dose for killing
cancer cells must therefore often be reduced to avoid intolerable toxicities.
    Pretargeting:   NeoRx's  Approach  to  Delivering   Drugs.   NeoRx's  cancer
therapeutic   product  under  development   employ  monoclonal   antibody  based
technology. Antibodies are proteins produced by certain white blood cells in the
body's  immune  system in  response  to antigens  (foreign  substances)  such as

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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,
known as "specificity," makes antibodies  potentially useful for the delivery of
imaging and therapeutic agents to disease sites.

    Monoclonal  antibodies  are  laboratory-produced  and share the  ability  of
natural human antibodies to bind to one particular  antigen target. In 1975, the
first practical method was demonstrated for producing  monoclonal  antibodies in
significant  quantities.  This method  consists of obtaining  antibody-producing
cells from mice immunized against a selected antigen and fusing these cells with
a type of cell that reproduces indefinitely. The products of the fusion of these
two  types of cells are  called  hybridomas.  Hybridomas  secrete  the  specific
antibody desired, grow well in culture and multiply to generate a vast number of
duplicate  hybridomas that also secrete the desired  antibody.  These antibodies
can be purified for use as pharmaceutical agents.

    In the conventional approach to radioimmunotherapy ("RIT"), the radiation is
linked to the antibody that is then  administered to patients.  The antibody and
the radiation circulate  together.  NeoRx's  pretargeting  technology employs an
antibody-mediated  targeting  strategy that is designed to deliver high doses of
an active  agent to tumor  cells,  while  minimizing  toxicity to normal  tissue
associated with conventional therapy.

    AVICIDIN:  The  First  NeoRx  Agent to Use the  Pretargeting  Platform.  The
AVICIDIN  agent takes  advantage of the high binding  affinity of two molecules:
biotin and  streptavidin.  An antibody linked to streptavidin is administered to
the patient and allowed to  accumulate  on the surface of the tumor cells.  This
accumulation  occurs because the antibody  portion of the  antibody-streptavidin
conjugate  recognizes and binds to antigen markers on the tumor cell surface. In
animal  experiments,  the conjugate attains peak uptake in the tumor after 24-36
hours,  at which time a clearing  agent is  administered  to remove  circulating
conjugate from the  bloodstream.  The final step involves  administering  biotin
linked  to  the  therapeutic  radionuclide,   yttrium-90.  This  small  molecule
biotin-yttrium   complex  is  designed  to  bind   specifically   to  where  the
streptavidin has accumulated, with the resultant beta particle emission from the
yttrium-90  killing  tumor  cells.  Biotin-yttrium  that  does  not  bind to the
streptavidin is quickly  eliminated  through the kidneys,  thereby  reducing the
radiation  dose to the bone  marrow.  In  preclinical  studies in  animals,  the
AVICIDIN agent  achieved a tenfold  improvement in the therapy ratio compared to
conventional   RIT,   accompanied   by   durable,    complete   regressions   of
chemotherapy-resistant  human  lung,  breast  and colon  cancer  tumors in mice.
Results of preclinical  studies are not  necessarily  indicative of results that
will be attained in human clinical trials.

    The AVICIDIN agent is being tested in Phase I/II clinical trials in patients
with tumors  that bind with the  antibody,  such as cancers of the lung,  colon,
breast and  prostate.  The  purposes of the study are to  determine  the maximum
tolerated  dose ("MTD") of  radiation,  to observe  anti-tumor  effects,  and to
determine the optimal timing and dosing of each component.

    In one series of tests, the Company's  investigators  are trying to optimize
the dosing and timing of the three components ("dosimetry").  In a second series
of tests,  the  investigators  are raising the radiation dose in groups of three
patients to determine the MTD and to observe anti-tumor effects when they occur.
These studies use an antibody  produced by mouse cells so that the antibody is a
murine  protein and results in a human  anti-mouse  antibody  ("HAMA")  response
after the first dose. Once the Company is satisfied it has a suitable  humanized
antibody, it plans to substitute this for the foreign murine antibody.

    To date,  the  AVICIDIN  dosimetry  studies  have shown  substantially  less
exposure  of  bone  marrow  than  conventional  RIT.  This  has  permitted  safe
administration  of higher radiation doses, and tumor shrinkage has been observed
following  just a single  AVICIDIN  dose even in patients with  advanced,  bulky
tumors.

    Other Uses of  Pretargeting.  NeoRx is testing the  delivery  of  additional
agents such as other forms of radiation,  drugs, immune response modifiers (e.g.

                                       2
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tumor necrosis  factor).  This unique  pretargeting  platform may also offer the
first  real  opportunity  to  deliver  alpha  emitters,   a  form  of  radiation
significantly  more  potent  than  yttrium-90,  effectively  and safely to solid
tumors.  NeoRx has received a Small Business  Innovative Research ("SBIR") grant
to study alpha emitter chemistry.

    Cancer:  Diagnosis  and  Staging of  Disease.  Early  diagnosis  and precise
detection of the malignant  cells are important  for cancer  treatment.  Current
diagnostic imaging techniques  include x-rays,  computerized  tomography ("CT"),
ultrasonography,  radioisotopic  imaging and nuclear magnetic  resonance imaging
("MRI"). Once cancer is suspected, its presence must be confirmed by biopsy (the
examination of cells removed from the body).  The next step is to use diagnostic
imaging to "stage" the patient,  that is, to determine the extent of the disease
throughout  the body.  Accurate  staging is important for designing  appropriate
treatment.  Using current methods,  several diagnostic imaging procedures may be
required to determine the organs to which the cancer has spread.  Staging may be
inaccurate  if all possible  body sites are not examined or if tumor  metastases
are too small to be detected by the diagnostic procedure used.

    Small Cell Lung Cancer:  Diagnosis and Staging.  The American Cancer Society
estimates that approximately  178,000 new cases of lung cancer will occur in the
United States in 1997, of which the Company believes  approximately  47,000 will
be small cell lung cancer.  Symptoms of this disease  usually  appear only after
the  disease  has  advanced  beyond the stage when it may be  surgically  cured.
According to the American Cancer Society,  the five-year  survival rate for lung
cancer  is 13%.  Although  most  small  cell lung  cancer  patients  respond  to
chemotherapy,  most also suffer a relapse.  Current treatment of this disease is
based on the  extent to which the tumor has  spread  throughout  the body.  As a
result, accurate imaging to determine the extent of the disease is important for
designing  appropriate   treatment.   Patients  whose  disease  has  not  spread
extensively are generally treated with chemotherapy and externally applied chest
radiation.  Those  patients whose disease has spread to the point that radiation
treatment  would not encompass  all known tumors  within one radiation  port are
treated with chemotherapy only.

    The  degree  to which  small  cell  lung  cancer  has  spread  is  generally
determined using a standard battery of four imaging tests, including CT scans of
the head,  chest and abdomen and a bone scan. This standard battery of tests may
take up to one week.  Bone marrow  aspirate,  a procedure in which a bone marrow
sample is removed for examination, is occasionally used as an additional test.

    The VERLUMA Kit: Imaging for Small Cell Lung Cancer.  The VERLUMA kit is the
Company's  diagnostic  imaging  product that is  indicated  to detect  extensive
disease in patients with biopsy-confirmed,  previously untreated small cell lung
cancer.  Boehringer Ingelheim International GmbH ("Boehringer  Ingelheim") holds
world-wide  manufacturing  rights and non-North American marketing rights to the
VERLUMA  kit.  Boehringer  Ingelheim  will pay  royalties  to  NeoRx  on  future
non-North American product sales, if any.

    The DuPont Merck Pharmaceutical Company ("DuPont Merck") markets the VERLUMA
kit in the United States and holds exclusive North American rights to market the
VERLUMA kit. In addition to paying  NeoRx $4.5  million  upon the FDA  marketing
clearance in the United States,  DuPont Merck will pay NeoRx  royalties on sales
of the VERLUMA Kit in North  America.  To date, the VERLUMA kit is approved only
in the United States. No applications for foreign approvals have been filed.

    The VERLUMA kit employs a Fab fragment of an antibody,  designated NR-LU-10,
linked to a nontoxic dose of the gamma-emitting radionuclide technetium-99m that
is injected intravenously and allowed to concentrate at the tumor sites. A gamma
camera is then used to  determine  the  location of the tumors.  In a Phase I/II
clinical  trial,  the VERLUMA kit localized to primary and/or  metastatic  small
cell and non-small  cell lung cancer,  and breast,  colon and prostate  cancers.
Data from a  completely  blinded  analysis of NeoRx's  Phase III small cell lung
cancer  clinical  trial show that the  VERLUMA  kit is more  sensitive  than any
single test used in the standard  battery of four tests to determine how far the

                                       3
<PAGE>
 
tumor has spread and has an accuracy level comparable to the standard battery of
tests. The Company believes that its use may result in cost savings,  as well as
reduced staging time compared to conventional tests.

Cardiovascular Disease and Its Treatment

    The American  Heart  Association  estimates  that  approximately  60 million
Americans have one or more types of cardiovascular disease, and that the cost of
cardiovascular  diseases  and  stroke in 1997 will be $259  billion.  Nearly one
million  people die of  cardiovascular  disease each year in the United  States,
making it the leading cause of death.

    Cardiovascular  disease is  divided  into four main  categories:  high blood
pressure,  coronary heart disease,  stroke and rheumatic heart disease.  Medical
procedures to treat coronary  heart disease  include  percutaneous  transluminal
coronary angioplasty, coronary artery bypass surgery and heart transplantation.

     Angioplasty:  The  Procedure.  Angioplasty  is a medical  procedure used to
increase blood flow through coronary  arteries that have been partially  blocked
by the build-up of plaque on the interior of the arterial wall.

    Restenosis is the recurrent  narrowing of an artery  following  angioplasty.
This  narrowing,  that reduces blood flow through the artery,  is believed to be
caused by a combination of at least three distinct but interrelated factors: (1)
vascular  remodeling,  or chronic  constriction  of the  artery,  (2) blood clot
formation and (3) the migration and  proliferation of smooth muscle cells at the
site of the  angioplasty  procedure  that encroach upon the flow of blood.  Data
from human studies suggests that vascular  remodeling  accounts for the majority
of late lumen loss that leads to restenosis following balloon angioplasty.

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

    BIOSTENT:  NeoRx's Approach to Treating  Restenosis.  The Company's BIOSTENT
agent under  development is designed to inhibit  vascular  remodeling  following
balloon  angioplasty.  By  addressing  remodeling,  the  BIOSTENT  agent  may be
complementary  to  the  anti-thrombotics   currently  on  the  market  or  under
development  by other  companies  for the treatment of  restenosis.  The drug is
intended to be  delivered  locally  immediately  following  angioplasty  using a
delivery  catheter.  The Company  believes that this method delivers the drug to
the  angioplasty  site and reduces  the chances of toxicity  that might occur if
systemic treatment were used to deliver similar concentrations at the site.

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

    The BIOSTENT agent may be unique with respect to other pharmaceutical agents
that have been  evaluated  in  animal  models  and  reported  in the  scientific
literature in that it not only inhibits  restenosis,  but actually  sustains the
increase in the luminal area following balloon trauma compared to the ballooned,
but  untreated,  arteries.  NeoRx  scientists  have  assessed the effects of the
BIOSTENT treatment method in a swine femoral artery model that was then extended
to swine coronary  arteries.  Analysis of swine femoral  arteries for as long as

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eight weeks and of swine coronary  arteries for as long as three weeks following
a single exposure to the BIOSTENT agent has indicated in these  experiments that
the treatment sustains the increase in the luminal area following balloon trauma
compared to the ballooned, but untreated, arteries.

    The BIOSTENT treatment method consists of the cytoskeletal inhibiting agent,
cytochalasin B, delivered through a specialized intracoronary delivery catheter.
The catheter is an  over-the-wire  design that allows rapid  placement using the
same  guidewire  used for balloon  dilation.  Commercialization  of the BIOSTENT
agent will depend on obtaining the FDA approval of the catheter. NeoRx completed
patient accrual of a multidose, multicenter, randomized,  double-blinded Phase I
trial. An interim analysis of the majority of the patients  revealed no evidence
of  drug-related  toxicity.  A final  analysis  of the  data  for the six  month
follow-up is being performed.

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

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

    A Phase I dosing study is being  conducted to determine  safety and the dose
of a drug that maximally increases activated TGF(beta) in patients with advanced
coronary artery disease. This drug has been provisionally  licensed from a third
party.  Either  NeoRx or the  third  party  may  terminate  at will the  further
development of this drug.

Products Under Development

    The following table summarizes products under development by NeoRx:
<TABLE>
<CAPTION>


         Product                                 Indication                                Status
------------------------------------    -----------------------------------       ---------------------------------
<S>                                     <C>                                       <C>
Cancer Therapy:
  AVICIDIN pretargeted cancer           Treatment of solid tumors, e.g.,          Phase I/II human clinical
     therapy product                    lung cancer, colon cancer,                trials
                                        etc.(1)
Cardiovascular Therapy:
Anti-restenosis
  BIOSTENT agent                        Inhibition of restenosis                  Phase I human clinical trials
Atherosclerosis
  TGF  upregulation                     Treatment of atherosclerosis              Phase I human clinical trials
------------------------------------
</TABLE>
(1) The Company's currently planned first indication for this product is for the
treatment of small cell lung cancer.
                        
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Patents and Proprietary Rights

    The Company's policy is to protect its proprietary technology  aggressively.
In addition to filing patent  applications  in the United States for many of its
inventions,  the Company files patent  applications  in Canada,  major  European
countries,  Japan and  additional  foreign  countries  on a  selective  basis to
protect important inventions.

    The Company holds a co-exclusive license for the monoclonal antibody used in
its cancer imaging and treatment products and also has obtained U.S. and foreign
patent  protection  relating  to  its  cancer  imaging  products.  NeoRx  has an
exclusive  license from  Stanford  University  for a patent  issued in the U.S.,
Europe  and Japan  that  covers  the  pretargeting  technology  used in  NeoRx's
AVICIDIN cancer therapy product under development.  The Company has been awarded
additional  U.S.  patents  pertaining to its  pretargeting  technology,  and has
received notices of allowance in the U.S. on several others;  other applications
are pending. The Company has also received a notice of allowance in the U.S. for
its BIOSTENT technology and has several patent applications  pending in both the
U.S. and foreign  jurisdictions.  NeoRx has  exclusively  licensed  from Indiana
University  a patent  covering  catheter  delivery  into blood  vessel  walls of
sustained release therapeutic agents contained within a particulate dosage form.
NeoRx is the exclusive  assignee of a two U.S.  patents granted to its Cambridge
collaborators  for the use of  various  TGF(beta)  elevating  agents  to treat a
variety of cardiovascular  indications and has additional  pending  applications
related to this technology.

    Competitors have filed  applications  for, or have been issued,  patents and
may obtain  additional  patents and  proprietary  rights relating to products or
processes  competitive  with or relating to those of the Company.  The scope and
validity  of these  patents,  the extent to which the Company may be required to
obtain licenses  thereunder or under other proprietary  rights, and the cost and
availability  of licenses  are unknown.  Accordingly,  there can be no assurance
that the Company's patent  applications will result in additional  patents being
issued  or  that,  if  issued,   the  patents  will  afford  protection  against
competitors  with similar  technology,  nor can there be any assurance  that any
patents issued to the Company will not be infringed or designed around by others
or that others will not obtain patents that the Company would need to license or
design around.

     As part of NeoRx's ongoing research activities, the Company in the ordinary
course  seeks  assurances  that it will own or license  any  rights  that may be
necessary  or useful to its  business.  The  Company  believes  that in  certain
circumstances  licensing  or  cross-licensing  arrangements  pertaining  to  the
relevant  technologies  and  providing  reasonable  economic  terms  may  be  an
expedient  way  to  resolve  any  potential   infringement   issues.   In  other
circumstances,   such  arrangements  may  not  be  warranted  or  obtainable  on
commercially  reasonable terms. In the event it were determined that one or more
of the  Company's  products  infringe one or more of such  patents,  the Company
could seek to enter a licensing or cross-licensing arrangement, but there can be
no assurance that such an arrangement would be available or, if available,  that
the terms of such an arrangement would be reasonable.

Competition

    Research and  development  in cancer and  cardiovascular  diseases is highly
competitive.  NeoRx faces  competition  from emerging  companies and established
biotechnology,  pharmaceutical and chemical  companies.  Many emerging companies
have corporate  partnership  arrangements with large,  established  companies to
support research, development and commercialization efforts of products that may
be competitive with those being developed by the Company. In addition,  a number
of established  pharmaceutical and chemical companies are developing proprietary
technologies or have enhanced their  capabilities by entering into  arrangements
with,  or  acquiring,   companies  with  proprietary  monoclonal  antibody-based
technology  or other  technologies  applicable  to the imaging or  treatment  of
cancer, the prevention of restenosis or the treatment of  atherosclerosis.  Many

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of the  Company's  existing  or  potential  competitors  have or have  access to
substantially  greater  financial,  research  and  development,   marketing  and
production resources than those of the Company.

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

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

    Other  companies are  developing  antibody-based  cancer  imaging  products.
Conventional  radiography,  conventional nuclear medicine scanning (including an
indium-labeled peptide for neuroendocrine tumors), CT and MRI are already widely
available and used by a large number of physicians.  These, along with a nuclear
medicine test now being marketed,  constitute the current competition for use of
the Company's VERLUMA lung cancer imaging product.

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

    The  Company's  anti-restenosis  product  under  development  is designed to
prevent  restenosis of blood vessels following  angioplasty where such narrowing
is  due  to  vascular   remodeling.   Due  to  the  incidence  and  severity  of
cardiovascular  diseases,  the market for therapeutic products that address such
diseases is large, and competition is intense and expected to increase. There is
no obligation for the licensor of the drug being studied for TGF upregulation to
permit its continued development after the dosing study is completed.

Government Regulation and Product Testing

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

    The steps required before a pharmaceutical agent may be marketed in the U.S.
include  (i)  preclinical  laboratory  tests,  in vivo  preclinical  studies and
formulation  studies,  (ii) the submission to the FDA of an Investigational  New
Drug  Application  ("IND"),  which must become  effective  before human clinical
trials can commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of a Biologic
License  Application ("BLA") or New Drug Application ("NDA") to the FDA, and (v)
the FDA approval of the BLA or NDA prior to any  commercial  sale or shipment of
the drug. In addition to obtaining FDA approval for each product,  each domestic

                                       7
<PAGE>

drug manufacturing  establishment must be registered with, and inspected by, the
FDA. Domestic  manufacturing  establishments are subject to biennial inspections
by the FDA and must comply with current  Good  Manufacturing  Practice  ("cGMP")
regulations  enforced by the FDA through its facilities  inspection  program for
biologics,  drugs and devices.  To supply products for use in the U.S.,  foreign
manufacturing  establishments  must comply with cGMP and are subject to periodic
inspection by the FDA or by corresponding  regulatory agencies in such countries
under reciprocal agreements with the FDA.

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

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

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

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

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

                                       8
<PAGE>


    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.

    In addition to regulations  enforced by the FDA, the Company also is subject
to  regulations  under  occupational  safety  and  health  laws,   environmental
protection laws and other present and potential  future federal,  state or local
regulations.  The Company's research and development involves the controlled use
of hazardous materials,  chemicals, and various radioactive compounds.  Although
the Company  believes that its safety  procedures  for handling and disposing of
such  materials  comply  with the  standards  prescribed  by state  and  federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely  eliminated.  In the event of such an accident, the Company
could be held liable for any damages  that result and any such  liability  could
exceed the  Company's  resources.  In addition,  federal and state  agencies and
congressional  committees  have  expressed  interest  in further  regulation  of
biotechnology.  The  Company  is unable to  estimate  the  extent  and impact of
regulation in the biotechnology  field resulting from any future federal,  state
or local legislation or administrative action.

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

Important Factors Regarding Forward-Looking Statements

    The following  important  factors,  among others,  could cause the Company's
actual  results to differ  materially  from  those  expressed  in the  Company's
forward-looking  statements in this report and presented elsewhere by management
from time to time.

     Early Stage of Product  Development;  Technological  Uncertainty.  To date,
substantially all of the Company's  revenues have consisted of payments received
under agreements with corporate partners and from government research contracts,
none of which provide for material future  funding.  The Company has received no
revenues to date from product  sales,  and does not expect to seek United States
regulatory  approval  for  sales of its  cancer  and  anti-restenosis  treatment
products before the year 2000. Royalties from the sale of the VERLUMA diagnostic
imaging agent will begin in 1997. The Company's current research and development
activities are focused primarily on its proposed therapeutic products, which are
in  an  early  stage  of  development.  In  preclinical  studies  the  Company's
pretargeting  technology has shown promise for the treatment of cancer tumors in
animals.  Results obtained in preclinical studies are not necessarily indicative
of results that will be obtained in human clinical trials.

    The Company will require collaborative  partners to assist in developing its
potential products,  and there can be no assurance that the Company will be able
to negotiate acceptable  collaborative  arrangements in the future. In addition,
the Company's  potential products will require  significant  additional research
and development and extensive clinical testing prior to commercial use.

    There can be no assurance that these potential products will be successfully
developed into drugs that can be  administered  to humans or that any such drugs
or related  therapies will prove to be safe and effective in clinical  trials or
cost-effective to manufacture.  Further,  these potential  products may prove to
have  undesirable  and  unintended  side effects that may prevent or limit their
commercial use.

    History  of  Losses;  Need  for  Additional  Funds.  The  Company  has  been
unprofitable  since inception and expects to incur  additional  operating losses
over the next several years. These operating losses may fluctuate from period to

                                       9
<PAGE>

period. The Company's existing capital resources and interest income thereon are
currently expected to be sufficient to fund the Company's operations through the
second  quarter  of 1998.  The  Company's  actual  expenditures  will  depend on
numerous  factors,  including  results of research and  development  activities,
clinical   trials,   the  levels  of  resources  that  the  Company  devotes  to
establishing and expanding marketing and manufacturing capabilities, competitive
and  technological  developments and the timing and cost of  relationships  with
parties to  collaborative  agreements.  The  Company  will  require  substantial
additional  funds to  complete  the  development  of its  therapeutic  products.
Adequate  funds for  these  purposes,  whether  through  additional  financings,
collaborative  arrangements with corporate sponsors or other sources, may not be
available when needed or on terms favorable to the Company.

    Dependence on  Suppliers.  The Company  depends on the timely  delivery from
suppliers of certain  materials and services.  In connection  with its research,
preclinical   studies  and  clinical   trials,   the  Company  has  periodically
experienced  interruption in the supply of monoclonal antibodies,  including the
1990 loss of its former sole supplier of the antibody used in its cancer imaging
products.  Interruptions  in these and other supplies could occur in the future.
The  Company  will  need  to  develop  sources  for  commercial   quantities  of
yttrium-90,  the radionuclide used in its proposed cancer therapeutic  products,
and for the  antibody,  streptavidin  and  clearing  agent used in the  AVICIDIN
agent.  The  catheter  used to deliver the  Company's  proposed  anti-restenosis
products has not yet been approved for sale by the FDA;  commercial  use of such
catheter depends on receiving such approval. In addition, the Company depends on
a supply of the catheter  from its  manufacturer,  and there can be no assurance
that the manufacturer  will provide a timely and adequate supply of catheters to
the Company.  Any failure by the  manufacturer  to timely and adequately  supply
catheters  would  have a material  adverse  effect on the  Company's  ability to
commercialize  these  products.  Also,  the  drug  used  in the  atherosclerosis
clinical trial to raise activated TGF(beta) levels is dependent on a third party
both for supply and for  agreement  to continue  testing  and  commercialization
after Phase I.

     Dependence  on Others  for  Commercial  Manufacturing  and  Marketing.  The
Company  has  no  manufacturing  facilities  for  commercial  production  of its
products  under  development.  The  Company  also has no  experience  in  sales,
marketing or distribution.  The Company's strategy for  commercialization of its
products   requires   entering   into  various   arrangements   with   corporate
collaborators,  licensors,  licensees and others to manufacture,  distribute and
market its  products.  The Company  will depend on the success of these  outside
parties in performing their responsibilities. Although the Company believes that
parties  to its  existing  and any  future  arrangements  will have an  economic
motivation to  successfully  perform  their  contractual  responsibilities,  the
amount and timing of resources to be devoted to these  activities are not within
the Company's control.  There can be no assurance that such parties will perform
their  obligations  as expected,  that the Company will derive any revenues from
such  arrangements  or that the Company's  reliance on others for  manufacturing
products will not result in unforeseen problems with product supply. The Company
entered into agreements  with Boehringer  Ingelheim and DuPont Merck under which
Boehringer  Ingelheim has worldwide  manufacturing rights and non-North American
marketing rights and DuPont Merck has exclusive North American  marketing rights
to the Company's  VERLUMA lung cancer imaging  product.  The Company  intends to
seek collaborative partners to assist in developing, manufacturing and marketing
its therapeutic  products under development.  There can be no assurance that the
Company will be able to negotiate acceptable  collaborative  arrangements in the
future  or  that  its  current  or  future  collaborative  arrangements  will be
successful.

    Competition.  Cancer imaging and therapy, and cardiovascular disease product
development is highly  competitive.  There are numerous  competitors  developing
products to detect, stage or treat each of the diseases for which the Company is
seeking to develop products.  Some competitors have adopted product  development
strategies  similar to the  Company's  approach  of  targeting  cancer  cells by
linking  radionuclides to monoclonal  antibodies.  Many emerging  companies have
corporate partnership  arrangements with large, established companies to support
research,  development  and  commercialization  efforts of products  that may be
competitive with those being developed by the Company. In addition,  a number of
 
                                       10
<PAGE>
                                      
established  pharmaceutical  and chemical  companies are developing  proprietary
technologies or have enhanced their  capabilities by entering into  arrangements
with,  or  acquiring,   companies  with  proprietary  monoclonal  antibody-based
technology  or other  technologies  applicable  to the imaging or  treatment  of
cancer and  restenosis.  Many major  pharmaceutical  companies,  either alone or
through   collaboration  with  smaller   companies,   have  active  programs  in
anti-restenosis therapy.  Moreover, metal stents are now being used to hold open
the arteries after angioplasty by mechanical means. Several major pharmaceutical
companies market a drug from the class of HMG CoA-reductase inhibitors that have
been shown to reduce risk of heart  attack.  Many of the  Company's  existing or
potential  competitors have or have access to substantially  greater  financial,
research and development,  marketing and production  resources than those of the
Company and may be better equipped than NeoRx to develop, manufacture and market
competing products.  The Company's  competitors already have, or may develop and
introduce  products  that are more  effective  than those of the Company or that
would render the  Company's  technology  and  products  under  development  less
competitive, uneconomical or obsolete.

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

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

    Delays and Costs Resulting From Government  Regulation.  The manufacture and
marketing of the Company's  proposed  products and its research and  development
activities  are  subject to  regulation  for  safety,  efficacy  and  quality by
numerous  government  authorities  in the  United  States  and other  countries.

                                       11
<PAGE>

Clinical  trials,  manufacturing  and  marketing  of products are subject to the
rigorous  testing  and  approval  processes  of the FDA and  equivalent  foreign
regulatory  authorities.  Clinical  trials and  regulatory  approval  can take a
number  of years to  accomplish  and  require  the  expenditure  of  substantial
resources.  There can be no assurance  that  clinical  trials will be started or
completed  successfully within any specified time period. Delays in approval can
occur  for a number  of  reasons,  including  the  Company's  failure  to obtain
necessary  supplies of monoclonal  antibodies or other  materials or to obtain a
sufficient  number of  available  patients to support the claims  necessary  for
regulatory approval. There can be no assurance that requisite FDA approvals will
be obtained on a timely  basis,  if at all, or that any  approvals  granted will
cover all the  clinical  indications  for which the Company  may seek  approval.
Delays or  failure  to obtain  regulatory  approval  would  adversely  affect or
prevent the marketing of other products developed by the Company and its ability
to receive royalty or other product  revenues.  The manufacture and marketing of
drugs are subject to continuing the FDA review and later discovery of previously
unknown  problems  with a  product,  manufacturer  or  facility  may  result  in
restrictions, including withdrawal of the product from the market. Marketing the
Company's  products  abroad will require  similar  regulatory  approvals  and is
subject to similar  risks.  In  addition,  the  Company is unable to predict the
extent of adverse  governmental  regulation that might arise from future U.S. or
foreign government action.

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

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

    Reliance on Key Personnel.  The Company's success will depend in part on the
efforts of certain  key  scientists  and  management  personnel.  Because of the
specialized nature of the Company's business,  the Company's ability to maintain
its  competitive  position  will  depend in part on its  ability to attract  and

                                       12
<PAGE>

retain qualified personnel. Competition for such personnel is intense. There can
be no  assurance  that the  Company  will be able to hire  sufficient  qualified
personnel on a timely basis or retain such personnel. The loss of key management
or scientific  personnel could have an adverse effect on the Company's business.
The Company does not maintain key person  insurance on any of its  scientists or
management personnel.

    Compliance With Environmental Regulations;  Hazardous Materials. The Company
is subject to federal,  state and local laws,  rules,  regulations  and policies
governing the use,  generation,  manufacture,  storage,  air emission,  effluent
discharge,  handling and disposal of certain  materials and wastes in connection
with its research and development  activities and its  manufacturing of clinical
trial  materials.  Although the Company believes that it has complied with these
laws and regulations in all material respects, there can be no assurance that it
will not be required to incur significant costs to comply with environmental and
health  and  safety  regulations  in the  future.  The  Company's  research  and
development and clinical  manufacturing  processes involve the controlled use of
small  amounts of  hazardous  and  radioactive  materials.  Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards  prescribed by such laws and regulations,  the risk of
accidental  contamination  or injury from these  materials  cannot be completely
eliminated.  In the event of such an accident,  the Company could be held liable
for any resulting  damages,  and any such  liability  could exceed the Company's
resources.

Employees

    As of March 7, 1997, the Company had 70 full-time  employees and 9 part-time
employees,  20 of whom hold  Ph.D.  degrees  and two of whom hold M.D.  degrees.
Sixty-one  employees  were engaged in research,  development  and  manufacturing
activities and 18 were employed in finance and administration.

    The Company considers its relations with its employees to be excellent. 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, 2001. The lease is renewable through May 31, 2006.

    NeoRx believes its facilities are in good condition and are adequate for all
present  uses. A portion of its  facilities is used for pilot  manufacturing  to
produce certain of its products under development. The Company believes that the
production  capacity of its pilot  facility is adequate to satisfy the Company's
Phase I clinical trial  requirements,  and it passed an FDA inspection for these
purposes in 1993 and a Washington  State Board of Pharmacy  inspection  in 1996.
The Company's strategy is to license manufacturing rights for its products,  but
it may  decide to produce  certain  components  of its  therapy  products.  Such
production would require a further  investment in facilities and equipment,  the
cost of which cannot be currently estimated.

Item 3. Legal Proceedings

    On June 6, 1996, the United States District Court for the Southern  District
of New York dismissed all claims against the Company in a purported class action
suit  against  David  Blech,  D. Blech & Co.  and a number of other  defendants,
including 11 publicly traded  biotechnology  companies,  of which one was NeoRx,
that had been named in an amended  complaint on March 27, 1995.  The  plaintiffs
have not appealed the order.  On July  26,1996,  the  plaintiffs  filed a second
amended  pleading that did not include any claims against the Company.  NeoRx is
not a defendant in the subject suit.
 
                                       13
<PAGE>

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

    Not applicable.

Executive Officers of the Company

    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.                       49         President, Chief Executive Officer and
                                                            Director
Richard L. Anderson.                             57         Senior Vice President, Chief Financial
                                                            Officer, Secretary and Treasurer
John M. Reno, Ph.D.                              50         Vice President, Research and Development
Robert W. Schroff, Ph.D., M.B.A.                 42         Vice President and General Manager,
                                                            Cardiovascular Products
Bruce H. Walters                                 53         Vice President, Human Resources
</TABLE>


Business Experience

    Dr.  Paul G. Abrams is a  co-founder  of the  Company,  has been a Director
since January 1985 and has been President and Chief Executive  Officer since May
1990. He was the Company's  Vice  President,  Medical  Affairs from January 1985
through April 1990. From 1981 to 1984, Dr. Abrams held the position of Expert in
the Biological Response Modifiers Program of the National Cancer Institute.  Dr.
Abrams holds J.D., M.D. and B.A. (summa cum laude with exceptional  distinction)
degrees from Yale  University.  He is a  board-certified  internist  and medical
oncologist  and  is an  Affiliate  Associate  Professor  in  the  Department  of
Radiology at the  University of  Washington.

    Richard L. Anderson  became Senior Vice President,  Chief Financial Officer,
Secretary  and  Treasurer  when hired in January  1997.  Mr.  Anderson  was Vice
President  and  Controller  at Mosaix  Inc.  (formally  called  Digital  Systems
International),  a provider  of  computer  telephony  integration  products  and
services,  from November 1994 to January 1997.  From  September  1993 to October
1994, Mr. Anderson was Vice President of Finance,  Chief  Financial  Officer and
Secretary of Merix Corporation (formally a division of Tektronix Corporation), a
manufacturer of printed  circuit boards.  From April 1982 to August 1993, he was
with Tektronix Corporation,  a manufacturer of test and measurement instruments,
serving in a variety of positions  including  Director of Corporate  Development
and Group Controller. Mr. Anderson holds an M.S. degree in Management from Johns
Hopkins University, an M.S. degree in Solid State Physics from the University of
Maryland,  a B.S. in Physics from Bucknell  University and is a Certified Public
Accountant.
    
    Dr. John M. Reno  has been Vice President,  Research and  Development  since
January 1993. He was the Company's  Director,  Research and Development from May
1991 until December 1992 and Director,  Product  Development  and  Manufacturing
from  November  1986 to April 1989.  Dr.  Reno joined  NeoRx in 1984 as a Senior
Scientist.  Prior to that time,  he held  positions as Group Leader with Seragen
Inc., and Project Leader with Dow Chemical  Company.  He holds a Ph.D. degree in
Biochemistry from Michigan State University.

     Dr.  Robert  W.  Schroff  has been  Vice  President  and  General  Manager,
Cardiovascular  Products  since January  1993.  He was the  Company's  Director,
Business  Development  and Analytical  Labs from November 1991 to December 1992;
Director,  Project  Management  from September  1990 to October 1991;  Director,
Clinical  Research  from  July  1986  to  August  1990;  and  Senior  Scientist,
Immunological  Assessment from January 1985 to July 1986. From 1982 to 1984, Dr.
Schroff was a Senior Staff Fellow of the National Cancer Institute.  Dr. Schroff
    
                                       14
<PAGE>

holds a Ph.D.  degree in  Immunology  from the Bowman Gray School of Medicine of
Wake Forest University.  He performed  postdoctoral studies at the University of
California  at Los Angeles.  Dr.  Schroff  also holds an M.B.A.  degree from the
University of Washington.

    Bruce H. Walters has been Vice  President,  Human  Resources since May 1989.
From April 1987 to April 1989, he was the Company's  Director,  Human Resources.
From 1985 to 1987, he was Manager,  Human  Resources for Aviall Inc., a provider
of  aircraft  repair  and  overhaul  services,  and from 1984 to 1985,  Manager,
Management Services of American Hospital Supply Corporation. Mr. Walters holds a
B.A. degree in Bacteriology from the University of California at Los Angeles.

                                       15
<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Stock Trading and Price Range of Common Stock
    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 prices for NeoRx Common Stock as reported by Nasdaq.

                                              SALES PRICE
                                          --------------------- 
                                            HIGH          LOW
                                          --------      -------  
1996:
First Quarter......................       $9 13/16      $6 3/16
Second Quarter.....................        8  1/4        4 5/8
Third Quarter......................        6  3/8        4 3/8
Fourth Quarter.....................        6 13/16       4
1995:
First Quarter......................       $7  1/8       $4 11/16
Second Quarter.....................        7  5/16       4 15/16
Third Quarter......................        7  7/8        4 13/16
Fourth Quarter.....................        7  3/8        4  7/8

    There were approximately  1,005 shareholders of record at December 31, 1996.
The Company has not paid cash  dividends on its Common Stock and does not intend
to pay cash dividends on its Common Stock in the foreseeable future.

Item 6.  Selected Financial Data (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                  
                                                              Years Ended
                                       -----------------------------------------------------------      Three Months Ended  
                                                    December 31,                                            December 31,
                                       ------------------------------------------    September 30,      -------------------
                                        1996        1995        1994        1993         1992            1992      1991
                                       ------      ------      ------      ------       ------          ------  -----------
                                                                                                                (unaudited)
Statement of Operations Data:
<S>                                   <C>         <C>         <C>         <C>          <C>             <C>         <C>    
Contract revenues and fees....        $ 4,784     $   307     $ 1,568     $ 3,676      $ 9,180         $   277     $   119
Operating expenses............         14,763      13,343      12,605      12,334       11,094           2,825       2,665
Loss from operations..........         (9,979)    (13,036)    (11,037)     (8,658)      (1,914)         (2,548)     (2,546)
Net loss......................         (9,001)    (12,271)    (11,144)     (8,536)      (2,763)         (2,425)     (3,688)
Net loss per common share.....        $ (0.68)    $ (0.98)    $ (1.02)    $ (1.10)     $ (0.60)        $ (0.36)    $ (0.78)
Weighted average common shares    
  outstanding.................         15,604      13,142      11,616       8,449        6,530           7,303       5,169
Balance Sheet Data:
Cash and cash equivalents.....        $ 2,945     $ 7,182     $ 2,428     $14,347      $12,359         $10,520     $11,094
Short-term investments........         15,322       8,937      14,723      13,421        4,000           2,500       4,168
Working capital...............         17,523      15,245      15,992      26,934       14,463          11,720      14,096
Total assets..................         20,510      18,518      20,035      29,848       18,511          14,943      17,355
Long-term debt................          1,242       1,283       1,212       1,222        1,239           1,236       1,293
Shareholders' equity..........        $17,079     $14,892     $15,841     $26,776      $14,531         $11,740     $13,146
----------
<FN>
Note: In February 1993, the Company changed its fiscal year-end from September 30 to December 31.
</FN>
</TABLE>


                                       16
<PAGE>  


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
  
Results of Operations

    The NeoRx Corporation ("NeoRx" or the "Company") develops  biopharmaceutical
products for the detection and  treatment of human  diseases.  The Company is no
longer  considered a company in the  development  stage as the  Company's  first
product,  VERLUMA(TM)  Small Cell Lung Cancer  Imaging Kit,  received  marketing
approval by the Food and Drug  Administration  (the "FDA") in August 1996. Sales
began in February 1997,  from which NeoRx will receive  royalties.  To date, the
Company's  revenues have consisted  principally of license fees from  Boehringer
Ingelheim International GmbH ("Boehringer Ingelheim"),  payments from The DuPont
Merck Pharmaceutical  Company ("DuPont Merck"),  Sterling Winthrop Inc. and from
federal  government  research  contracts.   The  Company  plans  to  enter  into
additional  collaborative  agreements  with  corporate  partners,  but  does not
currently have firm commitments for any such agreements.  Expenses incurred have
been  primarily  for research and  development  activities  and  administration.
Successful  future  operations  depend  upon the  Company's  ability to develop,
obtain regulatory approval for and commercialize its products.  The Company will
require a substantial  amount of additional funds to complete the development of
most of its products and to fund additional  operating  losses which the Company
expects to incur during the next several years.

Years Ended December 31, 1996, 1995 and 1994

   The Company's revenues in 1996, 1995 and 1994 were $4.8 million,  $.3 million
and $1.6  million,  respectively,  and  consisted  of license  fees and payments
received under its  collaborative and license  agreements.  Revenues in 1996 and
1994  consisted  primarily  of license  fees of $4.5  million and $1.4  million,
respectively,  from DuPont Merck for exclusive  North American  rights to market
NeoRx's VERLUMA lung cancer imaging products.  As part of the agreement,  DuPont
Merck also purchased 269,000 shares of Common Stock in October 1994.

   The Company's total operating expenses were $14.8 million,  $13.3 million and
$12.6 million in 1996, 1995 and 1994, respectively.  Of these amounts,  research
and development expenditures were $9.8 million, $8.7 million and $7.5 million in
1996, 1995 and 1994,  respectively.  Research and development expenses increased
12% in 1996 and 16% in 1995. The increase in research and  development  expenses
in  1996  and  1995  was  primarily  due  to  activities  relating  to  antibody
humanization,  increased  clinical trial  activities and a one-time  license fee
payment in 1995.  Approximately  100% of the Company's  research and development
expenses  in 1996  and  1995  were  attributable  to the  Company's  self-funded
research  programs,  and approximately 98% were self-funded in 1994. General and
administrative  expenses  were $5.0  million,  $4.6  million and $5.1 million in
1996, 1995 and 1994, respectively. General and administrative expenses increased
8% in 1996 and decreased 9% in 1995. The increase in general and  administrative
expenses  in 1996 was  principally  due to patent  filing  costs and other legal
expenses associated with collaborative  agreements.  The decrease in general and
administration  expenses in 1995 resulted  primarily from reduced legal fees and
costs  associated  with  the  Company's  patent  enforcement  suit  against  and
counterclaim by Immunomedics, Inc. which was settled in 1994.

   Investment and interest income was $1.1 million, $1.0 million and $.9 million
in  1996,  1995  and  1994,  respectively.  The  increase  in 1996  and 1995 was
primarily due to higher average cash balances resulting from sales of Common and
Preferred Stock. Interest expense was $.1 million in 1996, 1995 and 1994.

                                       17

<PAGE>



Management's  Discussion and  Analysis of  Financial  Condition  and  Results of
Operations (Continued)

Liquidity and Capital Resources

   The Company's operations have been financed primarily by funds raised through
the issuance of equity  securities and amounts received under  manufacturing and
marketing licenses.  Sales of the Company's Common and Preferred Stock raised an
aggregate  of $21.2  million  and cash fees  received  from  license  agreements
totaled $5.9 million during the past three years.

   The Company has invested $.7 million in  equipment,  furniture  and leasehold
improvements  over the past three  years,  primarily to support its research and
manufacturing  activities. As of December 31, 1996, the Company was committed to
spending  approximately  $2.2 million  pursuant to operating  and capital  lease
obligations.

   The  Company  has no  material  commitments  for  capital  expenditures.  The
Company's strategy is to form corporate alliances with pharmaceutical  companies
to provide  for the  manufacture  of its  products  under  development,  thereby
avoiding the need to make significant investments in production capacity.

   During  1996,  total  cash,  cash  equivalents  and  short-term   investments
increased $2.1 million and improved the Company's current ratio to 9.0 from 7.5.
The increases  were  primarily due to the receipt of a $4.5 million  license fee
payment and stock sales.

   In January 1996, the Company issued 370,000 shares of Common Stock and 47,000
shares of Series 2  Convertible  Preferred  Stock in  private  transactions  and
received net proceeds of $6.6 million.  In October 1995, the Company  registered
650,000  shares of Common Stock to be sold from time to time.  During 1996,  the
Company  issued  464,000  shares and received net proceeds of $3.8 million,  and
during 1995, the Company issued 186,000 shares and received net proceeds of $1.2
million.  Also during 1995, the NeoRx received net proceeds of $8.3 million from
the  sale of 1.4  million  units  consisting  of  Common  Stock  and  three-year
warrants.  In October 1994, the Company received $2.0 million from DuPont Merck,
for which DuPont Merck received  VERLUMA  marketing  rights in North America and
269,000 shares of NeoRx Common Stock.

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

   The Company  expects that its capital  resources and interest  income will be
sufficient  to finance its  currently  anticipated  working  capital and capital
requirements  through the second quarter of 1998. The Company's  working capital
and capital requirements will depend upon numerous factors, including results of
research and development  activities,  clinical trials,  the levels of resources
that  the  Company   devotes  to  establishing   and  expanding   marketing  and
manufacturing  capabilities,  competitive and technological developments and the
timing and cost of relationships with parties to collaborative  agreements.  The
Company will need to raise substantial  additional funds to conduct research and
development  activities,  preclinical  studies and clinical trials  necessary to
bring  its  products  to  market,   and  to  establish   marketing  and  limited
manufacturing  capabilities.  The  Company  intends to seek  additional  funding
through  public  or  private  equity  financings,  arrangements  with  corporate
collaborators or other sources.  Adequate funds may not be available when needed
or on terms acceptable to the Company.

                                       18

<PAGE>



Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>

                                                                                   Page
                                                                                  Numbers
                                                                                  -------
<S>                                                                                  <C>
Report of Independent Public Accountants.....................................        20
Balance Sheets - December 31, 1996 and 1995..................................        21
Statements of Operations - For the Years Ended December 31, 1996, 1995               22
and 1994.....................................................................
Statements of Cash Flows - For the Years Ended December 31, 1996, 1995               23
and 1994.....................................................................
Statements of Shareholders' Equity - For the Years Ended December 31,                24
1996, 1995 and 1994..........................................................
Notes to Financial Statements................................................        25
</TABLE>


     All  financial  schedules  are omitted  since the required  information  is
applicable  or has been  presented  in the  financial  statements  and the notes
thereto.

                                       19

<PAGE>


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of NeoRx Corporation:

    We have audited the  accompanying  balance  sheets of NeoRx  Corporation,  a
Washington  corporation,  as of  December  31,  1996 and 1995,  and the  related
statements of operations,  cash flows and  shareholders'  equity for each of the
years ended December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material  respects,  the financial  position of NeoRx  Corporation  as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years ended December 31, 1996, 1995 and 1994, in conformity with
generally accepted accounting principles.

                                                      ARTHUR ANDERSEN LLP
                                                      Seattle, Washington
                                                      February 25, 1997

                                       20

<PAGE>
<TABLE>
<CAPTION>


                                                NEORX CORPORATION
                                                  BALANCE SHEETS
                                         (In thousands, except share data)
                                                                                      DECEMBER 31,
                                                                                 ---------------------- 
                                                                                    1996         1995
                                                                                 ---------    ---------
                                      ASSETS
Current assets:
<S>                                                                              <C>          <C>      
Cash and cash equivalents....................................................    $   2,945    $   7,182
Short-term investments ......................................................       15,322        8,937
Inventories .................................................................          600          538
Prepaids and other ..........................................................          845          931
                                                                                 ---------    ---------
               Total current assets .........................................       19,712       17,588
                                                                                 ---------    ---------
Facilities and equipment, at cost:
Equipment and furniture .....................................................        3,744        3,498
Leasehold improvements ......................................................        3,237        3,233
                                                                                 ---------    ---------
                                                                                     6,981        6,731
Less: accumulated depreciation and amortization  ............................       (6,295)      (5,914)
                                                                                 ---------    ---------
     Facilities and equipment, net ..........................................          686          817
                                                                                 ---------    ---------
Other assets ................................................................          112          113
                                                                                 ---------    ---------
                                                                                 $  20,510    $  18,518
                                                                                 =========    =========

                         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................    $   1,235    $   1,511
Accrued liabilities .........................................................          910          531
Deferred revenue ............................................................           --          250
Current portion of capital leases ...........................................           44           51
                                                                                 ---------    ---------
               Total current liabilities ....................................        2,189        2,343
                                                                                 ---------    ---------
Non-current liabilities:
Convertible subordinated debentures, 9 3/4% .................................        1,195        1,195
Capital leases, less current portion ........................................           47           88
                                                                                 ---------    ---------
               Total non-current liabilities ................................        1,242        1,283
                                                                                 ---------    ---------
Commitments and contingencies
Shareholders' equity:
Series preferred stock, $.02 par value, 3,000,000 shares authorized:
          Convertible exchangeable preferred stock, Series 1,
               208,000 shares issued and outstanding, and
          Convertible preferred stock, Series 2,
               7,000 and -0- shares issued and outstanding, respectively ....            4            4
Common stock, $.02 par value, 60,000,000 shares authorized,
     16,451,000 and 14,359,000 shares issued and outstanding, respectively ..          329          287
Additional paid-in capital ..................................................      140,789      128,098
Deferred compensation .......................................................           --         (139)
Accumulated deficit .........................................................     (124,043)    (113,358)
                                                                                 ---------    ---------
               Total shareholders' equity ...................................       17,079       14,892
                                                                                 ---------    ---------
                                                                                 $  20,510    $  18,518
                                                                                 =========    =========

<FN>
                 The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                       21
<PAGE>

                                                NEORX CORPORATION
                                            STATEMENTS OF OPERATIONS
                                      (In thousands, except per share data)
<TABLE>
<CAPTION>



                                                                                    YEARS ENDED DECEMBER 31,
                                                                                --------------------------------      
                                                                                  1996        1995        1994
                                                                                --------    --------    --------
Revenues:
<S>                                                                             <C>         <C>         <C>     
Contract revenues and fees ..................................................   $  4,784    $    307    $  1,568
                                                                                --------    --------    --------
Operating expenses:
Research and development ....................................................      9,758       8,690       7,464
General and administrative ..................................................      5,005       4,653       5,141
                                                                                --------    --------    --------
          Total operating expenses ..........................................     14,763      13,343      12,605
                                                                                --------    --------    --------
Loss from operations ........................................................     (9,979)    (13,036)    (11,037)
Other income (expense):
   Investment and interest income, net ......................................      1,120       1,002         908
   Interest expense .........................................................       (142)       (140)       (127)
   Litigation expense, net ..................................................         --         (97)       (888)
                                                                                ========    ========    ========
Net loss ....................................................................   $ (9,001)   $(12,271)   $(11,144)
                                                                                ========    ========    ========
Preferred stock dividends ...................................................     (1,684)       (597)       (725)
                                                                                --------    --------    --------
Net loss applicable to common shares ........................................   $(10,685)   $(12,868)   $(11,869)
                                                                                ========    ========    ========
Net loss per common share....................................................   $   (.68)   $   (.98)   $  (1.02)
                                                                                ========    ========    ========
Weighted average common  shares outstanding .................................     15,604      13,142      11,616
                                                                                ========    ========    ========







<FN>
                 The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       22
<PAGE>

                                                NEORX CORPORATION
                                            STATEMENTS OF CASH FLOWS
                                                 (In thousands)
<TABLE>
<CAPTION>


                                                                                    YEARS ENDED DECEMBER 31,
                                                                                --------------------------------
                                                                                  1996        1995        1994
                                                                                --------    --------    --------
Cash flows from operating activities:
<S>                                                                             <C>         <C>         <C>      
  Net loss ..................................................................   $ (9,001)   $(12,271)   $(11,144)
                                                                                --------    --------    --------
     Adjustments to reconcile net loss to net cash
        (used in) operating activities:
        Depreciation and amortization .......................................        381         402         290
        (Increase) decrease in inventories ..................................        (62)       (145)        108
        (Increase) decrease in prepaids and other assets ....................        119         699        (922)
        Increase in accounts payable and accrued
          liabilities .......................................................        432         844       1,120
        Increase (decrease) in deferred revenue .............................       (250)         --          48
        Compensation expense on stock awards
          and options .......................................................        167         184         204
        Common stock for consulting services ................................        290         239          --
                                                                                --------    --------    --------
            Total adjustments ...............................................      1,077       2,223         848
                                                                                --------    --------    --------
  Net cash used in operating activities .....................................     (7,924)    (10,048)    (10,296)
                                                                                --------    --------    --------

Cash flows from investing activities:
  Proceeds from (purchases of) short-term
       investments, net .....................................................     (6,385)      5,786      (1,302)
  Facilities and equipment purchases ........................................       (250)       (129)       (280)
                                                                                --------    --------    --------
  Net cash provided by (used in) investing activities .......................     (6,635)      5,657      (1,582)

Cash flows from financing activities:
  Proceeds from sale of common stock and warrants ...........................      5,767       9,215         635
  Proceeds from sale of preferred stock .....................................      4,418          --          --
  Repayments of capital lease obligations ...................................        (48)        (35)        (44)
  Proceeds from stock options exercised .....................................        693         423          95
  Preferred stock dividends .................................................       (508)       (458)       (727)
                                                                                --------    --------    --------
  Net cash provided by (used in) financing activities .......................     10,322       9,145         (41)
                                                                                --------    --------    --------
Net increase (decrease) in cash and cash
  equivalents ...............................................................     (4,237)      4,754     (11,919)
Cash and cash equivalents:
  Beginning of period .......................................................      7,182       2,428      14,347
                                                                                --------    --------    --------
  End of period .............................................................   $  2,945    $  7,182    $  2,428
                                                                                ========    ========    ========


<FN>
                 The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       23
<PAGE> 
<TABLE>
<CAPTION>


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

                                                                             Additional                                  Total
                                     Number      Par    Number      Par       Paid-In      Deferred     Accumulated   Shareholders'
                                    of Shares   Value  of Shares   Value      Capital    Compensation     Deficit        Equity
                                    ---------   -----  ---------   -----     ----------  ------------  ------------   -------------
<S>                                       <C>    <C>      <C>       <C>       <C>           <C>         <C>             <C>      
Balance, December 31, 1993 .........      298    $  6     11,543    $231      $ 114,779     $(325)      $ (87,915)      $  26,776
Sale of common stock ($2.36 per
share) .............................       --      --        269       5            630        --              --             635
Exercise of stock options
($1.50-$2.94 per share) ............       --      --         35       1             94        --              --              95
Issuance of restricted common
stock to employees ($6.00-$6.38
per share) .........................       --      --         18      --            111        --              --             111
Amortization of deferred
compensation .......................       --      --         --      --             --        93              --              93
Preferred stock dividends ($2.44
per share) .........................       --      --         --      --             --        --            (725)           (725)
Net loss ...........................       --      --         --      --             --        --         (11,144)        (11,144)
                                         ----    ----    -------    ----      ---------     -----       ---------       ---------
Balance, December 31, 1994 .........      298       6     11,865     237        115,614      (232)        (99,784)         15,841
Sale of common stock and
warrants ...........................       --      --      1,700      34          9,181        --              --           9,215
Exercise of stock options
($1.50-$3.75 per share) ............       --      --        219       4            419        --              --             423
Issuance of common stock in
payment of expenses
($5.71-$6.25 per share) ............       --      --        321       6          1,932        --              --           1,938
Exchange of preferred stock for
common stock .......................      (90)     (2)       225       5            703        --            (706)             --
Issuance of compensatory stock 
options ($5.13 per share) ..........       --      --         --      --             91        --              --              91
Amortization of deferred
compensation .......................       --      --         --      --             --        93              --              93
Preferred stock dividends ($2.44
per share) .........................       --      --         29       1            158        --            (597)           (438)
Net loss ...........................       --      --         --      --             --        --         (12,271)        (12,271)
                                         ----    ----    -------    ----      ---------     -----       ---------       ---------
Balance, December 31, 1995 .........      208       4     14,359     287        128,098      (139)       (113,358)         14,892
Sale of common stock ($6.00-$9.42
per share) .........................       --      --        803      16          5,751        --              --           5,767
Sale of preferred stock ($100.00 per
share) .............................       47       1         --      --          4,417        --              --           4,418
Exercise of stock options
($1.50-$6.38 per share) ............       --      --        281       6            719        --              --             725
Issuance of common stock in payment
of expenses ($5.50-$7.87) per share        --      --        116       2            691        --              --             693
Exchange of preferred stock for
common stock .......................      (40)     (1)       860      17            (16)       --              --              --
Amortization of deferred
compensation .......................       --      --         --      --             --        139             --             139
Preferred stock dividends ..........       --      --         32       1          1,129         --         (1,684)           (554)
Net loss ...........................       --      --         --      --             --         --         (9,001)         (9,001)
                                         ----    ----    -------    ----      ---------      -----       ---------       ---------
Balance, December 31, 1996 .........      215    $  4     16,451    $329      $ 140,789      $  --       $(124,043)      $  17,079
                                         ====    ====    =======    ====      =========      =====       =========       =========





<FN>

                 The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       24

<PAGE> 



                               NEORX CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


NOTE 1.  The Company

     NeoRx Corporation ("NeoRx" or the "Company"),  incorporated in the state of
Washington,  develops biopharmaceutical products for the detection and treatment
of human  diseases.  The  Company  is no  longer  considered  a  company  in the
development stage and will therefore no longer present results of operations and
cash  flows  for  the  period  from  inception.  The  Company's  first  product,
VERLUMA(TM) Small Cell Lung Cancer Imaging Kit, received  marketing  approval by
the Food and Drug  Administration  (the  "FDA") in August  1996.  Sales began in
February 1997, from which NeoRx will receive  royalties.  The Company's revenues
have   consisted   principally  of  license  fees  from   Boehringer   Ingelheim
International  GmbH  ("Boehringer  Ingelheim"),  payments  from The DuPont Merck
Pharmaceutical Company ("DuPont Merck"), Sterling Winthrop Inc. and from federal
government  research  contracts.  The Company's  development  activities involve
inherent risks. These risks include, among others,  dependence on key personnel,
availability  of  raw  materials,  determination  of  the  patentability  of the
Company's  products and  processes  and approval by the FDA before the Company's
products may be sold  domestically.  Expenses  incurred have been  primarily for
research  and  development  activities  and  administration.  Successful  future
operations  depend  upon the  Company's  ability to develop,  obtain  regulatory
approval  for and  commercialize  its  products.  The  Company  will  require  a
substantial  amount of additional  funds to complete the  development of most of
its products and to fund additional  operating  losses which the Company expects
to incur during the next several years.

NOTE 2.  Summary of Significant Accounting Policies

     Cash Flows. For the purpose of the  accompanying  Statements of Cash Flows,
the Company considers all highly liquid investments with a remaining maturity of
three months or less when purchased to be cash equivalents.

     No capital lease  obligations were incurred during the years ended December
31, 1996 and 1994. Capital lease obligations  incurred to acquire equipment were
$143,000 in 1995.

     Interest  paid by the Company was  $143,000,  $141,000 and $127,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.

     In January  1996,  the Company sold  approximately  47,000  shares Series 2
Convertible  Preferred  Stock,  $.02 par value per share  ("Series  2  Preferred
Stock") at a stated  value of $100 per share that may be  converted  into Common
Stock valued at $120.50.  A non-cash  dividend charge of $956,000 was recognized
by the Company in 1996 for the amount of the excess of the conversion value over
the stated value.

     During the year  1996,  the  Company  exchanged  40,000  shares of Series 2
Preferred  Stock and paid accrued  dividends by issuing 892,000 shares of Common
Stock.  In June  1995,  the  Company  exchanged  90,000  shares  of  Convertible
Exchangeable  Preferred  Stock,  Series 1, $.02 par value per share  ("Series  1
Preferred Stock") and paid accrued dividends by issuing 254,000 shares of Common
Stock.

     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. Actual results could differ from those estimates.


                                       25

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

     Research and Development Revenues and Expenses. Revenues from collaborative
agreements are recognized as earned as the Company performs research  activities
under the terms of each  agreement.  Billings  in excess of  amounts  earned are
classified as deferred  revenue.  License fees earned are  recognized as revenue
unless  subject to a  contingency,  which results in a deferral of revenue until
the  contingency is satisfied.  Research and  development  costs are expensed as
incurred.

     Inventories.  Inventories  consist primarily of raw materials priced at the
lower of cost (first-in, first-out) or market.

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

    Net Loss Per Common  Share.  Net loss per  common  share is  computed  after
deduction of preferred  stock  dividends and is based upon the weighted  average
number of shares of Common Stock  outstanding  during each period.  Common Stock
equivalents include shares issuable upon the exercise of outstanding warrants or
stock  options,  but are not included in the  computation  of net loss per share
because the effect of including such shares would be antidilutive.

NOTE 3.  Short-Term Investments

     Short-term investments consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                       DECEMBER 31,
                                                 ------------------------
                                                  1996             1995
                                                 -------          -------
<S>                                               <C>              <C>   
Federal government and agency securities ....     $9,485           $6,988
Corporate debt securities ...................      5,837            1,949
                                                 -------           ------
                                                 $15,322           $8,937
                                                 =======           ======
</TABLE>


     As of  December  31,  1996,  the  Company  considers  that  all  short-term
investments as held-to-maturity  securities and amortized cost approximates fair
value. All securities mature within one year.

NOTE 4.  Accrued Liabilities

     Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                        DECEMBER 31,
                                                   ----------------------
                                                   1996              1995
                                                   -----            -----
<S>                                                 <C>              <C> 
Compensation ................................       $781             $450
Preferred stock dividends ...................         88               42
Interest ....................................          9                9
Other .......................................         32               30
                                                    ----             ----
                                                    $910             $531
                                                    ====             ====

</TABLE>

                                       26

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 5.  Leases

     The Company leases certain  equipment  under capital leases which expire on
various dates through 1999.  The total amount of equipment  under capital leases
included in facilities  and  equipment on the  accompanying  balance  sheets was
$294,000 at December 31, 1996 and 1995, and accumulated  amortization applicable
to such  leases  was  $184,000  and  $122,000  at  December  31,  1996 and 1995,
respectively.

     The lease for the Company's principal location expires in 2001 and contains
one five-year  renewal option.  Total rent payments under operating  leases were
$515,000,  $450,000 and $418,000 for the years ended December 31, 1996, 1995 and
1994, respectively.

     Minimum lease  payments and the present value of capital lease  obligations
as of December 31, 1996, were as follows (in thousands):
<TABLE>
<CAPTION>


                                                        Operating    Capital
YEAR                                                       Leases     Leases
----                                                    ---------    -------
<S>                                                         <C>          <C>
1997 ................................................       $ 501        $48
1998 ................................................         501         44
1999 ................................................         501          5
2000 ................................................         476          -
2001 ................................................         167          -
Thereafter ..........................................           -          -
                                                           ------       ----
     Total minimum lease payments ...................      $2,146         97
                                                           ======
Less: amount representing interest
 (5% - 12% annual interest rates) ...................                     (6) 
                                                                        ----
      Present value of capital lease obligations ....                     91
Less: current portion of capital leases .............                    (44)
                                                                         ---
      Obligations under capital leases, non-current..                    $47
                                                                         ===
</TABLE>


NOTE 6.  Revenues

     In 1996,  the Company  recorded as revenue a $4,500,000  milestone  payment
from DuPont Merck upon FDA approval to market VERLUMA in the United  States.  In
October 1994, the Company entered into a marketing  agreement with DuPont Merck,
under which DuPont Merck  received  exclusive  North  American  rights to market
NeoRx's  VERLUMA  lung cancer  imaging  product that  incorporates  the NR-LU-10
antibody,  and 269,000  shares of Common  Stock.  In  exchange,  NeoRx  received
$2,000,000,  of which the excess of the fair value of the shares of Common Stock
issued was recorded as revenue.  The Company will receive  royalties on sales of
the product.

NOTE 7.  Convertible Subordinated Debentures

     The Company has  outstanding  $1,195,000  principal  amount of  Convertible
Subordinated Debentures, 9 3/4% (the "Debentures"), that will be retired June 1,
2000.  The  Debentures  are  convertible  at the option of the  holder  into the
Company's  Common  Stock at a conversion  price of $25.73 per share,  subject to
adjustment under certain conditions. Interest is payable semi-annually on June 1
and December 1. The Debentures are redeemable, in whole or in part, at any time,
at the option of the Company at 102.9% of par,

                                       27

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

reducing to par by 1999,  together with accrued  interest.  The  Debentures  are
subordinated in right of payment to any outstanding  senior  indebtedness of the
Company, as defined in the indenture.

NOTE 8.  Contingencies

     Litigation.  On June 6, 1996,  the  United  States  District  Court for the
Southern  District of New York  dismissed  claims  against  NeoRx in a purported
class  action suit  against  David  Blech,  D. Blech & Co. and a number of other
defendants,  including 11 publicly traded biotechnology  companies, of which one
was NeoRx,  that had been named in an amended  complaint on March 27, 1995.  The
plaintiffs have not appealed the order. On July 26, 1996, the plaintiffs filed a
second  amended  pleading  which did not include any claims against the Company.
NeoRx is not a defendant in the subject suit.

     Product Liability. The testing, manufacturing,  marketing and sale of human
healthcare  products  by the  Company  entail  an  inherent  risk  that  product
liability claims will be asserted  against the Company.  The Company has product
liability  insurance coverage of $10,000,000 for aggregate claims that may arise
from the use of its products.

NOTE 9.  Shareholders' Equity

     Common Stock  Transactions.  During 1996, the Company issued 919,000 shares
of Common Stock and received  net  proceeds and services  valued at  $6,460,000.
During  1995,  the Company  issued  186,000  shares and received net proceeds of
$1,155,000.  In April and September  1995, the Company sold 1,557,000  shares of
Common Stock and 1,635,000  three-year  warrants to purchase  409,000  shares of
Common Stock,  exercisable at a price of $5.31 per share. Net proceeds  amounted
to  $8,309,000.  In October  1994,  the Company  issued to DuPont Merck  269,000
shares  of  Common  Stock in  connection  with  the  VERLUMA  marketing  license
agreement.

     During  1996,  the Company  exchanged  40,000  shares of Series 2 Preferred
Stock for  860,000  shares of Common  Stock and paid  accrued  dividends  on the
shares  valued at $174,000 by issuing  32,000  shares of Common  Stock.  In June
1995,  the  Company  exchanged  90,000  shares of Series 1  Preferred  Stock for
225,000 shares of Common Stock and paid accrued dividends on those shares valued
at $159,000 by issuing 29,000 shares of Common Stock.

     Preferred  Stock  Transactions.  Holders  of Series 1  Preferred  Stock are
entitled to receive an annual cash  dividend of $2.4375 per share if declared by
the  Board of  Directors  (the  "Board"),  payable  semi-annually  on June 1 and
December 1. Dividends are cumulative.  Each share of Series 1 Preferred Stock is
convertible  into  approximately  1.14  shares  of  Common  Stock,   subject  to
adjustment in certain events.  The Series 1 Preferred Stock is redeemable at the
option of the  Company at $25.73 per  share,  decreasing  to $25.00 per share by
1999.  Holders  of Series 1  Preferred  Stock have no voting  rights,  except in
limited circumstances.

     In June 1995,  the Company  exchanged  90,000  shares of Series 1 Preferred
Stock for 225,000  shares of Common  Stock.  (See  "Common  Stock  Transactions"
above.)

     Holders of Series 2  Preferred  Stock are  entitled  to receive  cumulative
dividends at the rate of 8% per annum compounded quarterly on the $100 per share
stated value of the Series 2 Preferred Stock.  The dividend is payable,  in cash
or Common  Stock at the  Company's  option,  at the time the Series 2  Preferred
Stock is redeemed or converted into Common Stock.  The Series 2 Preferred  Stock
is redeemable at the

                                       28

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

option of the Company at $120.50 per share. Each share of the Series 2 Preferred
Stock is  convertible  at the option of the holder  into the number of shares of
Common Stock  determined by dividing $120.50 by the average stock market closing
bid price of the  Common  Stock for the five  trading  days  prior to the day of
conversion,  but not less than $4.41 nor more than $8.36 per share. The discount
to be realized by the  difference  between the  conversion  value and the stated
value of the Series 2 Preferred  Stock issued was recognized by the Company as a
non-cash  dividend  charge of  $956,000.  The  holders of the Series 2 Preferred
Stock  have no voting  rights,  except in  limited  circumstances.  The Series 2
Preferred  Stock ranks junior to the Company's  Series 1 Preferred  Stock, as to
dividends, distributions and payments in liquidation.

    In January  1996,  the Company  issued  47,000  shares of Series 2 Preferred
Stock and received net proceeds of  $4,418,000.  During 1996,  40,000  shares of
Series 2 Preferred Stock were converted to 860,000 shares of Common Stock.  (See
"Common Stock Transactions" above.)

    Shareholders'   Rights  Plan.  On  April  10,  1996,  the  Board  adopted  a
Shareholders'  Rights Plan  intended to protect  the rights of  shareholders  by
deterring coercive or unfair takeover tactics.  The Board declared a dividend to
holders  of  the  Company's  Common  Stock,   payable  on  April  19,  1996,  to
shareholders  of record on that date, of one preferred share purchase right (the
"Right")  for  each  outstanding  share  of  the  Common  Stock.  The  Right  is
exercisable 10 days following the offer to purchase or acquisition of beneficial
ownership  of 20% of the  outstanding  Common  Stock  by a  person  or  group of
affiliated  persons.  Each Right entitles the registered holder,  other than the
acquiring  person or group,  to purchase from the Company  one-hundredth  of one
share of Series A Junior  Participating  Preferred  Stock  ("Series A  Preferred
Stock") at a price of $40,  subject to  adjustment.  The Rights expire April 10,
2006.  The Series A Preferred  Stock will be entitled to a minimum  preferential
quarterly  dividend $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, the 1994 Stock Option
Plan (the "1994 Plan") and the 1991 Stock Option Plan for Non-Employee Directors
(the "Directors  Plan").  The Company  accounts for its stock option plans under
the guidelines of Accounting  Principles  Board Opinion No. 25 ("APB 25"), under
which no  compensation  cost has been  recognized.  In 1996, the Company adopted
Statement of Financial  Accounting  Standards No. 123 ("SFAS 123"),  "Accounting
for Stock-Based  Compensation," effective for years beginning after December 15,
1995. The Company has continued to measure  compensation cost for employee stock
compensation plans under the guidelines of APB 25, as allowed by SFAS 123.

                                       29

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

    Had  compensation  cost for these  stock  option  plans been  determined  in
accordance  with SFAS 123,  the  Company's  "Net  loss" and "Net loss per common
share" would have  increased to the  following  pro forma  amounts for the years
ended December 31, 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                         1996           1995
                                                        -------       --------
<S>                             <C>                     <C>           <C>      
Net loss...................     As reported .......     $(9,001)      $(12,271)
                                Pro forma ...........    (9,503)       (12,364)

Net loss per common share..     As reported .........     $(.68)         $(.98)
                                Pro forma ...........      (.72)          (.99)
</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.

    The 1994 Plan authorizes the Board or an Option  Committee  appointed by the
Board to grant  options  to  purchase a maximum  of  2,500,000  shares of Common
Stock.  The 1994 Plan replaced the 1984 Stock Option Plan that expired  November
1, 1994.  The 1994 Plan allows for the issuance of incentive  stock  options and
nonqualified   stock  options  to  employees,   officers,   Directors,   agents,
consultants,  advisors and  independent  contractors of the Company,  subject to
certain restrictions. All option grants expire ten years from the date of grant.
In general,  two-thirds of the option grants become exercisable in increments at
a rate of 25% per year over a  four-year  period  from the grant  date,  and the
remaining  one-third becomes exercisable over a period of one to nine years from
the grant date unless accelerated by the Option Committee. The exercise price of
options  granted  under the 1994 Plan is equal to the fair  market  value of the
Common Stock at the date of grant.  As of December 31, 1996,  there were 424,000
shares of Common Stock available for issuance under the 1994 Plan.

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

    The Directors  Plan, as amended at its 1994 Annual Meeting of  Shareholders,
authorizes  the grant of stock options to  non-employee  Directors to purchase a
maximum of 250,000 shares of Common Stock.  Under the terms of the amended plan,
each eligible Director receives annually, concurrent with the annual election of
Directors,  an option to purchase  5,000  shares of Common  Stock at an exercise
price equal to the fair market  value of the Common  Stock on the date of grant.
The options become exercisable in two equal annual  installments  beginning with
the first annual meeting of  shareholders  after the date of grant. In addition,
each newly appointed non-employee Director receives a one-time initial option to
purchase  10,000  shares of Common Stock at an exercise  price equal to the fair
market  value of the Common  Stock on the date of grant.  Options  expire on the
earlier of ten years from the date of grant or five years  after the  Director's
termination  of service as a  Director.  As of  December  31,  1996,  there were
134,000 shares of Common Stock available for issuance under the Directors Plan.

                                       30

<PAGE> 




                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

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

                                                      1996                     1995                      1994
                                             -----------------------   ----------------------    ------------------------ 
                                                          Weighted                Weighted                    Weighted
                                               Number      Average       Number    Average         Number      Average
                                             of Shares   Share Price   of Shares  Share Price    of Shares   Share Price
                                             ---------   -----------   ---------  -----------    ---------   ------------ 
<S>                                              <C>          <C>         <C>          <C>          <C>           <C>  
Outstanding at beginning of year .....           2,911        $4.85       2,985        $4.61        1,003         $9.20
Granted ..............................             994         6.19         174         5.35        2,657          3.92
Exercised ............................            (281)        2.62        (219)        1.93          (35)         2.67
Canceled .............................            (815)        6.35         (29)        4.98         (640)        13.61
                                                 -----        -----       -----       ------         -----        -----
Outstanding at end of year ...........           2,809        $5.11       2,911        $4.85         2,985        $4.61
                                                 =====        =====       =====        =====         =====        =====

Exercisable at end of year ...........           1,267        $6.03       1,104        $6.86           769        $6.75
                                                 =====        =====       =====        =====         =====        =====
</TABLE>


     Information  relating  to  stock  options  outstanding  and  stock  options
exercisable at December 31, 1996 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  Share Price  of Shares   Share Price
------------------------                     ----------  -------------  -----------  ---------   -----------
<S>                                             <C>          <C>         <C>            <C>         <C>  
$1.50 - $3.75 ........................          1,506        7.4         $2.92          703         $2.85
$4.75 - $6.38 ........................            689        8.7          5.34           211         5.75
$7.00 - $21.75 .......................            614        7.0         10.25           353        12.54
                                                -----        ---         -----         -----        -----
                                                2,809        7.6         $5.11         1,267        $6.03
                                                =====        ===         =====         =====        =====
</TABLE>

     The fair value of each stock option  granted is valued on the date of grant
using the  Black-Scholes  option pricing model. The weighted average  grant-date
fair value of stock  options  granted  during 1996 was $3.66 per share using the
assumptions of expected  volatility of 70%, expected option lives of five to ten
years and risk-free  rates of interest of 6.5 - 6.7%.  During 1995, the weighted
average grant-date fair value of stock options granted was $3.74 per share using
the assumptions of expected  volatility of 70%, expected option lives of five to
ten years and risk-free rates of interest of 6.0 - 6.2%.

     Warrants. In connection with financing  transactions in April and September
1995,  the Company  issued  1,635,000  three-year  warrants to purchase  409,000
shares of Common Stock,  exercisable at a price of $5.31 per share. The warrants
expire in April 1998.

In  September  1992,  the  Company  issued  Common  Stock  purchase  warrants to
Boehringer  Ingelheim to acquire  250,000  shares of Common Stock at a per share
exercise price of $15.84 and to acquire  375,000 shares of Common Stock at a per
share exercise price of $21.12. The warrants expire in September 1997.

                                       31

<PAGE>  





                               NEORX CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 10.  Federal Income Taxes

     Federal income taxes are determined using an asset and liability approach.

     The components of the deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>

                                                           DECEMBER 31,
                                                      ---------------------- 
                                                       1996           1995
                                                      -------        -------
<S>                                                   <C>            <C>    
Net operating loss carryforwards ................     $18,900        $16,700
Research and development credits ................         900            600
Amortization and depreciation ....................        600            600
Other ...........................................         500            600
                                                      -------        -------
     Deferred tax asset .........................      20,900         18,500
Deferred tax asset valuation allowance ..........     (20,900)       (18,500)
                                                      -------        -------
     Net deferred taxes .........................     $    --        $    --
                                                      =======        =======

</TABLE>

     The Company has  established a valuation  allowance  equal to the amount of
the deferred tax asset because the Company has not had taxable  income since its
inception and significant  uncertainty exists regarding the ultimate realization
of the deferred tax asset.  Accordingly,  no tax benefits  have been recorded in
the accompanying Statements of Operations.

     The  Company's net operating  loss  carryforwards  expire during the period
from 1999 to 2011. During 1994, the Company  experienced  sufficient  changes in
ownership such that the amount of net operating loss  carryforwards and research
and  development  carryforwards  available  to be used in any given year will be
limited  under  Sections  382 and 383 of the Internal  Revenue Code of 1986,  as
amended.  This  limitation  will  result  in  the  expiration  of  approximately
$43,000,000 of the Company's net operating loss  carryforwards and $2,400,000 of
the research and development credit carryforwards. Accordingly, the deferred tax
asset and  related  valuation  allowance  related  to these  carryforwards  were
reduced in 1994 by approximately $17,000,000.

NOTE 11.  Subsequent Events

     In February  1997, the Company's  marketing  partner,  DuPont Merck,  began
sales of  VERLUMA  Small Cell Lung  Cancer  Imaging  Kit,  the  Company's  first
product, from which NeoRx will receive royalties.



                                       32

<PAGE> 





Item 9. Changes In and  Disagreements  With  Accountants  on Accounting and
         Financial Disclosure

    Not applicable.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

    (a) Directors.  The information required by this item is incorporated herein
by reference to the section  captioned  "Election of Directors" in the Company's
Proxy  Statement for the Annual  Meeting of  Shareholders  to be held on May 13,
1997,  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.  The information with respect to executive officers
required by this item is incorporated  herein by reference to pages 14 and 15 of
this Form 10-K.

    (C)  Compliance  With  Section  16(a) of the Exchange  Act. The  information
required  by this  item is  incorporated  herein  by  reference  to the  section
captioned "Compliance With Section 16(a) of the Securities Exchange Act of 1934"
in the Company's  Proxy  Statement for the Annual Meeting of  Shareholders to be
held on May 13, 1997, filed with the Commission pursuant to Section 14(a) of the
Exchange Act.

Item 11.  Executive Compensation

    The information required by this item is incorporated herein by reference to
the  sections  captioned  "Executive  Compensation,"  "Stock  Options,"  "Option
Exercises  in 1996  and  Year-End  Value  Table,"  "Report  of the  Compensation
Committee  on  Executive   Compensation,"   "Stock  Price  Performance   Graph,"
"Compensation   of  Directors"  and  "Employment   Agreements,   Termination  of
Employment and Change of Control  Agreements" in the Company's  Proxy  Statement
for the Annual Meeting of  Shareholders  to be held on May 13, 1997,  filed with
the Commission pursuant to Section 14(a) of the Exchange Act.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

    The information required by this item is incorporated herein by reference to
the section  captioned  "Security  Ownership  of Certain  Beneficial  Owners and
Management"  in  the  Company's  Proxy  Statement  for  the  Annual  Meeting  of
Shareholders to be held on May 13, 1997,  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 incorporated herein by reference to
the section captioned  "Certain  Relationships and Related  Transactions" in the
Company's  Proxy Statement for the Annual Meeting of Shareholders to be held May
13, 1997,  filed with the  Commission  pursuant to Section 14(a) of the Exchange
Act.


                                       33

<PAGE>




                                    PART IV

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

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

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

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

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

    (C)     Exhibits - See Exhibit Index filed herewith.

                                       34

<PAGE> 


<TABLE>
<CAPTION>

                                     EXHIBIT INDEX


                                                                                    Page Number
                                                                                 or Incorporation
 EXHIBIT                              Description                                 By Referecnce To
 -------                   ----------------------------------                    ------------------         
    <S>                                                                         <C>         
    3.1(a) Restated Articles of Incorporation                                           *
    3.1(b) Amendment to Restated Articles of Incorporation filed with the
           Washington Secretary of State on March 15, 1990                             ***
    3.1(c) Articles of Amendment, dated November 6, 1991, to Articles of
           Incorporation                                                               ****
    3.1(d) Articles of Amendment of NeoRx Corporation dated January 25, 1996          +++++
    3.1(e) Restated Articles of Incorporation, dated April 29, 1996                     39
    3.2    Bylaws, as amended, of the registrant                                       ***
    4.1    Form of Indenture, dated as of June 1, 1989, between NeoRx
           Corporation and First Interstate Bank of Washington, N.A., as
           trustee                                                                      **
    4.2    Statement of Rights and Preferences relating to Convertible
           Exchangeable Preferred Stock Series 1, par value $0.02 per share            ***
    4.3    Specimen Warrant Certificate                                                +++
    4.4    Form of Purchase Agreements dated as of April 18, 1995 between NeoRx
           Corporation and the Purchasers                                              +++
    4.5    Form of Purchase Agreements dated as of January 30, 1996 between
           NeoRx Corporation and the Purchasers                                        ++++
   4.6     Rights Agreement, dated April 10, 1996, between NeoRx Corporation
           and First Interstate Bank of Washington, N.A.                              ++++++
   10.1    1994 Stock Option Plan                                                       ++
   10.2    Option and Development Agreement, dated September 5, 1985, between
           NeoRx Corporation and Merck Frosst Canada, Inc                               *
   10.3    Amendment, dated May 4, 1989, to Option and Development Agreement
           between NeoRx Corporation and Merck Frosst Canada, Inc                       **
   10.4    Lease Agreement for 410 West Harrison facility, dated February 15,
           1996,  between NeoRx Corporation and Diamond Parking, Inc                  +++++ 
   10.5    1991 Stock Option Plan for  Non-Employee  Directors,  as amended             ++ 
   10.6    1991 Restricted Stock Option Plan                                          *****
   10.7    Stock and Warrant Purchase Agreement, dated as of September 11, 
           1992, between NeoRx Corporation and Boehringer Ingelheim 
           International GmbH                                                                       *****
   10.8    Amendment to Stock and Warrant Purchase Agreement, dated as of
           September 17, 1992, between NeoRx Corporation and Boehringer
           Ingelheim International GmbH                                                 +
   10.9    Second Amendment to Stock and Warrant Purchase Agreement, dated as of
           September  29,  1993,   between  NeoRx   Corporation  and  Boehringer
           Ingelheim International GmbH                                                 +
  10.10    Development and License Agreement, dated as of September 11, 1992,
           between NeoRx Corporation and Boehringer Ingelheim International
           GmbH                                                                       *****
  10.11    First Amendment to Development and License Agreement, dated September
           22, 1994, between NeoRx Corporation and Boehringer Ingelheim
           International GmbH                                                           ++
  10.12    Second Amendment to Development and License Agreement, dated October
           31, 1994, between NeoRx Corporation and Boehringer Ingelheim
           International GmbH                                                           ++
  10.13    Technology License Agreement, dated as of September 11, 1992, between
           NeoRx Corporation and Boehringer Ingelheim International GmbH              *****
  10.14    License Agreement, dated as of September 18, 1992, between NeoRx
           Corporation and Sterling Winthrop Inc                                      *****
  10.15    Collaboration and License Option Agreement, dated August 10, 1992,
           between NeoRx Corporation and Organon International B.V.                   *****
  10.16    Contract  for Support of Research  Project,  effective  as of July 1,
           1992, between NeoRx Corporation and the Curators of the University of
           Missouri                                                                   *****

</TABLE>

                                       35

<PAGE>  
<TABLE>
<CAPTION>





                                                                                    Page Number
                                                                                 or Incorporation
 EXHIBIT                           Description                                    By Reference To
 -------                    --------------------------------                     ------------------  

  <S>                                                                           <C>                                           
  10.17    Amendment No. 1 to Contract for Support of Research Project,
           effective as of July 1, 1993, between NeoRx Corporation and the
           Curators of the University of Missouri                                       +
  10.18    Agreement, dated as of December 15, 1995                                     ++
  10.19    License Option Agreement, dated June 1, 1991, between NeoRx
           Corporation and the UAB Research Foundation                                  +
  10.20    Research Agreement (With Option to License), dated February 8, 1993,
           between NeoRx Corporation and Southern Research Institute                    +
  10.21    Consulting Agreement, effective March 15, 1993, between NeoRx
           Corporation and Oxford Molecular Inc                                         +
  10.22    Agreement, dated as of August 1, 1993, between NeoRx Corporation and
           Avalon Medical Partners                                                      +
  10.23    Registration Rights Agreement, dated September 1993, between NeoRx
           Corporation and Avalon Medical Partners                                      +
  10.24    Consulting Agreement, dated as of July 7, 1993, between NeoRx
           Corporation and Dr. Fred Craves                                              +
  10.25    Amendment to consulting agreement, dated May 9,1995 between NeoRx
           Corporation and Dr. Fred Craves                                            +++++
  10.26    Engagement letter, dated as of June 22, 1993, between NeoRx
           Corporation and the Placement Agents                                       ******
  10.27    Purchase Agreements, dated May 19, 1993, between NeoRx Corporation
           and the Purchasers or representatives thereof                              ******
  10.28    Stock Purchase Agreement, dated as of October 5, 1994, between NeoRx
           Corporation and The DuPont Merck Pharmaceutical Company                      ++
  10.29    License Agreement, dated as of October 5, 1994, between NeoRx
           Corporation and The DuPont Merck Pharmaceutical Company                      ++
  10.30    Supply Agreement, dated November 10, 1994, between Cordis Corporation
           and NeoRx Corporation                                                        ++
  10.31    License Agreement, effective as of October 12, 1994, between Indiana
           University Foundation and NeoRx Corporation, as amended                      ++
  10.32    Agreement, dated as of June 1, 1987, between NeoRx Corporation and
           the Board of Trustees of the Leland Stanford Junior University, as
           amended                                                                      ++
  10.32(a) Amendment No. 3, dated November 15, 1995, to Contract between NeoRx
           Corporation and the Board of Trustees of the Leland Stanford Junior
           University                                                                  ++
  10.33    Research Collaboration Agreement, dated September 1, 1995, between
           NeoRx Corporation and biosys, Inc                                            ++
  10.34    Form of Registration Rights Agreement, dated January 30, 1996, by and
           among NeoRx Corporation and Grace Brothers, Ltd., Genesee Fund, Ltd.
           and SBSF Biotechnology Partners                                             ++++
  10.35    Indemnification Agreement                                                    #
  10.36    Change of Control Agreement                                                  ##
  10.37    Form of Key Executive Severance Agreement                                    ##
   23.1    Consent of Arthur Andersen LLP                                               82

--------   ----------
</TABLE>
<TABLE>
<S>        <C>                                                                           
*          Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration
           No. 33-20694) effective August 11, 1988 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 Registration Statement on Form S-4 (Registration
           No. 33-33153) effective March 27, 1990 and incorporated herein by reference.
****       Filed as an exhibit to the  Company's  Form 10-K for the fiscal  year
           ended September 30, 1990 and incorporated herein by reference.
*****      Filed as an exhibit to the  Company's  Form 10-K for the fiscal  year
           ended September 30, 1991 and incorporated herein by reference.

</TABLE>

                                       36

<PAGE> 




<TABLE>

<S>        <C> 
******     Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration
           No. 33-64992) effective August 25, 1993 and incorporated herein by reference.
+          Filed as an exhibit to the Company's Registration Statement on Form S-2 (Registration
           No. 33-71164) effective December 13, 1993 and incorporated herein by reference.
++         Filed as an exhibit to the  Company's  Form 10-K for the fiscal  year
           ended December 31, 1994 and incorporated herein by reference.
+++        Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration
           No. 33-60029) effective August 8, 1994 and incorporated herein by reference.
++++       Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration
           No. 333-00785) effective February 7, 1996 and incorporated herein by reference.
+++++      Filed as an  exhibit  to the  Company's  Form 10-K for the Year Ended
           December 31, 1995 and incorporated herein by reference.
++++++     Filed as an exhibit to the Company's  Registration  Statement on Form
           8-A, dated April 15, 1996 and incorporated herein by reference.
#          Filed as an exhibit to the Company's 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.
++          Confidential treatment requested


</TABLE>


                                       37

<PAGE>  






                                    SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   NEORX CORPORATION
                                   (Registrant)

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

                                             Date: March 25, 1997

    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>


<S>                                          <C>                            <C>

     /s/ PAUL G. ABRAMS
-----------------------------------------
         Paul G. Abrams                     President, Chief Executive      March 25, 1997
                                            Officer and Director
                                            (Principal Executive Officer)
     /s/ RICHARD L. ANDERSON
-----------------------------------------
         Richard L. Anderson                 Senior Vice President, Chief    March 25, 1997
                                             Financial Officer, Secretary
                                             and Treasurer (Principal
                                             Financial and Accounting
                                             Officer)
     /s/ FRED B. CRAVES
-----------------------------------------
                     Fred B. Craves          Chairman of the Board of        March 25, 1997
                                             Directors
     /s/ JAMES G. ANDRESS
-----------------------------------------
         James G. Andress                    Director                        March 25, 1997

     /s/ JACK L. BOWMAN
-----------------------------------------
         Jack L. Bowman                      Director                        March 25, 1997

     /s/ LAWRENCE H.N. KINET
-----------------------------------------
         Lawrence H.N. Kinet                 Director                        March 25, 1997

     /s/ CARL-HEINZ POMMER
-----------------------------------------
         Carl-Heinz Pommer                   Director                        March 25, 1997


</TABLE>
                                       38