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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, 1995
 
/ /            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)
 
<TABLE>
<S>                                                <C>
                    WASHINGTON                                         91-1261311
          (STATE OR OTHER JURISDICTION OF                   (IRS EMPLOYER IDENTIFICATION NO.)
          INCORPORATION OR ORGANIZATION)
</TABLE>
 
              410 WEST HARRISON STREET, SEATTLE, WASHINGTON 98119
                    (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
                            ------------------------
 
     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 1, 1996 was approximately $79 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 1, 1996, approximately 15.3 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
14, 1996 are incorporated by reference in Part III of this Form 10-K.
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
GENERAL
 
     NeoRx Corporation ("NeoRx" or the "Company") develops targeted
biopharmaceuticals for the diagnosis and treatment of certain types of cancer
and the reduction of restenosis following balloon angioplasty. NeoRx's most
advanced product under development is a lung cancer diagnostic imaging product,
Verluma(TM), for which Boehringer Ingelheim International GmbH ("Boehringer
Ingelheim") is licensed to manufacture and for which Boehringer Ingelheim has
filed with the United States Food and Drug Administration (the "FDA") a Product
License Application ("PLA"). Avicidin(R), the Company's lead cancer therapy
product under development, employs the Company's proprietary pretargeting
technology, which is designed to deliver high doses of a therapeutic agent to
tumor cells while minimizing toxicity to normal tissue, as compared with
conventional chemotherapy and radiation treatments. The Company is currently
conducting Phase I/II clinical trials of Avicidin. NeoRx is also developing
Biostent(TM), a pharmaceutical product that is designed to reduce restenosis
following balloon angioplasty through the inhibition of vascular remodeling, the
process of chronic constriction thought to be one of the primary causes of
restenosis. The Company is currently conducting a Phase I clinical trial of
Biostent.
 
     Verluma is the Company's diagnostic imaging agent for staging lung cancer.
NeoRx believes that its clinical data support a first-use indication of this
product to establish the stage and extent of small cell lung cancer, and that
such use may result in significant cost savings, as well as reduced staging time
compared to conventional tests. Boehringer Ingelheim, the Company's
manufacturing and non-North American marketing collaborator, filed a PLA and an
Establishment License Application ("ELA") with the FDA for this product in March
1994. In December 1995, the Oncology Drugs Advisory Committee ("ODAC") for the
FDA recommended that the FDA approve Verluma. On March 22, 1996, Boehringer
Ingelheim advised the Company that it had decided to discontinue the use of a
contract manufacturer of a non-biologic component of the Verluma product and
assume responsibility for its manufacture. Because Boehringer Ingelheim must
validate its manufacturing processes and procedures for this component, the
Company does not expect FDA approval before the third quarter 1996. In September
1992, the Company executed an agreement with Boehringer Ingelheim whereby the
Company granted Boehringer Ingelheim worldwide manufacturing rights and
non-North American marketing rights to the Company's cancer imaging products. In
addition, Boehringer Ingelheim will pay royalties to NeoRx on future product
sales. In connection with this corporate alliance, Boehringer Ingelheim
purchased 731,534 shares of NeoRx Common Stock for $11.6 million. In October
1994, the Company granted The DuPont Merck Pharmaceutical Company ("DuPont
Merck") exclusive North American rights to market its cancer imaging products
and issued it 268,904 unregistered shares of NeoRx Common Stock. In exchange,
NeoRx received $2 million upon signing the agreement and will receive $4.5
million upon FDA approval to market Verluma in the United States. In addition,
NeoRx will receive royalties from DuPont Merck on future sales of Verluma in
North America.
 
     The Company's Avicidin cancer therapy product under development employs
NeoRx's proprietary pretargeting technology, which involves the localization of
antibodies at tumor sites prior to administration of the radioactive isotope
yttrium-90, which subsequently binds to streptavidin that has been conjugated to
the antibody. Pretargeting technology is designed to allow the delivery of high
doses of a therapeutic agent to tumor cells while minimizing toxicity to normal
tissue associated with conventional therapy. In preclinical studies in animals,
the Company's pretargeting technology achieved a significant improvement in the
therapy ratio (the dose delivered to tumor divided by the dose delivered to
blood) compared to conventional radioimmunotherapy ("RIT"), and achieved
durable, complete regressions of chemotherapy-resistant human lung cancer
xenografts, as well as tumors of the colon and breast. The Company is currently
conducting Phase I/II clinical trials of its Avicidin cancer therapy product.
NeoRx is developing Avicidin initially for small cell lung cancer, and believes
that indications for other solid tumors may also be developed using pretargeting
technology.
 
     NeoRx is also developing Biostent, a pharmaceutical product that is
designed to reduce restenosis following balloon angioplasty through the
inhibition of vascular remodeling. Biostent is designed to maintain
 
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<PAGE>   3
 
the integrity of the dilated arterial wall, thereby preventing such remodeling.
Analysis of swine femoral arteries for as long as eight weeks and of swine
coronary arteries for as long as three weeks following a single exposure to
Biostent has indicated that the treatment sustains the increase in the luminal
area following balloon trauma compared to the ballooned, but untreated,
arteries. NeoRx is currently conducting a Phase I clinical trial of Biostent.
NeoRx is also researching Preverex(TM), a proprietary, sustained-release
formulation of the Company's Biostent agent, to address restenosis caused by
migration and proliferation of vascular smooth muscle cells in the arterial
wall.
 
     When used in this discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. 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 publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
 
BACKGROUND
 
CANCER
 
     The American Cancer Society estimated that approximately 1,252,000 new
cases of cancer would occur in the United States in 1995, of which 59% were
expected to be tumors of the lung, colon, breast and prostate. Cancer is a large
group of diseases characterized by uncontrolled and proliferative cell growth.
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). Early
diagnosis and precise detection of the malignant cells are thus important for
cancer treatment. Current diagnostic imaging techniques include x-rays,
computerized tomography or "CT", ultrasonography, radioisotopic imaging and
magnetic resonance imaging or "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.
 
     Surgery, radiation therapy and chemotherapy are the conventional methods of
cancer treatment. 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.
When 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.
 
     Each of NeoRx's cancer imaging and therapeutic products under development
employ monoclonal antibodies or their fragments to target tumors. Antibodies are
proteins produced by certain white blood cells in the body's immune system in
response to antigens (foreign substances) such as viruses, bacteria, toxins and
specific types of cancer cells. An antibody will recognize and bind specifically
only to a single type of antigen. This quality, 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
 
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of duplicate hybridomas that also secrete the desired antibody. These antibodies
can be purified for use as pharmaceutical agents.
 
RESTENOSIS
 
     Angioplasty is a medical procedure used to increase blood flow through
coronary arteries that have been partially blocked by the build-up of plaque on
the interior of the arterial wall. Restenosis is the recurrent narrowing of a
coronary artery following angioplasty. This narrowing, which reduces blood flow
through the artery, is believed to be caused by a combination of at least three
distinct but interrelated factors: vascular remodeling, or chronic constriction
of the artery, blood clot formation and the migration and proliferation of
smooth muscle cells at the site of the angioplasty procedure that encroach upon
the flow of blood. Studies have shown that vascular remodeling and smooth muscle
cell migration and proliferation account for the majority of occurrences of
restenosis. The Company believes that over 500,000 balloon angioplasties were
performed in the United States in 1994, and that approximately 40% 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 the placement of a metallic stent in the artery.
 
PRODUCTS UNDER DEVELOPMENT
 
     The following table summarizes products under development by NeoRx:
 
<TABLE>
<CAPTION>
                                                             COLLABORATIVE
           PRODUCT                      INDICATION              PARTNER               STATUS
-----------------------------    ------------------------    -------------     --------------------
<S>                              <C>                         <C>               <C>
CANCER IMAGING PRODUCTS:
Verluma                          Staging of small cell       Boehringer        PLA/ELA filed
                                 lung cancer                 Ingelheim/
                                                             DuPont Merck
Non-Small Cell Lung Cancer       Staging of non-small        Boehringer        Phase III human
  Imaging Kit                    cell lung cancer            Ingelheim/        clinicals completed
                                                             DuPont Merck
THERAPEUTIC PRODUCTS:
Cancer
Avicidin pretargeted cancer      Solid tumors(1)             --                Phase I/II human
  therapy product                                                              clinicals
Colon cancer radiotherapy        Colon cancer                Organon           Investigational New
  product                                                                      Drug application
                                                                               filed(2)
Anti-restenosis
Biostent                         Restenosis -- remodeling    --                Phase I human
                                                                               clinicals
Preverex                         Restenosis --               --                Preclinical
                                 proliferation/migration                       development
</TABLE>
 
---------------
(1) The Company's currently planned first indication for this product is for the
    treatment of small cell lung cancer.
 
(2) NeoRx is currently collaborating with Organon International B.V. ("Organon")
    in limited human testing of this product, which utilizes the Company's
    rhenium-labeling technology and an Organon antibody. Organon has retained
    ownership and marketing rights to this product, subject to payment of
    royalties to NeoRx if Organon chooses to commercialize this product.
 
CANCER IMAGING PRODUCTS
 
     VERLUMA.  The American Cancer Society estimated that approximately 170,000
new cases of lung cancer would occur in the United States in 1995, of which the
Company believes approximately 45,000 would
 
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<PAGE>   5
 
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 less than 20%. Although most small cell lung cancer patients respond
to chemotherapy, most also suffer a relapse. Current treatment of this disease
is based on the degree 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
radiation. Those patients whose disease has spread to the point that radiation
treatment would produce intolerable toxicity 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.
 
     Verluma 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. Data from NeoRx's
Phase III clinical trial show that Verluma is more sensitive than any single
test used in the standard battery of four tests to determine how far the tumor
has spread and has an accuracy level comparable to the standard battery of
tests. The Company believes that the use of Verluma may result in significant
cost savings as well as reduced staging time compared to the standard tests.
 
     Boehringer Ingelheim, the Company's manufacturing and non-North American
marketing collaborator, filed a PLA and an ELA with the FDA for Verluma in March
1994. In December 1995, ODAC recommended that the FDA approve Verluma. On March
22, 1996, Boehringer Ingelheim advised the Company that it had decided to
discontinue the use of a contract manufacturer of a non-biologic component of
the Verluma product and assume responsibility for its manufacture. Because
Boehringer Ingelheim must validate its manufacturing processes and procedures
for this component, the Company does not expect FDA approval before the third
quarter 1996.
 
     NON-SMALL CELL LUNG CANCER IMAGING KIT.  Non-small cell lung cancer
("NSCLC") includes several different types of lung cancer that have a resistance
to currently available chemotherapy. The American Cancer Society estimated that
approximately 170,000 new cases of lung cancer would occur in the United States
in 1995, of which the Company believes approximately 125,000 would be non-small
cell lung cancer. The degree to which the tumor has spread is generally
determined using mediastinoscopy or thoracotomy, both of which are invasive
surgical procedures that involve removal of tissue from the chest, in
combination with CT scans.
 
     NeoRx's NSCLC imaging kit is the same formulation as Verluma. Staging
classifications of NSCLC are considerably more complex than small cell lung
cancer. In Phase II clinical trials, the product detected the presence of
mediastinal metastases and detected metastases outside the chest in patients who
may have otherwise been considered surgical candidates. Those patients with
disease outside the chest need no further evaluation and are not candidates for
surgery or other invasive tests. Staging using the NSCLC imaging kit offers the
potential for avoiding unnecessary invasive tests and surgery. NeoRx has
completed Phase III clinical trials of its NSCLC imaging kit. The decision as to
whether to file this data with the FDA for a NSCLC imaging indication will be
made by Boehringer Ingelheim as the manufacturing licensee, and DuPont Merck as
the marketing licensee.
 
     MARKETING.  The Company has granted DuPont Merck North American marketing
rights and Boehringer Ingelheim non-North American marketing rights to the
Company's cancer imaging agents.
 
THERAPEUTIC PRODUCTS
 
  CANCER PRODUCTS
 
     AVICIDIN PRETARGETED CANCER THERAPY PRODUCT.  Cancer is second only to
cardiovascular disease as a cause of death in the United States. Current
regimens for the treatment of cancer include chemotherapy,
 
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<PAGE>   6
 
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.
 
     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. The pretargeting technology takes advantage of the high binding
affinity of two molecules: biotin and streptavidin. In NeoRx's Avicidin
application of pretargeting technology, an antibody covalently 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 last step
involves administering biotin linked to the therapeutic radionuclide,
yttrium-90. This small molecule biotin-yttrium complex is designed to bind
specifically to the streptavidin at the tumor cell surface, with the resultant
beta particle emission from the yttrium-90 killing tumor cells. Biotin-yttrium
that does not bind to the tumor-bound streptavidin is quickly removed from the
blood circulation by the kidneys, thereby reducing the radiation dose to the
bone marrow. In preclinical studies in animals, Avicidin 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.
 
     NeoRx is developing Avicidin initially for the treatment of small cell lung
cancer. The Company began a Phase I/II clinical trial in December 1993, using
imaging radionuclides to demonstrate that the system performs in humans as it
has in mice and larger animals. During the third quarter of 1994, NeoRx began a
dose escalation study using the therapeutic radionuclide yttrium-90. Initial
Phase I/II clinical trials utilize a murine antibody. The Company has developed
a humanized version of the antibody that may reduce the "human anti-mouse
antibody" response, or "HAMA," and currently plans to substitute this humanized
version for the murine version.
 
     In February 1996, the Company began a clinical study of the humanized
antibody to determine safety, pharmacokinetics and degree of immunogenicity. The
Company filed an Investigational New Drug application ("IND") in February 1996
to also determine biodistribution of the humanized antibody. If the results of
this testing are satisfactory, the Company plans to conduct a Phase I/II study
of humanized Avicidin, substituting the humanized antibody for the murine
version.
 
     The Company believes that indications for non-small cell lung cancer, colon
cancer, prostate cancer and breast cancer may also be developed using
pretargeting technology.
 
     NeoRx plans to fund the completion of the development and the
commercialization of the Avicidin product for small cell lung cancer through an
alliance with a pharmaceutical company or other corporate partner but has not
entered into any arrangements for such funding to date.
 
     COLON CANCER RADIOTHERAPY PRODUCT (COLLABORATION WITH ORGANON).  The
American Cancer Society estimated that approximately 138,000 new cases of colon
cancer would occur in the United States in 1995. The current therapies for colon
cancer are surgery and chemotherapy. RIT offers the potential of improving the
efficacy of colon cancer treatment by directing radiation to metastatic tumors.
 
     Organon has developed monoclonal antibodies derived from human cells that
contain no "foreign" peptide sequences and thus may not induce an immune
response upon administration. NeoRx and Organon have entered into a
collaboration wherein NeoRx's rhenium-labeling technology is applied to
Organon's human antibody directed against colon cancer. Organon is currently
conducting limited human testing of a conjugate using an Organon human antibody
and NeoRx's rhenium-labeling technology. Under the terms of the collaboration,
depending on the clinical trial results, Organon is obligated to pay licensing
fees, clinical development milestone payments and royalties on sales if Organon
chooses to commercialize the product. NeoRx does not have rights to market any
products which may result from this collaboration.
 
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<PAGE>   7
 
  ANTI-RESTENOSIS PRODUCTS
 
     BIOSTENT.  The Company's Biostent agent under development is designed to
maintain the integrity of the dilated arterial wall to inhibit vascular
remodeling following balloon angioplasty. Since the agent addresses remodeling,
it 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.
 
     Balloon angioplasty mechanically dilates the narrowed coronary artery.
After the angioplasty procedure is completed, the smooth muscle cells in the
dilated artery may begin constricting, thereby shrinking the luminal space in
the artery, a process called vascular remodeling. Preclinical studies have shown
that administering Biostent immediately after angioplasty impedes muscle
constriction and stabilizes the wall in its dilated condition. 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. Through this response, the collagen forms a rigid matrix,
thereby biologically supporting or "stenting" the arterial wall during the
period that the Biostent treatment inhibits arterial constriction.
 
     Biostent is 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. The effects of the Biostent treatment method have been assessed in a
pig femoral artery model. The pig femoral artery experiments have been extended
to evaluate the effects of the Biostent treatment method on pig coronary
arteries. Analysis of swine femoral arteries for as long as eight weeks and of
swine coronary arteries for as long as three weeks following a single exposure
to Biostent has indicated 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 Micro-Infusion Catheter (the "MIC"), under development by Cordis
Corporation ("Cordis"). Commercialization of Biostent will depend on obtaining
FDA approval of the MIC. NeoRx has an exclusive catheter supply agreement with
Cordis for use of the catheter in the treatment of vascular remodeling under
which preclinical, clinical and commercial supplies of the catheter will be
furnished. The MIC is an over-the-wire design that allows rapid placement of the
MIC using the same guidewire used for balloon dilation. The MIC consists of a
porous balloon delivery catheter covered with an outer microporous membrane.
This unique, patented design provides for rapid, uniform delivery of a drug to
the arterial wall. Systemic toxicology studies have been completed in both rats
and dogs, with doses as high as 10,000-fold above projected clinical dose levels
with no evidence of systemic toxicity observed. NeoRx began a Phase I clinical
trial of Biostent in July 1995.
 
     PREVEREX.  The Company believes that a sustained-release formulation of
cytochalasin B or certain other compounds may address that portion of restenosis
that is believed to be the result of proliferation and migration of smooth
muscle cells in the arterial wall. The Company is investigating the proprietary
use of cytochalasin B and other compounds incorporated into polymer microspheres
or other sustained-release delivery vehicles that release the drug over a period
of weeks within the arterial wall. Laboratory analysis indicates that sustained
exposure to cytochalasin B inhibits both the proliferation and migration of
vascular smooth muscle cells.
 
     The use of a sustained release delivery formulation potentially gives NeoRx
two important design advantages. First, the sustained-release delivery format is
designed to provide a constant release rate of therapeutic agent over a period
of weeks. In vitro studies have demonstrated that sustained exposure of vascular
smooth muscle cells to cytochalasin B reversibly inhibits proliferation and
migration. The Company believes these therapeutic effects are absent when
cytochalasin B is administered in the single, catheter-delivered bolus
administration employed in the Biostent formulation.
 
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<PAGE>   8
 
     The second design advantage of a sustained release delivery formulation is
the ability to target drug release to specific regions within the coronary
arterial wall. Cytochalasin B is a small molecule that does not easily lend
itself to direct targeting via attachment to various ligands. The attachment of
a targeting agent directly to cytochalasin B could interfere with its
therapeutic effect. However, the sustained-release vehicle may be targeted
through attachment of a targeting agent. Various sustained release delivery
formulations are currently being evaluated for in vitro efficacy prior to
assessment in animal models.
 
COLLABORATIONS
 
     In September 1992, the Company executed an agreement with Boehringer
Ingelheim whereby the Company granted Boehringer Ingelheim worldwide
manufacturing rights and non-North American marketing rights to the Company's
cancer imaging products. In connection with this corporate alliance, Boehringer
Ingelheim purchased 731,534 shares of NeoRx Common Stock for $11.6 million. In
addition, the Company has issued Boehringer Ingelheim warrants expiring in
September 1997 to purchase 250,000 shares of Common Stock at an exercise price
of $15.84 per share and 375,000 shares at an exercise price of $21.12 per share.
Boehringer Ingelheim will produce the Company's cancer imaging products for
marketing, distribution and sale in North America by DuPont Merck and for
marketing outside North America by Boehringer Ingelheim or its sublicensee. To
sell the products in the United States, the Company must receive marketing
approval from the FDA. Boehringer Ingelheim filed a PLA and an ELA for FDA
approval of Verluma, the Company's small cell lung cancer imaging agent, in
March 1994. In December 1995, ODAC recommended that the FDA approve Verluma. On
March 22, 1996, Boehringer Ingelheim advised the Company that it had decided to
discontinue the use of a contract manufacturer of a non-biologic component of
the Verluma product and assume responsibility for its manufacture. Because
Boehringer Ingelheim must validate its manufacturing processes and procedures
for this component, the Company does not expect FDA approval before the third
quarter 1996.
 
     In October 1994, the Company granted DuPont Merck exclusive North American
rights to market its cancer imaging products and issued 268,904 unregistered
shares of NeoRx Common Stock to DuPont Merck. In exchange, NeoRx received $2
million upon signing the agreement and will receive $4.5 million upon FDA
approval to market Verluma in the United States. In addition, NeoRx will receive
royalties from DuPont Merck on sales of Verluma in North America.
 
     NeoRx and Organon are collaborating in the field of cancer RIT, wherein
NeoRx's rhenium-labeling technology is applied to Organon's human antibody
directed against colon cancer. Under the terms of the collaboration, depending
on the clinical trial results, Organon is obligated to pay licensing fees,
clinical development milestone payments and royalties on sales if Organon
chooses to commercialize the product. NeoRx does not have rights to market any
products which may result from this collaboration.
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company's policy is to aggressively protect its proprietary technology.
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 has a co-exclusive license for the monoclonal antibody used in
its cancer imaging and treatment products and also has obtained numerous U.S.
and foreign patents relating to its cancer imaging products. NeoRx has obtained
an exclusive license from Stanford University for a patent that has been issued
in the United States and Europe that covers the pretargeting technology included
in its Avicidin cancer therapy product under development. In addition, the
Company has been awarded another U.S. patent pertaining to pretargeting
technology, and has developed a portfolio of patent applications building on
this patent. The Company is pursuing patent protection for its anti-restenosis
technology and products under development by filing numerous patent applications
in both the United States and foreign jurisdictions. In October 1994, NeoRx
obtained from Indiana University an exclusive license to a patent that broadly
covers
 
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<PAGE>   9
 
the sustained release catheter delivery into blood vessel walls of therapeutic
agents contained within a particulate dosage form.
 
     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 the Company'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
 
     Cancer imaging and therapy and anti-restenosis product development 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 or the prevention of restenosis. 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.
 
     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 prevention products could render the Company's technology
and products under development less competitive, uneconomical or obsolete.
 
     Timing of market introduction and healthcare 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, are used by a large number of physicians, and 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
 
                                        8
<PAGE>   10
 
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 products under development are designed to
prevent restenosis of blood vessels following angioplasty where such narrowing
is due to vascular remodeling or to smooth muscle cell migration and
proliferation. 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.
 
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 United States and
other countries. In the United States, drugs and biologics are subject to
rigorous FDA regulation. 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
United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an 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 PLA or New Drug Application ("NDA") to the
FDA, and (v) FDA approval of the PLA or NDA prior to any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each product,
each domestic drug manufacturing establishment must be registered with, and
inspected by, the FDA. Domestic manufacturing establishments are subject to
biennial inspections by the FDA and must comply with current good manufacturing
practice ("GMP") regulations enforced by the FDA through its facilities
inspection program for both drugs and devices. To supply products for use in the
United States, foreign manufacturing establishments must comply with GMP 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 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 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
 
                                        9
<PAGE>   11
 
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 PLA 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 PLA 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 PLA or NDA as containing adequate evidence of
the safety and efficacy of the drug. Notwithstanding the submission of such
data, the FDA may ultimately decide that the application does not satisfy its
regulatory criteria for approval. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
 
     Among the conditions for PLA or NDA approval is the requirement that the
prospective manufacturers' quality control and manufacturing procedures conform
to GMP. 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, does not expect regulatory approval for
commercial sales of its lung cancer imaging product earlier than the third
quarter of 1996 and does not expect to seek U.S. regulatory approval for sales
of its cancer and anti-restenosis treatment products before 1999. 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 initiated a Phase I
 
                                       10
<PAGE>   12
 
dose escalation study in humans in mid-1994 and does not expect to complete such
study before the second half of 1996. The Company's proposed therapeutic
products for the prevention of restenosis are also in an early stage of
development.
 
     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
period. For the period from February 13, 1984 (the Company's inception) to
December 31, 1995, the Company incurred net losses aggregating $105.9 million.
The Company's existing capital resources and interest income thereon are
currently expected to be sufficient to fund the Company's operations through
late 1997. 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 Avicidin. 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.
 
     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
 
                                       11
<PAGE>   13
 
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 anti-restenosis 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
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 of the Company's existing or potential competitors
have or have access to substantially greater financial, research and
development, marketing and production resources than those of the Company and
may be better equipped than NeoRx to develop, manufacture and market competing
products. The Company's competitors may 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 "human anti-streptavidin antibody" response,
or "HASA", 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 chemical
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 and has recently initiated a Phase I human
safety study of the humanized antibody, there can be no assurance that such
humanized antibody 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,
 
                                       12
<PAGE>   14
 
efficacy and quality by numerous government authorities in the United States and
other countries. Clinical trials, manufacturing and marketing of products are
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory authorities. Clinical trials and regulatory approval can take
a number of years to accomplish and require the expenditure of substantial
resources. There can be no assurance that clinical trials will be started or
completed successfully within any specified time period. Delays in approval can
occur for a number of reasons, including the Company's failure to obtain
necessary supplies of monoclonal antibodies or other materials or to obtain a
sufficient number of available patients to support the claims necessary for
regulatory approval. There can be no assurance that requisite FDA approvals will
be obtained on a timely basis, if at all, or that any approvals granted will
cover all the clinical indications for which the Company may seek approval.
Boehringer Ingelheim filed a PLA and an ELA with the FDA for approval to
manufacture and market Verluma in March 1994. In December 1995, ODAC recommended
that the FDA approve Verluma. On March 22, 1996, Boehringer Ingelheim advised
the Company that it had decided to discontinue the use of a contract
manufacturer of a non-biologic component of the Verluma product and assume
responsibility for its manufacture. Because Boehringer Ingelheim must validate
its manufacturing processes and procedures for this component, the Company does
not expect FDA approval before the third quarter 1996. The Company's business
would be adversely affected by significant delays in FDA approval of the
manufacture and marketing of this product by Boehringer Ingelheim or by failure
of the FDA to grant such 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 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
 
                                       13
<PAGE>   15
 
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
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 man 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 1, 1996, the Company had 70 full-time employees and 8 part-time
employees, 18 of whom hold Ph.D. degrees and two of whom hold M.D. degrees.
Fifty-seven employees were engaged in research, development and manufacturing
activities and 21 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
 
     The Company has been named as an additional codefendant in an amended
complaint filed in the United States District Court for the Southern District of
New York on March 27, 1995 in a pending purported class action suit against
David Blech, D. Blech & Co. and a number of other defendants, including 11
publicly traded biotechnology companies. The complaint seeks damages for alleged
unlawful manipulation of the stock market prices of the named biotechnology
companies. The Company believes that the claims against it have no factual or
legal basis and are without merit. Although the complaint alleges that D. Blech
& Co. was the
 
                                       14
<PAGE>   16
 
principal market maker for NeoRx stock, to the Company's knowledge D. Blech &
Co. was never a significant market maker for such stock. The Company intends to
defend this suit vigorously.
 
     In February 1995, the Company settled a lawsuit filed against it and
certain members of its Board of Directors and officers in May 1994 on behalf of
a class of purchasers of NeoRx Common Stock. Under the terms of the settlement,
NeoRx issued to the class 257,000 shares of NeoRx Common Stock valued at $1.5
million and collected insurance proceeds of $925,000.
 
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. .............   48   President, Chief Executive Officer and Director
Robert M. Littauer, M.B.A., C.P.A.......   47   Senior Vice President, Chief Financial Officer and
                                                Treasurer
Jeffrey J. Miller, Ph.D., J.D. .........   48   Senior Vice President, Business Development and
                                                Legal Affairs, and Secretary
John M. Reno, Ph.D. ....................   49   Vice President, Research and Development
Robert W. Schroff, Ph.D., M.B.A. .......   41   Vice President and General Manager, Cardiovascular
                                                Products
Bruce H. Walters........................   52   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.
 
     ROBERT M. LITTAUER has been Senior Vice President, Chief Financial Officer
and Treasurer since April 1993. He was the Company's Vice President, Chief
Financial Officer and Treasurer from August 1988 to April 1993. From September
1987 to July 1988, he was the Company's Vice President and Chief Financial
Officer and from June 1987 to August 1987, Chief Financial Officer. From 1982 to
1987, Mr. Littauer was Vice President, Finance and Treasurer of Concept, Inc., a
manufacturer of surgical products. He holds an M.B.A. and a B.S. degree in
Industrial Engineering and Operations Research from Cornell University and is a
Certified Public Accountant.
 
     DR. JEFFREY J. MILLER has been Senior Vice President, Business Development
and Legal Affairs since April 1993, and Secretary since August 1988. He was the
Company's Vice President, Business Development and Legal Affairs from September
1989 to April 1993 and Vice President and General Counsel from September 1987 to
August 1989. From 1985 to 1987, he was a partner in the Seattle law firm of Seed
and Berry. Dr. Miller holds a Ph.D. degree in Biology from the University of
California at Los Angeles, a J.D. degree from Loyola University of Los Angeles
and a B.A. degree from the University of California at Los Angeles.
 
     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
 
                                       15
<PAGE>   17
 
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
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.
 
                                       16
<PAGE>   18
 
                                    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.
 
<TABLE>
<CAPTION>
                                                                            SALES PRICE
                                                                          ----------------
                                                                          HIGH       LOW
                                                                          -----     ------
    <S>                                                                   <C>       <C>
    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
    1994:
    First Quarter.......................................................  $9 1/2  $6 1/8
    Second Quarter......................................................   6 5/16  2 1/2
    Third Quarter.......................................................   4 1/4   2 5/8
    Fourth Quarter......................................................   8 1/8   3 1/4
</TABLE>
 
     There were approximately 1,100 shareholders of record at December 31, 1995.
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
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED
                                       --------------------------------------------------
                                                                                             THREE MONTHS ENDED
                                               DECEMBER 31,              SEPTEMBER 30,          DECEMBER 31,
                                       -----------------------------   ------------------   ---------------------
                                         1995       1994      1993      1992       1991      1992        1991
                                       --------   --------   -------   -------   --------   -------   -----------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)        (UNAUDITED)
<S>                                    <C>        <C>        <C>       <C>       <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
Contract revenues and fees...........  $    307   $  1,568   $ 3,676   $ 9,180   $    355   $   277     $   119
Operating expenses...................    13,343     12,605    12,334    11,094     12,118     2,825       2,665
Loss from operations.................   (13,036)   (11,037)   (8,658)   (1,914)   (11,763)   (2,548)     (2,546)
Net loss.............................   (12,271)   (11,144)   (8,536)   (2,763)   (11,681)   (2,425)     (3,688)
Net loss per common share............  $  (0.98)  $  (1.02)  $ (1.10)  $ (0.60)  $  (3.49)  $ (0.36)    $ (0.78)
Weighted average common shares
  outstanding........................    13,142     11,616     8,449     6,530      3,813     7,303       5,169
BALANCE SHEET DATA:
Cash and cash equivalents............  $  7,182   $  2,428   $14,347   $12,359   $  1,616   $10,520     $11,094
Short-term investments...............     8,937     14,723    13,421     4,000      7,588     2,500       4,168
Working capital......................    15,245     15,992    26,934    14,463     16,495    11,720      14,096
Total assets.........................    18,518     20,035    29,848    18,511     21,087    14,943      17,355
Long-term debt.......................     1,283      1,212     1,222     1,239      8,347     1,236       1,293
Shareholders' equity.................  $ 14,892   $ 15,841   $26,776   $14,531   $  8,963   $11,740     $13,146
</TABLE>
 
---------------
Note: In February 1993, the Company changed its fiscal year-end from September
      30 to December 31.
 
                                       17
<PAGE>   19
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
RESULTS OF OPERATIONS
 
     NeoRx Corporation is a development stage enterprise and has received no
revenues from sales of its products under development. To date, the Company's
revenues have been derived principally from license fees from Boehringer
Ingelheim under a collaborative agreement executed in September 1992, payments
from DuPont Merck, Sterling Winthrop Inc. ("Sterling") and from federal
government research contracts. The Boehringer Ingelheim agreement does not
require future license or research payments to the Company from Boehringer
Ingelheim, although Boehringer Ingelheim is obligated to pay royalties on sales
of licensed products. The DuPont Merck agreement provides that the Company will
receive a licensing fee of $4.5 million upon FDA approval of Verluma and
royalties on sales of the product. The Company plans to enter into additional
collaborative agreements with corporate partners, but does not currently have
commitments for any such agreements. Expenses incurred have been primarily for
research and development and for administration, resulting in an accumulated
deficit since inception of $113.4 million. Successful future operations depend
on 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 that the Company expects to incur during the next
several years.
 
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
     The Company's revenues in 1995, 1994 and 1993 were $.3 million, $1.6
million and $3.7 million, respectively, and consisted of license fees and
payments received under its collaborative and license agreements. Revenues
received in 1994 consisted primarily of a license fee of $1.4 million from
DuPont Merck for exclusive North American rights to market NeoRx's Verluma lung
cancer imaging products as part of the DuPont Merck purchase of 269,000 shares
of NeoRx Common Stock in October 1994. In 1993, revenues included a $2.3 million
milestone payment received from Boehringer Ingelheim as part of its purchase of
234,000 shares of NeoRx Common Stock in September 1993, $.5 million received
from Sterling under a 1992 license agreement and $.9 million received under
collaborative research agreements.
 
     The Company's total operating expenses were $13.3 million, $12.6 million
and $12.3 million in 1995, 1994 and 1993, respectively. Of these amounts,
research and development expenditures were $8.7 million, $7.5 million and $6.7
million in 1995, 1994 and 1993, respectively. Research and development expenses
increased 16% in 1995 and 11% in 1994. The increase in research and development
expenses in 1995 was primarily due to activities relating to antibody
humanization, a one-time license fee payment and increased clinical trial
activities. The increase in research and development expenses in 1994 was
generally due to activities relating to bringing the cardiovascular program to
the clinic. Approximately 100%, 98% and 94% of the Company's research and
development expenses in 1995, 1994 and 1993, respectively, were attributable to
the Company's self-funded research programs. General and administrative expenses
were $4.7 million, $5.1 million and $5.6 million in 1995, 1994 and 1993,
respectively. General and administrative expenses decreased 9% in 1995 and 8% in
1994. The decrease in general and administrative expenses in 1995 and 1994
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 million, $.9 million and $.3 million
in 1995, 1994 and 1993, respectively. The increase in 1995 and 1994 was
primarily due to higher average cash balances resulting from sales of Common
Stock. Interest expense was $.1 million in 1995, 1994 and 1993.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, the Company's operations have been financed primarily by
funds raised through the issuance of equity and debt securities and amounts
received under manufacturing and marketing licenses. As of December 31, 1995,
sales of the Company's Common Stock had raised an aggregate of $101.6 million,
cash fees received from license agreements totaled $9.2 million, net proceeds
from the June 1989 sale of convertible
 
                                       18
<PAGE>   20
 
subordinated debentures amounted to $26.6 million and revenues received under
collaborative research agreements amounted to $24.7 million.
 
     Since inception, the Company has invested $8.9 million in equipment,
furniture and leasehold improvements, primarily to support its research and
manufacturing activities. As of December 31, 1995, the Company was committed to
spending approximately $2.8 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.
 
     The Company's liquidity position has improved during 1995. Although total
cash, cash equivalents and short-term investments decreased $1 million during
1995, the Company's current ratio increased to 7.5 from 6.4, primarily due to
payment of a litigation settlement brought against the Company and certain of
its Directors and officers in 1994 on behalf of a class of purchasers of NeoRx
Common Stock. Under the terms of the 1995 settlement, NeoRx issued to the class
257,000 shares of NeoRx Common Stock, valued at $1.5 million, and collected
insurance proceeds of $.9 million.
 
     In October 1995, the Company registered 650,000 shares of Common Stock for
sale from time to time. As of December 31, 1995, the Company had issued 186,000
shares and received net proceeds of $1.2 million. Also during 1995, the Company
received net proceeds of $8.3 million from the sale of 1.4 million units
consisting of Common Stock and warrants. During 1994, the Company received $2.0
million from DuPont Merck for Verluma North American marketing rights and the
purchase of 269,000 shares of NeoRx Common Stock. During 1993, the Company
received $23.8 million from the sale of 3.4 million shares of its Common Stock
in three transactions.
 
     In January 1996, the Company issued 370,000 shares of Common Stock and
47,000 shares of Series 2 Convertible Preferred Stock, $.02 par value per share
and received net proceeds of $6.7 million. During January and February 1996, the
Company sold 428,000 shares of Common Stock for net proceeds of $3.5 million.
The combined net proceeds from these transactions, totaling $10.2 million, are
not reflected in the December 31, 1995 balance sheet.
 
     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 late 1997. The Company's working capital and capital
requirements will depend on numerous factors, including results of research and
development activities, clinical trials, the levels of resources that the
Company devotes to establishing and expanding marketing and manufacturing
capabilities, 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.
 
                                       19
<PAGE>   21
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                  NUMBERS
                                                                                  -------
    <S>                                                                           <C>
    Report of Independent Public Accounts.......................................     21
    Balance Sheets -- December 31, 1995 and 1994................................     22
    Statements of Operations -- For the Years Ended December 31, 1995, 1994 and
      1993 and since inception..................................................     23
    Statements of Cash Flows -- For the Years Ended December 31, 1995, 1994 and
      1993 and since inception..................................................     24
    Statements of Shareholders' Equity -- For the Years Ended December 31, 1995,
      1994 and 1993 and since inception.........................................     25
    Notes to Financial Statements...............................................     26
</TABLE>
 
All financial schedules are omitted since the required information is applicable
or has been presented in the financial statements and the notes thereto.
 
                                       20
<PAGE>   22
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To The Shareholders of NeoRx Corporation:
 
     We have audited the accompanying balance sheets of NeoRx Corporation (a
Washington corporation in the development stage) as of December 31, 1995 and
1994, and the related statements of operations, cash flows and shareholders'
equity for each of the years ended December 31, 1995, 1994 and 1993, and for the
period from February 13, 1984 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoRx Corporation as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years ended December 31, 1995, 1994 and 1993, and for the period
from inception to December 31, 1995, in conformity with generally accepted
accounting principles.
 
ARTHUR ANDERSEN LLP
Seattle, Washington
February 16, 1996
 
                                       21
<PAGE>   23
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                                 BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
                                                                          1995          1994
                                                                        ---------     --------
<S>                                                                     <C>           <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................  $   7,182     $  2,428
Short-term investments................................................      8,937       14,723
Inventories...........................................................        538          393
Prepaids and other....................................................        931        1,430
                                                                        ---------     --------
          Total current assets........................................     17,588       18,974
                                                                        ---------     --------
FACILITIES AND EQUIPMENT, AT COST:
Equipment and furniture...............................................      3,498        3,298
Leasehold improvements................................................      3,233        3,204
                                                                        ---------     --------
                                                                            6,731        6,502
Less: accumulated depreciation and amortization.......................     (5,914)      (5,555)
                                                                        ---------     --------
  Facilities and equipment, net.......................................        817          947
                                                                        ---------     --------
OTHER ASSETS..........................................................        113          114
                                                                        ---------     --------
                                                                        $  18,518     $ 20,035
                                                                        =========     ========
                 LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................  $   1,511     $    603
Accrued liabilities...................................................        531        2,115
Deferred revenue......................................................        250          250
Current portion of capital leases.....................................         51           14
                                                                        ---------     --------
          Total current liabilities...................................      2,343        2,982
                                                                        ---------     --------
NON-CURRENT LIABILITIES:
Convertible subordinated debentures, 9 3/4%...........................      1,195        1,195
Capital leases, less current portion..................................         88           17
                                                                        ---------     --------
          Total non-current liabilities...............................      1,283        1,212
                                                                        ---------     --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Convertible exchangeable preferred stock, Series 1, $.02 par value,
  3,000,000 shares authorized, 208,000 and 298,000 shares issued and
  outstanding, respectively...........................................          4            6
Common stock, $.02 par value, 60,000,000 shares authorized, 14,359,000
  and 11,865,000 shares issued and outstanding, respectively..........        287          237
Additional paid-in capital............................................    128,098      115,614
Deferred compensation.................................................       (139)        (232)
Accumulated deficit since inception...................................   (113,358)     (99,784)
                                                                        ---------     --------
          Total shareholders' equity..................................     14,892       15,841
                                                                        ---------     --------
                                                                        $  18,518     $ 20,035
                                                                        =========     ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       22
<PAGE>   24
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                      FEBRUARY 13,
                                                                                          1984
                                                                                       (INCEPTION)
                                                    YEARS ENDED DECEMBER 31,               TO
                                                ---------------------------------     DECEMBER 31,
                                                  1995         1994        1993           1995
                                                --------     --------     -------     -------------
<S>                                             <C>          <C>          <C>         <C>
REVENUES:
Contract revenues and fees....................  $    307     $  1,568     $ 3,676       $    37,640
                                                --------     --------     -------         ---------
OPERATING EXPENSES:
Research and development......................     8,690        7,464       6,723            92,031
General and administrative....................     4,653        5,141       5,611            54,651
                                                --------     --------     -------         ---------
          Total operating expenses............    13,343       12,605      12,334           146,682
                                                --------     --------     -------         ---------
Loss from operations..........................   (13,036)     (11,037)     (8,658)         (109,042)
OTHER INCOME (EXPENSE):
  Investment and interest income, net.........     1,002          908         259            10,856
  Interest expense............................      (140)        (127)       (137)           (5,495)
  Litigation expense, net.....................       (97)        (888)         --              (985)
  Debt conversion expense.....................        --           --          --            (1,228)
                                                --------     --------     -------         ---------
Net loss......................................  $(12,271)    $(11,144)    $(8,536)      $  (105,894)
                                                ========     ========     =======         =========
Preferred stock dividends.....................      (597)        (725)       (739)           (5,903)
                                                --------     --------     -------         ---------
Net loss applicable to common shares..........  $(12,868)    $(11,869)    $(9,275)      $  (111,797)
                                                ========     ========     =======         =========
Net loss per common share.....................  $   (.98)    $  (1.02)    $ (1.10)      $    (21.02)
                                                ========     ========     =======         =========
Weighted average common shares outstanding....    13,142       11,616       8,449             5,319
                                                ========     ========     =======         =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       23
<PAGE>   25
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                       FEBRUARY 13,
                                                                                           1984
                                                        YEARS ENDED DECEMBER 31,      (INCEPTION) TO
                                                     ------------------------------    DECEMBER 31,
                                                       1995       1994       1993          1995
                                                     --------   --------   --------   --------------
<S>                                                  <C>        <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss.........................................  $(12,271)  $(11,144)  $ (8,536)    $ (105,894)
                                                     ---------  ---------  ---------   -----------
     Adjustments to reconcile net loss to net cash
       (used in) operating activities:
       Depreciation and amortization...............       402        290        456          9,453
       (Increase) decrease in inventories..........      (145)       108        (80)          (538)
       (Increase) decrease in prepaids and other
          assets...................................       699       (922)      (269)          (738)
       Increase in accounts payable and accrued
          liabilities..............................       844      1,120        286          2,000
       Increase (decrease) in deferred revenue.....        --         48       (391)           250
       Compensation expense on stock awards
          and options..............................       184        204        112          1,124
       Return of common stock for license..........        --         --         --         (3,850)
       Debt conversion expense.....................        --         --         --          1,228
       Common stock issued for consulting
          services.................................       239         --        303          2,042
                                                     ---------  ---------  ---------   -----------
          Total adjustments........................     2,223        848        417         10,971
                                                     ---------  ---------  ---------   -----------
  Net cash (used in) operating activities..........   (10,048)   (10,296)    (8,119)       (94,923)
                                                     ---------  ---------  ---------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from (purchases of) short-term
     investments, net..............................     5,786     (1,302)   (10,921)        (8,937)
  Facilities and equipment purchases...............      (129)      (280)      (204)        (8,920)
  Other............................................        --         --         --            (17)
                                                     ---------  ---------  ---------   -----------
  Net cash provided by (used in) investing
     activities....................................     5,657     (1,582)   (11,125)       (17,874)
                                                     ---------  ---------  ---------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of common stock and
     warrants......................................     9,215        635     23,810        100,186
  Proceeds from sale of convertible debentures.....        --         --         --         26,606
  Proceeds from capital lease obligations..........        --         --         --          2,322
  Repayments of capital lease obligations..........       (35)       (44)       (98)        (3,564)
  Proceeds from stock options exercised............       423         95         98          1,373
  Preferred stock issuance costs...................        --         --         --           (792)
  Preferred stock dividends........................      (458)      (727)      (727)        (5,515)
  Repurchase of preferred stock....................        --         --         --           (305)
  Repurchase of common stock.......................        --         --        (12)          (332)
                                                     ---------  ---------  ---------   -----------
  Net cash provided by (used in) financing
     activities....................................     9,145        (41)    23,071        119,979
                                                     ---------  ---------  ---------   -----------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS......................................     4,754    (11,919)     3,827          7,182
CASH AND CASH EQUIVALENTS:
  Beginning of period..............................     2,428     14,347     10,520             --
                                                     ---------  ---------  ---------   -----------
  End of period....................................  $  7,182   $  2,428   $ 14,347     $    7,182
                                                     =========  =========  =========   ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       24
<PAGE>   26
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                    PREFERRED STOCK      COMMON STOCK                                  ACCUMULATED
                                   -----------------   -----------------   ADDITIONAL                    DEFICIT        TOTAL
                                    NUMBER      PAR     NUMBER      PAR     PAID-IN       DEFERRED        SINCE      SHAREHOLDERS'
                                   OF SHARES   VALUE   OF SHARES   VALUE    CAPITAL     COMPENSATION    INCEPTION       EQUITY
                                   ---------   -----   ---------   -----   ----------   ------------   -----------   ------------
<S>                                <C>         <C>     <C>         <C>     <C>          <C>            <C>           <C>
BALANCE, FEBRUARY 13, 1984
  (INCEPTION)....................       --      $--          --    $ --     $     --       $   --       $      --      $     --
Sale of common stock and
  warrants.......................       --       --       6,213     124       65,771           --              --        65,895
Common stock issued in exchange
  for convertible subordinated
  debentures.....................       --       --         438       9        8,094           --              --         8,103
Issuance of common stock to
  consultants and employees for
  services ($.08-$20.00 per
  share).........................       --       --         356       7          271         (134)             --           144
Return of common stock for
  license........................       --       --        (500)    (10 )     (3,840)          --              --        (3,850)
Issuance of restricted common
  stock to employees.............       --       --          90       2          448         (450)             --            --
Exercise of stock options
  ($.40-$20.00 per share)........       --       --         284       5          741           --              --           746
Issuance of stock purchase
  warrants for 91,576 common
  shares ($2.00-$4.80 per
  share).........................       --       --          --      --          200           --              --           200
Issuance of preferred stock in
  exchange for convertible
  subordinated debentures........      791       16          --      --       18,002           --              --        18,018
Repurchase of preferred stock....     (101)      (2)         --      --         (303)          --              --          (305)
Repurchase of common stock.......       --       --         (59)     --         (196)           3              --          (193)
Common stock issued in exchange
  for
  preferred stock................     (392)      (8)        522      10        1,039           --            (855)          186
Amortization of deferred
  compensation...................       --       --          --      --           --          581              --           581
Preferred stock dividends ($2.44
  per share).....................       --       --          --      --           --           --          (3,842)       (3,842)
Net loss.........................       --       --          --      --           --           --         (73,943)      (73,943)
                                      ----      ---      ------    ----     --------        -----       ---------      --------
BALANCE, DECEMBER 31, 1992.......      298        6       7,344     147       90,227           --         (78,640)       11,740
Exercise of stock options
  ($1.50-$5.25 per share)........       --       --          61       1           97           --              --            98
Issuance of common stock to
  consultants for services
  ($8.00-$13.00 per share).......       --       --          30       1          302           --              --           303
Sale of common stock ($5.60-$8.00
  per share).....................       --       --       3,358      67       23,881           --              --        23,948
Exchange of common stock for
  warrants.......................       --       --         750      15         (165)          --              --          (150)
Issuance of compensatory stock
  option ($6.00 per share).......       --       --          --      --          437         (437)             --            --
Amortization of deferred
  compensation...................       --       --          --      --           --          112              --           112
Preferred stock dividends ($2.44
  per share).....................       --       --          --      --           --           --            (739)         (739)
Net loss.........................       --       --          --      --           --           --          (8,536)       (8,536)
                                      ----      ---      ------    ----     --------        -----       ---------      --------
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 common stock for
  preferred 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
                                      ====      ===      ======    ====     ========        =====       =========      ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       25
<PAGE>   27
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                         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 a development stage enterprise. 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 has received no revenues from sales
of its products. 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 United States Food and Drug Administration (the
"FDA") before the Company's products may be sold domestically. Expenses incurred
have been primarily for research and development activities and administration,
resulting in an accumulated deficit of $113.4 million. 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 an original maturity of
three months or less to be cash equivalents.
 
     Capital lease obligations incurred to acquire equipment were $1,381,000
since inception, of which $143,000 and $60,000 occurred in years the 1995 and
1993, respectively.
 
     Interest paid by the Company was $141,000, $127,000 and $135,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
 
     In June 1995, the Company exchanged 90,000 shares of Convertible
Exchangeable Preferred Stock, Series 1, $.02 par value ("Preferred Stock") for
225,000 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.
 
     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
 
                                       26
<PAGE>   28
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
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,
                                                                    ------------------
                                                                     1995       1994
                                                                    ------     -------
        <S>                                                         <C>        <C>
        Federal government and agency securities..................  $6,988     $ 6,421
        Corporate debt securities.................................   1,949       8,302
                                                                    ------      ------
                                                                    $8,937     $14,723
                                                                    ======      ======
</TABLE>
 
     The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. Under SFAS 115, debt securities that the
Company has both the intent and ability to hold to maturity are carried at
amortized cost. As of December 31, 1995, the Company considers all short-term
investments as held-to-maturity securities and amortized cost approximates fair
value. All securities mature within one year. Realized gains and losses
generated from the sale of securities during 1995 that were classified as
available-for-sale at December 31, 1994 were not material.
 
NOTE 4.  ACCRUED LIABILITIES
 
     Accrued liabilities consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                      ---------------
                                                                      1995      1994
                                                                      ----     ------
        <S>                                                           <C>      <C>
        Litigation settlement.......................................  $ --     $1,632
        Compensation................................................   450        379
        Preferred stock dividends...................................    42         62
        Interest....................................................     9         10
        Other.......................................................    30         32
                                                                      ----     ------
                                                                      $531     $2,115
                                                                      ====     ======
</TABLE>
 
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 and $195,000 at December 31, 1995 and 1994, respectively, and
accumulated amortization applicable to such leases was $122,000 and $115,000 at
December 31, 1995 and 1994, 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
$450,000, $418,000 and $405,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
 
                                       27
<PAGE>   29
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Minimum lease payments and the present value of capital lease obligations
as of December 31, 1995 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                    OPERATING     CAPITAL
                                                                     LEASES       LEASES
                                                                    ---------     -------
        <S>                                                         <C>           <C>
        1996......................................................   $   501       $  59
        1997......................................................       501          48
        1998......................................................       501          44
        1999......................................................       501           5
        2000......................................................       476          --
        Thereafter................................................       167          --
                                                                      ------        ----
        Total minimum lease payments..............................   $ 2,647         156
                                                                      ======
        Less: amount representing interes(5%-12% annual interest
          rate)...................................................                   (17)
                                                                                    ----
        Present value of capital lease obligations................                   139
        Less: current portion of capital leases...................                   (51)
                                                                                    ----
        Obligations under capital leases, non-current.............                 $  88
                                                                                    ====
</TABLE>
 
NOTE 6.  REVENUES
 
     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 received 269,000 shares of unregistered NeoRx Common
Stock. In exchange, NeoRx received $2,000,000 upon signing the agreement and
will receive $4,500,000 upon FDA approval to market Verluma in the United
States. In addition, the Company will receive royalties on sales of the product.
The excess of $2,000,000 over the fair value of the shares issued was recorded
as revenue.
 
     In September 1993, NeoRx received a $3,639,000 milestone payment from
Boehringer Ingelheim and issued to Boehringer Ingelheim 234,000 shares of NeoRx
Common Stock. The excess of the amount received over the value of the shares
issued was recorded as revenue.
 
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 $25.80 per share, subject to
adjustment under certain conditions. Interest is payable June 1 and December 1.
The debentures are redeemable, in whole or in part, at any time, at the option
of the Company at 103.9% of par, reducing to par by 1999, together with accrued
interest. The debentures are subordinated in right of payment to any outstanding
senior indebtedness of the Company, as defined in the indenture.
 
NOTE 8.  CONTINGENCIES
 
     Litigation.  On March 27, 1995, the Company was named as an additional
codefendant in an amended complaint filed in the United States District Court
for the Southern District of New York in a class action suit against David
Blech, D. Blech & Co. and a number of other defendants, including 11 publicly
traded biotechnology companies. The complaint seeks damages for alleged unlawful
manipulation of the stock
 
                                       28
<PAGE>   30
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
market prices of the named biotechnology companies. The Company believes that
the claims against it have no factual or legal basis and are without merit. The
Company intends to defend this suit vigorously.
 
     In February 1995, the Company settled a lawsuit filed against it and
certain members of the Board of Directors and officers in May 1994 on behalf of
a class of purchasers of NeoRx Common Stock. Under the terms of the settlement,
NeoRx issued to the class 257,000 shares of NeoRx Common Stock, valued at
$1,500,000, and collected insurance proceeds of $925,000.
 
     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 which may arise
from the use of its products.
 
NOTE 9.  SHAREHOLDERS' EQUITY
 
     Common Stock Transactions.  In October 1995, the Company registered 650,000
shares of Common Stock to be sold from time to time. As of December 31, 1995,
the Company had 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 unregistered
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 NeoRx Common Stock in connection with a license agreement. In December
1993, the Company sold to the public 2,000,000 shares of its Common Stock and
received net proceeds of $14,565,000. In September 1993, NeoRx received a
$3,639,000 milestone payment from Boehringer Ingelheim and issued to Boehringer
Ingelheim 234,000 shares of Common Stock. In June 1993, the Company sold
privately 1,125,000 shares of its Common Stock and received net proceeds of
$8,093,000.
 
     In June 1995, the Company exchanged 90,000 shares of Preferred Stock for
225,000 shares of Common Stock. Also at that time, preferred stock dividends
valued at $159,000 were paid by issuing 29,000 shares of Common Stock.
 
     Preferred Stock.  Holders of Preferred Stock are entitled to receive an
annual cash dividend of $2.4375 per share if declared by the Board of Directors,
payable on June 1 and December 1. Dividends are cumulative. Each share of
Preferred Stock is convertible into approximately 1.14 shares of Common Stock,
subject to adjustment in certain events. The holders of Preferred Stock have no
voting rights, except in limited circumstances. The Preferred Stock is
redeemable at the option of the Company at $25.98 per share, decreasing to
$25.00 per share by 1999.
 
     The Board of Directors 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's 1994 Stock Option Plan (the "1994 Plan")
authorizes the Board of Directors or an Option Committee appointed by the Board
of Directors 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, 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, one half of the option grants becomes exercisable in increments at a
rate of 25% per year over a four-year period from the grant date, and the
remaining one half becomes exercisable nine years from the grant date unless
accelerated by the Option Committee. The exercise price of options granted under
the 1994 Plan is
 
                                       29
<PAGE>   31
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
equal to the fair market value of the Common Stock at the date of grant. As of
December 31, 1995, there were 733,000 shares of Common Stock available for
issuance under the 1994 Plan.
 
     The Company's 1991 Stock Option Plan for Non-Employee Directors, 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. There were 159,000 shares of Common Stock available
for issuance under this plan as of December 31, 1995.
 
     In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," effective for years beginning
after December 15, 1995, was issued. The Company has continued to measure
compensation cost for employee stock compensation plans under the guidelines of
Accounting Principles Board Opinion No. 25, as allowed by SFAS 123. In 1996, the
Company will adopt the disclosure requirements of SFAS 123.
 
     Information relating to activity under the Company's stock option plans is
as follows:
 
<TABLE>
<CAPTION>
                                                                                   OPTION
                                                                                 PRICE RANGE
                                                             SHARES SUBJECT     -------------
                                                               TO OPTION
                                                             --------------
                                                             (IN THOUSANDS)
    <S>                                                      <C>                <C>
    Balance, December 31, 1992.............................         637         $1.50-$21.76
      Granted..............................................         478          8.00- 12.24
      Exercised............................................         (61)         1.50-  5.25
      Canceled.............................................         (51)         5.25- 19.00
                                                                  -----         ------------
    Balance, December 31, 1993.............................       1,003          1.50- 21.76
      Granted..............................................       2,657          2.94-  9.25
      Exercised............................................         (35)         1.50-  2.94
      Canceled.............................................        (640)         1.50- 21.76
                                                                  -----         ------------
    Balance, December 31, 1994.............................       2,985          1.50- 21.76
      Granted..............................................         174          5.13-  6.25
      Exercised............................................        (219)         1.50-  3.75
      Canceled.............................................         (29)         1.50-  9.50
                                                                  -----         ------------
    Balance, December 31, 1995.............................       2,911         $1.50-$21.76
                                                                  =====         ============
</TABLE>
 
     Options to purchase 1,084,000 shares of Common Stock were exercisable at
December 31, 1995.
 
     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 the Company's Common Stock at
a per share exercise price of $15.84 and to acquire 375,000 shares of the
Company's Common Stock at a per share exercise price of $21.12. The warrants
expire in September 1997.
 
                                       30
<PAGE>   32
 
                               NEORX CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
 
                  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,
                                                                 ---------------------
                                                                   1995         1994
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Net operating loss carryforwards.......................  $ 16,700     $ 13,300
        Research and development credits.......................       600          300
        Amortization and depreciation..........................       600          700
        Other..................................................       600          500
                                                                 --------     --------
        Deferred tax asset.....................................    18,500       14,800
        Deferred tax asset valuation allowance.................   (18,500)     (14,800)
                                                                 --------     --------
        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 periods
1999 to 2010. 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 January 1996, the Company issued 370,000 shares of Common Stock and
47,000 shares of Series 2 Convertible Preferred Stock, $.02 par value per share,
in a private transaction and received net proceeds of $6,700,000. In October
1995, the Company registered 650,000 shares of Common Stock to be sold from time
to time, and subsequent to December 31, 1995, 428,000 shares were issued for net
proceeds of $3,512,000.
 
                                       31
<PAGE>   33
 
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 14, 1996, 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 15 and 16 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 14, 1996, 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 Fiscal 1995 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 14, 1996, 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 14, 1996, 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
14, 1996, filed with the Commission pursuant to Section 14(a) of the Exchange
Act.
 
                                    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.
 
                                       32
<PAGE>   34
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                     PAGE NUMBER
                                                                                   OR INCORPORATION
EXHIBIT                                  DESCRIPTION                               BY REFERENCE TO
-------     ---------------------------------------------------------------------  ----------------
<S>         <C>                                                                    <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....      37
 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.................................     ++++
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.............      42
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.............................................................     *****
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...............................       +
</TABLE>
 
                                       33
<PAGE>   35
 
<TABLE>
<CAPTION>
                                                                                     PAGE NUMBER
                                                                                   OR INCORPORATION
EXHIBIT                                  DESCRIPTION                               BY REFERENCE TO
-------     ---------------------------------------------------------------------  ----------------
<S>         <C>                                                                    <C>
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......................................      61
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......................................     ++++
23.1        Consent of Arthur Andersen LLP.......................................      62
</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>
 
                                       34
<PAGE>   36
 
<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.
+++++   Confidential treatment requested
</TABLE>
 
                                       35
<PAGE>   37
 
                                   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/  ROBERT M. LITTAUER
 
                                            ------------------------------------
                                                     Robert M. Littauer
                                                Senior Vice President, Chief
                                              Financial Officer and Treasurer
 
                                                    Date: March 27, 1996
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
 
<TABLE>
<C>                                            <S>                              <C>
             /s/  PAUL G. ABRAMS               President, Chief Executive       March 27, 1996
---------------------------------------------  Officer and Director (Principal
               Paul G. Abrams                  executive officer)
           /s/  ROBERT M. LITTAUER             Senior Vice President, Chief     March 27, 1996
---------------------------------------------  Financial Officer and Treasurer
             Robert M. Littauer                (Principal financial and
                                               accounting officer)
             /s/  FRED B. CRAVES               Chairman of the Board of         March 27, 1996
---------------------------------------------  Directors
               Fred B. Craves
            /s/  JAMES G. ANDRESS              Director                         March 27, 1996
---------------------------------------------
              James G. Andress
             /s/  JACK L. BOWMAN               Director                         March 27, 1996
---------------------------------------------
               Jack L. Bowman
          /s/  LAWRENCE H.N. KINET             Director                         March 27, 1996
---------------------------------------------
             Lawrence H.N. Kinet
           /s/  CARL-HEINZ POMMER              Director                         March 27, 1996
---------------------------------------------
              Carl-Heinz Pommer
</TABLE>
 
                                       36