**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

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**ý****                      ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended June 30, 2005**

 

**CommissionFile No. 0-16614**

 

**NEORX CORPORATION**

(Exact name of Registrant as specified in itscharter)

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

** **

**300 ElliottAvenue West, Suite 500, Seattle, Washington 98119-4114**

(Address of principal executive offices)

 

Registrant’s telephone number, including areacode:**(206) 281-7001**

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes                            ý                                    No                                o

 

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

 

Yes                            ý                                    No                                o

 

As of August 5, 2005, 34,228,953 shares of theRegistrant’s common stock, $.02 par value per share, were outstanding.

 

 

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**TABLE OFCONTENTS**

 

**QUARTERLYREPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED JUNE 30, 2005**

 
| **PART I** | **FINANCIAL  INFORMATION** | ** **                                                                                                                   |       |
|-----------------|----------------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|            |                       |                                                                                                                         |       |
|            | Item 1.                    | Financial Statements:                                                                                                        |       |
|            |                       |                                                                                                                         |       |
|            |                       | Condensed  Consolidated Balance Sheets as of June 30, 2005 and December 31,  2004 (unaudited)                      |       |
|            |                       |                                                                                                                         |       |
|            |                       | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2005 and 2004 (unaudited) |       |
|            |                       |                                                                                                                         |       |
|            |                       | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2005 and 2004 (unaudited)           |       |
|            |                       |                                                                                                                         |       |
|            |                       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                            |       |
|            |                       |                                                                                                                         |       |
|            | Item 2.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |       |
|            |                       |                                                                                                                         |       |
|            | Item 3.                    | Quantitative and  Qualitative Disclosures About Market Risk                                                                  |       |
|            |                       |                                                                                                                         |       |
|            | Item 4.                    | Controls and Procedures                                                                                                      |       |
|            |                       |                                                                                                                         |       |
|            | **PART II**           | **OTHER INFORMATION**                                                                                                        | ** ** |
|            | ** **                 | ** **                                                                                                                   | ** ** |
|            | Item 4.                    | Submission of  Matters to a Vote of Security Holders                                                                         |       |
|            |                       |                                                                                                                         |       |
|            | Item 5.                    | Other Information                                                                                                            |       |
|            |                       |                                                                                                                         |       |
|            | Item 6.                    | Exhibits                                                                                                                     |       |
|            |                       |                                                                                                                         |       |
|            | Signatures                 |                                                                                                                         |       |
|            |                       |                                                                                                                         |       |
|            | Exhibit Index         |                                                                                                                         |       |
|                 |                            |                                                                                                                              |            |  |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

 

**NEORXCORPORATION AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(in thousands, except share data)(unaudited)

 
| ** **                                                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                            |       |                    |       |                        |       |
| **Current assets:**                                                                                                                                                                   |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                       | 11,486     |                        | $          | 16,254 |   |
| Investment securities                                                                                                                                                                 |       | —                  |       | 1,499                       |       |
| Prepaid expenses and other current assets                                                                                                                                             |       | 765                     |       | 639                         |       |
| Total current assets                                                                                                                                                                  |       | 12,251                  |       | 18,392                      |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Facilities and equipment, net                                                                                                                                                         |       | 324                     |       | 7,102                       |       |
| Other assets                                                                                                                                                                          |       | 67                      |       | 67                          |       |
| Assets held for sale                                                                                                                                                                  |       | 3,027                   |       | —                      |       |
| Licensed products, net of accumulated amortization  of $208 and $125                                                                                                                  |       | 1,792                   |       | 1,875                       |       |
| **Total assets**                                                                                                                                                                      |       | $                       | 17,461     |                        | $          | 27,436 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                         |       |                    |       |                        |       |
| **Current liabilities:**                                                                                                                                                              |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                      |       | $                       | 598        |                        | $          | 1,130 |   |
| Accrued liabilities                                                                                                                                                                   |       | 2,316                   |       | 1,271                       |       |
| Current portion of note payable                                                                                                                                                       |       | 262                     |       | 302                         |       |
| Total current liabilities                                                                                                                                                             |       | 3,176                   |       | 2,703                       |       |
| **Long-term liabilities:**                                                                                                                                                            |       |                    |       |                        |       |
| Note payable, net of current portion                                                                                                                                                  |       | 3,839                   |       | 3,905                       |       |
| **Shareholders’ equity:**                                                                                                                                                        |       |                    |       |                        |       |
| Preferred stock, $.02 par value, 3,000,000 shares  authorized:                                                                                                                        |       |                    |       |                        |       |
| Convertible preferred stock, Series 1,  205,340 shares issued and outstanding at June 30, 2005 and  December 31, 2004 (entitled in liquidation to $5,175)              |       | 4                       |       | 4                           |       |
| Convertible preferred stock, Series B, 1,575  shares issued and outstanding at June 30, 2005 and December 31,  2004 (entitled in liquidation to $15,750)               |       | —                  |       | —                      |       |
| Common stock, $.02 par value, 150,000,000 shares  authorized, 34,228,953 and 30,908,753 shares issued and outstanding at  June 30, 2005 and December 31, 2004, respectively |       | 684                     |       | 618                         |       |
| Additional paid-in capital                                                                                                                                                            |       | 258,240                 |       | 254,510                     |       |
| Accumulated deficit, including other comprehensive  loss of $0 and $1 at June 30, 2005 and December 31, 2004,  respectively                                                 |       | (248,482                | )          | (234,304                    | )          |
| Total shareholders’ equity                                                                                                                                                       |       | 10,446                  |       | 20,828                      |       |
| **Total liabilities and  shareholders’ equity**                                                                                                                                  |       | $                       | 17,461     |                        | $          | 27,436 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(unaudited)

(inthousands, except share data)

 
| ** **                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| **Revenues**                                  |       | $                                     | 2          |                                | $          | 508 |   | $ | 2 |   | $ | 1,008 |   |
| ** **                                    |       |                                  |       |                                |       |   |   |   |   |
| **Operating expenses:**                       |       |                                  |       |                                |       |   |   |   |   |
| Research and development                      |       | 2,376                                 |       | 3,109                               |       | 5,721 |   | 6,891 |   |
| General and administrative                    |       | 1,661                                 |       | 2,004                               |       | 3,422 |   | 3,681 |   |
| Asset impairment loss                         |       | 3,346                                 |       | —                              |       | 3,346 |   | — |   |
| Restructuring                                 |       | 1,504                                 |       | —                              |       | 1,504 |   | — |   |
| Total operating expenses                      |       | 8,887                                 |       | 5,113                               |       | 13,993 |   | 10,572 |   |
| Loss from operations                          |       | (8,885                                | )          | (4,605                              | )          | (13,991 | ) | (9,564 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| **Other income (expense):**                   |       |                                  |       |                                |       |   |   |   |   |
| Interest income                               |       | 98                                    |       | 73                                  |       | 191 |   | 149 |   |
| Interest expense                              |       | (66                                   | )          | (50                                 | )          | (129 | ) | (97 | ) |
| Total other income                            |       | 32                                    |       | 23                                  |       | 62 |   | 52 |   |
| Net loss                                      |       | (8,853                                | )          | (4,582                              | )          | (13,929 | ) | (9,512 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Preferred stock dividends                     |       | (125                                  | )          | (125                                | )          | (250 | ) | (250 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Net loss applicable to common shares          |       | $                                     | (8,978     | )                                   | $          | (4,707 | ) | $ | (14,179 | ) | $ | (9,762 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Loss per share applicable to common shares:   |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted                             |       | $                                     | (0.26      | )                                   | $          | (0.16 | ) | $ | (0.43 | ) | $ | (0.33 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Shares used in calculation of loss per share: |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted                             |       | 34,229                                |       | 30,358                              |       | 33,018 |   | 29,639 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

(in thousands)

 
| ** **                                                                   | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                         |       |                                |       |   |   |
| **Cash flows from operating  activities:**                                   |       |                                |       |   |   |
| Net loss                                                                     |       | $                                   | (13,929    | ) | $ | (9,512 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                |       | 321                                 |       | 382 |   |
| Loss on disposal of equipment                                                |       | 16                                  |       | — |   |
| Asset impairment loss                                                        |       | 3,346                               |       | — |   |
| Restructuring                                                                |       | 1,116                               |       | — |   |
| Stock options and warrants issued for services                               |       | (22                                 | )          | (8 | ) |
| Stock-based employee compensation                                            |       | 5                                   |       | 340 |   |
| Change in operating assets and liabilities:                                  |       |                                |       |   |   |
| Prepaid expenses and other assets                                            |       | 102                                 |       | 442 |   |
| Accounts payable                                                             |       | (532                                | )          | (35 | ) |
| Accrued liabilities                                                          |       | (71                                 | )          | 262 |   |
| Net cash used in operating activities                                        |       | (9,648                              | )          | (8,129 | ) |
|                                                                         |       |                                |       |   |   |
| **Cash flows from investing  activities:**                                   |       |                                |       |   |   |
| Proceeds from sales and maturities of investment  securities                 |       | 1,500                               |       | 7,695 |   |
| Purchases of investment securities                                           |       | —                              |       | (29 | ) |
| Facilities and equipment purchases                                           |       | (77                                 | )          | (164 | ) |
| Licensed products                                                            |       | —                              |       | (1,000 | ) |
| Net cash provided by investing activities                                    |       | 1,423                               |       | 6,502 |   |
|                                                                         |       |                                |       |   |   |
| **Cash flows from financing  activities:**                                   |       |                                |       |   |   |
| Proceeds from stock options and warrants exercised                           |       | —                              |       | 380 |   |
| Repayment of note payable principal                                          |       | (106                                | )          | (163 | ) |
| Preferred stock dividends                                                    |       | (250                                | )          | (250 | ) |
| Net proceeds from issuance of common stock and  warrants                     |       | 3,813                               |       | 9,042 |   |
| Net cash provided by financing activities                                    |       | 3,457                               |       | 9,009 |   |
|                                                                         |       |                                |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                        |       | (4,768                              | )          | 7,382 |   |
|                                                                         |       |                                |       |   |   |
| **Cash and cash equivalents:**                                               |       |                                |       |   |   |
| Beginning of period                                                          |       | 16,254                              |       | 15,166 |   |
| End of period                                                                |       | $                                   | 11,486     |   | $ | 22,548 |   |
|                                                                         |       |                                |       |   |   |
| **Supplemental disclosure of  non-cash financing activity:**                 |       |                                |       |   |   |
| Accrual of preferred dividend                                                |       | $                                   | 250        |   | $ | 250 |   |
| Cash paid for interest                                                       |       | $                                   | 134        |   | $ | 97 |   |
| Purchase of Licensed Products with common stock                              |       | $                                   | —     |   | $ | 1,000 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**NEORX CORPORATION AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

# **Note 1.Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of NeoRx Corporation and subsidiary (the Company). All intercompanybalances and transactions have been eliminated in consolidation.

 

The Company has historicallysuffered recurring operating losses and negative cash flows from operations. Asof June 30, 2005, the Company had net working capital of $9.1 million andhad an accumulated deficit of $248.5 million with total shareholders’ equity of$10.4 million. These consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States,assuming that the Company will continue as a going concern.

 

While management believes that current cash and cashequivalent balances, and any net cash provided by operations, will provideadequate resources to fund operations at least until December 31, 2005,this may not be the case. Management is therefore contemplating a number ofalternatives to enable the Company to continue operating, including:

 

•      raising additional capital to fund continuing operations by privateplacements or other sales of equity or debt securities or through theestablishment of other funding facilities;

 

•      entering into strategic collaborations, which may include jointventures or partnerships for product development and commercialization, merger,sale of assets or other similar transactions; and

 

•      obtaining additional capital resources to fund operations through costcutting mechanisms, including  the delay,reduction or curtailment of  theCompany’s  current and planned productdevelopment programs.

 

OnMay 6, 2005, the Company announced the implementation of a strategicrestructuring plan to refocus the Company’s resources on the development ofpicoplatin (NX 473). This restructuring included the discontinuation of theCompany’s skeletal targeted radiotherapy (STR) development program, includinghalting further patient enrollment in the Company’s Phase III trial of STR inmultiple myeloma, ceasing operations at the Company’s Denton, Texas  facility, where STR was manufactured, andreducing the Company’s workforce by 21 employees, leaving a post-restructuringworkforce of 29 employees. The Company expanded its restructuring activitiesunder the plan in June 2005 to include the termination of 4 additionalemployees. Under the plan, the Company will conserve its financial resources tofocus on its picoplatin clinical program, including its Phase II trial ofpicoplatin in small cell lung cancer, which was initiated in June 2005.The Company recorded a restructuring charge of $1,504,000 during the periodended June 30, 2005.

 

TheCompany evaluated its STR assets in light of the restructuring and determinedthat the related assets were impaired. A charge of $3,346,000 againstoperations was recognized in June 2005 to reflect the impairment. Futureadjustments to the charge may be taken as the assets involved are sold orotherwise disposed of. The Company is actively seeking a buyer for the Dentonfacility and its STR related assets (see Note 5). However, given the inherentuncertainty of the timing of a sale of the Denton facility, we have classifiedthis asset as long term.

 

The Company is continuing to evaluate other areaswhere expenses can be reduced. The Company will require additional funding tosupport the development of picoplatin.

 

The Company’s inability to obtain additional cash asneeded could have a material adverse effect on its financial position, resultsof operations and its ability to continue in existence. The accompanyingcondensed consolidated financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

 

Subject to the foregoing, the accompanying condensedconsolidated financial statements contained herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission(SEC). Certain information and note disclosures normally included in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted

 

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pursuantto those rules and regulations, although the Company believes that thedisclosures made are adequate to make the information presented not misleading.These financial statements should be read in conjunction with the Company’sannual report on Form 10-K for the year ended December 31, 2004 filedwith the SEC and available on the SEC’s website, www.sec.gov.

 

The accompanying condensed consolidated financialstatements have been prepared without audit. In the opinion of management, thecondensed consolidated financial statements reflect all adjustments, consistingonly of normal recurring accruals necessary to present fairly the Company’sfinancial position as of June 30, 2005 and the results of operations andcash flows for the periods ended June  30, 2005 and 2004.

 

The results of operations for the periods endedJune 30, 2005 and 2004 are not necessarily indicative of the expectedoperating results for the full year.

 

*Estimates and Uncertainities:*  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

*Stock Based Compensation*:  TheCompany accounts for its stock option plans for employees in accordance withthe provisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.Compensation expense related to employee stock options is recorded if, on thedate of grant, the fair value of the underlying stock exceeds the exerciseprice. The Company applies the disclosure-only requirements of Statement ofFinancial Accounting Standard (SFAS) No. 123, “Accounting for Stock-BasedCompensation,” and related interpretations, which allows entities to continueto apply the provisions of APB Opinion No. 25 for transactions withemployees and to provide pro forma results of operations disclosures foremployee stock option grants as if the fair-value based method of accounting inSFAS No. 123 had been applied to these transactions. Stock compensationcosts related to fixed employee awards with pro rata vesting are recognized ona straight-line basis over the period of benefit, generally the vesting periodof the options. For options and warrants issued to non-employees, the Companyrecognizes stock compensation costs utilizing the fair value methodologyprescribed in SFAS No. 123 over the related period of benefit.

 

Had compensation cost for these stock option plansfor employees been determined using the fair value based method of accountingunder SFAS No. 123, the Company’s net loss applicable to common shares andloss per share would have been the pro forma amounts indicated below (inthousands, except per share data): 

 
| ** **                                                                                         | ** ** | **Quarter  Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss applicable to common shares:                                                              |       |                             |       |                                |       |   |   |   |   |
| As reported                                                                                        |       | $                                | (8,978     | )                                   | $          | (4,707 | ) | $ | (14,179 | ) | $ | (9,762 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                      |       | 5                                |       | 340                                 |       | 5 |   | 340 |   |
| Deduct: Stock-based employee compensation  determined under fair value based method for all awards |       | (237                             | )          | (612                                | )          | (620 | ) | (957 | ) |
| Pro forma                                                                                          |       | $                                | (9,210     | )                                   | $          | (4,979 | ) | $ | (14,794 | ) | $ | (10,379 | ) |
| Loss per common share, basic and diluted:                                                          |       |                             |       |                                |       |   |   |   |   |
| As reported                                                                                        |       | $                                | (0.26      | )                                   | $          | (0.16 | ) | $ | (0.43 | ) | $ | (0.33 | ) |
| Pro forma                                                                                          |       | $                                | (0.27      | )                                   | $          | (0.16 | ) | $ | (0.45 | ) | $ | (0.35 | ) |

 

The per share weighted-average fair value of stockoptions granted during the three months ended and six months endedJune 30, 2005 and 2004 was $0.49, $1.98, $0.84, and $2.25, respectively,on the grant date using the Black-Scholes option pricing model with thefollowing weighted average assumptions:

 

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| ** **              | ** ** | **Quarter  Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected dividend rate  |       | 0.0                               | %          | 0.0                                  | %          | 0.0 | % | 0.0 | % |
| Risk-free interest rate |       | 3.67                              | %          | 3.49                                 | %          | 3.81 | % | 3.47 | % |
| Expected volatility     |       | 124.7                             | %          | 122.0                                | %          | 123.4 | % | 122.1 | % |
| Expected life in years  |       | 3.00                              |       | 4.00                                 |       | 3.41 |   | 4.00 |   |

 

# **Note 2. LossPer Common Share**

 

Basic and diluted loss per share are based on netloss applicable to common shares, which is comprised of net loss and preferredstock dividends in all periods presented. Shares used to calculate basic lossper share are based on the weighted average number of common shares outstandingduring the period. Shares used to calculate diluted loss per share are based onthe potential dilution that would occur upon the exercise or conversion ofsecurities into common stock using the treasury stock method. The calculationof diluted loss per share excludes the effect of the following stock optionsand warrants to purchase additional shares of common stock because the shareincrements would not be dilutive.

 
| ** **            | ** ** | **Quarter  Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Common stock options  |       | 4,225,629                        |       | 4,174,192                           |       | 4,225,629 |   | 4,174,192 |   |
| Common stock warrants |       | 3,225,400                        |       | 1,587,500                           |       | 3,225,400 |   | 1,587,500 |   |

 

In addition, 234,088 shares of common stock thatwould be issuable upon conversion of the Company’s Series 1 preferredstock are not included in the calculation of diluted loss per share for theperiods ended June 30, 2005 and 2004, respectively, and the 3,446,389and 3,150,000 shares of common stock that would be issuable upon conversion ofthe Company’s Series B preferred stock are not included in the calculationof diluted loss per share for the periods ended June 30, 2005 and 2004,respectively, because the effect of including such shares would not bedilutive.

 

**Note 3. Comprehensive Loss**

 

The Company’s comprehensive loss for the quartersended June 30, 2005 and 2004 was $8,853,000 and $4,589,000, respectively.The comprehensive loss for the quarters ended June 30, 2005 and 2004consisted of net loss of $8,853,000 and $4,582,000, respectively, and a netunrealized loss on investment securities of $0 and $7,000, respectively. Thecomprehensive loss for the six months ended June 30, 2005 and 2004 was$13,928,000 and $9,513,000, respectively. The comprehensive loss for the sixmonths ended June 30, 2005 and 2004 consisted of net loss of $13,929,000and $9,512,000, respectively, and a net unrealized gain on investmentsecurities of $1,000 and a net unrealized loss on investment securities of$1,000, respectively.

 

# **Note 4.Common Stock Private Placement**

# ** **

The Company raised approximately $3,800,000 in netproceeds from the sale of 3,320,000 shares of common stock in a privateplacement transaction in March 2005 (the March 2005 Financing). Inconnection with this private placement, the Company issued five-year warrantsto purchase an aggregate of 1,328,000 shares of common stock at an exerciseprice of $2.00 per share. The warrants are exercisable beginning onSeptember 3, 2005 and, thereafter, are exercisable at any time during theirterm. The Company intends to use the net proceeds from the financing added toits existing funds to support the current Phase II trial in picoplatin (NX 473)in small cell lung cancer and for general working capital, includingrestructuring costs associated with the Company’s termination of its STRdevelopment program (see Note 1 above). The 3,320,000 shares of common stockissued in the March 2005 Financing, and the shares of common stockissuable upon exercise of the warrants related thereto, have been

 

8

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registeredwith the SEC.

 

# **NOTE 5.Asset Impairment Loss**

# ** **

In June 2005, the Company recognized an assetimpairment loss of $3,346,000 on certain facilities and equipment resultingfrom the Company’s decisions to terminate all of its STR programs. The loss onthe Denton manufacturing facility and related equipment was determined from anappraisal study commissioned by the Company as well as management reviews withthe assistance of outside commercial real estate brokers. The Company used afair value of $3,300,000 for the Denton facility in determining the impairmentloss. This valuation was the result of weighting the range of values in theappraisal study, which varied from $3,100,000 to $5,000,000. The loss on theequipment at the Seattle facility was determined via estimates of potentialsales values of used equipment. These impairment charges established new costbases for the impaired assets, which are reported in Assets Held for Sale andother current assets on the accompanying Condensed Consolidated Balance Sheet.The Company is actively seeking a buyer for the Denton facility and its STRrelated assets. However, given the inherent uncertainty of the timing of a saleof the Denton facility, we have classified this asset as long term.

 

The following table summarizes information relatedto the impairment charges:

 
| **Description**                                     | ** ** | **Impairment  Loss** | ** ** | **Post  Impairment  Carrying Value** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|--------------------------------------|------------|
|                                                |       |                 |       |                                 |       |
| Equipment – Seattle, WA                        |       | $                    | 155,000    |                                 | $          | 45,000 |   |
| Equipment – Manufacturing Facility, Denton, TX |       | 589,000              |       | 183,000                              |       |
| Manufacturing Facility – Denton, TX            |       | 2,602,000            |       | 3,027,000                            |       |
| Total                                               |       | $                    | 3,346,000  |                                 | $          | 3,255,000 |   |

 

# **NOTE 6.Restructuring**

 

In May and June 2005, the Companyrestructured its operations and reduced its work force by 50% in connectionwith the implementation of its restructuring plan to refocus resources ondevelopment of picoplatin (NX 473) and discontinue its STR development program.The employees terminated as part of the reduction of staff were no longer withthe Company at June 30, 2005 and will not be providing future services tothe Company. The Company incurred termination benefits charges of totaling$892,000 as related to the reduction in staff in May and June 2005.Of this amount, $678,000 remained unpaid as of June 30, 2005, which willbe paid within one year.  The Companyincurred additional, non-employee charges totaling $612,000 related to thediscontinuation of its STR clinical trials, the closure of itsradiopharmaceutical manufacturing plant and other assets located in Denton, TXand a research facility in Seattle, primarily consisting of contracttermination and de-commissioning costs. Of this amount, $438,000 remainedunpaid as of June 30, 2005, which will be paid within one year. 

 

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The following table summarizes the change in therestructuring accrual from initial recognition through June 30, 2005:

 
| **Description**                           | ** ** | **Initial  Restructuring  Charge** | ** ** | **Payment  of  Restructuring  Obligations** | ** ** | **Accrued  Restructuring  Charge as of  June 30, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------|------------|
|                                      |       |                               |       |                                        |       |                                                         |       |
| Employee termination benefits             |       | $                                  | 892,000    |                                        | $          | (214,000                                                     | )          | $ | 678,000 |   |
| Contract termination costs                |       | 378,000                            |       | (171,000                                    | )          | 207,000                                                      |       |
| Other termination and consolidation costs |       | 234,000                            |       | (3,000                                      | )          | 231,000                                                      |       |
| Sub-total                                 |       | 612,000                            |       | (174,000                                    | )          | 438,000                                                      |       |
| Total                                     |       | $                                  | 1,504,000  |                                        | $          | (388,000                                                     | )          | $ | 1,116,000 |   |

 

# **Note 7.Liquidity**

 

The Company will need to raise additional capital orenter into strategic partnerships for the clinical development of itspicoplatin platinum compound, and to fund its future operating cash needs.

 

The Company raised approximately $9,000,000 in netproceeds from the sale of common stock and warrants in a private placementtransaction in February 2004. The Company raised approximately $3,800,000in net proceeds from the sale of common stock and warrants in March 2005.

 

In connection with its 2001 purchase of theradiopharmaceutical manufacturing plant and other assets located in Denton, TX,the Company assumed $6,000,000 principal amount of restructured debt held by TexasState Bank, McAllen, TX. The loan, which matures in April 2009, is securedby the assets acquired in the transaction. The interest rate on the loan was6.00% on June 30, 2005. The interest rate, which is equal to the bankprime rate and is adjusted on the same date that the bank prime rate changes asreported in the Wall Street Journal, was 6.25% on August 5, 2005. The loanprovides for a maximum annual interest rate of 18%. Principal and interest arepayable in monthly installments. Principal and interest paid on the note duringthe quarters ended June 30, 2005 and 2004 totaled $126,000 and $115,000,respectively. In December 2003, the Company sold a non-essential portionof the Denton facility, the proceeds of which ($827,000) were applied to reducethe outstanding balance on the loan. As of June 30, 2005, the outstandingbalance of the loan was $4,100,000. The fixed monthly payments on the note arerecalculated in April of each year based on the then current bank primeinterest rate and outstanding note balance. Because the loan is amortized overa fourteen-year period from its inception, a principal balance will remain atmaturity in April 2009. Based on an interest rate of 6.25% (effectiveJuly 1, 2005),******theestimated principal balance payable at maturity would be $3,068,000.

 

The terms of the Texas State Bank loan provide thatan event of default may be deemed to occur if the Company abandons, vacates ordiscontinues operations on a substantial portion of the Denton facility orthere is a material adverse change in the Company’s operations. If this were tooccur, Texas State Bank could declare the entire outstanding amount of the loan($4.1 million at June 30, 2005) due and immediately payable. In such case,the Company’s cash resources and assets could be impaired depending on itsability to raise funds through a sale of the Denton facility or other means.Texas State Bank has confirmed that it will not declare the loan in defaultbased solely on the Company’s suspension, either temporarily or permanently, ofmanufacturing activities at the Denton facility. Additionally, the Company doesnot believe that its strategic restructuring announced in May 2005constitutes a material adverse change in the Company’s operations or wouldaffect the Company’s ability to continue to make payments under the loan, whichwould cause Texas State Bank to accelerate the loan, nor has Texas State Bankindicated that it views the restructuring as such. The Company can provide noassurance, however, that Texas State Bank will not some time in the future seekto rely on these or other provisions to declare the Company in default of theloan.

 

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As a result of the restructuring and the decision todiscontinue its STR development program, the Company has ceased manufacturingoperations at the Denton TX facility and initiated efforts to market thebuilding and STR assets. The Company has received a preliminary appraisal ofthe Denton facility. The preliminary appraisal values range from $3.0 millionas a general purpose facility to $5.0 million as a special purpose facility.Given the information available, we believe it is most likely that we wouldreceive proceeds toward the lower end of that range. There can be no assurancethat the sale proceeds, if any, received by the Company from the sale of theDenton facility and assets will be sufficient to satisfy the outstandingbalance of the Texas State Bank loan.

 

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

 

•      the scope and timing of the Company’spicoplatin clinical program and other research and development efforts,including the progress and costs of the Company’s current Phase II trial ofpicoplatin in small cell lung cancer;

 

•      the Company’s ability to obtain clinicalsupplies of picoplatin drug product in a timely and cost-effective manner;

 

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

 

•      the costs of the restructuring announced inMay 2005, including the costs associated with discontinuing the STRdevelopment program, reducing the workforce and closing and decommissioning theDenton, Texas manufacturing facility, as well as the timing and amounts ofproceeds from the sale of the Denton facility and assets;

 

•      the Company’s alternatives with respect tothe STR assets, including any potential disposition or outlicensingalternatives and the timing, type and amount of consideration received andother terms of any such transactions;

 

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

 

•      the Company’s degree of success incommercializing picoplatin or any other cancer therapy product candidates;

 

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

 

•      the acquisition or in-licensing of otherproducts or intellectual property, if the Company chooses to undertake suchactivities; and

 

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

 

There can be no assurance that the Company will beable to obtain needed additional capital or enter into relationships withcorporate partners on a timely basis, on favorable terms, or at all. Conditionsin the capital markets in general and the life science capital marketspecifically may affect the Company’s potential financing sources andopportunities for strategic partnering. If we are unable to obtain sufficientcash when needed to fund our operations, we may be forced to seek protectionfrom creditors under the bankruptcy laws.

 

**Note 8. Recent Accounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards (SFAS) No.123R, Share-Based Payment.SFAS 123R replaces SFAS 123, Stock-Based Compensation, issued in 1995. SFAS123R requires that the fair value of the grant of employee stock options bereported as an expense in the results of operations. Historically, the Companyhas disclosed in its footnotes the pro forma expense effect of the grants.Stock compensation expense under the prior rules would have increasedreported diluted loss per share by $.01 for the quarter endedJune 30, 2005. Upon adoption of the revised standard, stock optionawards

 

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willbe charged to expense under the revised rules, which require that an expense berecognized equal to the fair value of the award. The Company has not determinedthe effect of the new standard on its earnings; however, expense under the newstandard will be higher. The effect of adopting the new rules on reporteddiluted earnings per share is dependent on the number of options granted in thefuture, the terms of those awards, and their fair values and, therefore, theeffect on diluted earnings per share could change. The adoption of theStatement is expected to have a material effect on the financial statements.

 

InApril 2005, the SEC approved a rule that delayed the effectivedate of SFAS No. 123R for public companies. As a result, the Companyexpects to adopt the revised rules on January 1, 2006.

 

**Note 9. Subsequent Event**

 

OnAugust 4, 2005, the Company entered into a Research Funding and OptionAgreement with The Scripps Research Institute (TSRI). Under the agreement, theCompany has agreed to provide TSRI an aggregate of $2.5 million over a 26-monthperiod to fund research relating to synthesis and evaluation of novel smallmolecule, multi-targeted protein kinase inhibitors as therapeutic agents,including for the treatment of cancer. The Company has the option to negotiatea worldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by the Company to TSRIquarterly in accordance with a negotiated budget, which provides for an initialpayment of $137,500 on August 8, 2005 and aggregate payments of $1,012,500and $1,350,000 in 2006 and 2007, respectively.

 

Unlessearlier terminated, the agreement will continue until October 1, 2007, andcan be extended by mutual agreement of the parties. The agreement may beterminated at any time by mutual written consent of the parties. The agreementmay be terminated by TSRI if the Company fails to make payments due under theagreement, subject to 30 days’ written notice to cure such nonpayment.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

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

 

Although we believe the expectations reflected inthe forward-looking statements are reasonable, we cannot guarantee futureresults, levels of activity, performance or achievements. You should not placeundue reliance on our forward-looking statements, which speak only as of thedate of this report. We undertake no obligation to update publicly anyforward-looking statements to reflect new information, events or circumstancesafter the date of this report, or to reflect the occurrence of unanticipatedevents.

 

NeoRx and STR are our trademarks or registeredtrademarks in the United States and/or foreign countries.

 

***Critical Accounting Policies andEstimates***

 

Our critical accounting policies and estimates havenot changed from those reported in our Annual Report on Form 10-K for theyear ended December 31, 2004. For a more complete description, pleaserefer to our Annual Report on Form 10-K.

 

# ***Strategic Restructuring***

# ** **

OnMay 6, 2005, we announced the implementation of a strategic restructuringplan to refocus our resources on the development of picoplatin (NX 473). Thisrestructuring included the discontinuation of our Skeletal TargetedRadiotherapy (STRTM) development program, including halting further patientenrollment in our Phase III trial of STR in multiple myeloma, ceasingoperations at our Denton, Texas facility, where STR was manufactured, and reducing our workforce by 21employees, leaving a post-restructuring workforce of 29 employees. Under theplan, we will conserve our financial resources to focus on our picoplatinclinical program, including our Phase II trial of picoplatin in small cell lungcancer, which was initiated in June 2005. We recorded a restructuringcharge of approximately $1.5 million during the period ended June 30,2005.

 

Wehave evaluated our STR assets in light of the restructuring and have determinedthat a likely impairment exists on those assets. A charge of approximately $3.3million was taken against operations in June 2005 to reflect suchimpairment. Future adjustments to the charge may be taken as the assets involvedare sold or otherwise disposed of. We are actively seeking a buyer for theDenton facility and our STR related assets. However, given the inherentuncertainty of the timing of a sale of the Denton facility, we have classifiedthis asset as long term.

 

Weare continuing to evaluate other areas where additional expenses can bereduced. We will require additional funding to support the development ofpicoplatin.

 

###### ***Results of Operations***

###### *** ***

###### ***Quarter and six months ended June 30, 2005 compared toquarter and six months ended June 30, 2004***

###### *** ***

Revenue for the second quarter of 2005 was $2,000,compared with $0.5 million for the second quarter of 2004. Revenue for the sixmonths ended June 30, 2005 was $2,000, compared with $1.0 million for thesix months ended June 30, 2004. Revenue for the quarter and six monthsended June 30, 2005 consisted of royalties from out-licensed intellectualproperty. Revenue for the second quarter of 2005 and first six months of 2004consisted of milestone payments from Boston Scientific Corporation.

** **

Total operating expenses for the second quarter of2005 increased 74% to $8.9 million, from $5.1 million for the second quarter of2004, and increased 32% to $14.0 million for the six months ended June 30,2005, from $10.6 million for the same period in 2004. Total operating expensesfor the quarter and six months ended June 30, 2005 included a non-cashasset impairment charge of $3.3 million. Additionally, a restructuring chargeof $1.5 million was incurred relating to termination benefits for the reductionin staff completed in May and June 2005 and

 

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forother costs related to the termination of STR programs.

 

Research and development (R&D) expensesdecreased 24% to $2.4 million for the second quarter of 2005, from $3.1 millionfor the second quarter of 2004, and decreased 17% to $5.7 million for the sixmonths ended June 30, 2005, from $6.9 million for the same period in 2004.The decrease in R&D expenses for the second quarter of 2005 and six monthsended June 30, 2005 resulted from lower clinical costs due to thetermination of our STR clinical program, including our STR Phase III trial inmultiple myeloma.

 

Generaland administrative (G&A) expenses decreased 17% to $1.7 million for thesecond quarter of 2005, from $2.0 million for the second quarter of 2004, anddecreased 7% to $3.4 million for the first six months of 2005, compared with$3.7 million for the same period in 2004. The reduction in G&A costs for2005 is due primarily to reductions both in personnel and in consultantactivity.

 

Cashand investment securities as of June 30, 2005 were $11.5 million, comparedwith $17.8 million at December 31, 2004. In March 2004, we raisedapproximately $3.8 million in net proceeds through the sale in a privateplacement of 3,320,000 shares of common stock. The purchasers in that offeringalso received five-year warrants to purchase an aggregate of 1,328,000 sharesof common stock at $2.00 per share. The Company will require additional fundsfor its picoplatin clinical program, which was initiated in June 2005. Inthe event that sufficient additional funds are not obtained, the Company may berequired to delay, reduce or curtail the scope of its picoplatin clinicalprogram and other product development efforts.

 

***Major Research and DevelopmentProjects***

 

Our major research and development project throughMay 6, 2005 and during the fiscal quarter ended June 30, 2004 wasSTR, a bone-targeting radiotherapeutic. On May 6, 2005, we announced theimplementation of a strategic restructuring program to refocus our resources onthe development of picoplatin (NX 473), a next-generation platinum-based cancertherapy. This restructuring included the discontinuation of our STR developmentprogram, including halting further patient enrollment in our Phase III trial ofSTR in multiple myeloma, ceasing operations at our Denton facility, where STRis manufactured, and reducing our workforce to 29 employees. Under the plan, wewill conserve our financial resources to focus on our picoplatin clinicalprogram, including our Phase II trial of picoplatin in small cell lung cancer,which was initiated in June 2005. We have incurred costs of approximately$58.2 million in connection with the STR program since the program’s inceptionin 1998.

 

Total estimated costs to complete the STR clinicaltrial and potentially obtain marketing approval were in the range of $35-40million, including cost of clinical drug supply. These costs would have beensubstantially higher if we were required to repeat, revise or expand the scopeof our trials, or conduct additional clinical trials. The termination of theSTR development program will relieve us of the annual costs associated with theprogram, including manufacturing, clinical trial and personnel costs. During2004, these costs were approximately $10.2 million. For 2005, these costs wereexpected to be approximately $4.5 million. We are actively seeking a buyer forthe Denton facility and our STR related assets. However, given the inherent uncertaintyof the timing of a sale of the Denton facility, we have classified this assetas long term.

 

STR was a clinical stage product candidate for whichno marketing approvals have been obtained. We had no material cash inflowsrelating to our STR development nor received any revenues from product sales ofSTR. Due to our decision to curtail our STR development program, there isneither an anticipated completion date nor an expected period during whichmaterial net cash inflows will commence. As a consequence of the restructuring,we are not dependent on the successful development and completion of our STRprogram and, therefore, there are no risks and uncertainties associated withthe STR program that will materially impact our operations and financial position.

 

Our current major research and development projectis picoplatin (NX 473), a next-generation platinum-based cancer therapydesigned to overcome platinum resistance in the treatment of solid tumors. Weinitiated a Phase II clinical study of picoplatin in small cell lung cancer inJune 2005. To date, we have incurred costs of approximately $1.9 millionin connection with the picoplatin clinical program. Total estimated costs tocomplete the picoplatin Phase II trial in small cell lung cancer are in therange of $10 to $15 million for the period through 2007, including the cost ofdrug supply. The costs could be substantially higher if we have to repeat,revise or expand the scope of our trial. Material cash inflows relating to ourpicoplatin development will not commence unless and until we complete

 

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requiredclinical trials and obtain FDA marketing approvals, and then only if picoplatinfinds acceptance in the marketplace. To date, we have not received any revenuesfrom product sales of picoplatin.

 

The risks and uncertainties associated with completingthe development of picoplatin on schedule or at all, include thefollowing, as well as the other risk factors described in this report:

 

•       Picoplatin may not be shown to be safe andefficacious in clinical trials;

 

•       We may be unable to obtain regulatory approvalof the drug or may be unable to obtain such approval on a timely basis;

 

•       We may be unable to secure adequate supplies ofpicoplatin drug product in order to complete our clinical trials; and

 

•       We may not have adequate funds to complete thedevelopment of picoplatin.

 

If we fail to obtain marketing approval forpicoplatin, are unable to secure adequate clinical and commercial supplies ofpicoplatin drug product, or do not complete development and obtain regulatoryapproval on a timely basis, our operations, financial position and liquiditycould be severely impaired, including as follows:

 

•       We would not earn any sales revenue frompicoplatin, which would increase the likelihood that we would need to obtainadditional financing for our other development efforts;

 

•       Our reputation among investors might be harmed,which could make it more difficult for us to obtain equity capital onattractive terms or at all.

 

Because of the many risks and uncertainties relatingto completion of clinical trials, receipt of market approvals and acceptance inthe marketplace, we cannot predict the period in which material cash inflowsfrom our picoplatin program will commence, if ever.

 

Ourdevelopment administration overhead costs, consisting of rent, utilities,consulting fees, patent costs and other various overhead costs, are included intotal research and development expense for each period, but are not allocatedamong our various projects. Our total development costs include the costs ofvarious other research efforts directed toward the identification of futureproduct candidates. These other research projects are pre-clinical and are notconsidered major projects. Our total research and development costs aresummarized below.

 
| ** **                           | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2005**                        | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                            |       |                                |       |   |   |   |   |
| Picoplatin                           |       | $                               | 865        |                                | $          | — |   | $ | 1,352 |   | $ | — |   |
| STR                                  |       | 884                             |       | 2,325                               |       | 2,796 |   | 5,371 |   |
| Other overhead and research costs    |       | 627                             |       | 784                                 |       | 1,573 |   | 1,520 |   |
|                                 |       |                            |       |                                |       |   |   |   |   |
| Total research and development costs |       | $                               | 2,376      |                                | $          | 3,109 |   | $ | 5,721 |   | $ | 6,891 |   |

 

###### ***Liquidity and capital resources***

###### *** ***

We have financed our operations primarily throughthe sale of equity securities, technology licensing, collaborative agreementsand debt instruments. We invest excess cash in investment securities that willbe used to fund future operating costs. Cash, cash equivalents and investmentsecurities totaled $11.5 million at June 30, 2005 compared to $17.8million at December 31, 2004. We primarily fund current operations withour existing cash and investments. Cash used for operating activities for thesix months ended June 30, 2005 totaled $9.6 million. Revenues and otherincome sources for the second quarter of 2005 were not sufficient to coveroperating expenses.

 

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Weraised approximately $3.8******million in net proceeds from the sale of common stock andwarrants in a private placement transaction in March 2005. We intend touse the net proceeds from this financing added to our existing funds to supportour Phase II trial in picoplatin in small cell lung cancer and for generalworking capital, including restructuring costs associated with the terminationof our STR development program. With the proceeds of this offering, and givingeffect to the strategic restructuring, we believe that our present cash, cashequivalents, investment securities and expected interest income will besufficient to fund our anticipated working capital and capital requirements atleast through the fourth quarter of 2005. In the event that sufficientadditional funds are not obtained or strategic partners are not found in thefuture, we may be required to delay, reduce or curtail the scope of ourpicoplatin development program, including any clinical trials, and otherproduct development efforts and/or further reduce costs for facilities andadministration.

 

We acquired the worldwide exclusive rights,excluding Japan, to develop, manufacture and commercialize picoplatin fromAnorMED, Inc. in April 2004. Under the terms of the agreement, wepaid AnorMED a one-time upfront milestone payment of $1.0 million in commonstock and $1.0 million in cash. The agreement also provides for additionalmilestone payments to AnorMED of up to $13 million, payable in cash or acombination of cash and common stock. Upon regulatory approval, AnorMED wouldreceive royalty payments of up to 15% on product sales. We initiated our firstpicoplatin clinical trial, a Phase II study of picoplatin in small cell lungcancer, in June 2005, and it is therefore unlikely that these milestoneswould be triggered during 2005 or 2006. Because we cannot predict the length oftime to completion of our Phase II study, the time of initiation and completionof a Phase III study or the time of submission of a New Drug Application (NDA)for picoplatin, we are unable to predict when such milestones might betriggered after 2006. We also currently plan to initiate a study of picoplatinin patients with colorectal cancer in late 2005 or early 2006.

 

Also in April 2004, we sold and transferred ourPretarget intellectual property to Aletheon Pharmaceuticals, Inc. Underthe agreement, we could receive up to $6.6 million in milestone payments ifAletheon achieves certain development goals, plus royalties on potential futureproduct sales. We did not receive any upfront consideration for the sale of thePretarget property. We discontinued our clinical studies using the Pretargettechnology in July 2002, and sought, both through targeted inquiries and abroad-based auction process, a buyer or licensee for the technology. The saleof the Pretarget intellectual property relieves us of the annual costsassociated with maintaining the Pretarget patent estate. During 2003, we spentapproximately $350,000 for the prosecution and maintenance of the Pretargetpatents and trademarks. For 2004, these costs were approximately $70,000.Seattle-based Aletheon is a development stage biotherapeutics company foundedby two former NeoRx employees. The timing and amount of milestone payments, ifany, are uncertain. The terms of the transaction were determined througharms-length negotiation. Neither the Company nor Bay City Capital LLC and its affiliatesat any time has held, or in the future plans to acquire, a financial interestin Aletheon.

 

In February 2004, we raised approximately $9.0million in net proceeds from the sale of common stock and warrants in a privateplacement transaction.

 

Inconnection with our 2001 purchase of the radiopharmaceutical manufacturingplant and other assets located in Denton, TX, we assumed $6.0 million principalamount of restructured debt held by Texas State Bank, McAllen, TX. The loan,which matures in April 2009, is secured by the assets acquired in thetransaction. The interest rate on the loan was 6.00% on June 30, 2005. Theinterest rate, which is equal to the bank prime rate and is adjusted on thesame date that the bank prime rate changes as reported in the Wall StreetJournal, was 6.25% on August 5, 2005. The loan provides for a maximumannual interest rate of 18%. Principal and interest are payable in monthlyinstallments. Principal and interest paid on the note during the quarters endedJune 30, 2005 and 2004 totaled $126,000 and $115,000, respectively. InDecember 2003, we sold a non-essential portion of the Denton facility, theproceeds of which ($827,000) were applied to reduce the outstanding balance onthe loan. As of June 30, 2005, the outstanding balance of the loan was$4.1 million. The fixed monthly payments on the note are recalculated inApril of each year based on the then current bank prime interest rate andoutstanding note balance. Because the loan is amortized over a fourteen-year periodfrom its inception, a principal balance will remain at maturity inApril 2009. Based on an interest rate of 6.25% (effective July 1,2005), the estimated principal balance payable at maturity would be $3.07million.

 

The terms of the Texas State Bank loan provide thatan event of default may be deemed to occur if the Company abandons, vacates ordiscontinues operations on a substantial portion of the Denton facility orthere is a material adverse change in the Company’s operations. If this were tooccur, Texas State Bank could declare the entire outstanding amount of the loan($4.1 million at June 30, 2005) due and immediately payable. In such case,our

 

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cash resources and assets couldbe impaired depending on our ability to raise funds through a sale of theDenton facility or other means. Texas State Bank has confirmed that it will notdeclare the loan in default based solely on our suspension, either temporarilyor permanently, of manufacturing activities at the Denton facility.Additionally, we do not believe that our strategic restructuring announced inMay 2005 constitutes a material adverse change in our operations or wouldaffect our ability to continue to make payments under the loan, which wouldcause Texas State Bank to accelerate the loan, nor has Texas State Bankindicated that it views the restructuring as such. We can provide no assurance,however, that Texas State Bank will not some time in the future seek to rely onthese or other provisions to declare us in default of the loan. We havereceived a preliminary appraisal of the Denton facility. The preliminaryappraisal values range from $3.0 million as a general purpose facility to $5.0million as a special purpose facility. Given the information available, webelieve it is most likely that we would receive proceeds toward the lower endof that range. There can be no assurance that the sale proceeds, if any,received by us from the sale of the Denton facility and other assets will besufficient to satisfy the outstanding balance on the Texas State Bank loan.

 

InApril 2003, we received $10 million from the sale to Boston ScientificCorporation (BSC) of certain non-core patents and patent applications and thegrant to BSC of exclusive license rights to certain patents and patentapplications. BSC originally asserted four such patents in two lawsuits againstJohnson & Johnson, Inc. and certain of its subsidiaries,including Cordis Corporation and Guidant Corporation, alleging infringement ofsuch patents. In both lawsuits, the defendants denied infringement and assertedinvalidity and unenforceability of the patents. BSC subsequently withdrew threeof the patents from the litigation. Although we are not currently a party tothe lawsuits, our management and counsel have been deposed in connection withthe lawsuits. It is possible that BSC, if it is unsuccessful or has limitedsuccess with its claims against Johnson & Johnson, Inc. and itssubsidiaries, may seek damages from us, including recovery of all or a portionof the amounts it paid to us in 2003. We cannot assess the likelihood ofwhether such claim will be brought against us or the extent of recovery, ifany, on any such claim.

 

We have historically suffered recurring operatinglosses and negative cash flows from operations. As of June 30, 2005, wehad net working capital of $9.1 million and had an accumulated deficit of$248.5 million with total shareholders’ equity of $10.4 million. Theseconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States, assuming that wewill continue as a going concern.

 

While management believes that current cash and cashequivalent balances, and any net cash provided by operations, will provideadequate resources to fund operations at least untilDecember 31, 2005, this may not be the case. Management is thereforecontemplating a number of alternatives to enable us to continue operating,including:

 

•      raising additional capital to fund continuingoperations by private placements or other sales of equity or debt securities orthrough the establishment of other funding facilities;

 

•      entering into strategic collaborations, which mayinclude joint ventures or partnerships for product development andcommercialization, merger, sale of assets or other similar transactions; and

 

•      obtaining additional capital resources to fundoperations through cost cutting mechanisms, including the delay, reduction orcurtailment of our product development programs.

 

InMay 2005, we implemented a strategic restructuring plan to reduce costs bydiscontinuing our STR development program and other STR related activities. Therestructuring is described in more detail in the section above entitled“Strategic Restructuring.”

 

We have no assurance that our restructuring or anyother cost savings alternatives will be successful. We may not be able toobtain the required additional capital or enter into relationships withcorporate partners on a timely basis, on favorable terms, or at all. Conditionsin the capital markets in general, and the life science capital marketspecifically, may affect our potential financing sources and opportunities forstrategic partnering. If we are unable to obtain sufficient cash when needed tofund our operations, we may be forced to seek protection from creditors underthe bankruptcy laws.

 

On August 4, 2005, we entered into a ResearchFunding and Option Agreement with The Scripps Research Institute, or TSRI.Under the agreement, we have agreed to provide TSRI an aggregate of $2.5million over a 26-month period to fund research relating to synthesis andevaluation of novel small molecule, multi-targeted protein kinase inhibitors astherapeutic agents, including for the treatment of cancer. We have the optionto negotiate a

 

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worldwide exclusive license touse, enhance and develop any compounds arising from the collaboration. Theresearch funding is payable by us to TSRI quarterly in accordance with anegotiated budget, which provides for an initial payment of $137,500 onAugust 8, 2005 and aggregate payments of $1,012,500 and $1,350,000 in 2006and 2007, respectively.

 

Our actual capital requirements will depend uponnumerous factors, including:

 

•      the scope and timing of our picoplatin clinicalprogram and other research and development efforts, including the progress andcosts of our Phase II trial of picoplatin in small cell lung cancer, which wasinitiated in June 2005;

 

•      our ability to obtain clinical supplies ofpicoplatin drug product in a timely and cost effective manner;

 

•      actions taken by the FDA and other regulatoryauthorities;

 

•       the costs of the restructuring announced inMay 2005, including the costs associated with discontinuing our STRdevelopment program, reducing  ourworkforce and closing and decommissioning the Denton, Texas manufacturingfacility, as well as the timing and amounts of proceeds from any sale of theDenton facility and assets;

 

•      our alternatives with respect to the STR assets,including any potential disposition or out-licensing alternatives and thetiming, type and amount of consideration received and other terms of any suchtransactions;

 

•      the timing and amount of any milestone or otherpayments we might receive from or pay to potential strategic partners;

 

•      our degree of success in commercializingpicoplatin or any other cancer therapy product candidates;

 

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

 

•      the acquisition or in-licensing of other productsor intellectual property, if we choose to undertake such activities; and

 

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

 

At June 30, 2005, we had the following long-termcontractual commitments:

 

Payments Due by Period

(in thousands)

 
| ** **           | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|----------------|------------|-----------|------------|
| Lease commitments    |       | 657                   |       | 1,138         |       | 605           |       | —         |       | 2,400     |       |
| Note payable (1)     |       | 503                   |       | 1,006         |       | 3,445         |       | —         |       | 4,954     | (2)        |
| Purchase commitments |       | 625                   |       | 1,875         |       | —        |       | —         |       | 2,500     |       |
|                 |       | 1,785                 |       | 4,019         |       | 4,050         |       | —         |       | 9,854     |       |

 

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(1) Amounts include interest payments.

(2) Amount includes total principal payment of $4,101 as reflectedon the Condensed Consolidated Balance Sheet as of June 30, 2005.

 

We believe we have adequate resources to meet ourobligations as they come due through December 31, 2005.

 

Our financial statements are prepared on a goingconcern basis; however, our inability to obtain additional cash as needed couldhave a material adverse effect on our financial position, results of operationsand our ability to continue in existence. Our condensed consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

***Additional factors that may affectresults***

 

In addition to the other information contained inthis report, you should carefully read and consider the following risk factorsbefore purchasing our common stock. Each of these******risks could harm our business,******operating resultsand financial condition, as well as decrease the value of an investment in ourstock. An investment in NeoRx securities involves a high degree of risk.

 

**Risks Related to Our Business**

 

**We have ahistory of operating losses, we expect to continue to incur losses, and we maynever become profitable.**

 

We have not been profitable since our formation in1984. As of June 30, 2005, we had an accumulated deficit of $248.5million. Our net loss for the quarter ended June 30, 2005 was $8.9million. We had net losses of

 

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$19.4 million for the yearended December 31, 2004, and $5.1 million for the year endedDecember 31, 2003. These losses resulted principally from costs incurredin our research and development programs and from our general andadministrative activities. To date, we have been engaged only in research anddevelopment activities and have not generated any significant revenues fromproduct sales. In May 2005, we announced the discontinuation of our STR(bone-targeted radiotherapeutic) development program as part of a strategicplan to refocus our limited resources on the development of picoplatin (NX473), a platinum-based compound. We do not anticipate that our proposedpicoplatin product candidate, or any other proposed products, will becommercially available for several years, if at all. We expect to incuradditional operating losses in the future. These losses may increasesignificantly if we expand clinical development, manufacturing andcommercialization efforts.

 

Our ability to achieve long-term profitability isdependent upon obtaining regulatory approvals for our picoplatin productcandidate and any other proposed products and successfully commercializing ourproducts alone or with third parties.

 

**We will need to raise additional capital, and ourfuture access to capital is uncertain.**

** **

It is expensive to develop cancer therapy productsand conduct clinical trials for these products. We currently have availablevery limited funds to support our picoplatin or any other clinical programs.The costs of our clinical programs could vary substantially if we have torepeat, revise or expand the scope of the trials, or conduct additionalclinical trials. We will be required to obtain additional funding or enter intostrategic partnerships to continue development of picoplatin or any otherproposed products, and to fund ongoing operations.

 

We raised approximately $3.8 million in net proceedsfrom the sale of common stock and warrants in a private placement transactionon March 7, 2005. We intend to use the net proceeds from this financingadded to our existing funds to support our Phase II trial in picoplatin insmall cell lung cancer and for general working capital, including restructuringcosts associated with the termination of our STR development program. Our totalcash and marketable securities, which include the funds from this financing,was $11.5 million at June 30, 2005.

 

Our consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States, assuming that we will continue as a going concern. Whilemanagement believes that current cash and cash equivalent balances, and any netcash provided by operations, will provide adequate resources to fund operationsat least until December 31, 2005, this may not be the case. Management istherefore exploring a number of alternatives to enable us to continueoperating, including:

 

•      raising additional capital to fund continuingoperations by private placements or other sales of equity or debt securities orthrough the establishment of other funding facilities;

 

•      entering into strategic collaborations, whichmay include joint ventures or partnerships for product development andcommercialization, merger, sale of assets or other similar transactions; and

 

•      obtaining additional capital resources tofund operations through cost cutting mechanisms, including the delay, reductionor curtailment of our product development programs.

 

In May 2005, we announced the immediateimplementation of a strategic restructuring plan to reduce costs bydiscontinuing our STR development program and other STR related activities. Therestructuring is described in more detail in the section above entitled“Strategic Restructuring.”

 

There can be no assurance that our strategicrestructuring or any of the other cost-saving alternatives listed above will besuccessful. We may not be able to obtain the required additional capital orenter into relationships with corporate partners on a timely basis, onfavorable terms, or at all. Conditions in the capital markets in general, andthe life science capital market specifically, may affect our potentialfinancing sources and opportunities for strategic partnering. If we raiseadditional funds by issuing common stock or securities convertible into orexercisable for common stock, further dilution to shareholders may result, andnew investors could have rights superior to current security holders. If we areunable to obtain sufficient cash when needed to fund our operations, we may beforced to seek protection from creditors under the bankruptcy laws.

 

On August 4, 2005, we entered into a ResearchFunding and Option Agreement with The Scripps Research Institute, or TSRI. Underthe agreement, we have agreed to provide TSRI an aggregate of $2.5 million overa 26-month period to fund research relating to synthesis and evaluation ofnovel small molecule, multi-targeted protein

 

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kinase inhibitors astherapeutic agents, including for the treatment of cancer. We have the optionto negotiate a worldwide exclusive license to use, enhance and develop anycompounds arising from the collaboration. The research funding is payable by usto TSRI quarterly in accordance with a negotiated budget, which provides for aninitial payment of $137,500 on August  8, 2005 and aggregate payments of$1,012,500 and $1,350,000 in 2006 and 2007, respectively.

 

The amount of additional financing we require willdepend on a number of factors, including the following:

 

•      the scope and timing of our proposedpicoplatin clinical program and other research and development efforts,including the progress and costs of  ourPhase II trial of picoplatin in small cell lung cancer, which was initiated inJune 2005;

 

•      our ability to obtain clinical supplies ofpicoplatin drug product in a timely and cost effective manner;

 

•      actions taken by the FDA and other regulatoryauthorities;

 

•      the costs of the strategic restructuringannounced in May 2005, including the costs of discontinuing our STRdevelopment program, reducing our workforce and closing and decommissioning theDenton, Texas manufacturing facility, as well as the timing and proceeds fromany sale of the Denton facility and assets;

 

•      our alternatives with respect to the STRassets, including any potential disposition or outlicensing alternatives andthe timing, amount and type of consideration received and other terms of anysuch transactions;

 

•      the timing and amount of any milestone orother payments we might receive from or pay to potential strategic partners;

 

•      our degree of success in commercializingpicoplatin or any other cancer therapy product candidates;

 

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

 

•      the acquisition or in-licensing of otherproducts or intellectual property, if we choose to undertake such activities;and

 

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

 

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

 

The manufacture and marketing of our proposedpicoplatin product candidate and our research and development activities aresubject to regulation for safety, efficacy and quality by the FDA in the UnitedStates and by comparable authorities in other countries.

 

The process of obtaining FDA and other requiredregulatory approvals, including foreign approvals, is expensive, often takesmany years and can vary substantially depending on the type, complexity andnovelty of the products involved.

 

We have had only limited experience in filing andpursuing applications necessary to gain regulatory approvals. This may impedeour ability to obtain timely approvals from the FDA or foreign regulatoryagencies. We will not be able to commercialize our product candidates until weobtain regulatory approval, and consequently any delay in obtaining, orinability to obtain, regulatory approval could harm our business.

 

If we violate regulatory requirements at any stage,whether before or after marketing approval is obtained,

 

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we may be fined, forced toremove a product from the market or experience other adverse consequences,including delay, which could materially harm our financial results.Additionally, we may not be able to obtain the labeling claims necessary ordesirable for product promotion. In addition, if we or other parties identifyserious side effects after any of our products are on the market, or ifmanufacturing problems occur, regulatory approval may be withdrawn andreformulation of our products, additional clinical trials, changes in labelingof our products, and/or additional marketing applications may be required.

 

The requirements governing the conduct of clinicaltrials and manufacturing and marketing of our proposed products outside theUnited States vary widely from country to country. Foreign approvals may takelonger to obtain than FDA approvals and can involve additional testing. Foreignregulatory approval processes include all of the risks associated with the FDAapproval processes. Also, approval of a product by the FDA does not ensureapproval of the same product by the health authorities of other countries.

 

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

 

In June 2005, we initiated a Phase II clinicaltrial of picoplatin for the treatment of patients with small cell lung cancer.This trial is a randomized trial comparing picoplatin to topotecan in patientswith small cell lung cancer who are refractory or resistant to previousplatinum-based therapy. Topotecan is an anti-tumor drug currently usedoff-label as a treatment for small cell lung cancer sensitive disease afterfailure of first line chemotherapy. The endpoints of the proposed picoplatintrial include survival, time to progression, duration of response and responserate.

 

We also plan to undertake a Phase I/II trial ofpicoplatin in colorectal cancer. The proposed trial would evaluate increasingdoses of picoplatin in combination with the chemotherapy agents 5-fluorouraciland leucovorin in patients who have failed a 5-fluorouracil/leucovorinchemotherapy regimen. Endpoints would include safety, response rate (tumorshrinkage), duration of response and time to progression. This proposed trialcurrently is targeted to begin in late 2005 or early 2006.

 

The actual time for initiation and completion of ourpicoplatin clinical trials depend upon numerous factors, including:

 

•      our ability to obtain adequate additionalfunding or enter into strategic partnerships;

 

•      approvals and other actions by the FDA andother regulatory agencies and the timing thereof;

 

•      our ability to open clinical sites;

 

•      our ability to enroll qualified patients intoour studies;

 

•      our ability to obtain sufficient, reliableand affordable supplies of the picoplatin drug product;

 

•      the extent of competing trials at theclinical institutions where we conduct our trials; and

 

•      the extent of scheduling conflicts withparticipating clinicians and clinical institutions.

 

We may notinitiate, advance or complete our picoplatin clinical trials as projected orachieve successful results.

 

We will rely on academic institutions and clinicalresearch organizations to conduct, supervise or monitor some or all aspects ofclinical trials involving our proposed picoplatin product. Further, we areseeking to enter into license agreements, partnerships or other collaborativearrangements to support financing, development and commercialization of ourpicoplatin product candidate. To the extent that we now or in the futureparticipate in such collaborative arrangements, we will have less control overthe timing, planning and other aspects of our clinical trials. If we fail toinitiate, advance or complete, or experience delays in or are forced to curtailour current or planned clinical trials, our stock price and our ability toconduct our business could be materially negatively affected.

 

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

 

Our research and development programs are designedto test the safety and efficacy of our proposed products in humans throughextensive preclinical and clinical testing. We may experience numerousunforeseen events during, or as a result of, the testing process that coulddelay or prevent commercialization of picoplatin or any other proposedproducts, including the following:

 

•      the safety and efficacy results obtained inearly human clinical trials may not be indicative of results obtained in laterclinical trials;

 

•      the results of preclinical studies may beinconclusive, or they may not be indicative of results that will be obtained inhuman clinical trials;

 

•      after reviewing test results, we or anypotential collaborators may abandon projects that we previously believed werepromising;

 

•      our potential collaborators or regulators maysuspend or terminate clinical trials if the participating subjects or patientsare being exposed to unacceptable health risks; and

 

•      the effects of our potential products may notbe the desired effects or may include undesirable side effects or othercharacteristics that preclude regulatory approval or limit their commercial useif approved.

 

Clinical testing is very expensive, can take manyyears, and the outcome is uncertain. The data that we may collect from ourpicoplatin clinical trials may not be sufficient to support regulatory approvalof our proposed picoplatin product. The clinical trials of picoplatin and anyother proposed products may not be initiated or completed on schedule, and theFDA or foreign regulatory agencies may not ultimately approve any of ourproduct candidates for commercial sale. Our failure to adequately demonstrate thesafety and efficacy of a cancer therapy product under development would delayor prevent regulatory approval of the product, which would prevent us frommarketing the proposed product.

 

**Success in early clinical trials may not be indicativeof results obtained in later trials.**

 

Results of early preclinical and clinical trials arebased on a limited number of patients and may, upon review, be revised ornegated by authorities or by later stage clinical results. Historically, theresults from preclinical testing and early clinical trials often have not beenpredictive of results obtained in later clinical trials. A number of new drugsand therapeutics have shown promising results in initial clinical trials, butsubsequently failed to establish sufficient safety and effectiveness data toobtain necessary regulatory approvals. Data obtained from preclinical andclinical activities are subject to varying interpretations, which may delay,limit or prevent regulatory approval.

 

**We aredependent on suppliers for the timely delivery of materials and services andmay experience future interruptions in supply.**

 

For our picoplatin product candidate to besuccessful, we need sufficient, reliable and affordable supplies of thepicoplatin drug product. Sources of picoplatin drug product may be limited, andthird-party suppliers of picoplatin drug product may be unable to manufacturedrug product in amounts and at prices necessary to successfully commercializeour picoplatin product. Moreover, third-party manufacturers must continuouslyadhere to cGMP regulations enforced by the FDA through its facilitiesinspection program. If the facilities of these manufacturers cannot pass apre-approval plant inspection, the FDA will not grant an NDA for our proposedproducts. In complying with cGMP and foreign regulatory requirements, any ofour third-party manufacturers will be obligated to expend time, money andeffort in production, record-keeping and quality control to assure that ourproducts meet applicable specifications and other requirements. If any of ourthird-party manufacturers fails to comply with these requirements, we may besubject to regulatory action.

 

Wehave a limited supply of picoplatin drug product that was manufactured by aprior licensee in September 2004 and earlier. The drug product has beendemonstrated to be stable for 12-18 months from the date of manufacture, whichtime period is not sufficient to complete both of our current and proposedclinical trials of picoplatin. We have entered into an agreement withHyaluron, Inc. to manufacture and supply additional picoplatin drugproduct on a purchase order, fixed fee basis. The agreement will continue untilApril 15, 2010, subject to

 

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earlier termination by eitherparty in the event of an uncured material breach or the liquidation orbankruptcy of the other party. We may terminate the agreement if we decide tono longer pursue manufacturing or distribution of picoplatin. There is noassurance that Hyaluron will be able to provide sufficient supplies ofpicoplatin drug product on a timely or cost-effective basis. There are ingeneral relatively few manufacturers and suppliers of picoplatin drug product.If Hyaluron or an alternate manufacturer is unable or unwilling to manufactureand provide drug product at a cost and on other terms acceptable to us, we maysuffer delays in, or be prevented from, initiating or completing our clinicaltrials of picoplatin.

 

In connection with our product developmentactivities, we rely on third-party contractors to perform for us, or assist uswith, certain specialized services, including drug manufacture and supply,dispensing, distribution and shipping, and clinical trial management. Becausethese contractors provide specialized services, their activities and quality ofperformance may be outside our direct control. If these contractors do notperform their obligations in a timely manner, or if we encounter difficultieswith the quality of services we receive from these contractors, we may incuradditional costs and delays in product development activities, which could havea material negative effect on our business.

 

**Our current debt obligations may restrict ouroperating and financing flexibility and could, in an event of default, impairour cash resources and assets.**

 

Inconnection with our 2001 purchase of the radiopharmaceutical manufacturingplant and other assets located in Denton, TX, we assumed $6.0 million principalamount of restructured debt held by Texas State Bank, McAllen, TX. The loan,which matures in April 2009, is secured by the assets acquired in thetransaction. The interest rate on the loan was 6.00% on June 30, 2005. Theinterest rate, which is equal to the bank prime rate and is adjusted on thesame date that the bank prime rate changes as reported in the Wall StreetJournal, was 6.25% on August 5, 2005. The loan provides for a maximumannual interest rate of 18%. Principal and interest are payable in monthlyinstallments. Principal and interest paid on the note during the quarters endedJune 30, 2005 and 2004 totaled $126,000 and $115,000, respectively. InDecember 2003, we sold a non-essential portion of its Denton facility, theproceeds of which ($827,000) were applied to reduce the outstanding balance onthe loan. As of June 30, 2005, the outstanding balance of the loan was$4.1 million. The fixed monthly payments on the note are recalculated inApril of each year based on the then current bank prime interest rate andoutstanding note balance. Because the loan is amortized over a fourteen-yearperiod from its inception, a principal balance will remain at maturity inApril 2009. Based on an interest rate of 6.25% (effective July 1,2005), the estimated principal balance payable at maturity would be $3.07million.

 

The terms of the Texas State Bank loan provide thatan event of default may be deemed to occur if we abandon, vacate or discontinueoperations on a substantial portion of the Denton facility or there is amaterial adverse change in our operations. If this were to occur, Texas StateBank could declare the entire amount of the loan ($4.1 million at June 30,2005) due and immediately payable. In such case, our cash resources and assetscould be impaired depending on our ability to raise funds through a sale of theDenton facility or other means. Texas State Bank has confirmed that it will notdeclare the loan in default based solely on our suspension, either temporarilyor permanently, of manufacturing activities at the Denton facility.Additionally, we do no believe that our strategic restructuring announced inMay 2005 constitutes a material adverse change in our operations or wouldaffect our ability to continue to make payments under the loan, which wouldcause Texas State Bank to accelerate the loan, nor has Texas State Bankindicated that it views the restructuring as such. We can provide no assurance,however, that Texas State Bank will not some time in the future seek to rely onthese or other provisions to declare the company in default of the loan. Wehave received a preliminary appraisal of the Denton facility. The preliminaryappraisal values range from $3.0 million as a general purpose facility to $5.0million as a special purpose facility. Given the information available, webelieve it is most likely that we would receive proceeds toward the lower endof that range. There can be no assurance that the sale proceeds, if any,received by us from the sale of the Denton facility and other assets will besufficient to satisfy the outstanding balance on the Texas State Bank loan.

 

**If we cannot negotiate and maintain collaborativearrangements with third parties, our research, development, manufacturing,sales and marketing activities may not be cost-effective or successful.**

 

Our success will depend in significant part on ourability to attract and maintain collaborative partners and strategicrelationships to support the development, sale, marketing, distribution andmanufacture of picoplatin and any other future product candidates andtechnologies in the US and Europe. At present, our only material collaborativeagreement is the exclusive worldwide (except Japan) license granted to us byAnorMED, Inc. for the development and commercial sale of picoplatin. Underthat license, we are solely responsible for the development

 

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and commercialization ofpicoplatin. AnorMED retains the right, at our cost, to prosecute patentapplications and maintain all patents. The parties executed the licenseagreement in April 2004, at which time we paid AnorMED a one-time upfrontmilestone payment of $1.0 million in NeoRx common stock and $1.0 million incash. The agreement also provides for additional milestone payments to AnorMEDof up to $13 million, payable in cash or a combination of cash and NeoRx commonstock. These milestones include our successful completion of a picoplatin PhaseII study or initiation of a picoplatin Phase III study, submission to the FDAof an NDA for picoplatin, regulatory approval from the FDA of picoplatin andthe attainment of certain levels of annual net sales of picoplatin. Uponregulatory approval, AnorMED also would receive royalty payments of up to 15%on product sales. We cannot be certain of the extent of our success, if any, incommercializing picoplatin and attaining established milestones. We initiatedour first picoplatin clinical trial, a Phase II study of picoplatin in smallcell lung cancer,  in June 2005 andit is therefore unlikely that these milestones will be triggered during 2005 or2006. Because we cannot predict the length of time to completion of our PhaseII study, the time of initiation and completion of a Phase III study or thetime of submission of an NDA for picoplatin, we are unable to predict when suchmilestones might be triggered after 2006. The license agreement may beterminated by either party for breach if the other party files a petition inbankruptcy or insolvency or for reorganization or is dissolved, liquidated ormakes assignment for the benefit of creditors. We can terminate the license atany time upon prior written notice to AnorMED. If not earlier terminated, thelicense agreement will continue in effect, in each country in the territory inwhich the licensed product is sold or manufactured, until the earlier of(i) expiration of the last valid claim of a pending or issued patentcovering the licensed product in that country or (ii) a specified numberof years after first commercial sale of the licensed product in that country.If AnorMED were to breach its obligations under the license, or if the licenseexpires or is terminated and we cannot renew, replace, extend or preserve ourrights under the license agreement, we would be unable to move forward with ourcurrent and planned picoplatin clinical studies.

 

None of our current employees has any experienceselling, marketing and distributing therapeutic products. To the extent we aresuccessful in obtaining approval for the commercial sale of picoplatin or anyother product candidate, we may need to secure one or more corporate partnersto conduct these activities. We may not be able to enter into partneringarrangements in a timely manner or on terms acceptable to us. To the extentthat we enter into co-promotion or other licensing arrangements, our product revenuesare likely to be lower than if we directly marketed and sold our products, andany revenues we receive would depend upon the efforts of third parties, whichefforts may not be successful. If we are not able to secure adequate partneringarrangements, we would have to hire additional employees or consultants withexpertise in sales, marketing and distribution. Employees with relevant skillsmay not be available to us. Additionally, any increase in the number ofemployees would increase our expense level and could have a material adverseeffect on our financial position.

 

**We face substantial competition in the development ofcancer therapies and may not be able to compete successfully, and our potentialproducts may be rendered obsolete by rapid technological change.**

 

The competition for development of cancer therapiesis substantial. There are numerous competitors developing products to treat thecancers for which we are seeking to develop products. Our initial focus forpicoplatin will be in small cell lung cancer, a disease for which therecurrently are limited effective therapeutic options. Numerous companies,including AstraZeneca PLC, Cell Therapeutics, Inc., Exelexis, Inc.,ImClone Systems Incorporated, ImmunoGen, Inc., Sanofi-Aventis Group, InexPharmaceuticals Corporation, Ipsen Limited, The Menarini Group, OSIGenetics, Inc. and PharmaMar USA, Inc., also are developing andtesting therapeutics for small cell lung cancer. These therapeutics includechemotherapy, inhibitors, monoclonal antibodies, antagonists and interferons.We cannot assure you that we will be able to effectively compete with these orfuture third party product development programs. Many of our existing orpotential competitors have, or have access to, substantially greater financial,research and development, marketing and production resources than we do and maybe better equipped than we are to develop, manufacture and market competingproducts. Further, our competitors may have, or may develop and introduce, newproducts that would render our proposed picoplatin product less competitive,uneconomical or obsolete.

 

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

 

Our success is dependent in part on obtaining, maintainingand enforcing our patents and other proprietary rights and our ability to avoidinfringing the proprietary rights of others. Patent law relating to the scopeof claims in the biotechnology field in which we operate is still evolving and,consequently, patent positions in our industry may not be as strong as inother, better-established fields. Accordingly, the United States Patent andTrademark Office

 

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(USPTO) may not issue patentsfrom the patent applications owned by or licensed to us. If issued, the patentsmay not give us an advantage over competitors with similar technologies.

 

Theissuance of a patent is not conclusive as to its validity or enforceability andit is uncertain how much protection, if any, will be given to our patents if weattempt to enforce them and they are challenged in court or in otherproceedings, such as oppositions, which may be brought in foreign jurisdictionsto challenge the validity of a patent. A third party may challenge the validityor enforceability of a patent after its issuance by the USPTO. It is possiblethat a competitor may successfully challenge our patents or that a challengewill result in limiting their coverage. Moreover, the cost of litigation touphold the validity of patents and to prevent infringement can be substantial.If the outcome of litigation is adverse to us, third parties may be able to useour patented invention without payment to us. Moreover, it is possible thatcompetitors may infringe our patents or successfully avoid them through designinnovation. We may need to file lawsuits to stop these activities. Theselawsuits can be expensive and would consume time and other resources, even ifwe were successful in stopping the violation of our patent rights. In addition,there is a risk that a court would decide that our patents are not valid andthat we do not have the right to stop the other party from using theinventions. There is also the risk that, even if the validity of our patentswas upheld, a court would refuse to stop the other party on the ground that itsactivities do not infringe our patents.

 

In addition, the protection afforded by issuedpatents is limited in duration. With respect to picoplatin, in the UnitedStates we expect to rely primarily on US Patent Number 5,665,771 (expiringFebruary 7, 2016), which is licensed to us by AnorMED. We may be able torely on the Hatch-Waxman Act to extend the term of a US patent coveringpicoplatin after regulatory approval, if any, of such product in the US.

 

Under our license agreement with AnorMED, AnorMEDretains the right to prosecute patent applications and maintain all licensedpatents, with NeoRx reimbursing such expenses. Under the AnorMED agreement, wehave the right to sue any third party infringers of the picoplatin patents inthe licensed territory (worldwide except Japan). If we do not file suit,AnorMED, in its sole discretion, has the right to sue the infringer at itsexpense.

 

In addition to the intellectual property rights describedabove, we rely on unpatented technology, trade secrets and confidentialinformation. Therefore, others may independently develop substantiallyequivalent information and techniques or otherwise gain access to or discloseour technology. We may not be able to effectively protect our rights inunpatented technology, trade secrets and confidential information. We requireeach of our employees, consultants and advisors to execute a confidentialityagreement at the commencement of an employment or consulting relationship withus. However, these agreements may not provide effective protection of ourinformation or, in the event of unauthorized use or disclosure, may not provideadequate remedies.

 

**The use of our technologies could potentially conflictwith the rights of others.**

 

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

 

**We may incur substantial costs as a result oflitigation or other proceedings relating to patent and other intellectualproperty rights.**

 

The cost to us of any litigation or otherproceedings relating to intellectual property rights, even if resolved in ourfavor, could be substantial. Some of our competitors may be better able tosustain the costs of complex patent litigation because they have substantiallygreater resources. If there is litigation against us, we may not be able tocontinue our operations. If third parties file patent applications, or areissued patents claiming technology also claimed by us in pending applications,we may be required to participate in interference proceedings in the USPTO todetermine priority of invention. We may be required to participate in interferenceproceedings involving our issued patents and pending applications. We may berequired to cease using the technology or license rights from prevailing thirdparties as a result of an unfavorable outcome in an interference proceeding. Aprevailing party in that case may not offer us a license on commerciallyacceptable terms.

 

In April 2003, we received $10 million from thesale to Boston Scientific Corporation (BSC) of certain

 

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non-core patents and patentapplications and the grant to BSC of exclusive license rights to certainpatents and patent applications. BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc. and certain of itssubsidiaries, including Cordis Corporation and Guidant Corporation, alleginginfringement of such patents. In both lawsuits, the defendants deniedinfringement and asserted invalidity and unenforceability of the patents. BSCsubsequently withdrew three of the patents from the litigation. Although we arenot currently a party to the lawsuits, our management and counsel have beendeposed in connection with the lawsuits. It is possible that BSC, if it isunsuccessful or has limited success with its claims against Johnson &Johnson, Inc. and its subsidiaries, may seek damages from us, includingrecovery of all or a portion of the amounts it paid to us in 2003. We cannotassess the likelihood of whether such claim will be brought against us or theextent of recovery, if any, on any such claim.

 

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

 

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

 

**Our use of radioactive and other hazardous materialsexposes us to the risk of material environmental liabilities, and we may incursignificant additional costs to comply with environmental laws in the future.**

 

Our research and development and manufacturingprocesses, as well as the manufacturing processes that may be used by ourcollaborators, involve the controlled use of hazardous and radioactivematerials. As a result, we are subject to foreign, federal, state and locallaws, rules, regulations and policies governing the use, generation,manufacture, storage, air emission, effluent discharge, handling and disposalof certain materials and wastes in connection with our use of these materials.Although we believe that our safety procedures for handling and disposing ofsuch materials comply with the standards prescribed by such laws andregulations, we may be required to incur significant costs to comply withenvironmental and health and safety regulations in the future. In the eventthat we discontinue operations in facilities that have had past research andmanufacturing processes where hazardous or radioactive materials have been inuse, we may have significant decommissioning costs associated with thetermination of operation of these facilities. These potential decommissioningcosts also may reduce the market value of the facilities and may limit ourability to sell or otherwise dispose of these facilities in a timely andcost-effective manner. We have terminated our STR manufacturing operations inDenton, Texas and are preparing that facility for possible sale. We currentlyestimate that the 2005 costs associated with the closure of the Dentonfacility, including decommissioning costs, will be approximately $0.7 million.These costs could increase substantially, depending on actions of regulators orif we discover previously unknown contamination in or around the facility. Inaddition, the risk of accidental contamination or injury from hazardous orradioactive materials cannot be completely eliminated. In the event of such anaccident, we could be held liable for any resulting damages, and any suchliability could exceed our resources. Our current insurance does not coverliability for the clean-up of hazardous waste materials or other environmentalrisks.

 

**Even if we bring products to market, changes inhealthcare reimbursement could adversely affect our ability to effectivelyprice our products or obtain adequate reimbursement for sales of our products.**

 

Potential sales of our products may be affected bythe availability of reimbursement from governments or other third parties, suchas insurance companies. It is difficult to predict the reimbursement status ofnewly approved, novel medical products. In addition, third-party payors areincreasingly challenging the prices charged for medical products and services.If we succeed in bringing one or more products to market, we cannot be certainthat these products will be considered cost-effective and that reimbursement tothe consumer will be available or will be sufficient to allow us tocompetitively or profitably sell our products.

 

The levels of revenues and profitability ofbiotechnology companies may be affected by the continuing efforts of governmentand third-party payors to contain or reduce the costs of healthcare throughvarious means. For

 

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example, in certain foreignmarkets, pricing or profitability of prescription pharmaceuticals is subject togovernmental control. In the United States, there have been, and we expect thatthere will continue to be, a number of federal and state proposals to implementsimilar governmental controls. It is uncertain what legislative proposals willbe adopted or what actions federal, state or private payors for health caregoods and services may take in response to any health care reform proposals orlegislation. Even in the absence of statutory change, market forces arechanging the health care sector. We cannot predict the effect health carereforms may have on the development, testing, commercialization andmarketability of our proposed cancer therapy products. Further, to the extentthat such proposals or reforms have a material adverse effect on the business,financial condition and profitability of other companies that are prospectivecollaborators for certain of our potential products, our ability tocommercialize our products under development may be adversely affected.

 

**The loss of key employees could adversely affect ouroperations.**

 

Neile Grayson, PhD, resigned as Vice President,Corporate Development, in January 2004. Although Dr. Grayson was anofficer of the Company, we did not, at the time of her resignation, consider hera key employee in terms of our product development activities. We did notexperience any material disruptions or delays as a consequence of theresignation of Dr. Grayson. Dr. Grayson’s position was eliminated andher responsibilities reassigned to other members of management. Melinda G. Kileresigned as Vice President, Finance, effective April 16, 2004. On thatdate, Michael K. Jackson was promoted to Chief Accounting Officer and assumedresponsibility for senior financial duties on an interim basis. As principalfinancial officer, Ms. Kile was considered a key employee of the Company;however, we did not experience any material disruptions or delays as aconsequence of Ms. Kile’s resignation. Susan D. Berland was appointedChief Financial Officer of the Company, effective October 25, 2004. Theposition of Chief Accounting Officer was eliminated as of December 31,2004, and Mr. Jackson resumed his prior responsibilities as CorporateController.

 

Gerald McMahon, Ph.D. was appointed Chief ExecutiveOfficer of the Company, effective May 11, 2004, and was named Chairman ofthe Board of Directors in June 2004. Jack L. Bowman retired from theposition as Chief Executive Officer effective May 11, 2004, and he did notstand for reelection as a director at the 2004 annual shareholders meeting. AsChief Executive Officer, Mr. Bowman was considered a key employee of theCompany. We did not experience any material disruption or delays as aconsequence of Mr. Bowman’s retirement.

 

In June 2005, Dr. Karen Auditore-Hargreavesresigned as President and Chief Operating Officer of the Company and LindaFindlay was, as part of our strategic restructuring, terminated as VicePresident, Human Resources. Although Dr. Auditore-Hargreaves andMs. Findlay were officers of the Company, we did not, at the time of theirresignation and termination, consider them key employees in terms of ourpicoplatin product development. The responsibilities ofDr. Auditore-Hargreaves and Ms. Findlay have been reassisnged toother members of management. We did not experience any material disruptions ordelays as a consequence of the resignation and termination ofDr. Auditore-Hargreaves and Ms.Findlay.

 

As of August 5, 2005, we had a total work forceof 24 full-time employees and 2 part-time employees. Our success depends, to asignificant extent, on the continued contributions of our principal managementand scientific personnel participating in our picoplatin development program.We have limited or no redundancy of personnel in several key development areas,including finance, legal, clinical operations, regulatory affairs and qualitycontrol and assurance. The loss of the services of one or more of our employeescould delay our picoplatin product development activities or other programs andresearch and development efforts. We do not maintain key-person life insuranceon any of our officers, employees or consultants.

 

Competition for qualified employees among companiesin the biotechnology and biopharmaceutical industry is intense. Our futuresuccess depends upon our ability to attract, retain and motivate highly skilledemployees and consultants. In order to commercialize our proposed productssuccessfully, we will in the future be required to substantially expand ourworkforce, particularly in the areas of manufacturing, clinical trialsmanagement, regulatory affairs, business development and sales and marketing.These activities will require the addition of new personnel, includingmanagement, and the development of additional expertise by existing managementpersonnel. Our current financial situation may make it difficult to attract andretain key employees.

 

We have change in control agreements and severanceagreements with all of our executive officers and consulting agreements withvarious of our scientific advisors. Our agreements with our executive officersprovide for “at will” employment, which means that each executive may terminatehis or her service with us at any time. In addition, our scientific advisorsmay terminate their services to us at any time.

 

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**Any weakness identified in our internal controls aspart of the evaluation being undertaken by us and our independent registeredpublic accounting firm pursuant to Section 404 of the Sarbanes-Oxley Actof 2002 could have an adverse effect on our business.**

 

Section 404 of the Sarbanes-Oxley Act of 2002requires public companies to evaluate and report on their systems of internalcontrol over financial reporting. In addition, the independent accountants mustreport on management’s evaluation. We have documented and tested our system ofinternal control over financial reporting in 2004 to provide the basis for ourmanagement’s evaluation included in our Form 10-K for the year endedDecember 31, 2004. Management’s assessment of the effectiveness of ourinternal control over financial reporting as of December 31, 2004 has beenaudited by KPMG LLP, an independent registered public accounting firm, andKPMG’s report is included in our Form 10-K for the year endedDecember 31, 2004. Based on this evaluation, we have concluded that, as ofDecember 31, 2004, we did not have any material weaknesses in our internalcontrol over financial reporting and our internal control over financialreporting was effective.

 

Due to the ongoing evaluation and testing of ourinternal controls, there can be no assurance that there may not be significantdeficiencies or material weaknesses that would be required to be reported inthe future. In addition, we expect the evaluation process and any requiredremediation, if applicable, to increase our accounting, legal and other costsand divert management resources from core business operations. We cannot becertain as to the results or actions related to our on-going evaluation andtesting of internal controls, or the impact of any of them on our operations orstock price.

 

**Risks Related to Our Common Stock**

 

**Our common stock listing was transferred from TheNasdaq National Market to The Nasdaq SmallCap Market; we currently are not incompliance with The Nasdaq SmallCap minimum bid requirement and failure toregain and maintain compliance with this and other continued listing standardscould result in delisting and adversely affect our market price and liquidity.**

 

Our common stock listing was transferred from TheNasdaq National Market to The Nasdaq SmallCap Market on March 20, 2003. Weelected to seek a transfer to The Nasdaq SmallCap Market because we had beenunable to regain compliance with The Nasdaq National Market minimum $1.00 bidprice requirement for continued listing. By transferring to The SmallCapMarket, we were afforded an extended grace period in which to satisfy TheSmallCap Market $1.00 minimum bid price requirement. On May 6, 2003, wereceived notice from Nasdaq confirming that we are in compliance with the $1.00SmallCap minimum bid price requirement. We will not be eligible to relist ourcommon stock on The Nasdaq National Market unless and until our common stockmaintains a minimum bid price of $5.00 per share for 90 consecutive tradingdays and we otherwise comply with the initial listing requirements for TheNasdaq National Market. Trading on the Nasdaq SmallCap Market may have anegative impact on the value of our common stock, because securities trading onthe Nasdaq SmallCap Market typically are less liquid than those traded on TheNasdaq National Market.

 

On May 12, 2005, we received a notice fromNasdaq indicating that the Company is not in compliance with Nasdaq MarketplaceRule 4310(c)(8)(D) (the Minimum Bid Price Rule) because the closingbid price of our common stock has been below $1.00 per share for 30 consecutivetrading days. In accordance with Nasdaq Marketplace Rules, we have beenprovided 180 calendar days, or until November 8, 2005, to regain compliancewith the Minimum Bid Price Rule. To regain compliance, the closing bid price ofour common stock must remain at $1.00 per share or more for a minimum of tenconsecutive trading days. If we do not regain compliance with the Minimum BidPrice Rule by November 8, 2005, Nasdaq will determine whether theCompany meets The Nasdaq SmallCap Market initial listing criteria set forth inMarketplace Rule 4310(c), except for the Minimum Bid Price Rule. If theCompany meets the initial listing criteria, we will be entitled to anadditional 180 calendar day compliance period. If the Company is not eligiblefor an additional compliance period, Nasdaq will provide us writtennotification that our common stock will be delisted. In such case,  we have the right to appeal Nasdaq’sdelisting determination to a Listing Qualifications Panel.

 

If our common stock were to be delisted from TheNasdaq SmallCap Market, we would may seek quotation on a regional stockexchange, if available. Such listing could reduce the market liquidity for ourcommon stock. If our common stock is not eligible for quotation on anothermarket or exchange, trading of our common stock could be conducted in theover-the-counter market on an electronic bulletin board established forunlisted securities such

 

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as the Pink Sheets or the OTCBulletin Board. As a result, an investor would find it more difficult todispose of, or obtain accurate quotations for the price of, our common stock.

 

If our common stock is delisted from The NasdaqSmallCap Market, and if we fail to obtain quotation on another market orexchange, and if the trading price remains below $5.00 per share, then tradingin our common stock might also become subject to the requirements of certainrules promulgated under the Securities Exchange Act of 1934, which requireadditional disclosure by broker-dealers in connection with any trade involvinga stock defined as a “penny stock” (generally, any equity security not listedon a national securities exchange or quoted on Nasdaq that has a market priceof less than $5.00 per share, subject to certain exceptions). Many brokeragefirms are reluctant to recommend low-priced stocks to their clients. Moreover,various regulations and policies restrict the ability of shareholders to borrowagainst or “margin” low-priced stocks, and declines in the stock price belowcertain levels may trigger unexpected margin calls. Additionally, becausebrokers’ commissions on low-priced stocks generally represent a higherpercentage of the stock price than commissions on higher priced stocks, thecurrent price of the common stock can result in an individual shareholderpaying transaction costs that represent a higher percentage of total sharevalue than would be the case if our share price were higher. This factor mayalso limit the willingness of institutions to purchase our common stock.Finally, the additional burdens imposed upon broker-dealers by theserequirements could discourage broker-dealers from facilitating trades in ourcommon stock, which could severely limit the market liquidity of the stock andthe ability of investors to trade our common stock

 

**Our stockprice is volatile and, as a result, you could lose some or all of yourinvestment.**

 

There has been a history of significant volatilityin the market prices of securities of biotechnology companies, including ourcommon stock. In 2004, the high and low closing sale prices were $5.78 and$1.43. In 2003, the high and low closing sale prices were $6.47 and $0.37. Thehigh and low closing sale prices during the period from January 2, 2005through August 5, 2005 were $2.34 and $0.47, respectively. Our stock pricehas been and may continue to be affected by this type of market volatility, aswell as our own performance. Our business and the relative price of our commonstock may be influenced by a large variety of factors, including:

 

•      announcements by us or our competitorsconcerning acquisitions, strategic alliances, technological innovations, newcommercial products or changes in product development strategies;

 

•      the availability of critical materials usedin developing our proposed picoplatin product;

 

•      our ability to conduct our picoplatinclinical development program on a timely and cost-effective basis and theprogress and results of our clinical trials and those of our competitors;

 

•      developments concerning patents, proprietaryrights and potential infringement;

 

•       developments concerning potential agreementswith collaborators;

 

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

 

•      our available cash or other sources offunding; and

 

•      future sales of significant amounts of ourcommon stock by us or our shareholders.

 

In addition, potential public concern about thesafety of our proposed picoplatin product and any other products we develop,comments by securities analysts, our ability to maintain the listing of ourcommon stock on the Nasdaq system, and conditions in the capital markets in generaland in the life science capital market specifically, may have a significanteffect on the market price of our common stock. The realization of any of therisks described in this report, as well as other factors, could have a materialadverse impact on the market price of our common stock and may result in a lossof some or all of your investment in NeoRx.

 

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

 

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**Certainprovisions in our articles of incorporation and Washington state law coulddiscourage a change of control.**

 

Our articles of incorporation authorize our board ofdirectors to issue up to 150,000,000 shares of common stock and up to 3,000,000shares of preferred stock. With respect to preferred stock, our board has theauthority to determine the price, rights, preference, privileges andrestrictions, including voting rights, of those shares without any further voteor action by our shareholders.

 

We have adopted a shareholder rights plan, which isintended to protect the rights of shareholders by deterring coercive or unfairtakeover tactics. The board of directors declared a dividend to holders of ourcommon stock of one preferred share purchase right for each outstanding shareof common stock. In addition, under certain circumstances, holders of ourSeries B Convertible Preferred Stock are entitled to receive one preferredshare purchase right for each share of common stock into which their Series Bpreferred stock may be converted. The rights are exercisable ten days followingthe offer to purchase or acquisition of beneficial ownership of 20% of theoutstanding common stock by a person or group of affiliated persons. Each rightentitles the registered holder, other than the acquiring person or group, topurchase from NeoRx one-hundredth of one share of Series A JuniorParticipating Preferred Stock at the price of $40, subject to adjustment. Therights expire April 10, 2006. In lieu of exercising the right bypurchasing one one-hundredth of one share of Series A preferred stock, theholder of the right, other than the acquiring person or group, may purchase for$40 that number of shares of our common stock having a market value of twicethat price.

 

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

 

•      a merger or consolidation with, dispositionof assets to, or issuance or redemption of stock to or from the acquiringperson;

 

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

 

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

 

A corporation may not opt out of this statute. Thisprovision may have the effect of delaying, deterring or preventing a change incontrol of NeoRx or limiting future investment in NeoRx by significantshareholders and their affiliates and associates.

 

The provisions of our articles of incorporation,shareholder rights plan and Washington law discussed above may have the effectof delaying, deterring or preventing a change of control of NeoRx, even if thischange would be beneficial to our shareholders. These provisions also may discouragebids for our common stock at a premium over market price and may adverselyaffect the market price of, and the voting and other rights of the holders of,our common stock. In addition, these provisions could make it more difficult toreplace or remove our current directors and management in the event ourshareholders believe this would be in the best interests of the corporation andour shareholders.

 

**Certain provisions of our Series B ConvertiblePreferred Stock and certain outstanding warrants may prevent or make it moredifficult for us to raise funds or take other actions.**

 

Certain provisions of the Preferred Stock andWarrant Purchase Agreement and Certificate of Designation for our Series BConvertible Preferred Stock may require us to obtain the approval of theholders of Series B preferred stock to amend, alter or repeal anyprovision of the Certificate of Designation which may be deemed to materiallyadversely affect the rights of the holders of Series B preferred stock orto authorize, create or issue any class or series of securities havingliquidation or other rights superior to those of the Series B preferredstock. The Series B preferred stock also contains provisions requiring theadjustment of the conversion price if we issue (other than in connection withcertain permitted transactions, such as strategic collaborations andacquisitions approved by the board of directors or transactions approved by amajority of the holders of the Series B preferred stock) shares of commonstock at prices lower than the conversion price. This means that if we need toraise equity financing at any

 

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time when the prevailing ordiscounted market price for our common stock is lower than the conversionprice, the conversion price will be reduced and the dilution to shareholdersincreased. These provisions may make it more difficult for our management orshareholders to take certain corporate actions and could delay, discourage orprevent future financings. These provisions could also limit the price thatcertain investors might be willing to pay for shares of our common stock.

 

The outstanding shares of Series B preferredstock, at a conversion price of $5.00 per share, were convertible into3,150,000 shares of common stock as of December 31, 2004. Giving effect tothe antidilution adjustment occurring as a result of our March 2005 commonstock financing, the outstanding shares of Series B preferred stockcurrently have a conversion price of $4.578 per share and are convertible into3,446,389 shares of common stock. In addition, warrants accompanying theSeries B preferred stock, at an exercise price of $6.00 per share, areexercisable into 630,000 shares of common stock. These shares of common stock,when issued upon conversion of the Series B preferred stock and exerciseof the warrants will be registered with the SEC and generally available forimmediate resale in the public market. The market price of our common stockcould fall as a result of such resales due to the increased number of sharesavailable for sale in the market.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

The Company isexposed to the impact of interest rate changes and changes in the market valuesof its investments.

 

**Interest Rate Risk**

 

The Company’s exposure to market rate risk forchanges in interest rates relates primarily to the Company’s debt securitiesincluded in its investment portfolio. The Company does not have any derivativefinancial instruments. The Company invests in debt instruments of the USGovernment and its agencies and high-quality corporate issuers. Investments inboth fixed rate and floating rate interest earning instruments carry a degreeof interest rate risk. Fixed rate securities may have their fair market valueadversely impacted due to a rise in interest rates, while floating ratesecurities may produce less income than expected if interest rates decrease.Due in part to these factors, the Company’s future investment income may fallshort of expectations due to changes in interest rates or the Company maysuffer losses in principal if forced to sell securities that have declined inmarket value due to changes in interest rates. At June 30, 2005, theCompany owned no government debt instruments and no corporate debt securities.

 

The Company’sonly outstanding debt is its note payable to Texas State Bank. The outstandingbalance of the note was $4.1 million on June 30, 2005. The note, whichmatures in April 2009, bears interest equal to the bank prime rate. Theinterest rate on the note is adjusted on the same date that the bank prime ratechanges. The maximum permitted interest rate on the loan is 18% per annum.Because the interest rate on the note varies, the Company’s interest expensesmay increase as the bank prime interest rate increases. Extreme increases inthe bank prime interest rate, up to the maximum interest rate permitted underthe note, could materially affect the Company’s interest expense.

 

**Item 4. Controls and Procedures**

 

Under the supervision and with the participation ofthe Company’s management, including the Company’s Chairman and Chief ExecutiveOfficer and the Chief Financial Officer, the Company has evaluated theeffectiveness and design of its disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e)) as of the end ofthe period covered by this report, and, based on their evaluation, the Chairmanand Chief Executive Officer and the Chief Financial Officer have concluded thatthese disclosure controls and procedures are effective  in ensuring that the information disclosed bythe Company in the reports that the Company files or submits under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the rules and forms.

 

There were no changes in theCompany’s internal control over financial reporting that occurred during thequarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s control over financial reporting.

 

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***Limitations on theEffectiveness of Controls***

 

Our management, including our Chairman and ChiefExecutive Officer and our Chief Financial Officer, does not expect that ourdisclosure controls or our internal controls will prevent all error and allfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of that controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of control must beconsidered relative to their costs. Because of the inherent limitation in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the reality that judgments indecision-making can be faulty, and breakdowns can occur because of simple erroror mistake. Additionally, controls can be circumvented by the individual actsof some persons, by collusion of two or more persons, or by management overrideof the control. The design of any system of controls is also based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time controls may become inadequate becauseof changes in conditions, of the degree of compliance with the policies andprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

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**PART II. OTHER INFORMATION**

 

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

 

The Company’s annual meetingof shareholders was held on June 15, 2005. The following nominees wereelected as directors, each to hold office until his successor is elected andqualified, by the vote set forth below:

 
| **Nominee**         | ** ** | **For**    | ** ** | **Abstain** | ** ** |
|---------------------|------------|------------|------------|-------------|------------|
|                |       |       |       |        |       |
| Gerald Mc Mahon     |       | 28,408,500 |       | 1,154,649   |       |
| Frederick B. Craves |       | 28,300,228 |       | 1,262,921   |       |
| E. Rolland Dickson  |       | 28,437,270 |       | 1,125,879   |       |
| Carl S. Goldfischer |       | 28,472,312 |       | 1,090,837   |       |
| Alan A. Steigrod    |       | 28,441,532 |       | 1,121,617   |       |
| David B. Stevens    |       | 27,862,313 |       | 1,700,836   |       |
| Robert M. Littauer  |       | 27,828,504 |       | 1,734,645   |       |
| Alan Glassberg      |       | 28,476,777 |       | 1,086,372   |       |

 

The proposal to approve an amendment of theCompany’s Articles of Incorporation to increase the number of authorized sharesof common stock from 60,000,000 shares to 150,000,000 shares was approved bythe votes set forth below:

 

Holders of Common Stock and Series B StockVoting Together as a Single Voting Group:

 
| For     |   | 27,013,693 |   |
|---------|--------|------------|--------|
| Against |   | 2,468,328  |   |
| Abstain |   | 81,128     |   |

 

Holders of Common Stock Voting as a Separate VotingGroup:

 
| For     |   | 27,013,693 |   |
|---------|--------|------------|--------|
| Against |   | 2,468,328  |   |
| Abstain |   | 81,128     |   |

 

The proposal to approve the NeoRx Corporation 2004Incentive Compensation Plan was approved by the vote set forth below:

 

Holders of Common Stock and Series B StockVoting Together as a Single Voting Group:

 
| For     |   | 5,185,365 |   |
|---------|--------|-----------|--------|
| Against |   | 2,309,555 |   |
| Abstain |   | 75,603    |   |

 

**Item 5. Other Information**

 

(a) **EntryInto Material Definitive Agreement.**Effective July 1, 2005, theCompany entered into a Consulting Agreement with Alan B. Glassberg, MD, adirector of the Company. Under the agreement, Dr. Glassberg agrees toprovide consulting and advisory services relating to the Company’s platinumcompound technology and  other evaluationand services relative to new business and technology opportunities,premarketing assessments and general clinical and business strategies. NeoRxwill pay Dr. Glassberg a fee of $300 per hour for his services, subject toa maximum (excluding reimbursement for actual and necessary out-of-pocketexpenses) of $55,000. The term of the agreement runs from July 1, 2005until December 1, 2005. The agreement may be terminated by either partyimmediately with cause, or upon 30 days written notice without cause. A copy ofthe agreement is attached to this report as Exhibit 10.35, andincorporated herein by reference.

 

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**Item 6.Exhibits**

 

(a) Exhibits – See Exhibit Index below.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                       | NEORX CORPORATION                            |
|--------------------------------------------|----------------------------------------------|
|                                       | (Registrant)                                 |
|                                       |                                         |
| Date:   August 9, 2005 | By:                                          | /s/ SUSAN D. BERLAND |   |
|                                       | Susan D. Berland                             |
|                                       | Chief Financial Officer                      |
|                                       | (Principal Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                       | ** ** | ** ** |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1         |       | Amended and Restated Articles of Incorporation, as amended  June 15, 2005                                                                                                                                        |       | (B)        |
| 3.2         |       | Bylaws, as amended                                                                                                                                                                                                    |       | (K)        |
| 10.1        |       | Restated 1994 Stock Option Plan (‡)                                                                                                                                                                              |       | (F)        |
| 10.2        |       | Lease Agreement for 410  West Harrison facility, dated March 1, 1996, between NeoRx Corporation  and Diamond Parking, Inc                                                                                        |       | (H)        |
| 10.3        |       | Amendment No. 1, dated August 14, 2000, to Lease Agreement  between NeoRx Corporation and Dina Corporation                                                                                                  |       | (J)        |
| 10.4        |       | 1991 Stock Option Plan for Non-Employee Directors, as amended (‡)                                                                                                                                                |       | (E)        |
| 10.5        |       | 1991 Restricted Stock Plan (‡)                                                                                                                                                                                   |       | (D)        |
| 10.6        |       | Indemnification Agreement (‡)                                                                                                                                                                                    |       | (H)        |
| 10.7        |       | Stock Option Grant Program for Nonemployee Directors under the NeoRx  2004 Incentive Compensation Plan, as amended                                                                                                    |       | (B)        |
| 10.8        |       | Stock Option Agreement, dated December 19, 2000, between NeoRx  Corporation and Carl S. Goldfischer (‡)                                                                                                     |       | (I)        |
| 10.9        |       | Stock Option Agreement, dated January 17, 2001, between NeoRx  Corporation and Carl S. Goldfischer (‡)                                                                                                      |       | (I)        |
| 10.10       |       | License Agreement dated as of April 2, 2004, between the Company  and AnorMED, Inc. Certain portions of the agreement have been omitted  pursuant to a request for confidential treatment                   |       | (Q)        |
| 10.11       |       | Stock Option Grant Program for Nonemployee Directors under the NeoRx  Corporation 1994 Restated Stock Option Plan (‡)                                                                                            |       | (M)        |
| 10.12       |       | Facilities Lease, dated February 15, 2002, between NeoRx  Corporation and Selig Real Estate Holdings Six                                                                                                         |       | (A)        |
| 10.13       |       | Lease Termination/Continuation Agreement dated October 8, 2002,  between NeoRx Corporation and Dina Corporation                                                                                                  |       | (N)        |
| 10.14       |       | Key Executive Severance Agreement dated as of May 13, 2003,  between the Company and Karen Auditore-Hargreaves (‡)                                                                                          |       | (C)        |
| 10.15       |       | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of May 13, 2003, between the Company and  Karen Auditore-Hargreaves (‡)                                 |       | (L)        |
| 10.16       |       | Change of Control Agreement dated as of May 13, 2003, between  the Company and Karen Auditore-Hargreaves (‡)                                                                                                |       | (C)        |
| 10.17       |       | Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Linda Findlay (‡)                                                                                                 |       | (C)        |
| 10.18       |       | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of February 28, 2003, between the Company  and Linda Findlay (‡)                                        |       | (L)        |
| 10.19       |       | Change of Control Agreement dated as of February 28, 2003,  between the Company and Linda Findlay (‡)                                                                                                       |       | (C)        |
| 10.20       |       | Key Executive Severance Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                                                                                    |       | (C)        |
| 10.21       |       | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of February 28, 2003, between the Company  and Anna Wight (‡)                                           |       | (L)        |
| 10.22       |       | Change of Control Agreement dated as of February 28, 2003,  between the Company and Anna Wight (‡)                                                                                                          |       | (C)        |
| 10.23       |       | Key Executive Severance Agreement dated as of June 23, 2005,  between the Company and David A. Karlin(‡)                                                                                                    |       | (P)        |
| 10.24       |       | Change of Control Agreement dated as of June 23, 2005, between  the Company and David A. Karlin (‡)                                                                                                         |       | (P)        |
| 10.25       |       | Amended and Restated 2004 Incentive Compensation Plan (‡)                                                                                                                                                        |       | (G)        |
| 10.26       |       | Manufacturing and Supply Agreement dated as of May 4, 2004,  between Hyaluron, Inc. and the Company. Certain portions of the  agreement have been omitted pursuant to a request for confidential treatment. |       | (T)        |
| 10.27       |       | Employment Letter dated as of April 26, 2004, between the  Company and Gerald McMahon (‡)                                                                                                                   |       | (L)        |

 

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| 10.28 |   | Key Executive Severance Agreement dated as of May 11, 2004,  between the Company and Jerry McMahon (‡)                                                                 |   | (R) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|
| 10.29 |   | Change of Control Agreement dated as of May 11, 2004, between  the Company and Jerry McMahon (‡)                                                                       |   | (R) |
| 10.30 |   | Key Executive Severance Agreement dated as of October 25, 2004,  between the Company and Susan D. Berland (‡)                                                          |   | (S) |
| 10.31 |   | Amendment No. 1 dated as of March 30, 2005 to Key Executive  Severance Agreement dated as of October 25, 3004, between the Company  and Susan D. Berland (‡) |   | (L) |
| 10.32 |   | Change of Control Agreement dated as of October 25, 2004,  between the Company and Susan D. Berland (‡)                                                                |   | (S) |
| 10.33 |   | Form of Non-Qualified Stock Option Agreement under 2004  Incentive Compensation Plan (‡)                                                                               |   | (O) |
| 10.34 |   | Form of Incentive Stock Option Agreement under 2004 Incentive  Compensation Plan (‡)                                                                              |   | (O) |
| 10.35 |   | Consulting Agreement between the Company and Alan B. Glassberg, M.D.  (‡)                                                                                                   |   | (T) |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification of Chairman and  Chief Executive Officer                                                                                        |   | (T) |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial  Officer                                                                                                     |   | (T) |
| 32.1  |   | Section 1350 Certification of Chairman and Chief Executive  Officer                                                                                                         |   | (T) |
| 32.2  |   | Section 1350 Certification of Chief Financial Officer                                                                                                                       |   | (T) |

 
|   | (‡) |   | Management contract or compensatory plan.                                                                                                                                                       |
|--------|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |   |                                                                                                                                                                                            |
|   | (A)      |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal  year ended December 31, 2001, and incorporated herein by reference.                                               |
|   |     |   |                                                                                                                                                                                            |
|   | (B)      |   | Filed as an exhibit to the Company’s Current Report on Form 8-K  filed June 16, 2005, and incorporated herein by reference.                                                      |
|   |     |   |                                                                                                                                                                                            |
|   | (C)      |   | Filed as an exhibit to the Company’s Registration Statement on  Form S-3/A (Registration No. 333-111344) filed on February 23,  2004, and incorporated herein by reference. |
|   |     |   |                                                                                                                                                                                            |
|   | (D)      |   | Filed as an exhibit to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 30, 1991, and incorporated herein by  reference.                            |
|   |     |   |                                                                                                                                                                                            |
|   | (E)      |   | Incorporated by reference to Exhibit A to the Company’s  definitive proxy statement on Schedule 14A filed April 10, 1996.                                                   |
|   |     |   |                                                                                                                                                                                            |
|   | (F)      |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal  year ended December 31, 1995, and incorporated herein by reference.                                               |
|   |     |   |                                                                                                                                                                                            |
|   | (G)      |   | Incorporated by reference to Exhibit A to the Company’s  definitive proxy statement on Schedule 14A filed April 29, 2005.                                                   |
|   |     |   |                                                                                                                                                                                            |
|   | (H)      |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 1996, and incorporated herein by reference.                                             |
|   |     |   |                                                                                                                                                                                            |
|   | (I)      |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal  year ended December 31, 2000, and incorporated herein by reference.                                               |
|   |     |   |                                                                                                                                                                                            |
|   | (J)      |   | Filed as an exhibit to the Company’s Form 10-K for the fiscal  year ended December 31, 1998, and incorporated herein by reference.                                               |
|   |     |   |                                                                                                                                                                                            |
|   | (K)      |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 1999, and incorporated herein by reference.                                         |

 

37

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|   | (L)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 2005, and incorporated herein by reference.     |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                    |
|   | (M)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended June 30, 2002, and incorporated herein by reference.      |
|   |   |   |                                                                                                                                                    |
|   | (N)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 2002, and incorporated herein by reference. |
|   |   |   |                                                                                                                                                    |
|   | (O)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended September 30, 2004, and incorporated herein by reference. |
|   |   |   |                                                                                                                                                    |
|   | (P)    |   | Filed as an exhibit to the Company’s Current Report on Form 8-K  filed on June 29, 2005, and incorporated herein by reference.           |
|   |   |   |                                                                                                                                                    |
|   | (Q)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended March 31, 2004, and incorporated herein by reference.     |
|   |   |   |                                                                                                                                                    |
|   | (R)    |   | Filed as an exhibit to the Company’s Form 10-Q for the quarterly  period ended June 30, 2004, and incorporated herein by reference.      |
|   |   |   |                                                                                                                                                    |
|   | (S)    |   | Filed as an exhibit to the Company’s Current Report on Form 8-K  filed October 19, 2004, and incorporated herein by reference.           |
|   |   |   |                                                                                                                                                    |
|   | (T)    |   | Filed herewith.                                                                                                                                         |

 

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