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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý                                        | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------- | ----------------------------------------------------------------------------------------
|FOR THE FISCAL YEAR ENDED MARCH 31, 2002
|OR                                      
|o                                        | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-8549

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AVATEX CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

25-1425889(I.R.S. Employer Identification No.)5910 North Central Expressway, Suite 1780,
Dallas, Texas(Address of principal executive offices)

75206(Zip Code)


Registrant's telephone number, including area code: 214-365-7450

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

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Class
A Common Stock, par value $.01 per share
    Warrants to Purchase Class A Common Stock at $2.25 per share
    6.75% Notes of Avatex Funding, Inc. due December 7, 2002 Guaranteed by Avatex Corporation

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

On
May 28, 2002, the aggregate value of voting stock held by non-affiliates of the registrant was approximately $103,000.

On
May 28, 2002, there were 19,637,357 shares of the registrant's common stock outstanding before deducting 2,378,164 shares which represent the Corporation's 48.1% equity interest in common
stock of the Corporation owned by Phar-Mor, Inc.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

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PART I

ITEM 1. BUSINESS

Avatex Corporation is a holding company that, along with its subsidiaries, owns interests in other corporations and partnerships. We consolidated Chemlink
Laboratories, LLC ("Chemlink") at March 31, 2002 as a result of our control of 50% of the voting interests of Chemlink through our 59% interest in Chemlink Acquisition Company, LLC ("CLAC").
Prior to March 31, 2002, Chemlink was carried on an equity basis (see discussion below). Chemlink is primarily engaged in the development, manufacture and distribution of effervescent tablet
and granule formulations for consumers and businesses for use in cleaning, disinfecting and sterilization applications. We also own 48% of Phar-Mor, Inc. ("Phar-Mor")
which operates a chain of discount retail drugstores. Phar-Mor filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code on September 24, 2001.

We
were incorporated in Delaware on September 27, 1982, under the name National Intergroup, Inc. We were formed to effect a corporate restructuring of National Steel
Corporation ("NSC") and its subsidiaries. On September 13, 1983, NSC was merged into one of our subsidiaries and the stockholders of NSC became our stockholders. We sold substantially all of
our investment in NSC and related metals operations by fiscal 1991 and invested in distribution businesses, principally FoxMeyer Corporation ("FoxMeyer"). On August 27, 1996, FoxMeyer filed for
protection under Chapter 11 of the Bankruptcy Code. On November 8, 1996, the Bankruptcy Court approved the sale of the principal assets of FoxMeyer and FoxMeyer Drug Company ("FoxMeyer Drug")
to McKesson Corporation ("McKesson"). On March 18, 1997, the FoxMeyer Chapter 11 cases were converted into Chapter 7 liquidation cases. On December 7, 1999, we merged with Xetava
Corporation ("Xetava"), a wholly-owned subsidiary, which resulted in the elimination of our outstanding preferred stock and the issuance of a new Class A $0.01 par value common stock in place
of the previously outstanding $5.00 par value common stock.

We
have also been involved in making significant investments in other operating activities. Since fiscal 1993, we have made investments in various real estate properties and loans. We
sold the last of these investments in May 1999. Starting in September 1995, we directly and indirectly acquired certain equity investments in Phar-Mor and, at
March 31, 2002, owned approximately 48.1% of Phar-Mor's outstanding common stock. Depending on the outcome of Phar-Mor's bankruptcy proceeding, we may lose all or
part of our ownership interest in Phar-Mor. Starting in March 1998, we made equity investments in Chemlink through CLAC and currently own approximately 59% of CLAC's outstanding
membership interests. Our current investments are described in the "Description of Business" section below.

As
discussed more fully in Note O to the consolidated financial statements and in "Liquidity and Capital Resources" contained herein in Item 7, it is possible that we will not
have sufficient cash to pay the $14.3 million face amount of the 6.75% notes issued by Avatex Funding, Inc. ("Avatex Funding"), and guaranteed by us, when they mature on
December 7, 2002. Our management continues to investigate strategies and alternatives to address this issue. However, should we not be able to generate sufficient cash flows from our
investments, restructure our liabilities, and/or obtain additional financing, we may have to seek protection under the federal bankruptcy laws. We had adequate funds at March 31, 2002 to meet
our obligations then due, and we believe we have adequate funds to continue to pay our debts as they become due until the maturity date of the 6.75% notes. The financial statements contained herein
have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do
not reflect any adjustments that might ultimately result from this uncertainty.

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Description of Business

Cautionary Statement under the Private Securities Litigation Reform Act of 1995: This Annual Report on Form 10-K contains certain
"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the assumptions, beliefs and opinions of our management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "should," and similar expressions are intended to identify forward-looking statements. Such statements
reflect our current views with respect to future events and are subject to certain risks and uncertainties, including, but not limited to, the risk that we may be unable to implement strategies to
continue as a going concern. Management believes that our assets may be inadequate to retire the 6.75% notes issued by Avatex Funding, and guaranteed by us, at the notes' maturity in
December 2002, and we may be unable to develop any strategies that will allow us to operate after that date. In companies in which we have invested, we also face risks associated with
competitive pressures; the effects on our investment in Phar-Mor as a result of its bankruptcy filing; the ability of the management of the companies in which we have invested to develop,
implement and market their products and services; and other such risks. These other risks include decreased consumer spending, decreased availability of venture capital, customer concentration issues
and the effects of general economic conditions including the changes resulting from the effects of the events of September 11, 2001 and their aftermath. In addition, our business, operations
and financial condition are subject to the risks, uncertainties and assumptions which are described in our reports and statements we have filed from time to time with the Securities and Exchange
Commission, including this report. Should one or more of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those
described herein. The forward-looking statements made in this document speak only to the date on which such statements are made, and we undertake no obligation to update any forward-looking statement
to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Our
fiscal year ends on March 31; therefore, references to fiscal 2002 or 2002, fiscal 2001 or 2001, etc. herein refer to our fiscal year ending on March 31 of that year.

Chemlink Laboratories, LLC

We, through CLAC, control 50% of the voting interests of Chemlink. Effective March 31, 2002, CLAC was able to designate the majority of Chemlink's
directors as a result of a restructuring and an additional investment by CLAC in Chemlink, as discussed below. Therefore, Chemlink was consolidated with us at March 31, 2002. Prior to that
date, we carried Chemlink on an equity basis.

Chemlink
is principally engaged in the development, manufacture and distribution of proprietary effervescent tablet and granule formulations for use in cleaning, disinfecting and
sterilization applications. In addition to pursuing opportunities in the dental and medical markets where it has shipped products for the last several years, Chemlink has developed a unique and
patentable formulation and process for the manufacture of effervescent tablets, granules and powders. This new technology significantly expands the options for both the types of ingredients as well as
the concentration of ingredients that can be utilized in effervescent formulations. As a result, the new technology creates an opportunity to develop effervescent formulations for many laundry
detergent and cleaning products for both consumers and businesses which have, to date, been impractical because of the limitations inherent in older effervescent technologies.

Before
March 31, 2002, CLAC owned 50% of the voting rights in Chemlink and accounted for its investment in Chemlink on an equity basis. CLAC had originally acquired its 50%
interest for approximately $8.2 million. During 2002, CLAC made additional investments in Chemlink in order to provide operating funds to Chemlink. CLAC invested $1.4 million in Chemlink
in May and

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September 2001. The additional investment in September 2001 was part of an overall restructuring of the membership interests in Chemlink. As part of the restructuring, the May and
September contributions were invested in Preferred C membership interests ("Preferred C") which will earn a preferred return and have preference in liquidation over all other membership interests. In
addition, CLAC's prior investments in Chemlink were modified and will also earn a preferred return and have preference in liquidation to other members' interests in Chemlink. CLAC's voting interest in
Chemlink remained at 50% of the total membership interests entitled to vote on most matters after the restructuring. In December 2001 and March 2002, CLAC made additional investments of
approximately $0.6 million in order to continue to provide operating funds to Chemlink. CLAC received additional Preferred C interests and the right to appoint a majority of Chemlink's board
members effective March 31, 2002. Therefore, because we controlled Chemlink as of March 31, 2002, its assets and liabilities have been consolidated as of that date. The remaining 50% of
the voting rights of Chemlink that CLAC does not control are accounted for as a minority interest in the consolidated balance sheet.

While
CLAC and others have had to fund Chemlink's operations due to a lack of significant sales during the year, Chemlink currently anticipates entering into several contracts which
should provide funds to cover at least a portion of its future operating expenses. Chemlink is in discussions with other companies which may provide the additional business needed to allow Chemlink to
totally fund its operating expenses and to potentially increase its liquidity and/or allow it to distribute the preferred returns on its Preferred C and other membership interests. Until such time,
however, CLAC or other investors may continue to have to make contributions to fund Chemlink's ongoing operations.

In
addition to our investment of approximately $3.5 million in CLAC in prior years for a 41.1% interest, we invested approximately $1.6 million in fiscal 2002 in order to
provide our portion of the funds used by CLAC to make its additional investments in Chemlink in fiscal 2002, as described above. Of the amount invested in fiscal 2002, we invested $1.1 million
in CLAC in May and September 2001 as part of an overall restructuring of CLAC's membership interests. The membership interests we received for our additional investments will earn a preferred
return. We also increased our ownership interest in CLAC's voting rights from 41% to 59% as of September 1, 2001 as a result of the restructuring as certain other members, including
Phar-Mor, were unable or decided not to contribute based on their original ownership in CLAC. We made additional contributions of approximately $0.5 million in December 2001
and March 2002; however, our ownership percentage in CLAC remained at 59%.

Therefore,
since September 1, 2001, because we have owned 59% of the voting rights in CLAC, we have reported CLAC's results on a consolidated basis. The remaining 41% of the
voting rights in CLAC that we do not own are accounted for as a minority interest from that date.

Phar-Mor, Inc.

We own approximately 48.1% of Phar-Mor's outstanding common stock at March 31, 2002. Phar-Mor filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code on September 24, 2001. Phar-Mor has since closed approximately 65 of its 139 stores as part of its plan to emerge from bankruptcy. Depending
on the outcome of Phar-Mor's bankruptcy proceeding, we may lose all or part of our investment in the common stock of Phar-Mor. Therefore, we are unable to currently determine
the market value of our investment in Phar-Mor common stock. Our Co-Chairmen and Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin, continue to
serve as Co-Chairmen and Co-Chief Executive Officers of Phar-Mor.

During
fiscal 1999, Phar-Mor acquired 2,086,200 shares of our common stock at a cost of approximately $5.0 million. In December 1999, Phar-Mor
acquired an additional 2,862,400 shares of our common stock for approximately $5.7 million. As a result, Phar-Mor owns 25.2% of our issued Class A common stock. To the extent
that we own 48.1% of Phar-Mor, we have treated an equivalent

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amount of Phar-Mor's cost of our common stock similar to treasury stock and have consequently reduced stockholders' equity. We also have reduced the number of shares outstanding when
calculating earnings per share to reflect our 48.1% equity ownership interest in our own Class A common stock owned by Phar-Mor.

Presby Corp.

We own the equivalent of an approximate 13.5% fully-diluted interest in Presby Corp. ("Presby"), formerly RAS Holding Corp., assuming conversion of the
outstanding Presby convertible preferred stock and the exercise of all the outstanding Presby options and warrants. We have invested a total of $2.4 million in the Series B convertible
preferred stock of Presby (the "Series B Preferred").

Presby
is a privately-held company that has developed a surgical technique called the Surgical Reversal of Presbyopia, which uses a patented medical device, the Scleral
Expansion Band ("SEB"), to treat presbyopia. Presbyopia is, in general, the loss of the human eye's ability to focus at near distances due to aging, resulting in the need for reading glasses or
bifocals. We have been advised that Presby has completed the surgical procedures required for its Phase I clinical trials in the United States and that it has received approval from the U.S. Food and
Drug Administration (the "FDA") to proceed with clinical studies required for market approval in the United States. However, the final outcome of the trials and achieving commercial success of the
technique are each highly uncertain. In addition, Presby has advised us that they have sought FDA approval to start clinical trials in the United States for use of the SEBs to treat certain forms of
glaucoma and ocular hypertension. Similar studies related to the treatment of presbyopia, ocular hypertension and glaucoma have begun in Canada. Presby has also developed related products which
include a specialized incision device and replacement blades for use with the surgical procedure, thus providing more consistent and reliable outcomes.

In
March 2002, Presby entered into a license agreement with CIBA Vision AG ("CIBA"), a subsidiary of Novartis AG. Under the license agreement, Presby granted to CIBA an exclusive
worldwide license to market and sell Presby's ophthalmic surgical products for use in the treatment of presbyopia, ocular hypertension and primary open angle glaucoma. CIBA will assume responsibility
for the manufacture of the licensed products following a transition period and has committed to provide additional cash infusions to Presby when Presby meets certain future milestones. Because Presby
retains responsibility for FDA trials and product development, it may still need to obtain additional financing from other sources in order to complete its FDA trials so it can bring its products to
market in the United States.

Our
Series B Preferred has voting rights equivalent to the common stock of Presby and accrues dividends at 12% per annum less 85% of any amounts paid to RAS Service Co, LP ("RAS
Service") as described below. The accrued dividends were deferred until the last day of the month following December 2001 (or, at Presby's option, in quarterly increments from that date to the
last day of the month following September 2002). Presby has exercised the option to defer payment until at least the last day of the month following June 2002. In addition, during fiscal
2001 the number of shares of common stock into which each Series B Preferred is convertible was changed from 2.1:1 to 2.52:1 as a result of Presby not meeting certain goals set forth in the
applicable certificate of designation.

RAS
Service is a limited partnership whose partners were the original owners of the Series B Preferred and another partnership that included certain principals in Presby. RAS
Service has a service contract with Presby under which it provides advisory and consulting services to Presby and receives the lesser of $20 per SEB sold or 5% of the net sales price of each SEB after
commissions (calculated on a quarterly basis) for providing these services. Of the revenue recognized by RAS Service, 85% is payable to the Series B Preferred partners and 15% is payable to the
other partner. The dividend on the Series B Preferred is reduced, but not below zero, by the 85% of the revenues due the Series B Preferred partners. A subsidiary of ours is the general
partner of RAS Service and receives

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approximately the first $15 thousand of the fees due the Series B Preferred partners. The remainder of the fees earned by the Series B Preferred partners are split among the
partners based on their original investment in the Series B Preferred. Payment of the fees by Presby to RAS Service was deferred until the last day of the month following December 31,
2001 (or in quarterly increments from that date consistent with the Series B Preferred deferral date). Presby has deferred the payment until at least the last day of the month following
June 2002. The service contract expires September 30, 2006 (or on December 31, 2006 if the Series B Preferred payment date is deferred to September 30, 2002).

In
connection with a potential future investment by CIBA or others, the terms of the Series B Preferred and the RAS Service contract with Presby may be subject to modifications to
be negotiated by the holders of the Series B Preferred and the new investors, including but not limited to the payment and/or further deferral of the accrued dividends of $0.7 million
and the accrued service fee of $0.1 million.

Investment iniLife Systems, Inc.

We own the equivalent of an approximate 14.5% interest, on a fully-diluted basis, iniLife Systems, Inc.
("iLife"), a privately-held corporation.iLife owns certain patents issued or pending which
provide for reliable, electrode-free, non-invasive methods for detecting and analyzing breathing, heart rate and body motions as well as methods for microwatt wireless
transmission, for digital data recording and for electrode-free, infrasound-based detection and intervention.iLife has incorporated these
technologies into personal emergency response systems and wireless vital signs monitors.iLife's commercial sales and/or licensing revenues have been
minimal to date.

In
fiscal 2002,iLife modified its corporate structure and set up a wholly-owned subsidiary, iLife Solutions ("Solutions"), which now owns or licenses all the
assets and assumed all the liabilities formerly held by iLife. We, along with other investors, loaned Solutions $1.0 million (our share was approximately $0.2 million) which is secured by the
assets of Solutions.iLife is attempting to find additional outside investors in order to provide funds to continue its operations and has reduced the
number of its employees and deferred the salaries of certain of its employees, with their agreement, for a period of six months. We wrote off our equity investment in iLife during the current fiscal
year to reflect what management believed to be an other than temporary decline in value. We believe that there is
adequate value iniLife to eventually recover our $0.2 million loan to Solutions.

We
originally invested approximately $1.3 million iniLife in December 1997 to purchase Series B convertible
preferred stock (the "B Preferred") for what was then a 6.3% fully-diluted ownership interest iniLife. In addition, we made various loans to iLife during
fiscal years 2000 and 2001. The loans had a carrying value of approximately $1.9 million at maturity in March 2001 and, in
connection with additional investments intoiLife by third parties, were converted into an equivalent number of shares of redeemable Series C
convertible preferred stock ("C Preferred") at $1.30 per share. We have also received a total of 3,720,207 warrants to purchase common stock at $1.30 per share as part of these transactions. These
warrants expire between March 2005 and March 2006. As described above, we believe the B Preferred, the C Preferred and the warrants have no current value and, accordingly, have written
off our $3.4 million equity investment in these securities in fiscal 2002.

Other

In May 2000, we invested approximately $0.2 million to acquire a 41.5% interest in a Delaware limited liability company, Cyclone Acquisition
Company, LLC ("Cyclone"), which acquired the rights to the "Cyclone Fence" name from Cyclone, Inc. at a cost of $0.3 million. Cyclone is attempting to license the "Cyclone Fence" name to
fence retailers. After initial attempts to license the name to large home improvement retailers were unsuccessful, we wrote off our investment in Cyclone in fiscal 2001. Further attempts to license
the name are continuing.

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At
March 31, 2001, we owned approximately $1.9 million of preferred stock of HPD Holdings Corp. ("HPD"), which was a privately held corporation whose subsidiary
manufactured and distributed household product lines. At the time of our initial investment in April 1998, we also received 2.5% of the common stock of HPD. In February and April 2000,
we invested approximately $0.1 million in a subordinated debenture of HPD and received warrants to purchase additional common stock of HPD at $.01 per share that would have expired
February 1, 2010. In April 2001, WD-40 Company acquired all of the outstanding common and preferred stock of HPD and repaid its debentures. We received a total of
approximately $2.6 million for our HPD investment resulting in a gain of approximately $0.6 million that was recognized in fiscal 2002.

The
interests in CLAC and Presby noted above are our direct interests and do not give effect to Phar-Mor's investments in these same companies. Phar-Mor has an
approximate 7.2% interest in Presby on a fully-diluted basis. Phar-Mor also owns approximately an 18% interest in CLAC.

Environmental Regulation

We, like many other enterprises, are subject to federal, state and local laws and regulations governing environmental matters. Such laws and regulations primarily
affect our previously sold or discontinued operations where we retained all or part of any environmental liabilities on conditions existing at the date of sale.

We
anticipate that compliance with statutory requirements related to environmental quality will continue to necessitate cash outlays by us for certain of our former operations. The
amounts of these liabilities are difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by us, the unknown
extent of our probable liability in proportion to the probable liability of other parties. Moreover, we may have environmental liabilities that we cannot, in our judgment, estimate at this time and
that losses attributable to remediation costs may arise at other sites. We recognize that additional work may need to be performed to ascertain the ultimate liability for such sites, and that further
information may change our current assessment. See Note L to our consolidated financial statements and "Item 3. Legal Proceedings" contained herein for a discussion of outstanding environmental
actions.

Employees

We employed 21 persons at March 31, 2002, including the 11 employees of Chemlink and excluding the employees of Phar-Mor.

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ITEM 2. PROPERTIES

Our executive office, located at 5910 North Central Expressway, Suite 1780, Dallas, Texas, contains approximately 10,223 square feet of space under a lease
agreement that expires in December 2003. We license approximately 62% of such office space to Presby andiLife.

ITEM 3. LEGAL PROCEEDINGS

McKesson/Vendor Litigation

In January 1997, we filed a lawsuit against McKesson and certain major pharmaceutical manufacturers. Prior to our fiscal year ended March 31, 2001,
we entered into settlement agreements with all of the manufacturer defendants in the litigation, under which we received confidential settlement payments. In December 2001, we entered into a
settlement agreement with McKesson that settled all of our claims against McKesson and all claims asserted by McKesson against us and certain of our officers in the litigation, under which we received
a confidential settlement payment.

Reliance Insurance Matters.

Our primary directors and officers' liability insurance policy for the three-year period ending on or about April 25, 1998 was United Pacific
Insurance Company ("UPIC"). On May 29, 2001, a Pennsylvania state court entered an order placing Reliance Insurance Company ("Reliance") and its subsidiary, UPIC, into "rehabilitation" under
Pennsylvania's Insurance Department Act. On October 3, 2001, the court entered an Order of Liquidation that superseded the May 29 order, terminated the rehabilitation of Reliance and
UPIC and appointed the insurance commissioner of the State of Pennsylvania as liquidator. We cannot estimate at this time the impact, if any, that might result from Reliance and UPIC being liquidated
on our 1996 stockholder litigation, the FoxMeyer directors lawsuit or the Ben Franklin Retail Stores, Inc. ("Ben Franklin") lawsuits discussed below.

1996 Stockholder Litigation

We and certain of our current and former officers and directors have been named in a series of purported class action lawsuits that were filed and subsequently
consolidated underZuckerman, et al. v. FoxMeyer Health Corporation, et al., in the United States District Court for the Northern District of Texas,
Dallas Division, Case No. 396-CV-2258-T. The lawsuit purports to be brought on behalf of purchasers of our common and former Series A and convertible
preferred stock during the period July 19, 1995 through August 27, 1996. In May 1997, plaintiffs in the lawsuit filed a consolidated amended class action complaint, which alleges
that we and the defendant officers and directors made misrepresentations of material facts in public statements or omitted material facts from public statements, including the failure to disclose
purportedly negative information concerning FoxMeyer's National Distribution Center and Delta computer systems and the resulting impact on our existing and future business and financial condition. In
March 1998, the Court denied our motion to dismiss the amended complaint in the lawsuit. In January 2002, the Court granted the plaintiffs' unopposed motion to certify a class of
purchasers of common stock as to federal claims, and reserved judgment on all other class certification issues. Discovery is proceeding in the lawsuit, and we intend to continue to vigorously defend
ourselves in the lawsuit.

FoxMeyer Corporation

In April 1998, the FoxMeyer Bankruptcy Trustee (the "Trustee") filed a lawsuit against the five former directors of FoxMeyer in the United States
Bankruptcy Court for the District of Delaware (the "Directors Lawsuit"), alleging that the defendants breached their fiduciary duties in connection with the June 19, 1996 dividend of certain
assets to us. The defendants have denied liability in the Directors Lawsuit and, in connection with the October 1997 settlement of a separate lawsuit brought by the

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Trustee against us relating to the dividend, the defendants received covenants not to execute from the Trustee. Discovery is virtually complete, and no trial date has been set.

In
February 2001, UPIC, the primary directors and officers' liability insurance carrier during the period of time covered by the Directors Lawsuit, filed a declaratory judgment
action in the United States District Court for the Northern District of Texas against us, the five former FoxMeyer directors and the Trustee, seeking a declaration that there is no insurance coverage
for the claims in the Directors Lawsuit. The Trustee also filed a separate lawsuit in the Delaware Bankruptcy Court against us, the five former FoxMeyer directors, UPIC and Gulf Insurance Company,
which is our excess directors and officers' liability insurance carrier, seeking a declaration that there is insurance coverage for the claims in the Directors Lawsuit. The Trustee added a second
claim for relief seeking a declaration that (i) any payments under the insurance policies are property of the FoxMeyer estates, (ii) any payments under the policies pending final
adjudication of the Directors Lawsuit constitute a violation of the automatic stay, and (iii) the parties be enjoined from taking any action to dissipate the proceeds of the policies. We have
filed answers to both of these lawsuits, and have moved for a judgment on the pleadings with respect to the Trustee's second claim for relief. We are currently paying our own defense costs and the
costs of the directors in these lawsuits and the Directors Lawsuit, although all of these lawsuits have been dormant since the entry of the UPIC Order of Liquidation.

Ben Franklin Retail Stores, Inc.

In 1997, the bankruptcy trustee and certain creditors of our former 17%-owned subsidiary, Ben Franklin, filed three lawsuits against us and certain of our and Ben
Franklin's current and former officers and directors. We and our officers and directors were subsequently dropped as defendants. All of the cases have been dismissed at least once, and the plaintiffs
are appealing the dismissal orders. In connection with paying our own defense costs in fiscal 1998, we also paid the initial defense costs of certain individuals who are named as defendants in these
lawsuits by reason of the fact that they may have been serving at our request as a director or officer of Ben Franklin. These costs also constituted a portion of the retention under the Ben Franklin
directors and officers' liability insurance policy issued by UPIC. Thereafter, UPIC paid defense costs until its liquidation proceeding in fiscal 2002, after which we resumed paying the appeal costs
of certain defendants.

We
were advised in May 2002 that the defendants in the two federal lawsuits are close to a tentative settlement of that litigation. Any settlement would be subject to definitive
documentation and approval by the Ben Franklin bankruptcy court. In the appeal of the state lawsuit, oral argument was held on May 28, 2002. If a settlement is reached and approved in the
federal court lawsuits or if liability is ever imposed in the state court lawsuit, we may, if appropriate, agree to indemnify certain defendants in accordance with Delaware law. We are unable to
estimate the possible loss, if any, which may accrue from this lawsuit.

National Aluminum Corporation

During our fiscal year ended March 31, 1990, we disposed of the operating assets of our subsidiary, National Aluminum Corporation ("NAC"). In connection
with the disposition of these assets, NAC retained responsibility for certain environmental matters. Except for attorneys' fees, NAC did not pay any amounts during fiscal 2002 with respect to these
matters, which are described in paragraphs (a) through (f) below:

(a)Diaz. In June 1988, NAC received notification that it was considered to be one of several hundred potentially responsible parties ("PRPs")
for the clean-up of a site known as the Diaz Refinery located in Diaz, Arkansas. In September 1989, a complaint was filed against NAC and others in the Chancery Court of Jackson
County, Arkansas, styledGrantors to the Diaz Refinery PRP Committee Site Trust, et al. v. Rheem Manufacturing Company, et al., in which a PRP steering
committee sought a declaratory

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judgment relating to cleanup liability and cost recovery at the site. In January 1990, NAC was dismissed as a defendant and realigned as a plaintiff, and thereby joined the PRP steering
committee that is
participating in site remediation activities. Assuming final approval of the cleanup by the State of Arkansas, NAC does not anticipate any additional material costs at the site.

(b) Fisher-Calo. In October 1990, the Environmental Protection Agency (the "EPA") sent a Special Notice Letter to approximately 350
PRPs, including NAC, with respect to the remediation of the Fisher-Calo Chemical and Solvent Recovery Site located in Kingsbury, Indiana. In August 1991, approximately 52 PRPs,
including NAC, executed a Consent Decree to perform the remedial design/remedial action, and NAC paid its allocated share of approximately $890,000 of the estimated $25 to $35 million total
cost of the cleanup at that time. In fiscal 2002, the PRP group implemented a structured financing arrangement by purchasing a cost-cap insurance policy and an annuity that will fund all
estimated future costs at the site, which resulted in NAC receiving a $316,767 refund of previously paid costs. NAC does not anticipate any additional material costs at the site.

(c) Granville Solvents. In May 1995, a complaint was filed against NAC and others in the United States District Court for the Southern District
of Ohio styledAT&T Global v. Union Tank Car Co., in which a PRP group seeks to recover costs incurred relating to the Granville Solvents site located
in Granville, Ohio. In August 1995, NAC was dismissed as a defendant following its payment of approximately $18,000 for its allocated share of past costs and agreement to join the PRP group and
participate in funding the remedial work at the site. NAC also signed an Administrative Order on Consent with the EPA and, in November 2000, paid $11,600 as its share of the PRP group's
settlement with the State of Ohio. The total cost of the remaining remedial work at the site is estimated to be approximately $3.1 million, and NAC's allocated share is likely to be
approximately 1.0% of the total remaining cost plus any related litigation assessments for cost recovery actions against non-participating PRPs.

(d)Green River. In January 1992, the EPA notified NAC that it was considered to be one of a number of PRPs with respect to the disposal of
allegedly hazardous substances at the Green River Disposal Site located in Davies County, Kentucky. NAC has since paid a total of approximately $288,000 of the total estimated costs associated with
the investigation and remediation of the site, including the remedial investigation/feasibility study, the remedial action and the payment of the EPA's past costs. In August 2000, the EPA
issued a record of decision regarding groundwater remediation at the site, which requires the PRPs to put in place institutional controls to prevent future use of the groundwater. In
August 2001, the EPA issued a special notice letter to various PRPs, including NAC, with respect to the August 2000 record of decision. Various PRPs, including NAC, are currently
negotiating the terms of a consent decree with respect to the special notice letter and record of decision. If the current draft of the consent decree is executed by the PRPs, the EPA and the
Department of Justice, it would then be lodged with the court for approval, after which the PRPs are required to establish and maintain financial security in the amount of $4 million upon the
entry of the decree. NAC estimates that its share of this amount is approximately $195,000 and that NAC may also be responsible for additional costs to comply with the consent decree in the future.

(e) Hastings/Amerimark. The United States District Court for the Western District of Michigan previously ruled in favor of Amerimark Building Products,
the successor to Hastings Building Products, Inc., that NAC is liable for 75% of response costs and remedial activities, including a soil vapor extraction system, related to mask wash
contamination of soil and groundwater in the vicinity of a former NAC plant located in Hastings, Michigan. Owens Corning, the successor to Amerimark Building Products, has retained a consultant to
conduct confirmatory soil and groundwater sampling to
verify that the remedial activities were successful and to obtain closure of the site from the state. Should additional groundwater remediation be necessary, NAC would allegedly be responsible for its
volumetric share of the costs, which costs cannot be estimated at this time. While Owens Corning filed

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for bankruptcy protection in October 2000, NAC does not believe that the filing will materially change NAC's obligations at the site.

(f)Organic Chemical. In March 1991, NAC received notification that its former Hastings Aluminum Products division was considered to be one of a
number of PRPs for wastes present at the Organic Chemical Site located near Grandville, Michigan. In the notice, the EPA requested NAC's voluntary participation in certain remedial actions and, in
January 1992, the EPA issued an Administrative Order requiring NAC and approximately 150 other PRPs to perform remediation of operable unit one at the site. A group of PRPs, including NAC, has
performed remediation at operable unit one and, in February 2000, a Consent Decree was entered with respect to remediation of operable unit two. Assuming the alternate compliance points
demonstration plan is successful, NAC anticipates that its remaining costs at the site will consist of (i) NAC's 1.5% allocated percentage of the total response costs, which are expected to be
between $1.0 million and $2.5 million and paid over a number of years, and (ii) NAC's 1.5% allocated percentage of any future EPA oversight costs permitted under the Consent
Decree, which NAC estimates to be de minimus. If the demonstration plan is unsuccessful, the estimated costs of active groundwater remediation may be significantly higher.

Bull Moose Tube Company

In August 1988, we sold all of the outstanding stock of Bull Moose Tube Company to Caparo, Inc. The Stock Purchase Agreement contained an
environmental indemnification provision. In March 2001, we were served in a lawsuit Caparo filed against us seeking indemnification for (i) costs of removing dioxin contaminated soil at
a facility located in Gerald, Missouri, which was remediated under an EPA plan, and (ii) contributions made in connection with soil contamination at the Missouri Electric Works site in Cape
Girardeau, Missouri. The lawsuit seeks a total of approximately $287,000 in alleged indemnified costs, although additional amounts have been identified during discovery. We believe that we may have
one or more valid defenses to the indemnity request, and are defending ourselves in the lawsuit.

We
also are a party to various other disputes arising out of the conduct of our business. We, however, do not believe that the outcome of these disputes, individually or in the
aggregate, will have a material adverse effect on our business or financial condition.

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

None

EXECUTIVE OFFICERS OF THE REGISTRANT

|Abbey J. Butler   |  | Co-Chairman of the Board and Co-Chief Executive Officer     
|----------------- |  | ------------------------------------------------------------
|Melvyn J. Estrin  |  | Co-Chairman of the Board and Co-Chief Executive Officer     
|Grady E. Schleier |  | Senior Vice President, Chief Financial Officer and Treasurer
|John G. Murray    |  | Vice PresidentFinance                                      
|Robert H. Stone   |  | Vice President, General Counsel and Secretary               

PART II

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

Our Class A common stock is traded on the OTC Bulletin Board system. At May 31, 2002, we had 4,815 common stockholders of record. Information
concerning the high and low market prices of our common stock and dividends declared for each quarter in the last two fiscal years are shown below.

10

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The prices presented are bid prices which represent prices quoted by broker-dealers on the OTC Bulletin Board system and do not necessarily reflect prices from actual transactions.

STOCK
PRICES FOR FISCAL 2002 AND 2001

|                            |             | Market Price Range |   | Dividends Declared
Per Share
|--------------------------- | ----------- | ------------------ | - | ----------------------------
|
|
|
|Common Stock (Symbol: AVAT) |             |                    |   |                             
|                            | 1st Quarter |                    | $ | 0.4900                      
|                            | 2nd Quarter |                    |   | 0.5300                      
|                            | 3rd Quarter |                    |   | 0.1500                      
|                            | 4th Quarter |                    |   | 0.0800                      

While
there are no restrictions on the payment of dividends, we do not presently intend to pay any dividends on our common stock. Information about our common stock and our ability to
pay dividends
are incorporated herein by reference to Notes G and O to the consolidated financial statements contained herein in Item 8.

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ITEM 6. SELECTED FINANCIAL DATA

The following summary should be read in conjunction with the consolidated financial statements contained herein:

AVATEX CORPORATION AND SUBSIDIARIES  FIVE-YEAR FINANCIAL SUMMARY AND RELATED DATA

|                      |                                                                                                                                                       | For the years ended March 31,                                              |  
|--------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -
|
|
|Summary of Operations |                                                                                                                                                       |                                                                            |  
|                      | Operating costs                                                                                                                                       |                                                                            | $
|                      | Other income (expense)                                                                                                                                |                                                                            |  
|                      | Interest and dividend income                                                                                                                          |                                                                            |  
|                      | Interest expense                                                                                                                                      |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  
|                      | Loss from continuing operations before National Steel Corporation ("NSC"), income tax provision, equity in income of affiliates and minority interest |                                                                            |  
|                      | NSC net preferred dividend income and loss on settlement                                                                                              |                                                                            |  
|                      | Income tax benefit                                                                                                                                    |                                                                            |  
|                      | Equity in income (loss) of affiliates                                                                                                                 |                                                                            |  
|                      | Minority interest in results of operations of consolidated subsidiaries                                                                               |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  
|                      | Loss from continuing operations                                                                                                                       |                                                                            |  
|                      | Discontinued operations                                                                                                                               |                                                                            |  
|                      | Extraordinary items                                                                                                                                   |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  
|                      | Net income (loss)                                                                                                                                     |                                                                            |  
|                      | Preferred stock dividends                                                                                                                             |                                                                            |  
|                      | Gain on exchange of preferred stock                                                                                                                   |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  
|                      | Income (loss) applicable to common stockholders                                                                                                       |                                                                            | $
|                      |                                                                                                                                                       |                                                                            |  
|Common Share Data     |                                                                                                                                                       |                                                                            |  
|                      | Basic and diluted income (loss) per share:                                                                                                            |                                                                            |  
|                      |                                                                                                                                                       | Income (loss) from continuing operations applicable to common stockholders |  
|                      |                                                                                                                                                       | Discontinued operations                                                    |  
|                      |                                                                                                                                                       | Extraordinary items                                                        |  
|                      |                                                                                                                                                       |                                                                            |  
|                      |                                                                                                                                                       | Income (loss) per share                                                    |  
|                      | Cash dividends per share                                                                                                                              |                                                                            |  
|                      | Average number of common shares outstanding (in thousands):                                                                                           |                                                                            |  
|                      |                                                                                                                                                       | Basic and diluted                                                          |  
|                      |                                                                                                                                                       |                                                                            |  
|Financial Information |                                                                                                                                                       |                                                                            |  
|                      | Working capital                                                                                                                                       |                                                                            | $
|                      | Total assets                                                                                                                                          |                                                                            |  
|                      | Capital expenditures                                                                                                                                  |                                                                            |  
|                      | Long-term debt                                                                                                                                        |                                                                            |  
|                      | Redeemable preferred stock                                                                                                                            |                                                                            |  
|                      | Stockholders' equity (deficit)                                                                                                                        |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  
|Key Financial Ratios  |                                                                                                                                                       |                                                                            |  
|                      | Current ratio                                                                                                                                         |                                                                            |  
|                      | Long-term debt as a percent of total capitalization                                                                                                   |                                                                            |  
|                      |                                                                                                                                                       |                                                                            |  

The comparability of the information presented above is affected by acquisitions, dispositions, and other transactions which are described in the
accompanying footnotes to the consolidated financial statements which should be read in conjunction with this five-year financial summary. SEC regulations require that capitalization
ratios also be shown with our former redeemable preferred stock included in debt. On this basis, long-term debt as a percentage of total capitalization would be 339.7% and 247.8%,
respectively, for fiscal years 1999 and 1998.

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

AVATEX CORPORATION AND SUBSIDIARIES  MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS  MARCH 31, 2002  (in thousands of dollars)

Overview

Avatex Corporation is a holding company that, along with its subsidiaries, owns interests in other corporations and partnerships. We consolidated Chemlink
Laboratories, LLC ("Chemlink") at March 31, 2002 as a result of our control of 50% of the voting interests of Chemlink through our 59% interest in Chemlink Acquisition Company, LLC ("CLAC").
Prior to March 31, 2002, Chemlink was carried on an equity basis (see discussion below). Chemlink is primarily engaged in the development, manufacture and distribution of effervescent tablet
and granule formulations for consumers and businesses for use in cleaning, disinfecting and sterilization applications. We also own 48% of Phar-Mor, Inc. ("Phar-Mor")
which operates a chain of discount retail drugstores. Phar-Mor filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code on September 24, 2001.

We
filed a lawsuit against McKesson Corporation ("McKesson") and certain pharmaceutical manufacturers in January 1997 related to the actions we alleged they took to drive our
pharmaceutical distribution subsidiary, FoxMeyer Drug Company, out of business. We previously settled with the various pharmaceutical manufacturers and, in December 2001, we settled with
McKesson. After payment of contingent attorneys' fees and other expenses and the distributions described below, we retained $2,562 in the current fiscal year relating to the litigation.

With
respect to distributions from the proceeds of the McKesson litigation, under the terms of the June 1999 merger agreement between us and Xetava Corporation ("Xetava"), certain
of our former preferred stockholders had elected to exchange their preferred shares for cash, notes, warrants and a deferred contingent cash right. The deferred contingent cash right entitled the
former shareholders to a percentage of our net recovery in the McKesson litigation. The amount distributed to these former shareholders in December 2001 was approximately $386. In addition,
certain current and former employees were also participants under a Performance Incentive Plan relating to the litigation. The amount distributed to current and former employees in
December 2001 was 17.5% of the net proceeds of the litigation or approximately $400.

During
2002, CLAC made additional investments in Chemlink in order to provide operating funds to Chemlink. CLAC invested $1,400 in Chemlink in May and September 2001. The
additional investments in Chemlink were in a new preferred membership interest and were part of an overall restructuring of the membership interests in Chemlink (see Note B to the consolidated
financial statements). CLAC's voting interest in Chemlink remained at 50% of the total membership interests entitled to vote on most matters after the restructuring. In December 2001 and
March 2002, CLAC made additional investments of $641 in order to provide operating funds to Chemlink. CLAC received additional preferred membership interests and a majority of Chemlink's board
seats effective March 31, 2002. Therefore, because we controlled Chemlink as of March 31, 2002, its assets and liabilities have been consolidated as of that date. The remaining 50% of
the voting rights of Chemlink that CLAC does not control are accounted for as a minority interest in the consolidated balance sheet. Chemlink's results of operations for the current fiscal year were
reported on an equity basis.

Our
investment in Phar-Mor was reduced to zero at June 30, 2001 as a result of the recognition of our equity in Phar-Mor's losses during that quarter.
Therefore, there was no immediate impact on our

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financial condition as a result of the bankruptcy filing by Phar-Mor in September 2001. Depending on the outcome of Phar-Mor's bankruptcy proceeding, we may lose all or
part of our investment in the common stock of Phar-Mor. We did not file for bankruptcy and are not part of the Phar-Mor bankruptcy proceeding except as it may relate to our
investment in the common stock of Phar-Mor. Our Co-Chairmen and Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin, continue to serve as
Co-Chairmen and Co-Chief Executive Officers of Phar-Mor. See Notes A and B to the consolidated financial statements.

The
extraordinary item for the year ended March 31, 2002 represents gains realized on the early extinguishment of approximately $11,744 face value of the 6.75% notes issued by our
subsidiary, Avatex Funding, Inc. ("Avatex Funding"), which we purchased for approximately $7,055. The gain of $2,476 represents the difference in the purchase price and the discounted carrying
value of the notes at the time of purchase. This purchase reduced the outstanding face value of the 6.75% notes to $14,281. See "Liquidity and Capital Resources" below for a discussion of our possible
inability to repay the notes at their maturity in December 2002 and, as a result, the possibility of seeking protection under federal bankruptcy law.

RESULTS OF OPERATIONS  YEAR ENDED MARCH 31, 2002 COMPARED  TO YEAR ENDED MARCH 31, 2001

Gain on Settlement of Legal Action

Gain on settlement of legal action reflects the net proceeds received from our settlement with McKesson in fiscal year 2002 and with certain pharmaceutical
manufacturers in fiscal year 2001 after contingent legal and other expenses paid directly from the settlement. See the discussion above.

Operating Costs

Total operating costs including depreciation and amortization decreased $1,868 to $3,328 for the year ended March 31, 2002 compared to $5,196 for the year
ended March 31, 2001. Operating costs decreased primarily as a result of decreased legal expenses of $2,438 and a decrease in travel expenses of $138. These were partially offset by an increase
of $578 in expenses related to our pension plans and an increase of $130 in other expenses.

Other Income (Expense)

Other expense of $1,211 for the year ended March 31, 2002 was related to a loss of $3,423 for the decline in value of our investment in iLife Systems, Inc. ("iLife"), partially offset by $2,212 in income primarily due to $566 of
gains on the sale of securities and investments and $1,619 in payments received on assets sold or written off in prior fiscal years. Other income of $13 for the year ended March 31, 2001,
related to $3,764 in income consisting primarily of a gain on the sale of equity securities of $3,411 and a gain of $325 on a payment received on an asset sold in a prior fiscal year. This was
partially offset by the $3,751 write-down of our investment in Phar-Mor (see Note D to the consolidated financial statements).

Interest and Dividend Income

Interest and dividend income decreased $1,227 to $739 for the year ended March 31, 2002 compared to $1,966 for the year ended March 31, 2001. The
decrease was due to a decline of $1,026 in interest income from short-term investments as a result of lower cash balances and lower interest rates in the
current versus prior fiscal year and a decline of $206 in interest on notes receivable which were either redeemed or converted to preferred stock. Dividend income increased $5 as compared to the prior
year primarily from earning a higher dividend rate on the preferred stock of Presby Corp.

14

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("Presby") and from the additional investment we made in the preferred stock ofiLife less the impact of the sale of the preferred stock of HPD
Holdings Corp. ("HPD").

Interest Expense

Interest expense decreased $2,292 to $2,694 for the year ended March 31, 2002 from $4,986 for the year ended March 31, 2001. The decrease was
principally due to the payoff of a note to the FoxMeyer Corporation ("FoxMeyer") Bankruptcy Trustee (the "Trustee") in February 2001 and the purchase and subsequent cancellation of $11,744 face
value of the 6.75% notes of Avatex Funding.

Equity in Loss of Affiliates

Equity in loss of affiliates was $14,427 for the year ended March 31, 2002 compared to equity in loss of affiliates of $16,311 for the year ended
March 31, 2001. The $1,884 decrease in our equity in loss of affiliates was due to the following:



Income Taxes

We recorded no federal income tax provision for the current or prior year. Any income tax expense or benefit related to the current or prior year's income (loss)
was offset by a corresponding change in the deferred tax asset valuation allowance.

Minority interest

As a result of the change in our accounting for CLAC (see Note B to the consolidated financial statements), CLAC's results are consolidated with our
results starting September 1, 2001. Therefore, this caption in the statement of operations primarily represents the portion of the equity loss in Chemlink since September 2001 that was
allocated to CLAC's minority interest. There was no corresponding minority interest in the prior year as CLAC was carried on an equity basis.

Discontinued Operations

The gain on disposal of discontinued operations for the year ended March 31, 2002 was due to a $48 tax refund received on one of our former real estate
investments sold in May 1999, a refund of a previously paid environmental claim of a discontinued operation of $317, and $337 related to the reduction of certain reserves for contingent
liabilities for a subsidiary sold in fiscal 1998, as these reserves were no longer required. For the year ended March 31, 2001, the gain on disposal of discontinued operations of $2,188 related
to the reduction of certain reserves for contingent liabilities of National Aluminum Corporation ("NAC"), whose operations were substantially discontinued prior to fiscal 1991, as these reserves were
no longer required.

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Extraordinary Items

We recognized a gain of $2,476 on the purchase and subsequent cancellation of $11,744 face value of the 6.75% notes of Avatex Funding during the year ended
March 31, 2002. Gain on the extinguishment of debt for the year ended March 31, 2001 consisted of a gain of $4,551 on the settlement of a note payable to the Trustee and a gain of $384
related to the difference in the carrying value and the cost of open market purchases of the 6.75% notes of Avatex Funding during fiscal 2001. The equity in extraordinary item of affiliate for fiscal
2001 represented our equity in Phar-Mor's gain on the early extinguishment of its debt.

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RESULTS OF OPERATIONS  YEAR ENDED MARCH 31, 2001 COMPARED  TO YEAR ENDED MARCH 31, 2000

Gain on Settlement of Legal Action

Gain on settlement of legal action reflects the net proceeds received from our settlement with certain pharmaceutical manufacturers in fiscal years 2001and 2000
after contingent legal and other expenses paid directly from the settlement. See the discussion above.

Operating Costs

Operating costs including depreciation and amortization decreased $3,424 to $5,196 for the year ended March 31, 2001, compared to $8,620 for the year ended
March 31, 2000, primarily as a result of a decrease of $2,719 in expenses related to the Xetava merger and the settlement of certain related lawsuits. In addition, expenses related to payroll,
pension expense and insurance were $1,059 less than in the prior year. Other expenses were also $326 less than in the prior year principally due to a settlement of an excise tax dispute. These
decreases were offset by $680 in increased legal fees and related costs. The increase in legal fees and related costs resulted primarily from additional fees related to a lawsuit against FoxMeyer's
former directors and in pursuing the McKesson litigation (see "Item 3. Legal Proceedings").

Other Income

Other income of $13 for the year ended March 31, 2001, related to $3,764 in income consisting primarily of a gain on the sale of equity securities of
$3,411 and a gain of $325 on a payment received on an asset sold in a prior fiscal year. This was partially offset by the $3,751 write-down of our investment in Phar-Mor. Other
income of $449 for the year ended March 31, 2000 related to $1,676 in income consisting primarily of $576 in gains on the sale of securities, a class action settlement of $484
related to investment transactions in prior years and $550 in payments on assets either sold or written-off in a prior fiscal year. This was partially offset by a $1,077
write-off of the carrying value of our investment in Imagyn Medical Technologies, Inc. as a result of the elimination of our equity interest under its Chapter 11 plan of
reorganization and a write-down in the carrying value of an investment in a non-public company of $150.

Interest and Dividend Income

Interest and dividend income decreased $201 to $1,966 for the year ended March 31, 2001 compared to $2,167 for the year ended March 31, 2000.
Interest income decreased $338 and dividend income increased $137. Interest decreased primarily as a result of less cash to invest than in the prior year. Invested cash decreased from approximately
$23,352 at March 31, 2000 to approximately $13,666 at March 31, 2001. Dividend income increased as a result of further investments in the preferred stock of certain private companies.

Interest Expense

Interest expense increased $2,905 to $4,986 for the year ended March 31, 2001 compared to $2,081 for the year ended March 31, 2000. Interest expense
rose as a result of a $2,840 increase in interest expense on the 6.75% notes issued by Avatex Funding, which were outstanding only from December in the prior fiscal year, and by an increase of $65 in
interest expense primarily related to a note payable to the Trustee, due to increases in the prime rate and the effect of compounding prior to its repayment in February 2001.

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Equity in Loss of Affiliates

Equity in loss increased $15,568 to a loss of $16,311 for the year ended March 31, 2001 compared to an equity in loss of $743 for the year ended
March 31, 2000. The change in equity in loss of affiliates was primarily the result of $15,402 in increased losses at Phar-Mor that were due to declines in operating income and
investment results when compared to the prior year. Our equity in investment income earned by Phar-Mor for the year ended March 31, 2001 was $10,494 less than in the prior fiscal
year while our equity in operating income was $4,908 less than in the prior year. Investment results were lower principally due to write-downs related to technology investments, primarily for
on-line stores, while operating results decreased due to lower sales revenue, higher interest expense and lower profit margins than in the prior year. The remainder of the $166 increase in
our equity loss in the current year was primarily a result of our equity in Cyclone's results.

Income Taxes

We recorded no federal income tax provision or benefit for the current or prior year. Any income tax expense or benefit related to the current or prior year's
income (loss) was offset by a corresponding change in the deferred tax asset valuation allowance.

Discontinued Operations

For the year ended March 31, 2001, the gain on disposal of discontinued operations of $2,188 related to the reduction of certain reserves for contingent
liabilities for NAC, whose operations were substantially discontinued prior to fiscal 1991, as these reserves were no longer required. For the year ended March 31, 2000, the $7,872 gain on
disposal of discontinued operations includes the gain on the contingent payment received on the fiscal 1997 sale of a discontinued operation of $2,314 and the gain on the disposal of the real estate
segment of $5,558, net of taxes. The $259 in income from discontinued operations in the prior fiscal year related to the operations of the real estate segment for April and May 1999 prior to
its disposal.

Extraordinary Item

Gain on the extinguishment of debt for the year ended March 31, 2001 is comprised of a gain of $4,551 on the settlement of a note payable to the Trustee
and a gain of $384 related to the difference in the carrying value and the cost of open market purchases of the 6.75% notes of Avatex Funding during fiscal 2001. The equity in extraordinary item of
affiliate for both fiscal 2001 and 2000 represents our equity in Phar-Mor's gain on the early extinguishment of its debt.

Preferred Stock Dividends

Preferred stock dividends of $20,912 were incurred for the year ended March 31, 2000. The preferred stock was eliminated as of December 7, 1999.
This elimination of the preferred stock resulted in a $225,009 gain for fiscal 2000 in connection with the exchange of preferred stock for either our Class A common stock or other consideration
(see Note G to the consolidated financial statements).

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, we had cash and cash equivalents of approximately $6,224. During the year ended March 31, 2002, we purchased $1,717 of
membership interests in CLAC or Chemlink and purchased $114 in Phar-Mor common stock raising our ownership from 47.1% to 48.1%. We also sold our investment in HPD for $2,602 and received
$1,619 on investments that were written off or sold in a prior year.

18

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Our
debt consists of the 6.75% notes issued by Avatex Funding. The 6.75% notes require semi-annual cash interest payments of approximately $482 with the remaining principal
balance of approximately $14,281 due in December 2002. Since we have guaranteed the 6.75% notes and Avatex Funding has no assets other than the Phar-Mor common stock securing the
notes, we have made and may make additional capital contributions to Avatex Funding so it can satisfy its interest and principal obligations on the notes.

For
corporate operations, cash requirements include the funding of monthly operating activities, the payment of benefit obligations, and the funding of environmental liabilities of
previously owned businesses. The amounts and timing of the cash requirements for environmental liabilities are uncertain. We will likely be required to fund any cash to be paid by Avatex Funding to
its note holders. We expect to receive cash from the collection of receivables and from interest and dividend income earned on our investments. However, dividends on the preferred stock of Presby and iLife have never been paid in cash and may continue to be deferred.

We
will likely continue to report operating losses, which together with the remaining pending litigation, as discussed in Note L to the consolidated financial statements, continue
to raise substantial doubt as to our ability to continue as a going concern. In addition, the 6.75% notes issued by Avatex Funding, and guaranteed by us, mature in December 2002 and are now
classified as current liabilities. We had previously anticipated that our lawsuit against McKesson and others, as described in Note L, and our 48% ownership interest in Phar-Mor, as
described in Note B, might generate funds to assist in funding the retirement of the 6.75% notes in December 2002. During the year ended March 31, 2002, however, we settled the
McKesson lawsuit which resulted in our retaining $2,562 after payment of contingent litigation and other expenses and distributions. Also, as previously reported, Phar-Mor filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in September 2001. Finally, $4,352 in prepaid pension costs included in the amount of "Other assets" at March 31,
2002 cannot be converted into funds that would be available to us.

We
had adequate funds at March 31, 2002 to meet our obligations then due and believe we have adequate funds to continue to pay our debts as they become due until the maturity date
of the 6.75% notes.

The
principal development stage companies in which we have invested are Presby, Chemlink andiLife. None of these companies has yet
reached a stage where cash flows from ongoing operations are positive. Each of these companies has had to meet its respective liquidity needs by raising additional capital. No assurances can be made
that they will either be successful in generating positive operational cash flows or in raising additional capital if needed. Additionally, while these companies had minimal revenues during their
latest fiscal year, none has yet been successful in firmly establishing products in its respective markets.

Our
management continues to investigate strategies and alternatives to address these issues. While we will continue our vigorous defense of our remaining litigation, there is no
assurance that we will be able to resolve our lawsuits in a favorable manner. In addition, there is no assurance that our investments will produce adequate returns to overcome our operating losses and
provide adequate funds for debt repayment or future operations or that we will be able to continue to buy back our debt at a substantial discount to face value. Further, it is unlikely that we will be
able to obtain additional debt or equity financing. Therefore, since there is no assurance that we will be able to generate sufficient cash flows from our investments, restructure our liabilities, or
obtain additional financing, at December 7, 2002, we may be in default on the 6.75% notes at that time which in turn could force us to seek protection under the federal bankruptcy laws.

These
financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course
of business. The financial statements do not reflect any adjustments that might ultimately result from the resolution

19

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of the uncertainties discussed above. In particular, the financial statements do not purport to show the realizable value on a liquidation basis of our assets or their availability to satisfy
liabilities. The financial statements also do not show amounts that could be allowed for claims or contingencies or the status or priority of those claims. See Note O to the consolidated
financial statements.

OTHER

We have approximately $1,253 in reserves in connection with environmental claims relating to businesses that were disposed of or discontinued (see Note L
to the consolidated financial statements and "Item 3. Legal Proceedings"). During fiscal 2002, we paid approximately $47 with respect to related legal fees. We received a refund of approximately $317
for an overpayment in a prior fiscal year of an environmental claim. The $317 is shown as a gain in "Gain on disposal of discontinued operations".

In
June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS
No.142 "Goodwill and Other Intangible Assets". These pronouncements significantly change the accounting for business combinations, goodwill and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination that is completed after June 30, 2001. SFAS No. 142 requires that goodwill
and indefinite lived intangible assets are no longer amortized but are reviewed for impairment at least annually. The amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangibles acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal years
beginning after December 15, 2001. We applied these statements to our acquisition of additional voting interests in CLAC (see Note B to the condensed consolidated financial statements).
We do not believe that the adoption of these statements for goodwill or intangibles acquired prior to July 1, 2001 will have a material effect on our financial condition or results of
operations.

The
FASB also issued SFAS No. 143 "Accounting for Asset Retirement Obligations" in June 2001. SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and amortized over the remaining life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In
August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions relating to the disposal of a segment of a business
contained in APB Opinion No. 30 "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 eliminates the two accounting models that existed for long-lived assets under SFAS No. 121 and APB Opinion No. 30 by
establishing a single model based on the framework originally established in SFAS No. 121 for long-lived assets to be disposed of by sale and resolving implementation issues related
to SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of either statement will have a material
effect on our financial condition or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk is in the fluctuation in the fair value of our available for sale securities. These are primarily long-term investments whose
ultimate value depends on the success of the investee in developing and selling its products or technologies. Therefore, the change in the value of these

20

---

securities due to changes in current interest rates is not considered material. The change in market value will relate primarily to changes in the ability of the investee to successfully implement
their business plan. We also hold short-term cash investments which are subject to interest rate risk. Because of the very short-term nature of these investments, the risk to
the fair value of these investments is not considered material although there is cash flow exposure if rates significantly change.

On
Balance Sheet Financial Instruments for the fiscal year ended March 31, 2002 (in thousands except for interest rates) are as follows:



On
Balance Sheet Financial Instruments for the fiscal year ended March 31, 2001 (in thousands except for interest rates):

|                                 |                       | Expected maturity date |   |   |  |   |        |  
|-------------------------------- | --------------------- | ---------------------- | - | - |  | - | ------ | -
|
|
|Assets                           |                       |                        |   |   |  |   |        |  
|Securities available for sale(1) |                       |                        |   |   |  |   |        |  
|                                 | Fixed Rate            |                        | $ |  |  | $ |       |  
|                                 | Average interest rate |                        |   |  |  |   |       |  
|                                 |                       |                        |   |   |  |   |        |  
|Liabilities                      |                       |                        |   |   |  |   |        |  
|Long-term debt(2)                |                       |                        |   |   |  |   |        |  
|                                 | Fixed Rate            |                        | $ |  |  | $ | 20,915 |  
|                                 | Average interest rate |                        |   |  |  |   | 21.0   | %
|                                 |                       |                        |   |   |  |   |        |  

---

21

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index
to Financial Statements

|                                                                                                                                   |  | Page
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                                                       |  | 23  
|Consolidated Statements of OperationsFor the Three Years Ended March 31, 2002                                                     |  | 24  
|Consolidated Balance SheetsMarch 31, 2002 and 2001                                                                                |  | 25  
|Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)For the Three Years Ended March 31, 2002 |  | 26  
|Consolidated Statements of Cash FlowsFor the Three Years Ended March 31, 2002                                                     |  | 27  
|Notes to Consolidated Financial StatementsFor the Three Years Ended March 31, 2002                                                |  | 28  

22

---

INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of
Avatex Corporation
Dallas, Texas

We
have audited the accompanying consolidated balance sheets of Avatex Corporation and subsidiaries (the "Company") as of March 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the three years in the period then ended. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Avatex Corporation and subsidiaries at March 31, 2002
and 2001, and the results of their operations and their cash flows for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note O to the consolidated
financial statements, the Company's recurring losses from operations, pending litigation and potential liquidity issues from scheduled maturities of debt raise substantial doubt about its ability to
continue as a going concern.
Management's plans concerning these matters are also described in Note O. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Deloitte &
Touche LLP
Dallas, Texas
May 21, 2002

23

---



AVATEX CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                          |                                                                            | For the years ended March 31, |        
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------- | -------
|
|
|Operating income (loss)                                                                   |                                                                            |                               |        
|                                                                                          | Gain on settlement of legal action, net of expenses                        |                               | $      
|                                                                                          | Operating costs, including general and administrative costs                |                               |        
|                                                                                          | Depreciation and amortization                                              |                               |        
|                                                                                          |                                                                            |                               |        
|Total operating loss                                                                      |                                                                            |                               | (766   
|Other income (expense)                                                                    |                                                                            |                               | (1,211 
|Interest and dividend income                                                              |                                                                            |                               | 739    
|Interest expense                                                                          |                                                                            |                               | (2,694 
|                                                                                          |                                                                            |                               |        
|Loss from continuing operations before equity in loss of affiliates and minority interest |                                                                            |                               | (3,932 
|Equity in loss of affiliates                                                              |                                                                            |                               | (14,427
|                                                                                          |                                                                            |                               |        
|Loss from continuing operations before minority interest                                  |                                                                            |                               | (18,359
|Minority interest                                                                         |                                                                            |                               | 196    
|                                                                                          |                                                                            |                               |        
|Loss from continuing operations                                                           |                                                                            |                               | (18,163
|Discontinued operations                                                                   |                                                                            |                               |        
|                                                                                          | Income from discontinued operations, net of tax                            |                               |        
|                                                                                          | Gain on disposal of discontinued operations, net of tax                    |                               |        
|                                                                                          |                                                                            |                               |        
|Income (loss) before extraordinary items                                                  |                                                                            |                               | (17,461
|Extraordinary items:                                                                      |                                                                            |                               |        
|                                                                                          | Gain on extinguishment of debt                                             |                               |        
|                                                                                          | Equity in extraordinary item of affiliate                                  |                               |        
|                                                                                          |                                                                            |                               |        
|Net income (loss)                                                                         |                                                                            |                               | (14,985
|Preferred stock dividends                                                                 |                                                                            |                               |       
|Gain on exchange of preferred stock in connection with merger with Xetava Corporation     |                                                                            |                               |       
|                                                                                          |                                                                            |                               |        
|Income (loss) applicable to common stockholders                                           |                                                                            | $                             | (14,985
|                                                                                          |                                                                            |                               |        
|Basic and diluted income (loss) per share:                                                |                                                                            |                               |        
|                                                                                          | Income (loss) from continuing operations applicable to common stockholders |                               | $      
|                                                                                          | Discontinued operations                                                    |                               |        
|                                                                                          | Extraordinary items                                                        |                               |        
|                                                                                          |                                                                            |                               |        
|Income (loss) per share applicable to common stockholders                                 |                                                                            | $                             | (0.87  
|                                                                                          |                                                                            |                               |        
|Average number of common shares outstanding                                               |                                                                            |                               | 17,271 
|                                                                                          |                                                                            |                               |        

See notes to consolidated financial statements.

24

---



AVATEX CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                               | March 31, |       
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | --------- | ------
|
|
|ASSETS                                               |                                                                                                               |           |       
|Current assets                                       |                                                                                                               |           |       
|                                                     | Cash and cash equivalents                                                                                     |           | $     
|                                                     | Receivables, less allowance for possible losses of $17 in 2002 and $47 in 2001                                |           |       
|                                                     | Inventories                                                                                                   |           |       
|                                                     | Other current assets                                                                                          |           |       
|                                                     |                                                                                                               |           |       
|Total current assets                                 |                                                                                                               |           | 7,340 
|Investment in affiliates                             |                                                                                                               |           | 70    
|Property and equipment                               |                                                                                                               |           | 374   
|                                                     | Less accumulated depreciation and amortization                                                                |           |       
|                                                     |                                                                                                               |           |       
|Net property and equipment                           |                                                                                                               |           | 240   
|Other assets                                         |                                                                                                               |           | 10,836
|                                                     |                                                                                                               |           |       
|Total assets                                         |                                                                                                               | $         | 18,486
|                                                     |                                                                                                               |           |       
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)       |                                                                                                               |           |       
|Current liabilities                                  |                                                                                                               |           |       
|                                                     | Accounts payable                                                                                              |           | $     
|                                                     | Other accrued liabilities                                                                                     |           |       
|                                                     | Salaries, wages and employee benefits                                                                         |           |       
|                                                     | Long-term debt due within one year                                                                            |           |       
|                                                     |                                                                                                               |           |       
|Total current liabilities                            |                                                                                                               |           | 14,906
|Long-term debt                                       |                                                                                                               |           | 7     
|Other long-term liabilities                          |                                                                                                               |           | 8,128 
|Commitments and contingencies                        |                                                                                                               |           |      
|Minority interest                                    |                                                                                                               |           | 453   
|Stockholders' equity (deficit)                       |                                                                                                               |           |       
|                                                     | Class A common stock $0.01 par value; authorized 50,000,000 shares; issued 19,637,357 shares in 2002 and 2001 |           |       
|                                                     | Capital in excess of par value                                                                                |           |       
|                                                     | Accumulated other comprehensive loss                                                                          |           |       
|                                                     | Accumulated deficit                                                                                           |           |       
|                                                     |                                                                                                               |           |       
|                                                     |                                                                                                               |           | 146   
|                                                     | Less: equity in cost of common stock of the Corporation held by Phar-Mor, Inc.                                |           |       
|                                                     |                                                                                                               |           |       
|Total stockholders' equity (deficit)                 |                                                                                                               |           | (5,008
|                                                     |                                                                                                               |           |       
|Total liabilities and stockholders' equity (deficit) |                                                                                                               | $         | 18,486
|                                                     |                                                                                                               |           |       

See notes to consolidated financial statements.

25

---



AVATEX CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)        AND COMPREHENSIVE INCOME (LOSS)

|                          |                                                                                                   | Common
stock         |        | Capital in
excess of
par
value |   | Accumulated
other
comprehensive
income
(loss) |        | Accumulated
deficit |         | Common
stock
held by
Phar-Mor,
Inc. |   | Total    |        
|------------------------- | ------------------------------------------------------------------------------------------------- | -------------------- | ------ | ------------------------------ | - | --------------------------------------------- | ------ | ------------------- | ------- | ----------------------------------- | - | -------- | -------
|
|Balance at March 31, 1999 |                                                                                                   | $                    | 69,032 |                                | $ | 119,103                                       |        | $                   | 1,820   |                                     | $ | (365,967 | )      
|                          | Components of comprehensive income:                                                               |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Net income                                                                                        |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | 1,485  
|                          | Net unrealized holding gain on securities                                                         |                      |        |                                |   |                                               |        |                     |         | 162                                 |   |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   | Comprehensive income |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Cancellation of old common stock reissued as Class A common stock                                 |                      |        | (68,894                        | ) |                                               | 68,894 |                     |         |                                     |   |          |        
|                          | Dividends in arrears on Convertible Preferred and Series A Preferred                              |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | (18,649
|                          | Amortization of discount on Series A Preferred                                                    |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | (2,263 
|                          | New Class A common stock issued in exchange for preferred stock in merger with Xetava Corporation |                      |        | 58                             |   |                                               | 4,315  |                     |         |                                     |   |          |        
|                          | Value of warrants issued in merger with Xetava Corporation                                        |                      |        |                                |   |                                               | 858    |                     |         |                                     |   |          |        
|                          | Gain on exchange of preferred stock in merger with Xetava Corporation                             |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | 225,009
|                          | Equity in cost of common stock of the Corporation held by Phar-Mor, Inc.                          |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|Balance at March 31, 2000 |                                                                                                   |                      | 196    |                                |   | 193,170                                       |        |                     | 1,982   |                                     |   | (160,385 | )      
|                          | Components of comprehensive loss:                                                                 |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Net loss                                                                                          |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | (7,134 
|                          | Net unrealized holding loss on securities                                                         |                      |        |                                |   |                                               |        |                     |         | (2,034                              | ) |          |        
|                          | Additional minimum pension liability                                                              |                      |        |                                |   |                                               |        |                     |         | (9                                  | ) |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   | Comprehensive loss   |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Equity in cost of common stock of the Corporation held by Phar-Mor, Inc.                          |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|Balance at March 31, 2001 |                                                                                                   |                      | 196    |                                |   | 193,170                                       |        |                     | (61     | )                                   |   | (167,519 | )      
|                          | Components of comprehensive loss:                                                                 |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Net loss                                                                                          |                      |        |                                |   |                                               |        |                     |         |                                     |   |          | (14,985
|                          | Additional minimum pension liability                                                              |                      |        |                                |   |                                               |        |                     |         | (10,651                             | ) |          |        
|                          | Net unrealized holding loss on securities                                                         |                      |        |                                |   |                                               |        |                     |         | (4                                  | ) |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   | Comprehensive loss   |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          | Equity in cost of common stock of the Corporation held by Phar-Mor, Inc.                          |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        
|Balance at March 31, 2002 |                                                                                                   | $                    | 196    |                                | $ | 193,170                                       |        | $                   | (10,716 | )                                   | $ | (182,504 | )      
|                          |                                                                                                   |                      |        |                                |   |                                               |        |                     |         |                                     |   |          |        

See notes to consolidated financial statements.

26

---



AVATEX CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                |                                                                                                     | For the years ended March 31,            |        
|----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------- | -------
|
|
|Cash flows from operating activities:                                                           |                                                                                                     |                                          |        
|Net income (loss)                                                                               |                                                                                                     | $                                        | (14,985
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |                                                                                                     |                                          |        
|                                                                                                | Equity in loss of affiliates                                                                        |                                          |        
|                                                                                                | Depreciation and amortization                                                                       |                                          |        
|                                                                                                | Loss (gain) on investments                                                                          |                                          |        
|                                                                                                | Other non-cash charges (credits)                                                                    |                                          |        
|                                                                                                | Gain on disposal of discontinued operations                                                         |                                          |        
|                                                                                                | Extraordinary item, gain on extinguishment of debt                                                  |                                          |        
|                                                                                                | Minority interest                                                                                   |                                          |        
|                                                                                                | Cash provided (used) by working capital items, net of acquisitions:                                 |                                          |        
|                                                                                                |                                                                                                     | Receivables                              |        
|                                                                                                |                                                                                                     | Other assets                             |        
|                                                                                                |                                                                                                     | Accounts payable and accrued liabilities |        
|                                                                                                | Other                                                                                               |                                          |        
|                                                                                                |                                                                                                     |                                          |        
|Net cash provided (used) by operating activities                                                |                                                                                                     |                                          | (3,132 
|                                                                                                |                                                                                                     |                                          |        
|Cash flows from investing activities:                                                           |                                                                                                     |                                          |        
|                                                                                                | Increase in cash from consolidation of former equity investments                                    |                                          |        
|                                                                                                | Purchase of property, plant and equipment                                                           |                                          |        
|                                                                                                | Purchase of investments                                                                             |                                          |        
|                                                                                                | Proceeds from the disposition of investments                                                        |                                          |        
|                                                                                                | Other                                                                                               |                                          |        
|                                                                                                |                                                                                                     |                                          |        
|Net cash provided by investing activities                                                       |                                                                                                     |                                          | 2,600  
|                                                                                                |                                                                                                     |                                          |        
|Cash flows from financing activities:                                                           |                                                                                                     |                                          |        
|                                                                                                | Debt repayments                                                                                     |                                          |        
|                                                                                                | Debt repurchases on open market                                                                     |                                          |        
|                                                                                                | Cash paid to preferred stockholders and certain other parties in the merger with Xetava Corporation |                                          |        
|                                                                                                | Investment in consolidated subsidiary by minority interest                                          |                                          |        
|                                                                                                |                                                                                                     |                                          |        
|Net cash used by financing activities                                                           |                                                                                                     |                                          | (6,910 
|                                                                                                |                                                                                                     |                                          |        
|Net increase (decrease) in cash and cash equivalents                                            |                                                                                                     |                                          | (7,442 
|                                                                                                | Cash and cash equivalents, beginning of year                                                        |                                          |        
|                                                                                                |                                                                                                     |                                          |        
|Cash and cash equivalents, end of year                                                          |                                                                                                     | $                                        | 6,224  
|                                                                                                |                                                                                                     |                                          |        

See notes to consolidated financial statements.

27

---



AVATEX CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        FOR THE THREE YEARS ENDED MARCH 31, 2002

NOTE ASIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS

Description of Business:Avatex Corporation is a holding company that, along with its subsidiaries, owns interests in other
corporations and partnerships. The Company consolidated Chemlink Laboratories, LLC ("Chemlink") at March 31, 2002 as a result of its control of 50% of the voting interests of Chemlink through
its 59% interest in Chemlink Acquisition Company, LLC ("CLAC"). Prior to March 31, 2002, Chemlink was carried on an equity basis (see Note B). Chemlink is primarily engaged in the
development, manufacture and distribution of effervescent tablet and granule formulations for consumers and businesses for use in cleaning, disinfecting and sterilization applications. The Company
also owns 48% of Phar-Mor, Inc. ("Phar-Mor") which operates a chain of discount retail drugstores. Phar-Mor filed for bankruptcy protection under Chapter 11
of the Bankruptcy Code on September 24, 2001.

Going Concern:These financial statements have been prepared on a going concern basis which contemplates the realization of
the Company's assets and the settlement of its liabilities and commitments in the normal course of business. See Note O for a discussion of the Company's ability to continue as a going concern
and its plans addressing those issues.

Basis of Presentation:The preparation of the consolidated financial statements, in conformity with generally accepted
accounting principles, requires management of the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of
revenues and expenses during such reporting periods. Actual results could differ from these estimates.

The
consolidated financial statements include the accounts of all majority-owned subsidiaries and partnerships in which the Company has a controlling interest. Investments in other
companies and partnerships in which the Company has significant influence but does not have a controlling interest are accounted for on the equity basis. All significant intercompany balances and
transactions have been eliminated.

Cash and cash equivalents:Cash and cash equivalents consist principally of amounts held in demand deposit accounts and
amounts invested in financial instruments having a maturity of three months or less at the time of purchase and are recorded at cost. At March 31, 2002, the Company also had $0.2 million
in other cash investments, with an initial maturity greater than three months, which were carried in "Other current assets". These short-term cash investments and other cash investments
may subject the Company to a concentration of credit risk. To lessen this risk, the Company placed substantially all of its cash investments with major financial institutions and diversified money
market mutual funds.

Inventory:Inventories are stated at the lower of cost or market. Cost is determined using the average cost method.
Inventories consisted almost entirely of raw materials at March 31, 2002. There was no work-in-process inventory and finished goods were de minimus.

Investments:The Company's investments in debt securities, and in equity securities that have a readily determinable fair
value, are classified as either "available for sale" or "trading" and are carried at fair value. The classification of the security is determined at its acquisition date and is reviewed periodically.
Unrealized gains or losses result from the difference in the fair market value and the cost

28

---

of securities. For securities classified as available for sale, unrealized gains or losses are shown as a component of stockholders' equity. For trading securities, the unrealized gains or losses are
reported in the results of operations as "other income (expense)". Management of the Company periodically reviews its investments, including those investments accounted for under the equity method of
accounting, where fair value is less than cost to determine if the decline in value is other than temporary. If the decline in value is judged to be other than temporary, the carrying value of the
security is written-down to fair value. The amount of any write-down would be included in "other income (expense)" as a realized loss. Realized gains and losses resulting from
the sale of securities are determined using the average cost method. See Notes B and E.

Property and Equipment:Property and equipment are stated at cost. Gains or losses on properties retired or disposed of are
included in results of operations. The cost of maintenance and repairs is charged against results of operations as incurred. Depreciation of property and equipment is provided using the
straight-line method at rates designed to distribute the cost of properties over their estimated
service lives of 3 to 10 years for equipment and furniture. Amortization of leasehold improvements is included in depreciation and amortization and is based on the shorter of the minimum term
of the lease or the asset's estimated useful life. Depreciation for income tax purposes is computed using both the straight-line and accelerated methods.

Property
and equipment consisted of the following (in thousands of dollars):

March 31,2002

2001Leasehold improvements

$
22

$
15Equipment and furniture


345


148Construction in progress


7


Total property and equipment

$
374

$
163


Long-Lived Assets:The Company has approximately $1.4 million in patents that are held by Chemlink at
March 31, 2002. The carrying value of the patents is being amortized over their estimated useful life. The Company reviews long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the total future
undiscounted cash flows generated by the asset to its carrying value. If the carrying value of the asset is more than its undiscounted expected future cash flows, an impairment exists which is
measured by the difference between the carrying value and the estimated fair value of the asset. Assets to be disposed of are reported at the lower of their carrying value or fair value less costs to
sell.

Income Taxes:Deferred tax assets and liabilities are established for temporary differences between financial statement
carrying amounts and the taxable basis of assets and liabilities using rates currently in effect. A valuation allowance is established for any portion of the deferred tax asset for which realization
is not likely. The deferred tax asset is reviewed periodically to determine the amount considered realizable.

29

---

Comprehensive Income (Loss):Comprehensive income (loss) is the change in the equity of a business enterprise during a period
from transactions and other events from nonowner sources. Changes in balances of items that are reported directly in a separate component of stockholders' equity (foreign currency translation
adjustments, unrealized gains and losses, certain hedging transactions and minimum pension liability adjustments) are added or subtracted from net income (loss) to arrive at comprehensive income
(loss).

The
details of other comprehensive income (loss) are as follows (amounts in thousands):

|                                                                             |                                         | For the years ended March 31, |        
|---------------------------------------------------------------------------- | --------------------------------------- | ----------------------------- | -------
|
|Other comprehensive income (loss), net of tax:                               |                                         |                               |        
|Unrealized gains (losses) on securities                                      |                                         | $                             | (1,937 
|Reclassification adjustment for losses (gains) included in net income (loss) |                                         |                               | 1,933  
|                                                                             |                                         |                               |        
|                                                                             | Net unrealized gains (losses)           |                               |        
|Minimum pension liability adjustment                                         |                                         |                               | (10,651
|                                                                             |                                         |                               |        
|                                                                             | Total other comprehensive income (loss) |                               | $      
|                                                                             |                                         |                               |        

Accumulated
other comprehensive income (loss) in the consolidated statements of stockholders' equity (deficit) consisted of unrealized gains (losses) on securities of $(56) in 2002,
$(52) in 2001 and $1,982 in 2000 and a minimum pension liability charge of $10,660 in 2002 and $9 in 2001.

As
a result of the Company's income tax position (see Note K), income tax provisions (benefits) were not allocated to any of the components of other comprehensive income (loss)
for the three years ended March 31, 2002.

Stock-Based Compensation:As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation", the Company has continued to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued to
Employees" and adopted only the disclosure requirements of SFAS No. 123. Accordingly, no compensation costs were recognized in connection with the Company's stock option plan (see
Note H).

30

---

Income (Loss) Per Share:The amounts used in the calculation of income (loss) per share from continuing operations were as
follows (amounts in thousands, except per share amounts):

|                                                                                                        |                                                                                                           | For the years ended March 31, |        
|------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ----------------------------- | -------
|
|Loss from continuing operations                                                                         |                                                                                                           | $                             | (18,163
|Add gain on exchange of preferred stock in connection with merger with Xetava Corporation               |                                                                                                           |                               |       
|Deduct dividends on preferred shares                                                                    |                                                                                                           |                               |       
|                                                                                                        |                                                                                                           |                               |        
|Income (loss) from continuing operations applicable to common stockholders forBasicearnings per share   |                                                                                                           |                               | (18,163
|Effect of dilutive securities:                                                                          |                                                                                                           |                               |        
|                                                                                                        | Dividends on convertible preferred shares were anti-dilutive until their cancellation on December 7, 1999 |                               |        
|                                                                                                        |                                                                                                           |                               |        
|Income (loss) from continuing operations applicable to common stockholders forDilutedearnings per share |                                                                                                           | $                             | (18,163
|                                                                                                        |                                                                                                           |                               |        
|Shares                                                                                                  |                                                                                                           |                               |        
|Weighted average number of common shares outstanding for calculation ofBasicearnings per share          |                                                                                                           |                               | 17,271 
|Conversion of preferred stock, unless anti-dilutive                                                     |                                                                                                           |                               |       
|Warrants to purchase common stock, unless anti-dilutive                                                 |                                                                                                           |                               |       
|Outstanding options, unless anti-dilutive                                                               |                                                                                                           |                               |       
|                                                                                                        |                                                                                                           |                               |        
|Weighted average number of common shares outstanding for calculation ofDilutedearnings per share        |                                                                                                           |                               | 17,271 
|                                                                                                        |                                                                                                           |                               |        
|Income (loss) from continuing operations:                                                               |                                                                                                           |                               |        
|                                                                                                        | Basic                                                                                                     |                               | $      
|                                                                                                        | Diluted                                                                                                   |                               | $      
|                                                                                                        |                                                                                                           |                               |        

Options
to purchase approximately 1.8 million shares of common stock at March 31, 2002 and 3.9 million shares of common stock each at March 31, 2001 and 2000
were not included in the computation of diluted earnings per share because the average market price of the Company's common stock was less than the exercise price of the options or the effect of
including the options in the calculation would be anti-dilutive. Conversion of the Company's former convertible preferred stock, until its cancellation on December 7, 1999, was also
not included in the calculation of diluted earnings per share as it would also have been anti-dilutive. Warrants to purchase approximately 2.3 million shares of the Company's
Class A common stock at $2.25 per share were issued on December 7, 1999. These warrants were not included in the computation of diluted earnings per share because the average market
price of the Company's common stock was less than the exercise price of the warrants and the effect of including the warrants in the calculation would be anti-dilutive.

Reclassifications:Certain previously reported amounts were reclassified to conform to current year presentations.

31

---

Common Stock of Avatex Corporation Held By An Affiliate:In December 1999, Phar-Mor acquired 2,862,400
shares of the Company's common stock at a cost of $5.7 million. Additionally, during fiscal 1999, Phar-Mor acquired 2,086,200 shares of the Company's common stock through open
market
transactions at a cost of approximately $5.0 million. As a result of these purchases, Phar-Mor currently owns 4,948,600 shares or 25.2% of the Company's issued Class A common
stock. The Company accounts for its investment in Phar-Mor on an equity basis and treats Phar-Mor's investment in its common stock similar to treasury stock, with a reduction
in the Company's stockholders' equity of $5.2 million at March 31, 2002 (the equivalent of 2,378,164 shares of the Company's common stock) and $5.1 million at March 31,
2001 (the equivalent of 2,332,241 shares of the Company's common stock). The reduction was equal to the Company's 48.1% and 47.1% ownership interests, respectively, in the cost of its common stock
held by Phar-Mor. In addition, the weighted average number of shares outstanding used in calculating earnings per share was reduced by 2,366,702 shares in 2002, 2,064,105 shares in 2001
and 1,149,469 shares in 2000. The reduction was equal to the percentage of the Company's ownership interest in its common stock since its acquisition by Phar-Mor.

Derivatives:The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended, on April 1, 2001. The adoption of SFAS No. 133 did not impact the Company's results of operations or financial condition.

Segment Information:During the three years ended March 31, 2002, the Company operated in only one segment as defined
under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which consists of owning interests in other corporations and partnerships. Management reviews the
results of each of the Company's investments in other entities, reviews new investment opportunities and allocates resources to these or new investments based on this review and the Company's current
financial situation. The Company has no foreign source revenues. Interest and dividend income and other income are derived primarily from investments the Company has made.

Newly Issued Accounting Standards:In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations" and SFAS No.142 "Goodwill and Other Intangible Assets". These pronouncements significantly change the accounting for business combinations, goodwill and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize
intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination that is completed after June 30, 2001. SFAS No. 142
requires that goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment at least annually. The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangibles acquired prior to July 1, 2001, companies are required to adopt the pronouncement in
their fiscal years beginning after December 15, 2001. The Company applied these statements to its acquisition of additional voting interests in CLAC (see Note B). Management of the
Company does not believe that the adoption of these statements for goodwill or intangibles acquired prior to July 1, 2001 will have a material effect on its financial condition or results of
operations.

The
FASB also issued SFAS No. 143 "Accounting for Asset Retirement Obligations" in June 2001. SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized

32

---

in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized as part of the carrying amount of the long-lived
asset and amortized
over the remaining life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions relating to the disposal of a segment of a business contained in APB Opinion No. 30 "Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
eliminates the two accounting models that existed for long-lived assets under SFAS No. 121 and APB Opinion No. 30 by establishing a single model based on the framework
originally established in SFAS No. 121 for long-lived assets to be disposed of by sale and resolving implementation issues related to SFAS No. 121. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of either statement will have a material effect on its financial condition or results of
operations.

NOTE BINVESTMENTS IN SUBSIDIARIES AND AFFILIATES AND DISCONTINUED OPERATIONS

Chemlink Laboratories, LLC and Chemlink Acquisition Company, LLC

The Company, through CLAC, controls 50.0% of the voting interests of Chemlink. Effective March 31, 2002, CLAC was able to designate the majority of
Chemlink's directors as a result of a restructuring and an additional investment by CLAC in Chemlink. Therefore, Chemlink was consolidated with the Company at March 31, 2002. The results for
Chemlink for the three years ended March 31, 2002 were carried on an equity basis by CLAC. The results of CLAC for fiscal 2000 and 2001 and for the five months ended August 31, 2001 were
also carried on an equity basis. CLAC's results were consolidated effective September 1, 2001 as explained below.

CLAC
has no investments or other businesses other than its investment in Chemlink. Chemlink is an Atlanta-based company which is principally engaged in the development, manufacture and
distribution of proprietary effervescent tablet and granule formulations for use in cleaning, disinfecting and sterilization applications. In addition to pursuing opportunities in the dental and
medical markets where it has shipped products for the last several years, Chemlink has developed a unique and patentable formulation and process for the manufacture of effervescent tablets, granules
and powders. This new technology significantly expands the options for both the types of ingredients as well as the concentration of ingredients that can be utilized in effervescent formulations. As a
result, the new technology creates an opportunity to develop effervescent formulations for many laundry detergent and cleaning products for both consumers and businesses which have, to date, been
impractical because of the limitations inherent in older effervescent technologies. While CLAC and others have had to fund Chemlink's operations due to a lack of significant sales during the current
and prior years, Chemlink currently anticipates entering into several contracts which should provide funds to cover at least a portion of its future operating expenses. Chemlink is in discussions with
other companies which may provide the additional business needed to allow Chemlink to totally fund its operating expenses and to

33

---

potentially increase its liquidity. Until such time, however, CLAC or other investors will continue to have to make contributions to fund Chemlink's ongoing operations.

Before
March 31, 2002, CLAC owned 50.0% of the voting rights in Chemlink and accounted for its investment in Chemlink on an equity basis. CLAC had originally acquired its 50.0% of
Chemlink's voting rights for approximately $8.2 million. The acquisition of CLAC's interest in Chemlink was accounted for by the purchase method of accounting and resulted in a
$6.6 million difference between CLAC's purchase price and the net book value of Chemlink's assets acquired less liabilities assumed. This difference was allocated to the then existing patents
controlled by Chemlink. The value of the patents was being amortized to expense over their average remaining life. During the quarter ended September 30, 2001, and prior to the purchase
discussed below, management of the Company determined that the remaining $5.6 million value CLAC assigned to various Chemlink's patents had become impaired. The Company recognized a loss of
$2.2 million for its equity in the write-down of those patents to their estimated net realizable value. The impairment in value was a result of the new patents Chemlink is obtaining
(as discussed above) which limit the market for products based on these older patents.

During
2002, CLAC made additional investments in Chemlink in order to provide operating funds to Chemlink. CLAC invested $1.4 million in Chemlink in May and September 2001.
The additional investment in September 2001 was part of an overall restructuring of the membership interests in Chemlink. As part of the restructuring, the May and September contributions were
invested in Preferred C membership interests ("Preferred C") which will earn a preferred return and have preference in liquidation over all other membership interests. In addition, CLAC's prior
investments in Chemlink were modified and will also earn a preferred return and have preference in liquidation to other members' interests in Chemlink. CLAC's voting interest in Chemlink remained at
50.0% of the total membership interests entitled to vote on most matters after the restructuring. In December 2001 and March 2002, CLAC made additional investments of approximately
$0.6 million in order to provide operating funds to Chemlink. CLAC received additional Preferred C interests and the right to appoint a majority of Chemlink's board members effective
March 31, 2002. Therefore, because the Company controlled Chemlink as of March 31, 2002, its assets and liabilities have been consolidated as of that date. The remaining 50.0% of the
voting rights of Chemlink that CLAC does not control are accounted for as a minority interest in the consolidated balance sheet. The investments by CLAC in Chemlink in the current fiscal year were
also accounted for by the purchase method of accounting and resulted in an additional value of $0.9 million being assigned to the new Chemlink patents.

Before
September 1, 2001, the Company owned 41.1% of the voting rights in CLAC and accounted for its investment in CLAC on an equity basis. In March and December 1998, the
Company invested a total of $3.0 million to acquire its 41.1% interest in CLAC. In addition the Company invested approximately $0.2 million each in 2000 and 2001. In order to provide the
Company's portion of the funds used by CLAC to make its additional investments in Chemlink in May and September 2001, as described above, the Company invested approximately $1.1 million
in CLAC. The additional investment by the Company in CLAC was part of an overall restructuring of CLAC's membership interests. The membership interests received by the Company for its additional
investments will earn a preferred return. The Company also increased its ownership interest in CLAC's voting

34

---

rights from 41.1% to 59.0% as of September 1, 2001 as a result of the restructuring as certain other members, including Phar-Mor, were unable or decided not to contribute based on
their original ownership in CLAC. In order to provide the Company's portion of the funds used by CLAC to make its additional investments in Chemlink in December 2001 and March 2002, as
described above, the Company invested approximately $0.5 million in CLAC; however, the Company's ownership percentage in CLAC remained at 59.0%.

Therefore,
since September 1, 2001, because the Company has owned 59.0% of the voting rights in CLAC, the Company has reported CLAC's results on a consolidated basis. The
remaining 41.0% of the voting rights in CLAC that the Company does not own are accounted for as a minority interest from that date.

Assuming
that the Company had increased its interest in CLAC's voting rights to 59.0% on April 1, 2001 by making its $1.6 million in fiscal 2002 contributions in CLAC as of
that date, and assuming that CLAC had made its $2.0 million in fiscal 2002 contributions in Chemlink on April 1, 2001 and obtained control of Chemlink's board as of that date, the
following are the Company's estimated pro forma results for the year ended March 31, 2002 (in thousands of dollars):

For the year ended
March 31, 2002As reported

Pro formaLoss from continuing operations before equity in loss of affiliates and minority interest

$
(3,932
)
$
(11,028
)Equity in loss of affiliates


(14,427
)

(11,573
)Loss from continuing operations before minority interest


(18,359
)

(22,601
)Minority interest


196


4,161Loss from continuing operations


(18,163
)

(18,440
)Loss before extraordinary items


(17,461
)

(17,738
)Net loss


(14,985
)

(15,262
)Basic and diluted loss per share:Loss from continuing operations

$
(1.05
)
$
(1.06
)Discontinued operations


0.04


0.04Extraordinary items


0.14


0.14Loss per share


(0.87
)

(0.88
)


Assuming
that the Company had increased its interest in CLAC's voting rights to 59.0% on April 1, 2000 by making its $1.6 million in fiscal 2002 contributions in CLAC as of
that date, and assuming that CLAC had made its $2.0 million in fiscal 2002 contributions in Chemlink on April 1,

35

---

2000 and obtained control of Chemlink's board as of that date, the following are the Company's estimated pro forma results for the year ended March 31, 2001 (in thousands of dollars):

For the year ended
March 31, 2001As reported

Pro formaLoss from continuing operations before equity in loss of affiliates and minority interest

$
(6,831
)
$
(8,348
)Equity in loss of affiliates


(16,311
)

(15,959
)Loss from continuing operations before minority interest


(23,142
)

(24,307
)Minority interest





1,124Loss from continuing operations


(23,142
)

(23,183
)Loss before extraordinary items


(20,954
)

(20,995
)Net loss


(7,134
)

(7,175
)Basic and diluted loss per share:Loss from continuing operations

$
(1.32
)
$
(1.32
)Discontinued operations


0.12


0.12Extraordinary items


0.79


0.79Loss per share


(0.41
)

(0.41
)


Summarized
unaudited condensed statements of operations for the three years ended March 31, 2002 and condensed balance sheets as of March 31, 2002 and 2001 for Chemlink,
excluding the Company's purchase adjustments, are as follows (in thousands of dollars):

For the years ended March 31,Condensed Statements of Operations2002

2001

2000Net sales

$
93

$
280

$
891Gross margin


6


247


652Net loss


(1,601
)

(1,331
)

(929
)


Condensed Balance Sheets

March 31,
2002

March 31,
2001Current assets

$
742

$
51Property and equipment


211


182Other assets


315


213Total assets

$
1,268

$
446Current liabilities

$
606

$
304Long-term debt


7


Stockholders' equity


655


142Total liabilities and stockholders' equity

$
1,268

$
446


36

---

Phar-Mor, Inc.

Since September 1995, the Company has owned Phar-Mor common stock. Phar-Mor operates a chain of discount retail drugstores devoted
to the sale of prescription and over-the-counter drugs, health and beauty care products, and other general merchandise and grocery items. The investment in
Phar-Mor's common stock is accounted for using the equity method of accounting. Phar-Mor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on
September 24, 2001.

The
Company purchased 1,065,000 shares of Phar-Mor common stock in the open market during fiscal 2001 for approximately $1.2 million, which brought the Company's
ownership to 5,769,033 shares or approximately 47.1% of Phar-Mor's outstanding shares at March 31, 2001 compared to 4,704,033 shares or 38.4% at March 31, 2000. The Company
purchased an additional 113,600 shares of Phar-Mor common stock in the open market during fiscal 2002 prior to the bankruptcy filing by Phar-Mor. The purchases brought the
Company's ownership percentage to 48.1%. As a result of the increase in the Company's equity ownership, the amount and number of shares of its common stock held by Phar-Mor that are
considered treasury stock have also increased (see Note A). The Company has pledged 4,704,033 of the Company's 5,882,633 shares of Phar-Mor common stock as collateral for its
long-term debt (see Note F).

At
September 30, 2000, as a result of continuing operating losses at Phar-Mor, the significant reduction in the value of their internet investments, and the continuing
decline in their per share market price, the Company reviewed the carrying value of its investment in Phar-Mor to determine if there had been an other than temporary decline in the value
of that investment. Based on information available to the Company at that time about Phar-Mor's current and projected operations and information gathered about similar companies, the
Company's management believed that there was such a decline in value during the three months ended September 30, 2000. The Company recognized a loss of $3.7 million in "Other income
(expense)" in the consolidated statements of operations to reduce its carrying value to $9.9 million.

The
carrying value of Phar-Mor on the Company's books at June 30, 2001 was reduced to zero as a result of our equity in Phar-Mor's losses during that
quarter. The Company did not recognize any additional losses in Phar-Mor after June 30, 2001 except that, in the quarter ended September 30, 2001, the Company recognized a
loss of $9 thousand due to the investments the Company made in Phar-Mor common stock in July and August 2001. Depending on the outcome of Phar-Mor's bankruptcy
proceeding, the Company may lose all or part of its investment in the common stock of Phar-Mor. The Company is, therefore, unable to currently determine the market value of its holdings in
Phar-Mor common stock. The Company's Co-Chairmen and Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin, continue to serve as Co-Chairmen
and Co-Chief Executive Officers of Phar-Mor.

37

---

Summarized
unaudited financial information for Phar-Mor was as follows for the three years ended March 31, 2002 (in thousands of dollars):

|Condensed Statements of Operations                 |  | 52 Weeks Ended
March 30, 2002 |          | 52 Weeks Ended
March 31, 2001 |   | 53 Weeks Ended
April 1, 2000 |  
|-------------------------------------------------- |  | ----------------------------- | -------- | ----------------------------- | - | ---------------------------- | -
|Net sales                                          |  | $                             | 951,579  |                               | $ | 1,265,869                    |  
|Operating earnings (loss)                          |  |                               | (56,343  | )                             |   | (9,093                       | )
|Reorganization items                               |  |                               | (30,313  | )                             |   |                             |  
|Extraordinary item, gain on extinguishment of debt |  |                               | 1,824    |                               |   | 20,178                       |  
|Net loss                                           |  |                               | (111,396 | )                             |   | (17,400                      | )

---

|Note: |  | The net loss for the 52 weeks ended March 30, 2002 and March 31, 2001, and the 53 weeks ended April 1, 2000, included $4,508 in expense, $759 in income and $281 in expense, respectively, related to Phar-Mor's investment
in the Company.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Condensed Balance Sheets

March 30, 2002

March 31, 2001Current assets

$
163,512

$
244,016Property and equipment


48,645


82,066Other assets


7,225


39,335Total assets

$
219,382

$
365,417Current liabilities

$
47,654

$
120,485Liabilities subject to compromise


164,616


Long-term obligations


56,176


182,552Stockholders' equity (deficit)


(49,064
)

62,380Total liabilities and stockholders' equity (deficit)

$
219,382

$
365,417


The
Company's equity percentage ownership in the extraordinary item for Phar-Mor relating to the early extinguishment of their debt is shown in the Company's statements of
operations as "Equity in extraordinary item of affiliate."

Cyclone Acquisition Company, LLC ("Cyclone")

In May 2000, the Company invested approximately $0.2 million to acquire a 41.5% interest in a Delaware limited liability company, Cyclone, which
acquired the rights to the "Cyclone Fence" name from Cyclone, Inc. at a cost of $0.3 million. Cyclone is attempting to license the "Cyclone Fence" name to fence retailers. After initial
attempts to license the name to large home improvement retailers were unsuccessful, the Company wrote off its investment in Cyclone in fiscal 2001. Further attempts to license the name are continuing.

Discontinued Operations

The Company received, as part of the proceeds on the sale in August 1996 of its discontinued pharmacy benefit management operation, a right to an
additional minimum payment of $2.5 million

38

---

that was due at any time after August 2, 1997. This payment could increase up to $5.0 million based on certain criteria if there was an initial public offering that included its former
pharmacy benefit management operation. In August 1999, the Company collected the $5.0 million payment after an initial public offering that included its former operation. The Company
recognized a gain on the disposal of discontinued operations of $2.5 million less approximately $0.2 million of contingent incentive fees due primarily to former employees of the
discontinued operation.

Certain
of the Company's subsidiaries were controlling partners in various limited partnerships engaged in the buying, holding, operating and disposing of real estate and real estate
loans. On May 12, 1999, the Company announced that it had entered into an agreement to sell its interests in its three remaining real estate developments. On May 27, 1999, one property
was sold to a third party and the Company's interests in the partnerships that owned the other two properties were sold to the other partners or their affiliates. As a result of these sales, the
Company received $11.4 million in cash and a one-year, $0.6 million secured note. A gain on the disposal of discontinued operations of approximately $6.2 million
($5.6 million net of taxes) was recognized as a result of the sale. The Company also recognized income from discontinued operations of $0.3 million, which represents the results of
operations of the three properties until their sale on May 27, 1999. Revenues for the real estate segment for the period from April 1, 1999 to the sale in May 1999 were
$2.8 million. Income taxes related to discontinued operations in 2000 were immaterial. An additional gain on disposal of operations was recognized in fiscal 2002 as a result of a tax refund of
less than $0.1 million.

During
2002, the Company reduced by approximately $0.3 million certain reserves for contingent liabilities related to the sale of the operations of its wholly-owned subsidiary, US
HealthData Interchange, Inc., in fiscal 1998. Management had determined that these reserves were no longer required. Also during 2002, the Company received a refund on a previously paid
environmental claim of $0.3 million for a former site related to its wholly-owned subsidiary, National Aluminum Corporation ("NAC"). In addition, during 2001, the Company reduced by
approximately $2.2 million certain reserves for contingent liabilities related to NAC as these reserves were no longer required. NAC's operations were substantially discontinued prior to fiscal
1991. The reduction in reserves and the refund were recorded in "gain on disposal of discontinued operations" in the consolidated statements of operations.

39

---

NOTE CSUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION

The following supplemental cash flow information is provided for interest and income taxes paid and for non-cash transactions (in thousands of
dollars):

|                             |                                                            | For the years ended March 31,
|---------------------------- | ---------------------------------------------------------- | -----------------------------
|
|Interest paid                |                                                            | $                            
|Income taxes paid (refunded) |                                                            |                              
|Non-cash transactions:       |                                                            |                              
|                             | Note receivable converted into equity investment           |                              
|                             | Stock of WD-40 Company received on sale of an investment   |                              
|                             | Note received on sale of other investments                 |                              
|                             | Reduction in book value of redeemable preferred stock      |                              
|                             | Value of common stock and warrants issued in Xetava merger |                              
|                             | Value of long-term debt issued in Xetava merger            |                              
|                             | Cumulative dividends accrued but not paid                  |                              

40

---

The
following supplemental information is provided for other assets, other accrued liabilities and other long-term liabilities (in thousands of dollars):

March 31,2002

2001Other assets:Prepaid pension cost

$
4,352

$
14,183Securities available for sale


2,355


4,304Cash surrender value of life insurance


1,980


1,782Other investments, at cost





1,288Accrued dividends on preferred stock


702


430Patents


1,415


Other


32


264Total

$
10,836

$
22,251Other accrued liabilities:Accrued interest payable

$
284

$
517Liabilities related to discontinued operations


108


428Environmental liabilities


210


65Other


160


186Total

$
762

$
1,196Other long-term liabilities:Pension and postretirement benefits

$
4,632

$
4,812Environmental liabilities


1,043


1,153Liabilities related to discontinued operations


453


453Liabilities for potential claims


2,000


2,000Total

$
8,128

$
8,418


NOTE DOTHER INCOME (EXPENSE)

In 2002, other expense related primarily to a $3.4 million write-down of the Company's investment in iLife Systems, Inc.
("iLife") to its estimated fair value (see Note E) partially offset by
a gain on the sale of equity securities of $0.6 million (see Note E) and a gain of $1.6 million for payments received on assets either sold or written-off in a prior
fiscal year.

In
2001, other income related primarily to a gain on the sale of equity securities of $3.4 million and a gain of $0.3 million on a payment received on an asset sold in a
prior fiscal year, offset by the $3.7 million write-down of the Company's investment in Phar-Mor to its estimated fair value during the quarter ended
September 30, 2000 (see Note B).

In
2000, other income of $0.4 million consisted of $1.7 million in income primarily from $0.6 million in gains on the sale of securities, a class action settlement
of $0.5 million related to investment transactions in prior years and $0.6 million in payments received on assets either sold or

41

---

written-off in a prior fiscal year. This was partially offset by a $1.1 million write-off of the carrying value of the Company's investment in Imagyn Medical
Technologies, Inc. as a result of the elimination of the Company's equity interest under their Chapter 11 plan of reorganization and a write-down in the carrying value of an
investment in a non-public company of $0.2 million.

NOTE EINVESTMENTS

The Company's investments in debt securities, and in equity securities that have a readily determinable market value, were classified as either "available for
sale" or "trading". The carrying value and gross unrealized gains and losses for available for sale securities were as follows (in thousands of dollars):

March 31,2002

2001Carrying value

$
2,355

$
6,086Unrealized gains





4Unrealized losses


56


56


Available
for sale securities included $2.4 million and $4.3 million in "Other assets" at March 31, 2002 and March 31, 2001, respectively, and
$1.8 million in "Other current assets" at March 31, 2001, depending on the securities' expected holding period.

The
gross proceeds and realized gains and losses from the sale of available for sale securities and the change in unrealized gains (losses) on available for sale and trading securities
were as follows (in thousands of dollars):

For the years ended March 31,2002

2001

2000Available for sale securities:Proceeds from sales

$
1,838

$
9,005

$
2,646Realized gains


11


3,411


576Realized losses


1,944





Net unrealized gains (losses)


(4
)

(2,034
)

162Trading securities:Net unrealized losses included in net income








(1,077
)


Included
in the available for sale securities at March 31, 2002 or at March 31, 2001 are the Company's investments in redeemable preferred stock of Presby Corp. ("Presby"), iLife and HPD Holdings Corp.
("HPD"). A discussion of these significant investments follows.

Presby Corp.

In April 1998, the Company invested in Presby, formerly RAS Holding Corp., by purchasing Series B convertible preferred stock ("Series B
Preferred"). In July 1998 and February 1999, the Company made additional purchases of the Series B Preferred after Presby met certain performance goals. The Company's total
investment was approximately $1.4 million. The Company also received

42

---

two-year warrants which were exercised in April 2000 to purchase additional Series B Preferred for approximately $0.9 million. In addition, the Company purchased
additional Series B Preferred shares from other investors for less than $0.1 million during fiscal 2001. On a fully-diluted basis, assuming the exercise of all convertible preferred
stock, warrants and options outstanding, the Company would own approximately 13.5% of the common stock of Presby.

Presby
is a privately-held company that has developed a surgical technique called the Surgical Reversal of Presbyopia, which uses a patented medical device, the Scleral
Expansion Band ("SEB"), to treat presbyopia. Presbyopia is, in general, the loss of the human eye's ability to focus at near distances due to aging, resulting in the need for reading glasses or
bifocals. The Company has been advised that Presby has completed the surgical procedures required for its Phase I clinical trials in the United States and that it has received approval from the U.S.
Food and Drug Administration (the "FDA") to proceed with clinical studies required for market approval in the United States. However, the final outcome of the trials and achieving commercial success
of the technique are each highly uncertain. In addition, Presby has advised the Company that they have sought FDA approval to start clinical trials in the United States for use of the SEBs to treat
certain forms of glaucoma and ocular hypertension. Similar studies related to the treatment of presbyopia, glaucoma and ocular hypertension have begun in Canada. Presby has also developed related
products which include a specialized incision device and replacement blades for use with the surgical procedure providing more consistent and reliable outcomes.

In
March 2002, Presby entered into a license agreement with CIBA Vision AG ("CIBA"), a subsidiary of Novartis AG. Under the license agreement, Presby granted to CIBA an exclusive
worldwide license to market and sell Presby's ophthalmic surgical products for use in the treatment of presbyopia, ocular hypertension and primary open angle glaucoma. CIBA will assume responsibility
for the manufacture of
the licensed products following a transition period and has committed to provide additional cash infusions to Presby when Presby meets certain future milestones. Because Presby retains responsibility
for FDA trials and product development, it may still need to obtain additional financing from other sources in order to complete its FDA trials so it can bring its products to market in the United
States.

The
Series B Preferred has voting rights equivalent to the common stock of Presby and accrues dividends at 12% per annum less 85% of any amounts paid to RAS Service Co, LP ("RAS
Service") as described below. The accrued dividends did not have to be paid in cash until the last day of the month following December 2001 (or, at Presby's option, in quarterly increments from
that date to the last day of the month following September 2002). Presby has exercised the option to defer payment until at least the last day of the month following June 2002. In
addition, during fiscal 2001 the number of shares of common stock into which each Series B Preferred is convertible was changed from 2.1:1 to 2.52:1 as a result of Presby not meeting certain
goals set forth in the applicable certificate of designation.

RAS
Service is a limited partnership whose partners were the original owners of the Series B Preferred and another partnership that included certain principals in Presby. RAS
Service has a service contract with Presby under which it provides advisory and consulting services to Presby and receives the lesser of $20 per SEB sold or 5% of the net sales price of each SEB after
commissions (calculated on a quarterly basis) for providing these services. Of the revenue recognized by RAS Service, 85% is payable

43

---

to the Series B Preferred partners and 15% is payable to the other partner. The dividend on the Series B Preferred is reduced, but not below zero, by the 85% of the revenues due the
Series B Preferred partners. One of the Company's subsidiaries is the general partner of RAS Service and receives approximately the first $15 thousand of the fees due the Series B
Preferred partners. The remainder of the fees earned by the Series B Preferred partners are split among the partners based on their original investment in the Series B Preferred. Payment
of the fees by Presby to RAS Service was deferred until the last day of the month following December 31, 2001 (or in quarterly increments from that date consistent with the Series B
Preferred deferral date). Presby has deferred the payment until at least the last day of the month following June 2002. The service contract expires September 30, 2006 (or on
December 31, 2006 if the Series B Preferred payment date is deferred to September 30, 2002).

In
connection with a potential future investment by CIBA or others, the terms of the Series B Preferred and the RAS Service contract with Presby may be subject to modifications to
be negotiated by the holders of the Series B Preferred and the new investors, including but not limited to the payment and/or further deferral of the accrued dividends of $0.7 million
and the accrued service fee of $0.1 million.

The
Company's investment in Presby, including accrued dividends, was carried at $3.1 million and $2.8 million, at March 31, 2002 and 2001, respectively. The Company
also licenses office space at the Company's Dallas, Texas office to Presby and, until March 31, 2002, received a consulting fee to provide certain management services to Presby. The rentals
received for the office space were less than $0.1 million per year for the three years ended March 31, 2002, and the consulting fees were less than $30 thousand per year for the
same period.

iLife Systems, Inc.

The Company owns the equivalent of an approximate 14.5% interest, on a fully-diluted basis, iniLife, a privately
held corporation.iLife owns certain patents issued or pending which provide for reliable, electrode-free, non-invasive methods
for detecting and analyzing breathing, heart rate and body motions as well as methods for microwatt wireless transmission, for digital data recording and for electrode-free,
infrasound-based detection and intervention.iLife has incorporated these technologies into personal emergency response systems and wireless vital signs
monitors.iLife's commercial sales and/or licensing revenues have been minimal.

In
fiscal 2002,iLife modified its corporate structure and set up a wholly-owned subsidiary, iLife Solutions ("Solutions"), which now owns or licenses all the
assets and assumed all the liabilities formerly held by iLife. The Company, along with other investors, loaned Solutions $1.0 million (the Company's portion was approximately $0.2 million)
which
is secured by the assets of Solutions.iLife is attempting to find additional outside investors in order to provide funds to continue its operations and
has reduced the number of its employees and deferred the salaries of certain of its employees, with their agreement, for a period of six months. The Company wrote off its equity investment in iLife
during the current fiscal year to reflect what the Company's management believed to be an other than temporary decline in value. The Company
believes that there is adequate value iniLife to eventually recover our $0.2 million loan to Solutions.

44

---

The
Company originally invested approximately $1.3 million in December 1997 to purchase a Series B convertible preferred stock (the "B Preferred") for what was then
a 6.3% fully-diluted ownership interest iniLife. In addition, the Company made various loans toiLife
during fiscal years 2000 and 2001. The loans had a carrying value of approximately $1.9 million at maturity and, in connection with additional investments into iLife by third parties in
March 2001, was converted into an equivalent number of shares of redeemable Series C convertible preferred stock
("C Preferred") at $1.30 per share. The Company has also acquired a total of 3,720,207 warrants to purchase common stock at $1.30 per share as part of these transactions. These warrants expire between
March 2005 and March 2006. As described above, the Company believes the B Preferred, the C Preferred and the warrants have no current value and, accordingly, the Company has written off
its $3.4 million equity investment in these securities in fiscal 2002.

The
Company also licenses office space and leases furniture and equipment at the Company's Dallas, Texas office toiLife. The rentals
received were less than $55 thousand per year for the three years ended March 31, 2002.

HPD Holdings Corp.

At March 31, 2001, the Company owned approximately $1.9 million of preferred stock of HPD, which was a privately held corporation whose subsidiary
manufactured and distributed household product lines. At the time of the Company's initial investment in April 1998, the Company also received 2.5% of the common stock of HPD. In February and
April 2000, the Company invested approximately $0.1 million in a subordinated debenture of HPD and received warrants to purchase additional common stock of HPD at $.01 per share that
were to expire February 1, 2010. In April 2001, WD-40 Company acquired all of the outstanding common and preferred stock of HPD and repaid its debentures. The Company
received a total of approximately $2.6 million for its HPD investment resulting in a gain of approximately $0.6 million that was recognized in the first quarter of fiscal 2002.

NOTE FLONG-TERM DEBT

Long-term debt was as follows (in thousands of dollars):

March 31,2002

20016.75% notes of Avatex Funding, Inc. ("Avatex Funding"), net of discount of $1,282 in 2002 and $5,110 in 2001

$
12,999

$
20,915Capital leases


11


Total


13,010


20,915Long-term debt due within one year


13,003


Long-term debt

$
7

$
20,915


The
6.75% notes were issued by Avatex Funding on December 7, 1999, to the Company's former preferred stockholders who elected this option in the merger with Xetava Corporation
("Xetava")(see Note G). Avatex Funding is a wholly-owned subsidiary that has a separate corporate existence from the

45

---

Company. Avatex Funding's sole purpose is to issue the notes and to own 4,704,033 shares of the common stock of Phar-Mor which are pledged to secure the notes. Avatex Funding is
prohibited by the note indenture from transacting any other business, and the company does not have any other material assets or liabilities not related to the notes. At the time of issue, the notes
were recorded at their estimated fair value of $19.9 million and are being amortized on an effective yield basis of 21% over the term of the notes. The notes mature December 7, 2002, and
interest is due on June 15 and December 15 of each year. The Company guarantees the notes. See Note O for a discussion of the Company's ability to repay the notes at maturity.

In
April 2001, the Company repurchased $11.7 million face amount of the 6.75% notes for $7.1 million. This purchase resulted in an extraordinary gain of
approximately $2.5 million which represents the difference in the purchase price and the discounted carrying value of the notes at the time of purchase. For the year ended March 31,
2001, a gain of approximately $0.4 million was recognized on the early extinguishment of approximately $2.7 million face value of the 6.75% notes that the Company purchased in the open
market for approximately $1.6 million. The remaining principal amount of the notes is approximately $14.3 million.

Capital
leases relate to assets owned by Chemlink. The carrying value of the assets is $12 thousand. Payments over the remaining life of the capitalized leases are as follows:
$4 thousand in 2003, $5 thousand in 2004 and $4 thousand in 2005. The difference in the remaining payments of $13 thousand and the carrying value of $11 thousand
represents imputed interest.

In
addition, there was an extraordinary gain of $4.6 million during 2001 related to the retirement of a note payable to the FoxMeyer Corporation ("FoxMeyer") Bankruptcy Trustee
(the "Trustee") in February 2001. The gain represented the difference in the carrying value of the note and the $6.0 million payment to settle the note. In addition to the cash payment,
the Company also gave up its rights to a 30% interest in certain pending litigation filed by the Trustee against various third parties.

NOTE GCAPITAL STOCK

At the Annual Meeting of Stockholders held on December 6, 1999, the Company's common and former preferred stockholders approved the merger with a
wholly-owned subsidiary, Xetava, under an Amended and Restated Agreement and Plan of Merger that was executed on June 18, 1999 and subsequently amended on October 19, 1999 (the "Merger
Agreement"). Holders of approximately 76% of the outstanding shares of each series of the Company's former preferred stock and holders of approximately 65% of its issued shares of common stock voted
in favor of the merger.

The
merger was consummated on December 7, 1999. Under the Merger Agreement, the former preferred stockholders received in exchange for their preferred stock either new
Class A common stock
or, alternatively, a combination of cash, secured notes, warrants and other consideration (the "Alternate Consideration"). The then existing common stockholders received new Class A common
stock on a one-for-one basis for their common stock. As a result of the merger, the two former series of preferred stock were eliminated.

Preferred Stock:The Company is authorized to issue 10,000,000 shares of preferred stock. Currently, no preferred stock is
outstanding. The two former series of preferred stock that were eliminated in the merger with Xetava are discussed below.

46

---

At
December 7, 1999, the Company had 652,273 shares of its former cumulative convertible preferred stock outstanding. Cumulative dividends unpaid for the convertible preferred
stock at December 7, 1999, were $10.4 million or $15.92 per share. Each share of the former convertible preferred stock was either converted into 9.134 shares of Class A common
stock or, at the election of the holder, into Alternate Consideration consisting of $3.7408 in cash, $8.34 principal amount of 6.75% notes due December 2002 issued by Avatex Funding and
warrants to purchase 0.67456 shares of the Class A common stock at $2.25 per share.

In
addition, at December 7, 1999, the Company had 4,312,351 shares of $4.20 Cumulative Exchangeable Series A Preferred Stock, par value $5 per share, with a liquidation
preference of $40 (the "Series A preferred stock") outstanding. Cumulative dividends unpaid for the Series A preferred stock at December 7, 1999, were $67.4 million or
$15.64 per share. Each share of the former Series A preferred stock was either converted into 7.253 shares of Class A common stock or, at the election of the holder, into Alternate
Consideration consisting of $2.9705 in cash, $6.623 principal amount of the 6.75% notes, and warrants to purchase 0.53567 shares of the Class A common stock at $2.25 per share.

On
December 7, 1999, the Company paid approximately $12.9 million in cash, issued approximately $28.7 million face amount of 6.75% notes, and issued warrants to
purchase 2,319,334 shares of Class A common stock to the former preferred stockholders who elected the Alternate Consideration. The former preferred stockholders who did not elect to receive
the Alternate Consideration were issued 5,830,873 shares of Class A common stock. With the 13,806,484 shares of the former common stock that were converted to the same number of shares of
Class A common stock, the Company issued a total of 19,637,357 shares of the Class A common stock.

In
addition, the holders of shares of both of the former series of preferred stock who elected the Alternate Consideration received a deferred contingent right to a portion of any net
recovery that the Company may receive in certain litigation brought by the Company against McKesson Corporation ("McKesson") and a number of large pharmaceutical manufacturers (see Note L). In
December 2001, the holders of the deferred contingent rights were paid $0.4 million in full satisfaction of these rights.

As
a result of the merger, the Company recognized a gain on the exchange of its preferred stock that is shown as an increase in stockholders' equity in connection with the Xetava merger,
which was calculated as follows (in thousands of dollars):

Book value of preferred stock including cumulative unpaid dividends

$
264,082Cash paid to preferred stockholders and expenses related to the S-4 filing


(13,920
)Value of common stock issued in the exchange (at market value)


(4,373
)Value of warrants issued in the exchange (at estimated market value)


(858
)Value of 6.75% notes issued in the exchange (at estimated market value)


(19,922
)Gain on exchange of preferred stock in connection with Xetava merger

$
225,009


Common Stock:At March 31, 2002 and 2001, the Company had 19,637,357 shares of Class A $0.01 par value common
stock outstanding before consideration of its common stock owned by Phar-Mor. Class A common stock was issued December 7, 1999 in exchange for the previously outstanding
$5.00 par value common stock on a one-for-one basis and to the former preferred

47

---

stockholders who elected not to take the Alternate Consideration (see above). The Company has also reserved 1,765,000 shares of its Class A common stock for issuance under the stock option and
performance award plans (see Note H) and 2,319,334 shares for issuance upon conversion of the $2.25 warrants (see above). The warrants expire March 7, 2005. While there are no
restrictions on the Company's ability to pay dividends on its common stock, the Company does not presently intend to pay any dividends (see Note O concerning the Company's ability to continue
as a going concern).

As
of March 31, 2002, Phar-Mor had acquired 4,948,600 shares of the Company's Class A common stock at a cost of approximately $10.7 million. The Company
accounts for its investment in Phar-Mor on an equity basis (see Note B) and treats Phar-Mor's investment in its common stock similar to treasury stock, with a reduction
in the Company's stockholders' equity of $5.2 million and $5.1 million at March 31, 2002 and 2001, respectively, and a reduction in the number of shares outstanding for
calculating earnings per share (see Note A).

NOTE HEMPLOYEE COMPENSATION PLANS

The Company maintains the Amended and Restated Stock Option and Performance Award Plan (the "Plan"). The Plan provides for the granting of incentive options and
non-qualified options to purchase shares of the Company's common stock to certain officers and key employees and for the granting of non-qualified stock options to the outside
directors on an automatic basis. The Plan also permits the granting of performance shares, restricted shares and performance units to participants (other than outside directors). Under the Plan, the
Finance and Personnel Committee of the Board of Directors determines the price at which options are to be granted, the period over which options are exercisable, the duration of performance or
restriction periods and performance targets over which performance shares shall be earned. A total of 9,000,000 shares of the Company's common stock may be granted under the Plan. At March 31,
2002, options for 7,188,192 shares were still available for grant under the Plan.

The
Company previously had a Performance Incentive Plan that provided for participants to receive 17.5% of the net proceeds, if any, from litigation related to a lawsuit against McKesson
and various other defendants. As a result of the settlement of that case (see Note L), the participants were paid approximately $0.4 million during 2002.

48

---

The
following table summarizes the information with respect to stock options for the three years ended March 31, 2002. The exercise price of options granted was equal to the
published market price of the common stock on the date of grant.

|                      |  |           |  | Outstanding
|--------------------- |  | --------- |  | -----------
|
|March 31, 1999        |  | 2,750,611 |  | 3,853,114  
|Granted               |  |           |  | 5,000      
|Exercised             |  |           |  |           
|Canceled or forfeited |  |           |  |           
|                      |  |           |  |            
|March 31, 2000        |  | 3,303,108 |  | 3,858,114  
|Granted               |  |           |  | 5,000      
|Exercised             |  |           |  |           
|Canceled or forfeited |  |           |  |           
|                      |  |           |  |            
|March 31, 2001        |  | 3,855,614 |  | 3,863,114  
|Granted               |  |           |  | 100,000    
|Exercised             |  |           |  |           
|Canceled or forfeited |  |           |  | (2,198,114 
|                      |  |           |  |            
|March 31, 2002        |  | 1,662,500 |  | 1,765,000  
|                      |  |           |  |            

The
fair value of each option grant was estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants
during the three years ended March 31, 2002:

|                              |  | 2002 |  | 2001 |  | 2000
|----------------------------- |  | ---- |  | ---- |  | ----
|Expected dividend yield (%)   |  | 0.0  |  | 0.0  |  | 0.0 
|Expected volatility (%)       |  | 93.7 |  | 93.4 |  | 80.8
|Risk-free interest rates (%)  |  | 4.7  |  | 5.8  |  | 6.2 
|Expected option lives (years) |  | 5.0  |  | 5.0  |  | 5.0 

The
weighted-average fair values of options granted during 2002 were $0.10, during 2001 were $0.30 and during 2000 were $0.54.

The
Company accounts for stock-based compensation using the intrinsic value method of APB 25 (see Note A). Accordingly, no compensation expense was recognized. If the Company had
used the fair value of options at the grant dates, as defined by SFAS No. 123, to recognize compensation cost for the

49

---

three years ended March 31, 2002, the reported loss from continuing operations and net income (loss) would have been as follows on a pro forma basis (in thousands of dollars, except per share
amounts):

|                                                           |                                                    | 2002 |   | 2001    |   | 2000 |        
|---------------------------------------------------------- | -------------------------------------------------- | ---- | - | ------- | - | ---- | -------
|As reported:                                               |                                                    |      |   |         |   |      |        
|                                                           | Loss from continuing operations                    |      | $ | (18,163 | ) | $    | (23,142
|                                                           | Net income (loss)                                  |      |   | (14,985 | ) |      | (7,134 
|Pro forma:                                                 |                                                    |      |   |         |   |      |        
|                                                           | Loss from continuing operations                    |      | $ | (18,167 | ) | $    | (23,226
|                                                           | Net income (loss)                                  |      |   | (14,989 | ) |      | (7,218 
|                                                           |                                                    |      |   |         |   |      |        
|As reported for both basic and diluted earnings per share: |                                                    |      |   |         |   |      |        
|                                                           | Income (loss) per share from continuing operations |      | $ | (1.05   | ) | $    | (1.32  
|                                                           | Net income (loss) per share                        |      |   | (0.87   | ) |      | (0.41  
|Pro forma for both basic and diluted earnings per share:   |                                                    |      |   |         |   |      |        
|                                                           | Income (loss) per share from continuing operations |      | $ | (1.05   | ) | $    | (1.32  
|                                                           | Net income (loss) per share                        |      |   | (0.87   | ) |      | (0.41  
|                                                           |                                                    |      |   |         |   |      |        

The
following table summarizes information about significant option groups outstanding and exercisable as of March 31, 2002 and related weighted-average exercise price and
weighted-average contractual life remaining:

|                   |  | Outstanding |  | Exercisable |      | 
|------------------ |  | ----------- |  | ----------- | ---- | 
|
|
|$0.1350 to $0.7812 |  | 110,000     |  | $           | 0.18 | 
|                   |  |             |  |             |      | 
|$1.1250            |  | 1,655,000   |  | $           | 1.13 | 
|                   |  |             |  |             |      | 

NOTE IRETIREMENT PLANS

The Company has retirement plans consisting of both defined benefit and defined contribution plans. Pension benefits under the defined benefit plans are generally
based upon years of service or a combination of remuneration and years of service. No current employee is covered under a defined benefit plan. The Company's funding policy for defined benefit plans
is to make payments to the pension trusts in accordance with the funding requirements of federal laws and regulations. The Company's outside directors are covered under a non-qualified and
unfunded defined benefit plan.

The
Company has also maintained an employees' savings plan under Section 401(k) of the Internal Revenue Code for all employees since April 1997. Under the plan, employees
generally may elect to exclude up to 20% of their compensation from amounts subject to income tax as a salary deferral contribution. The Company makes a matching contribution to each employee, which
immediately vests, in an amount equal to 50% of the first 6% of the employee's contribution.

50

---

Pension
income under the Company's retirement plans for the three years ended March 31, 2002 are presented in the table below (in thousands of dollars):

For the years ended March 31,2002

2001

2000Net periodic pension cost (income) for defined  benefit plans:Service costbenefits earned for the year

$
58

$
71

$
65Interest cost on projected benefit obligation


3,173


3,316


3,358Expected return on plan assets


(3,940
)

(4,903
)

(4,573
)Net actuarial loss


186





Net amortization and deferral


(184
)

(184
)

(183
)Net periodic pension cost (income)


(707
)

(1,700
)

(1,333
)Pension cost for defined contribution plans


34


34


37Total pension cost (income)

$
(673
)
$
(1,666
)
$
(1,296
)


The
net periodic pension income for defined benefit plans was determined by assuming a weighted average expected long-term rate of return on plan assets of 7.8% for the three
years ended March 31, 2002.

The
following table sets forth the funded status of the Company's defined benefit pension plans and amounts recognized in its consolidated balance sheets at March 31, 2002 and
2001 utilizing a weighted average discount rate of 6.75% in 2002 and 7.0% in 2001 (in thousands of dollars):

March 31,2002

2001Change in benefit obligation:Benefit obligation, beginning of year

$
47,805

$
48,086Service cost


58


71Interest cost


3,173


3,316Actuarial losses


771


905Benefits paid


(4,391
)

(4,573
)Benefit obligation, end of year


47,416


47,805Change in plan assets:Fair value of plan assets, beginning of year


53,022


65,464Actual return on plan assets


(1,188
)

(8,070
)Benefits paid


(4,205
)

(4,372
)Fair value of plan assets, end of year


47,629


53,022Funded status


213


5,217Unrecognized transition obligation (asset)


11


(173
)Unrecognized net actuarial loss


14,105


8,392Net amount recognized

$
14,329

$
13,436


51

---

The
benefit obligations and plan assets at March 31, 2002 of the plans in which the benefit obligation exceeded plan assets were $37.8 million and $37.2 million,
respectively. The benefit obligations at March 31, 2001 in plans in which the benefit obligation exceeded plan assets were $0.8 million. There were no plan assets related to underfunded
plans at March 31, 2001.

The
following table presents amounts recognized in the consolidated balance sheets at March 31, 2002 and 2001 that net to the amount recognized in the table above (in thousands of
dollars):

March 31,2002

2001Prepaid pension cost

$
4,352

$
14,183Accrued pension liability


(683
)

(756
)Accumulated other comprehensive loss


10,660


9Net amount recognized

$
14,329

$
13,436


The
increase in the accumulated other comprehensive loss was primarily a result of the change in the funding status of one of the Company's pension plans. The prepaid pension cost for
the plan was $10.0 million at March 31, 2001, and the fair value of the plan's assets at that time exceeded its benefit obligation. As a result of the decrease in the discount rate and
the losses realized on the plan's assets in the current year, the plan's assets are $5 thousand less than its benefit obligation at March 31, 2002. Therefore, the Company has recognized
a decrease in its prepaid pension costs with a corresponding charge to other comprehensive loss in the current year of approximately $10.7 million.

At
March 31, 2002, the assets of the Company's defined benefit pension plans were comprised of approximately 13% bonds, 76% stocks, 8% hedge funds and 3% other, principally cash.
Included in pension plan assets were 1,361,500 shares of the Company's common stock with a market value of less than $0.1 million at March 31, 2002. Also included in pension plan assets
were approximately $5.3 million face amount of 6.75% Avatex Funding notes with an estimated market value of approximately $1.1 million at March 31, 2002.

NOTE JPOSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company has a plan for retired employees that provides for postretirement health care and life insurance benefits. No current employees are covered under the
plan. Health benefits include major medical insurance with deductible and coinsurance provisions. Life insurance benefits are for a flat benefit. The plan provides that some retirees pay for a portion
of their coverage. The plan is not funded, and the Company pays all benefits on a current basis.

52

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The
net periodic postretirement benefit cost for the three years ended March 31, 2002 was as follows (in thousands of dollars):

For the years ended March 31,2002

2001

2000Service costbenefits earned for the year

$


$


$
Interest cost


130


167


183Amortization of prior service cost and net gain


(99
)

(44
)

(40
)Total postretirement benefit cost

$
31

$
123

$
143


The
following table sets forth the status of the postretirement health care and life insurance plans and amounts recognized in the consolidated balance sheets at March 31, 2002
and 2001 utilizing a discount rate of 6.75% for 2002 and 7.0% for 2001 (in thousands of dollars):

March 31,2002

2001Benefit obligation, beginning of year

$
2,467

$
2,748Service cost





Interest cost


130


167Plan participants' contributions


41


38Benefits paid


(208
)

(140
)Actuarial gain


(470
)

(346
)Benefit obligation, end of year


1,960


2,467Unrecognized net gain


1,525


1,154Amount of postretirement benefit obligation included in the consolidated balance sheet

$
3,485

$
3,621


Medical
costs were assumed to increase at a rate of 7.0% during 2002 and then to decline over a period of 4 years to a rate of 5.0%. To demonstrate the volatility of the valuation
results based on this assumption, the impact of a 1% increase or a 1% decrease in the cost of health care would result in a 9.6% increase or an 8.1% decrease in the postretirement benefit obligation
and a $12 thousand increase or a $10 thousand decrease in postretirement benefit cost for the plan.

NOTE KINCOME TAXES

There was no provision for income taxes for any of the three years ended March 31, 2002.

The
Company recorded no federal income tax benefits for its losses from continuing operations for the three years ended March 31, 2002 because of the uncertainty of realizing its
deferred tax assets. The
Company adjusted the valuation allowance to maintain a full valuation allowance against the net deferred tax assets.

53

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While
the Company has generated substantial loss, capital loss and tax credit carryforwards in prior years, the availability of such loss and tax credit carryforwards to reduce future
consolidated federal income tax liability is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"), including limitations upon the utilization of loss and tax
credit carryforwards in the event of an ownership change (as defined in the Code). The Company believes that the latest ownership change occurred in December 1999 in connection with the Xetava
merger (see Note G). As a result of the ownership change, the Company will have less than $0.1 million per year of operating loss carryforwards available from tax loss carryforwards
incurred prior to December 8, 1999.

At
March 31, 2002, the Company has for federal income tax purposes operating loss carryforwards of approximately $10.1 million, of which $1.2 million expires in
2022, $5.4 million expires in 2021 and $3.5 million expires in 2020. The Company has capital loss carryforwards of $0.8 million which expire in 2005.

The
reasons for the difference between the total tax provision and the amount computed by applying the statutory federal income tax rate to loss from continuing operations were as
follows (in thousands of dollars):

|                                                                            |  | For the years ended March 31, |       
|--------------------------------------------------------------------------- |  | ----------------------------- | ------
|
|Statutory rate applied to pre-tax loss                                      |  | $                             | (6,426
|Change in deferred tax asset valuation allowance from continuing operations |  |                               | 3,128 
|Corporate dividend-received deduction                                       |  |                               | (6    
|Effect of change in control on net operating loss and credit carryforwards  |  |                               |      
|Market adjustment to investment                                             |  |                               | (557  
|Equity in affiliates                                                        |  |                               | 4,051 
|Other items                                                                 |  |                               | (190  
|                                                                            |  |                               |       
|Total tax provision                                                         |  | $                             |      
|                                                                            |  |                               |       

54

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The
Company's current and noncurrent deferred taxes, which net to a zero balance as of March 31, 2002 and 2001, consisted of the following temporary differences and net operating
losses at the statutory rate, tax credits, and valuation allowance (in thousands of dollars):

March 31,2002

2001Deferred tax assets:Tax net operating losses

$
3,816

$
3,420Investments


2,382


Other liabilities


3,521


3,754Tax credits


3


3Total deferred tax assets


9,722


7,177Deferred tax liabilities:Retirement plans


(5,930
)

(5,609
)Other


(1,041
)

(833
)Deferred tax liability


(6,971
)

(6,442
)Valuation allowance


(2,751
)

(735
)Deferred tax asset, net

$


$



The
net change in the valuation allowance for 2002 was an increase of approximately $2.0 million. The net change consisted of a $3.1 million increase in the deferred tax
asset valuation allowance related to continuing operations partially offset by a reduction of $1.1 million to recognize a decrease in the deferred tax asset related to gains in extraordinary
items and discontinued operations. The valuation allowance offsets the remaining net deferred tax assets due to the uncertainty of realizing any benefit from the deferred tax assets.

NOTE LCOMMITMENTS AND CONTINGENCIES

The Company leases various types of properties, primarily corporate office space and equipment, through noncancelable operating leases. Rental expense for
continuing operations under operating leases totaled $0.3 million in 2002, $0.2 million in 2001 and $0.2 million in 2000. Minimum rental payments under operating leases with
remaining terms of one year or more at March 31, 2002 total $0.6 million with payments due of $0.3 million in 2003, $0.2 million in 2004 and $0.1 million in 2005.
Sublease income from licensing the Company's office space was approximately $0.2 million in 2002. The Company expects to receive sublease income of approximately $0.1 million in both
2003 and 2004.

The
Company has retained responsibility for certain potential environmental liabilities attributable to former operating units. The Company is subject to federal, state and local
environmental laws, rules and regulations, including the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and similar state superfund statutes related to sites
of those former operating units. These statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated
properties regardless of fault. The Company and its subsidiaries received various claims and demands from governmental agencies relating to investigations and remedial actions to address environmental
clean-up costs and in some

55

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instances have been designated as a potentially responsible party by the Environmental Protection Agency.

At
March 31, 2002, the Company had reserves of approximately $1.3 million for environmental assessments, remediation activities, penalties or fines at seven sites that may
be imposed for non-compliance with such laws or regulations. Reserves are established when it is probable that liability for such costs will be incurred and the amount can be reasonably
estimated. Management's estimates of these costs are based upon currently available facts, existing technology, presently enacted laws and regulations and the professional judgment of consultants and
counsel. Where the available information is sufficient to estimate the amount of the liability, that estimate has been used. Where the information is only sufficient to establish a range of probable
liability and no point within the range is more likely than the other, the lower end of the range was used.

The
amount of reserves for environmental liabilities is difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of
sites not formerly owned by the Company, the unknown extent of the probable liability in proportion to the probable liability of other parties. Moreover, the Company may have environmental liabilities
that it cannot, in its judgment, estimate at this time and losses attributable to remediation costs may arise at other sites. The Company recognizes that additional work may need to be performed to
ascertain the ultimate liability for such sites, and further information could ultimately change the current assessment. A change in the estimated liability could have a material impact on the
Company's financial condition and results of operations.

In
January 1997, the Company filed a lawsuit against McKesson and certain pharmaceutical manufacturers. Prior to our fiscal year ended March 31, 2001, the Company entered
into settlement agreements with all of the manufacturer defendants in the litigation, under which we received confidential settlement payments. In December 2001, we entered into a settlement
agreement with McKesson that settled all of our claims against McKesson and all claims asserted by McKesson against us and certain of our officers in the litigation, under which we received a
confidential settlement payment. After payment of contingent attorneys' fees and other expenses and the distributions described below, the Company retained approximately $2.6 million in the
current fiscal year relating to the litigation.

With
respect to distributions from the proceeds of the McKesson litigation, under the terms of the June 1999 merger agreement between the Company and Xetava (see Note G),
certain of the Company's former preferred stockholders had elected to exchange their preferred shares for cash, notes, warrants and a deferred contingent cash right. The deferred contingent cash right
entitled the former shareholders to a percentage of the Company's net recovery in the McKesson litigation. The amount distributed to these former shareholders in December 2001 was approximately
$0.4 million. In addition, certain current and former employees were also participants under a Performance Incentive Plan (see Note H) relating to the litigation. The amount distributed
to current and former employees in December 2001 was 17.5% of the net proceeds of the litigation or approximately $0.4 million.

The
Company's primary directors and officers' liability insurance policy for the three years ending on or about April 25, 1998 was United Pacific Insurance Company ("UPIC"). On
May 29, 2001, a Pennsylvania state court entered an order placing Reliance Insurance Company ("Reliance") and its

56

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subsidiary, UPIC, into "rehabilitation" under Pennsylvania's Insurance Department Act. On October 3, 2001, the court entered an Order of Liquidation that superseded the May 29 order,
terminated the rehabilitation of Reliance and UPIC and appointed the insurance commissioner of the State of Pennsylvania as liquidator. We cannot estimate at this time the impact, if any, that might
result from Reliance and UPIC being liquidated on our 1996 stockholder litigation, the FoxMeyer directors lawsuit or the Ben Franklin Retail Stores, Inc. ("Ben Franklin") lawsuits discussed
below.

The
Company and certain of its current and former officers and directors have been named in a series of purported class action lawsuits that were filed and subsequently consolidated
under Zuckerman, et al. v. FoxMeyer Health Corporation, et al., in the United States District Court for the Northern District of Texas, Dallas Division, Case
No. 396-CV-2258-T. The lawsuit purports to be brought on behalf of purchasers of the Company's common and formerly outstanding preferred stocks during the
period July 19, 1995 through August 27, 1996. In May 1997, plaintiffs in the lawsuit filed a consolidated amended class action complaint, which alleges that the Company and the
defendant officers and directors made misrepresentations of material facts in public statements or omitted material facts from public statements, including the failure to disclose purportedly negative
information concerning the Company's National Distribution Center and Delta computer systems and the resulting impact on its existing and future business and financial condition. In March 1998,
the court denied the Company's motion to dismiss the amended complaint in the lawsuit. In January 2002, the Court granted the plaintiffs' unopposed motion to certify a class of purchasers of
common stock as to federal claims and reserved judgment on all other class certification issues. The Company intends to continue to vigorously defend itself in the lawsuit. The Company is unable at
this time to estimate the possible loss, if any, which may accrue from this lawsuit.

In
April 1998, the Trustee filed a lawsuit against five former directors of FoxMeyer, in which the Trustee alleges that the defendants breached their fiduciary duty in connection
with the June 19, 1996 dividend of certain assets to the Company. The defendants have denied liability and, in connection with the October 1997 settlement of a separate lawsuit brought
by the Trustee against the Company, the defendants received covenants not to execute from the Trustee. Discovery is virtually complete, and no trial date has been set. In February 2001, UPIC,
the primary directors and officers' liability insurance carrier during the period of time covered by the lawsuit, filed a declaratory judgment action in the United States District Court for the
Northern District of Texas against the Company, the five former FoxMeyer directors and the Trustee, seeking a declaration that there is no insurance coverage for the claims in the lawsuit. The Trustee
also filed a separate lawsuit in the Delaware Bankruptcy Court against the Company, the five former FoxMeyer directors, UPIC and Gulf Insurance Company, which is the Company's excess directors and
officers' liability insurance carrier, seeking a declaration that there is insurance coverage for the claims in the lawsuit. The Trustee added a second claim for relief seeking a declaration that
(i) any payments under the insurance policies are property of the FoxMeyer estates, (ii) any payments under the policies pending final adjudication of the lawsuit constitute a violation
of the automatic stay, and (iii) the parties be enjoined from taking any action to dissipate the proceeds of the policies. The Company has filed answers to both of these lawsuits, and has moved
for a judgment on the pleadings with respect to the Trustee's second claim for relief. The Company is currently paying its own defense costs and the costs of the directors in these lawsuits, although
all of these lawsuits have been dormant since the entry of the UPIC Order of Liquidation.

57

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In
1997, the bankruptcy trustee and certain creditors of the Company's former 17%-owned subsidiary, Ben Franklin, filed three lawsuits against the Company and certain of its and Ben
Franklin's current and former officers and directors. The Company and its officers and directors were subsequently dropped as defendants. All of the cases have been dismissed at least once, and the
plaintiffs are appealing the dismissal orders. In connection with paying the Company's defense costs in fiscal 1998, the Company also paid the initial defense costs of certain individuals who are
named as defendants in these lawsuits by reason of the fact that they may have been serving at the Company's request as a director or officer of Ben Franklin. These costs also constituted a portion of
the retention under the Ben Franklin directors and officers' liability insurance policy issued by UPIC. Thereafter, UPIC paid defense costs until its liquidation proceeding in fiscal 2002, after which
the Company resumed paying the appeal costs of certain defendants. The Company was advised in May 2002 that the defendants in the two federal lawsuits are close to a tentative settlement of
that litigation. Any settlement would be subject to definitive documentation and approval by the Ben Franklin bankruptcy court. In the appeal of the state lawsuit, oral argument was held on
May 28, 2002. If a settlement is reached and approved in the federal court lawsuits or if liability is ever imposed in the state court lawsuit, the Company may, if appropriate, agree to
indemnify certain defendants in accordance with Delaware law. The Company is unable to estimate the possible loss, if any, which may accrue from this lawsuit.

There
are various other pending claims arising out of the normal conduct of the Company's businesses. In the opinion of management, the ultimate outcome of these other claims and
lawsuits will not have a material effect on the Company's consolidated financial condition or results of operations.

NOTE MESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determined the estimated fair value of financial instruments based on available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts that the
Company might realize in a current market exchange. The use of different market assumptions and/or estimation methodologies might have had a material effect on the estimated fair value of the
Company's financial instruments at March 31, 2002 or 2001, respectively.

The
carrying amounts of cash and cash equivalents, accounts and notes receivable, other current assets and accounts payable and other accrued liabilities were reasonable estimates of
their fair value.

The
carrying value of long-term debt was $13.0 million and $20.9 million at March 31, 2002 and 2001, respectively, while the estimated fair value was
approximately $2.9 million and $20.9 million, respectively, based upon either quotes obtained from qualified outside parties or interest rates available to the Company for issuance of
similar debt with similar terms and remaining maturities.

Debt
and equity securities classified as "available for sale" or "trading" were carried at their estimated fair value (see Notes A and E).

The
carrying value of other investments was estimated to be at fair value, or it was not practicable to estimate their fair value without incurring substantial costs. The carrying value
of these investments was $1.3 million at March 31, 2001.

58

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The
fair value estimates were based on pertinent information available to management as of March 31, 2002 and 2001. Such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein.

NOTE NQUARTERLY DATA (UNAUDITED)

The following is a quarterly tabulation of the results of operations for the two years ended March 31, 2002 (in thousands of dollars, except per share
amounts):

|                                                                                          |                   | Quarter |        
|----------------------------------------------------------------------------------------- | ----------------- | ------- | -------
|
|2002:                                                                                     |                   |         |        
|Revenues                                                                                  |                   | $       | 0      
|Operating income (loss)                                                                   |                   |         | (1,191 
|Loss from continuing operations before equity in loss of affiliates and minority interest |                   |         | (332   
|Loss from continuing operations                                                           |                   |         | (12,010
|Discontinued operations                                                                   |                   |         |       
|Extraordinary items                                                                       |                   |         | 2,476  
|Net loss                                                                                  |                   |         | (9,534 
|Loss per common share from continuing operations:                                         |                   |         |        
|                                                                                          | Basic and Diluted |         |        
|Net loss per common share:                                                                |                   |         |        
|                                                                                          | Basic and Diluted |         |        
|                                                                                          |                   |         |        
|2001:                                                                                     |                   |         |        
|Revenues                                                                                  |                   | $       | 0      
|Operating loss                                                                            |                   |         | (920   
|Loss from continuing operations before equity in loss of affiliates                       |                   |         | (1,670 
|Loss from continuing operations                                                           |                   |         | (6,791 
|Discontinued operations                                                                   |                   |         |       
|Extraordinary items                                                                       |                   |         | 344    
|Net income (loss)                                                                         |                   |         | (6,447 
|Loss per common share from continuing operations:                                         |                   |         |        
|                                                                                          | Basic and Diluted |         |        
|Net income (loss) per common share:                                                       |                   |         |        
|                                                                                          | Basic and Diluted |         |        
|                                                                                          |                   |         |        

The
quarterly results from continuing operations were significantly affected by amounts shown in "Other income (expense)". See Note D for explanations of transactions included in
this caption. Net income (loss) results were significantly affected by the gain or loss from discontinued operations (see Note B) and extraordinary items (see Notes B and F).

59

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Per
share amounts were computed independently for each quarter based on the average number of shares outstanding during that quarter. As a result, the sum of the quarterly per share
amounts may not equal the per share amount for the entire year.

NOTE OGOING CONCERN

The conditions described below raise substantial doubt about the Company's ability to continue as a going concern.

The
Company will likely continue to report operating losses as it has for the last several years. The Company also continues to have exposure to losses arising from pending litigation,
as discussed in Note L. In addition, the 6.75% notes issued by Avatex Funding, and guaranteed by the Company, mature in December 2002 and are now classified as current liabilities. The
Company had previously anticipated that its lawsuit against McKesson and others, as described in Note L, and its 48% ownership interest in Phar-Mor, as described in Note B,
might generate funds to assist in funding the payoff of the 6.75% notes in December 2002. During the quarter ended December 31, 2001, however, the Company settled the McKesson lawsuit
which resulted in the Company retaining approximately $2.6 million, after payment of contingent litigation and other expenses and distributions. Also, as previously reported,
Phar-Mor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in September 2001. Therefore, it is unlikely that any value exists in the Company's ownership
interest in Phar-Mor. Finally, the $4.4 million in prepaid pension costs included in the amount of "Other assets" at March 31, 2002 cannot be converted into funds that would
be available to the Company. As a result, the Company believes it may not have sufficient cash to repay the notes at their maturity in December 2002.

The
Company had adequate funds at March 31, 2002 to meet its obligations then due and believes it has adequate funds to continue to pay its debts as they become due until the
maturity date of the 6.75% notes.

Management
of the Company continues to investigate strategies and alternatives to address these issues. While the Company will continue its vigorous defense of its remaining litigation,
there is no assurance that the Company will be able to resolve its lawsuits in a favorable manner. In addition, there is no assurance that the Company's investments will produce adequate returns to
overcome the Company's operating losses and provide adequate funds for debt repayment or future operations or that the Company will be able to continue to buy back its debt at a substantial discount
to face value. Further, it is unlikely that the Company will be able to obtain additional debt or equity financing. Therefore, since there is no assurance that the Company will be able to generate
sufficient cash flows from its investments, restructure its liabilities, or obtain additional financing, at December 7, 2002, the Company may be in default on the 6.75% notes at that time which
in turn could force the Company to seek protection under the federal bankruptcy laws.

The
Company's financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. The financial statements do not reflect any adjustments that might ultimately result from the resolution of these uncertainties. In particular, the financial statements do
not purport to show the realizable value on a liquidation basis of the Company's assets or their availability to satisfy

60

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liabilities. The financial statements also do not show amounts that could be allowed for claims or contingencies or the status or priority of those claims.

61

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

None

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

Our Board of Directors

Our Board of Directors consists of six members. Set forth below for each director is his name, age, period served as director, present position with us (if any)
and other business experience:

Abbey J. Butler, age 64, has served as Co-Chairman of our Board since March 1991 and was appointed our
Co-Chief Executive Officer in October 1991. He also serves as Co-Chairman of the Board and Co-Chief Executive Officer of Phar-Mor, Inc.
("Phar-Mor"), which filed for relief under chapter 11 of the Bankruptcy Code in September 2001, and as President and a director of C.B. Equities Corp., a private investment company.
In connection with our investments, Mr. Butler serves as a director of Presby Corp. ("Presby") andiLife Systems, Inc.
("iLife") and as a member of the Board of Managers of Chemlink Laboratories, LLC ("Chemlink"), Chemlink Acquisition Company, LLC ("CLAC") and Cyclone
Acquisition Company, LLC ("Cyclone"). Mr. Butler is a member of the Board of Trustees of The American University and a director of the Starlight Foundation, a charitable organization.

Melvyn J. Estrin, age 59, has served as Co-Chairman of our Board since March 1991 and was appointed our
Co-Chief Executive Officer in October 1991. He also serves as Co-Chairman of the Board and Co-Chief Executive Officer of Phar-Mor, which filed
for relief under chapter 11 of the Bankruptcy Code in September 2001. Mr. Estrin has served as Chairman of the Board and Chief Executive Officer of Human Service Group, Inc., a
private management and investment firm, since 1983 and is also Chairman and Chief Executive Officer of University Research Co., LLC. In connection with our investments, Mr. Estrin serves as a
director of Presby andiLife and as a member of the Board of Managers of Chemlink, CLAC, and Cyclone. Mr. Estrin also served as a Trustee of the
University of Pennsylvania and was appointed by President George H.W. Bush to serve as Commissioner of the National Capital Planning Commission.

Hyman H. Frankel, Ph.D., age 81, holds a Ph.D. in Sociology, and also served as our consultant from 1992 through May 2002. He has
served as President and a director of Human Service Group, Inc., a private management and investment firm, and was also a founder and has served as an executive officer and a director of
University Research Co., LLC since 1965. Mr. Estrin controls both of these companies. Dr. Frankel has also served as Chairman of the Board of The Center for Human Service, Inc., a
non-profit health and education research organization, and as Vice President and a director of American Health Services, an operator of general and psychiatric hospitals and nursing homes.
Dr. Frankel has held teaching and research positions in social sciences at a number of universities throughout the United States during the past 35 years, and has served in various
capacities in connection with a number of government commissions and other programs.

Fred S. Katz, age 63, is President of First Taconic Capital Corporation, a private merchant banking and consulting firm. Mr. Katz
has over 30 years of diversified investment and merchant banking experience specializing in investments in emerging growth companies and industries through private placements or public
offerings of securities.

William A. Lemer, age 61, is a private investor and real estate developer. He has served as President of Bethesda Avenue
Photo, Inc. and Pentagon Concourse Photo, Inc., franchisees of One

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Hour Moto Photo, since June 1992. Since April 1988, he has been the general partner of Metro Associates Limited Partnership, which owns a shopping center in Woodbridge, Virginia.
Mr. Lemer is the brother-in-law of Mr. Estrin.

Charles C. Pecarro, age 64, is the Chief Financial Officer of Human Service Group, Inc. and President of University Research Co.,
LLC. Mr. Estrin controls both of these companies. Mr. Pecarro has worked for the companies since 1972, and he has been a certified public accountant since 1968. Mr. Pecarro also
serves on the Board of Directors of the Center for Technical Cooperation, a private non-profit corporation, and the Jones Foundation.

Our Executive Officers

Grady E. Schleier, age 50, has served as our Senior Vice President, Chief Financial Officer and Treasurer since
September 1999. He previously served as our Vice President and Treasurer since November 1995 and our Chief Financial Officer since June 1999. Mr. Schleier is a director of
Presby and is a member of the Board of Managers of Chemlink.

John G. Murray, age 47, has served as our Vice PresidentFinance since July 1997. He was previously a consultant to us
from July 1996 to July 1997 and served as our Vice President and Assistant Treasurer from April 1996 to July 1996 and as Director of Special Projects and Assistant
Treasurer from August 1993 to March 1996. Mr. Murray is a member of the Board of Managers of Chemlink.

Robert H. Stone, age 42, has served as our Vice President, General Counsel and Secretary since November 1996. From
November 1994 to November 1996, he served as our Associate General Counsel and Assistant Secretary.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors and executive officers and persons who beneficially own more than 10%
of a registered class of our equity securities to file reports of holdings and transactions in our common stock with the Securities and Exchange Commission. Based solely on our review of copies of the
forms filed pursuant to Section 16(a) furnished to us, or written representations that no year-end Form 5 filings were required, we believe that our directors, executive
officers and 10% owners complied with these filing requirements during fiscal 2002.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation of our Co-Chief Executive Officers and our other executive officers during fiscal 2002. The amounts
listed for fiscal 2002 consist of compensation we paid during fiscal 2002 and salary Phar-Mor paid or expects to pay during its fiscal year ended June 29, 2002; bonuses, LTIP
payouts and other compensation that may be paid by Phar-Mor will be determined after its fiscal year has ended. The amounts listed for fiscal 2001 consist of compensation we paid and
bonuses we accrued (but did not pay) during fiscal 2001 and compensation Phar-Mor paid during its fiscal year ended June 30, 2001. The amounts listed for fiscal 2000 consist of
compensation we paid during fiscal 2000 and Phar-Mor paid during its fiscal year ended July 1, 2000. The aggregate amount of perquisites and personal benefits we provided did not
exceed the lesser of $50,000 or 10 percent of any executive officer's total salary and bonus for any fiscal year.

63

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Summary Compensation Table

|                                                                               |  |                |  | Annual Compensation         |  | Long-term Compensation |  |                       
|------------------------------------------------------------------------------ |  | -------------- |  | --------------------------- |  | ---------------------- |  | ----------------------
|
|
|Abbey J. Butler(B)
Co-Chairman and Co-
Chief Executive
Officer                 |  | 2002
2001
2000 |  | 1,010,378
1,000,439
961,670 |  | 0
0
154,032            |  | 10,000
285,000
180,000
|Melvyn J. Estrin(B)
Co-Chairman and Co-
Chief Executive Officer                |  | 2002
2001
2000 |  | 1,010,378
1,000,439
961,670 |  | 0
0
154,032            |  | 10,000
285,000
180,000
|Grady E. Schleier
Senior Vice
President, Chief
Financial Officer and Treasurer |  | 2002
2001
2000 |  | 250,000
250,000
229,167     |  | 0
1,000
0              |  | 0
0
0                 
|John G. Murray
Vice President
Finance                                         |  | 2002
2001
2000 |  | 230,000
230,000
217,500     |  | 0
0
0                  |  | 0
0
0                 
|Robert H. Stone
Vice President,
General Counsel and
Secretary                  |  | 2002
2001
2000 |  | 230,000
230,000
217,500     |  | 0
1,000
0              |  | 0
0
0                 

---



64

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Aggregate Options/SAR Exercises in Fiscal 2001 by Executive  Officers and Fiscal Year-End Option/SAR Values

Our executive officers did not exercise any options during fiscal 2002. Because the market value of our common stock on March 31, 2002 was less than the
exercise price of their options, there were no in-the-money unexercised options held at the end of fiscal 2002.

Number of Securities Underlying Unexercised
Options/SARs at FY-End (#)NameExercisable

UnexercisableAbbey J. Butler

400,000

0Melvyn J. Estrin

400,000

0Grady E. Schleier

100,000

0John G. Murray

100,000

0Robert H. Stone

100,000

0


Long-Term Incentive Plans Awards in Last Fiscal Year

Our Performance Incentive Plan (the "Incentive Plan") was not renewed beginning in fiscal 2000 with respect to our "Net Income," as defined in the Incentive Plan.
In fiscal 1998, however, we granted awards totaling 17.5% of any future "Litigation Income," which was defined in the Incentive Plan to mean net income generated in connection with our lawsuit against
McKesson Corporation. That lawsuit was settled in December 2001, and the amounts paid to our executive officers on account of Litigation Income are set forth above in the Summary Compensation
Table. The Incentive Plan is no longer in effect for any purpose.

Compensation of Directors

Mr. Butler and Mr. Estrin do not receive any compensation or fees for serving as directors or attending Board or committee meetings. Our other
directors receive an annual fee of $22,500, plus $1,000 for each Board or committee meeting they attend. Committee chairmen receive an additional

65

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$1,000 for each committee meeting. All directors are reimbursed for any travel and lodging expenses they incur in connection with Board and committee meetings.

Under
our 2001 Amended and Restated Stock Option and Performance Award Plan, our non-employee directors are automatically granted options to purchase 15,000 shares of our
common stock when first elected to serve on our Board, plus options to purchase 20,000 shares of our common stock in each year the director continues to serve on our Board in which there is an annual
meeting effective with the annual meeting for fiscal 2001. Under our Directors' Retirement Plan, we pay a qualifying director a monthly benefit for a period equal to his years of service or
15 years, whichever is less, equal to 1/12 of the highest annual fee in effect for directors during the director's years of service on our Board. A qualifying director is one who
has a minimum number of years of service, other than directors who are, or at any time subsequent to December 31, 1975 have been, one of our officers. The monthly payment begins at the later of
the director's retirement or age 60.

Each
of our directors is a party to an indemnification agreement with us dated October 23, 1997. See "Employment and Indemnification Agreements" below. Dr. Frankel also
served as a consultant to us through May 2002 and was paid a monthly fee of $3,750 pursuant to a written consulting agreement. The consulting agreement was terminated effective May 31,
2002.

Employment and Indemnification Agreements

Abbey J. Butler and Melvyn J. Estrin, our Co-Chairmen and Co-Chief Executive Officers, each has an employment agreement with us dated as
of February 27, 1995, and amended effective as of February 1, 1998 and December 6, 1999. Each of the agreements is for a rolling three-year term at a minimum annual
base salary of $475,000, subject to periodic increases by our Board of Directors. Mr. Butler and Mr. Estrin are also entitled to participate in the benefits generally available to our
senior executives, and are permitted to engage in activities with other companies, ventures or investments, provided that such activities do not unreasonably impede the performance of their duties for
us, and to retain any compensation and other benefits they may receive in such capacity. If either Mr. Butler's or Mr. Estrin's employment with us is terminated without "Just Cause" (as
defined in the agreements, including but not limited to in the event of a change of control of us), Mr. Butler or Mr. Estrin, as the case may be, will be entitled to receive a
one-time lump sum payment equal to one hundred fifty percent (150%) times the full amount of his monthly base salary and cash bonus awards that otherwise would have been earned by him
during the full term of his agreement, plus payment of certain allocated office overhead expenses, payment of premiums payable by us for life insurance policies applicable to Mr. Butler or
Mr. Estrin, as the case may be, and certain tax adjustment payments in respect of any amounts that constitute excess parachute payments under federal tax laws. In addition, the Butler and
Estrin employment agreements provide that if (a) any "person" (as defined in Section 13(d) of Securities Exchange Act of 1934, as amended) is or becomes the beneficial owner, directly or
indirectly, of either
(i) 35% of the outstanding shares of our common stock or (ii) securities representing 35% of the combined voting power of our outstanding voting securities, or (b) during any
period of two consecutive years, individuals who at the beginning of such period constitute our Board of Directors cease, at any time after the beginning of such period, for any reason to constitute a
majority of our Board of Directors, unless each new director was nominated, or the election of such director was ratified, by at least two-thirds of the directors still in office who were
directors at the beginning of such two-year period, then Mr. Butler or Mr. Estrin shall have the right to elect to treat such event as constituting a termination without
"Just Cause" under their respective employment agreements. The agreements further provide, however, that payment of severance and other benefits must be deferred in connection with a termination
without "Just Cause" under certain circumstances.

Mr. Butler
and Mr. Estrin also serve as Co-Chairmen and Co-Chief Executive Officers of Phar-Mor and have separate employment agreements
with Phar-Mor. These employment agreements are described in Phar-Mor's Annual Report on Form 10-K for the fiscal year ended June 30, 2001.

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Grady
E. Schleier, our Senior Vice President, Chief Financial Officer and Treasurer, has an employment agreement with us dated as of November 12, 1996, as amended by amendments
effective as of February 1, 1998, September 1, 1999, and September 25, 2001. Under the agreement, which expires on January 31, 2004, Mr. Schleier's minimum annual
base salary is $250,000, and he is also entitled to participate in the benefits generally available to our senior executives. If Mr. Schleier's employment with us is terminated "Without Cause"
(as defined in the agreement), he would be entitled to receive, at his option (i) a single lump sum severance payment equal to the amount of total compensation that would otherwise have been
paid during the forthcoming twelve months or (ii) monthly severance payments for a period of twenty-four months.

John
G. Murray, our Vice PresidentFinance, and Robert H. Stone, our Vice President, General Counsel and Secretary, each has an employment agreement with us that is virtually
identical to our employment agreement with Mr. Schleier, except that the minimum annual base salary for each of Mr. Murray and Mr. Stone is $230,000.

Each
executive officer is also a party to an indemnification agreement with us dated October 23, 1997. Each agreement terminates upon the later of (i) ten years following
the date that the officer ceases to serve in his capacity as an officer of ours, any of our majority-owned subsidiaries, other of our enterprises or an employee benefit plan or trust related thereto
which such officer served at our request and (ii) the final termination of any proceeding to which indemnification or advancement of expenses relates pursuant to the agreement. Under each
agreement, the executive officer is entitled to indemnification for damages and expenses in any proceeding involving us (whether or not brought by us or in our right) subject to conditions and
limitations depending on the circumstances of the proceeding and conduct of the officer. In addition, each executive officer is entitled to be advanced expenses in connection with any such proceeding.
If there is a change of control (as defined in the agreement), upon the request of any executive officer in connection with any proceedings for which indemnification or advancement of expenses is
provided, we are required to create a trust and fund the
trust in an amount sufficient to cover any expenses (as determined by an independent counsel appointed in accordance with the terms of the agreement) to be incurred by the executive officer relating
to the proceeding.

Compensation Committee Interlocks and Insider Participation

The Finance and Personnel Committee (the "Finance Committee") of our Board of Directors performs the functions of a compensation committee. During fiscal 2002,
the Finance Committee consisted of Mr. Wineapple, who was the Chairman, Mr. Katz and Mr. Lemer. Mr. Wineapple resigned from the Board of Directors and the Finance Committee
in April 2002.

Report of the Finance Committee

Compensation of the Company's executive officers consists of base salary, stock option grants and participation in our 401(k) Plan and other employee health and
welfare benefit plans. Executive officers are also eligible to receive discretionary bonuses as an incentive for superior performance. The goals of the Company's executive compensation policy are to
motivate and reward its executive officers for overseeing and managing the Company's operations and investments, contributing towards long-term strategic planning and improving
long-term stockholder value, and to attract and retain high-quality executive talent.

The
Finance Committee's philosophy regarding executive compensation also recognizes the Company's unique financial history and the extensive knowledge of its officers with respect to the
events and circumstances occurring during that time. These individuals are involved extensively in the ongoing analysis and valuation of the Company's three principal investments: Presby, Chemlink and iLife. In addition, these individuals have extensive and critical knowledge and experience regarding the

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facts and circumstances underlying the stockholder lawsuit against the Company that relates to actions of FoxMeyer Drug Company in 1995 and 1996.

During
fiscal 2002, the Company's officers were compensated in accordance with their existing employment agreements. In December 2001, the Company settled its lawsuit against
McKesson Corporation and the Company's officers were paid a Litigation Income bonus on account of awards granted in fiscal 1998 under the Company's then-existing Incentive Plan. In fiscal
2002, the Company extended the term of the employment agreements with its officers other than its Co-Chief Executive Officers, but did not increase any of their salaries.

Co-Chief Executive Officers

The Company's Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin, are compensated in accordance with their existing employment
agreements, which were last amended with respect to payment of compensation in fiscal 1998, at the rate of $475,000 per year. The Committee has not increased their salary or awarded or paid them any
bonuses since fiscal 1998, other than the Litigation Income bonus described above in the amount of $86,338 each. Mr. Butler and Mr. Estrin were otherwise treated substantially the same
as the Company's other officers with respect to employee benefits, except that they received the benefit of company-paid split-dollar life insurance and long term care insurance policies.

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code (the "Code") limits the deductibility on the Company's federal income tax return of compensation over
$1 million to any of its executive officers unless, in general, the compensation is paid pursuant to a plan that is performance related, non-discriminatory and has been approved by
shareholders. Because the compensation of certain executive officers may exceed $1 million in any one year, the Code may limit the deductibility of such compensation unless an exception to such
limitation is available. In such event, and because of the uncertainties surrounding the application and interpretation of these limits, no assurance can be given that any such compensation will be
fully deductible. The Company's employment agreements with Mr. Butler and Mr. Estrin also contain certain severance provisions applicable in the event of a change of control. If the
benefits received by either Mr. Butler or Mr. Estrin pursuant to these provisions equal or exceed 300% of his average annual taxable compensation (as defined in the applicable
regulations), the full amount of such excess will not be deductible by the Company and such amount will reduce the $1 million limit under Section 162(m).



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Performance Graph

For at least the last four fiscal years we compared the performance of our common stock with the Standard & Poor's 500 Index and the Standard &
Poor's SmallCap 600 Index because, among other reasons, we believed that we could not reasonably identify a peer group. Beginning in fiscal 2001, we believed that it was more appropriate to compare
the performance of our common stock with the Standard & Poor's SmallCap 600 Index and the Wilshire MicroCap Index, which is a capitalization-weighted index of all stocks in the bottom half of
the Wilshire 5000 Index, rather than the Standard & Poor's 500 Index. The following graph and table assume that $100 was invested on April 1, 1997, and that all dividends were
reinvested, for our last five fiscal years:

LOGO

|                  |  |   |        | Fiscal Year Ended March 31,
|----------------- |  | - | ------ | ---------------------------
|
|Avatex            |  | $ | 100.00 |                            
|S&P SmallCap 600  |  |   | 100.00 |                            
|Wilshire MicroCap |  |   | 100.00 |                            

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Disclosure

The following table sets forth information as of March 31, 2002 with respect to our only equity compensation plan, which was approved by our stockholders
at our annual meeting held on September 25, 2001:

|Plan Category                                                     |  | Number of securities to be issued upon exercise of outstanding options (a) |  | Weighted-average exercise price of outstanding options |      | Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)
|----------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | ------------------------------------------------------ | ---- | -----------------------------------------------------------------------------------------------------------------------------------------
|2001 Amended and Restated Stock Option and Performance Award Plan |  | 1,765,000                                                                  |  | $                                                      | 1.07 |                                                                                                                                          

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information as of May 15, 2002 about beneficial ownership of our common stock by (i) our directors and executive
officers and (ii) persons known to us to be beneficial owners of more than 5% of our common stock:

|Name and Address
of Beneficial Owner (1)                                |  | Number of Shares of
Common Stock
Beneficially Owned (2) |  | Percentage of
Outstanding Shares (3) |   | Number of Shares That May Be Acquired Within Sixty Days
|----------------------------------------------------------------------- |  | ------------------------------------------------------- |  | ------------------------------------ | - | -------------------------------------------------------
|Centaur Partners Group (4)                                              |  | 3,035,520                                               |  | 14.6                                 | % | 1,958                                                  
|Directors (including those who                                          |  |                                                         |  |                                      |   |                                                        
|are also Executive Officers):                                           |  |                                                         |  |                                      |   |                                                        
|Abbey J. Butler (4)                                                     |  | 2,004,750                                               |  | 9.7                                  | % | 400,000                                                
|Melvyn J. Estrin (4)                                                    |  | 1,830,770                                               |  | 8.8                                  | % | 401,958                                                
|Hyman H. Frankel                                                        |  | 2,500                                                   |  | <1                                   | % | 2,500                                                  
|Fred S. Katz                                                            |  | 2,500                                                   |  | <1                                   | % | 2,500                                                  
|William A. Lemer                                                        |  | 2,500                                                   |  | <1                                   | % | 2,500                                                  
|Charles C. Pecarro                                                      |  | 2,500                                                   |  | <1                                   | % | 2,500                                                  
|Executive Officers:                                                     |  |                                                         |  |                                      |   |                                                        
|Grady E. Schleier                                                       |  | 100,000                                                 |  | <1                                   | % | 100,000                                                
|John G. Murray                                                          |  | 100,000                                                 |  | <1                                   | % | 100,000                                                
|Robert H. Stone                                                         |  | 100,000                                                 |  | <1                                   | % | 100,000                                                
|All Directors and Executive Officers as a Group:                        |  | 4,145,520                                               |  | 20.0                                 | % | 1,111,958                                              
|Other Holders:                                                          |  |                                                         |  |                                      |   |                                                        
|Phar-Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44501               |  | 4,948,600                                               |  | 23.8                                 | % | 0                                                      
|Tocqueville Asset
Management, L.P. (5)
1675 Broadway
New York, NY 10019 |  | 1,361,500                                               |  | 6.6                                  | % | 0                                                      

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Chemlink Laboratories, LLC

We, along with Phar-Mor, three of our officers (Abbey Butler, Melvyn Estrin and Grady Schleier and/or their designees), one of our directors (Charles
Pecarro), and five additional parties related to, or referred to by, Mr. Butler or Mr. Estrin, own membership interests in CLAC, and CLAC owns membership interests in Chemlink. During
fiscal 2002, we and certain other members of CLAC made a series of additional contributions to CLAC, and CLAC made additional contributions to Chemlink, in
each case in exchange for additional membership interests that entitle the holder to a priority return. Our total contributions during fiscal 2002 were approximately $1.6 million. We are also a
party to a consulting agreement with Chemlink, under which we provide certain financial, accounting and other management consulting services to Chemlink. In March 2002, Mr. Butler and
Estrin each purchased a direct membership interest in Chemlink from another unaffiliated member in Chemlink. Mr. Butler and Mr. Estrin are members of the Board of Managers of CLAC, and
Mr. Butler, Mr. Estrin, Mr. Murray and Mr. Schleier are members of the Board of Managers of Chemlink.

HPD Holdings Corp. ("HPD")

We and Cabot Noble, Inc., which is a wholly-owned subsidiary of Phar-Mor, each acquired $1.25 million of preferred stock and 2.5% of the
common stock of HPD in 1998. The largest shareholder of HPD is HPD Partners, L.P. In April 2001, WD-40 Company acquired all of the outstanding stock of HPD. Mr. Butler and
Mr. Estrin were directors of HPD and limited partners in HPD Partners, L.P.

iLife Systems, Inc.

We, along with our five officers, certain additional parties related to or referred by Mr. Butler or Mr. Estrin, and other unaffiliated third
parties own Series B preferred stock and warrants to purchase Series B preferred stock ofiLife. In fiscal 2002, as part of an internal
restructuring, (i)iLife transferred substantially all of its assets and liabilities to a wholly-owned subsidiary, iLife Solutions ("Solutions"), and
(ii) we, along with other investors (including Messrs. Butler, Schleier, a designee of
Mr. Estrin and additional parties related to or referred by Mr. Estrin) loaned Solutions a total of $1 million. Our share of this loan was approximately $209,000.
Mr. Butler and Mr. Estrin are directors ofiLife, and we license toiLife a portion of the
office space we lease in Dallas, Texas.

Presby Corp.

We, along with Cabot Noble, Inc., our five officers and our Director of Accounting (and/or their designees), one of our directors, Mr. Pecarro, and
certain additional parties related to, or referred to by, Mr. Butler or Mr. Estrin, own Series B preferred stock of Presby. During a portion of fiscal 2002 we were a party to a
consulting agreement with Presby, under which we provided certain financial,

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accounting and other management consulting services to Presby. We also license to Presby a portion of the office space we lease in Dallas, Texas. Mr. Butler, Mr. Estrin and
Mr. Schleier are directors of Presby.

PART IV

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

(a)(1)

Financial StatementsReference is made to the listing on page 75 of all financial statements filed as part of this report.(2)

Financial Statement SchedulesReference is made to the listing on page 75 of all financial statement schedules filed as part of this report.(3)

ExhibitsReference is made to the Exhibit Index beginning on page 77 for a list of all exhibits filed as part of this report.(b)

Reports on Form 8-KDuring the three months ended March 31, 2002, we did not file any Current Reports on Form 8-K.


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SIGNATURES

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

|             |  |     |  | Avatex Corporation                                                                            
|------------ |  | --- |  | ----------------------------------------------------------------------------------------------
|             |  | By: |  | /s/GRADY E. SCHLEIERGrady E. Schleier                                                         
|June 7, 2002 |  |     |  | Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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

Principal Executive Officers:

|                                        |  |                                                                                                |  |             
|--------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------
|/s/ABBEY J. BUTLERAbbey J. Butler       |  | Co-Chairman of the Board and
Co-Chief Executive Officer                                        |  | June 7, 2002
|/s/MELVYN J. ESTRIN
Melvyn J. Estrin    |  | Co-Chairman of the Board and
Co-Chief Executive Officer                                        |  | June 7, 2002
|/s/GRADY E. SCHLEIERGrady E. Schleier   |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | June 7, 2002
|Additional Directors:                   |  |                                                                                                |  |             
|/s/HYMAN H. FRANKELHyman H. Frankel     |  | Director                                                                                       |  | June 7, 2002
|/s/FRED S. KATZFred S. Katz             |  | Director                                                                                       |  | June 7, 2002
|/s/WILLIAM A. LEMERWilliam A. Lemer     |  | Director                                                                                       |  | June 7, 2002
|/s/CHARLES C. PECARROCharles C. Pecarro |  | Director                                                                                       |  | June 7, 2002

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ITEM 14(a) (1) and (2) and ITEM 14(d)

AVATEX CORPORATION AND SUBSIDIARIES  LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following financial statements of Avatex Corporation and subsidiaries are included in Item 14(a)(1):

|                                                                                                                                    |  | Page No. in
Form 10-K
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|Independent Auditors' Report                                                                                                        |  | 23                   
|Consolidated Statements of OperationsFor the Three Years Ended March 31, 2002                                                      |  | 24                   
|Consolidated Balance SheetsMarch 31, 2002 and 2001                                                                                 |  | 25                   
|Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)
For the Three Years Ended March 31, 2002 |  | 26                   
|Consolidated Statements of Cash FlowsFor the Three Years Ended March 31, 2002                                                      |  | 27                   
|Notes to Consolidated Financial StatementsFor the Three Years Ended March 31, 2002                                                 |  | 28                   
|The following financial statement schedules of Avatex Corporation and subsidiaries are included in Item 14(d):                     
|
|Schedule IIValuation and Qualifying Accounts                                                                                       |  | 76                   

Financial
statement schedules other than those listed above have been omitted because the required information is contained in the consolidated financial statements and notes thereto or
such information is not applicable.

In
accordance with Regulation S-X, audited financial statements of Phar-Mor, Inc. (a 48%-owned affiliate) for the fiscal year ending June 29,
2002 will be filed as an amendment to the Corporation's Form 10-K within 90 days of Phar-Mor, Inc.'s fiscal year end.

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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS  AVATEX CORPORATION AND SUBSIDIARIES  (in thousands of dollars)

|COL A                                                          |  | COL B |                           | COL C |   | COL D |  | COL E
|-------------------------------------------------------------- |  | ----- | ------------------------- | ----- | - | ----- |  | -----
|
|
|                                                               |  |       | Year Ended March 31, 2002 |       |   |       |  |      
|Allowance for possible losses on notes and accounts receivable |  | $     | 47                        |       | $ |      |  | $    
|                                                               |  |       | Year Ended March 31, 2001 |       |   |       |  |      
|Allowance for possible losses on notes and accounts receivable |  | $     | 47                        |       | $ |      |  | $    
|                                                               |  |       | Year Ended March 31, 2000 |       |   |       |  |      
|Allowance for possible losses on notes and accounts receivable |  | $     | 15                        |       | $ | 32    |  | $    

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Notes:

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AVATEX CORPORATION AND SUBSIDIARIES    EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3-A            |  | Certificate of Merger of Xetava Corporation with and into registrant, dated December 7, 1999, with the Restated Certificate of Incorporation of the registrant annexed thereto. (Filed as Exhibit 3-A to the registrant's Current Report on Form
8-K filed December 16, 1999 and incorporated herein by reference.)
|3-B            |  | Restated Certificate of Incorporation of Avatex Funding, Inc. (Filed as Exhibit 3-B to the registrant's Current Report on Form 8-K filed December 16, 1999 and incorporated herein by reference.)                                                                                                                  
|3-C            |  | By-laws of the registrant. (Filed as Exhibit 3-C to the registrant's Annul Report on Form 10-K for the fiscal year ended March 31, 2001 and incorporated herein by reference.)                                                                                                                                     
|4-A            |  | Indenture, dated as of December 7, 1999, among the registrant, Avatex Funding, Inc. and Norwest Bank Minnesota, N.A., as indenture trustee. (Filed as Exhibit 4-A to the registrant's Current Report on Form 8-K filed December 16, 1999
and incorporated herein by reference.)                                    
|4-B            |  | Pledge and Security Agreement, dated as of December 7, 1999, among the registrant, Avatex Funding, Inc. and Norwest Bank Minnesota, N.A., as collateral agent. (Filed as Exhibit 4-B to the registrant's Current Report on Form 8-K filed
December 16, 1999 and incorporated herein by reference.)                 
|10-A           |  | National Intergroup, Inc. Director's Retirement Plan dated December 1, 1983. (Filed as Exhibit 10-A to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1992 and incorporated herein by reference.)                                                                                 
|10-B           |  | Avatex Corporation Amended and Restated Stock Option and Performance Award Plan. (Filed as Exhibit 10-D to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and incorporated herein by
reference.)                                                                 
|10-C           |  | Avatex Corporation Employees' Savings and Profit Sharing Plan, effective as of April 1, 1997. (Filed as Exhibit 10-X to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and incorporated herein by reference.)                                                                
|10-D           |  | Employment Agreement, dated as of February 27, 1995, between the registrant and Abbey J. Butler. (Filed as Exhibit 10-AF to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and incorporated herein by
reference.)                                                            
|10-E           |  | Amendment to Employment Agreement between the registrant and Abbey J. Butler, effective as of February 1, 1998. (Filed as Exhibit 10-N to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by
reference.)                                              
|10-F           |  | Second Amendment to Employment Agreement, dated December 6, 1999, between the registrant and Abbey J. Butler. (Filed as Exhibit 10-B to the registrant's Current Report on Form 8-K filed December 16, 1999 and incorporated herein by reference.)                                                                 
|10-G           |  | Employment Agreement, dated as of February 27, 1995, between the registrant and Melvyn J. Estrin. (Filed as Exhibit 10-AG to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and incorporated herein by
reference.)                                                           
|               |  |                                                                                                                                                                                                                                                                                                                    

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|10-H |  | Amendment to Employment Agreement between the registrant and Melvyn J. Estrin, effective as of February 1, 1998. (Filed as Exhibit 10-O to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by
reference.)            
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10-I |  | Second Amendment to Employment Agreement, dated December 6, 1999, between the registrant and Melvyn J. Estrin. (Filed as Exhibit 10-C to the registrant's Current Report on Form 8-K filed December 16, 1999 and incorporated herein by reference.)                               
|10-J |  | Employment Agreement dated as of November 12, 1996 between the registrant and Grady E. Schleier. (Filed as Exhibit 10-T to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and incorporated herein by reference.)                            
|10-K |  | Amendment to Employment Agreement between the registrant and Grady E. Schleier, effective as of February 1, 1998. (Filed as Exhibit 10-S to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein
by reference.)           
|10-L |  | Second Amendment to Employment Agreement, dated September 1, 1999, between the registrant and Grady E. Schleier. (Filed as Exhibit 10-T to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000 and incorporated herein by
reference.)            
|10-M |  | Third Amendment to Employment Agreement, dated September 25, 2001, between the registrant and Grady E. Schleier. (Filed as Exhibit 10-B to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference.)
|10-N |  | Employment Agreement dated as of November 12, 1996 between the registrant and Robert H. Stone. (Filed as Exhibit 10-U to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and incorporated herein by reference.)                              
|10-O |  | Amendment to Employment Agreement between the registrant and Robert H. Stone, effective as of February 1, 1998. (Filed as Exhibit 10-T to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by
reference.)             
|10-P |  | Second Amendment to Employment Agreement, dated September 1, 1999, between the registrant and Robert H. Stone. (Filed as Exhibit 10-U to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000 and incorporated herein by
reference.)              
|10-Q |  | Third Amendment to Employment Agreement, dated September 25, 2001, between the registrant and Robert H. Stone. (Filed as Exhibit 10-C to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and incorporated
herein by reference.)  
|10-R |  | Employment Agreement effective as of February 1, 1998 between the registrant and John G. Murray. (Filed as Exhibit 10-Q to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by reference.)                            
|10-S |  | First Amendment to Employment Agreement, dated September 1, 1999, between the registrant and John G. Murray. (Filed as Exhibit 10-V to the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000 and incorporated herein by
reference.)                
|10-T |  | Second Amendment to Employment Agreement, dated September 25, 2001, between the registrant and John G. Murray. (Filed as Exhibit 10-A to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and incorporated
herein by reference.)  
|     |  |                                                                                                                                                                                                                                                                                   

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|10-U |  | Form of Indemnification Agreement between the registrant and each of its officers and directors. (Filed as Exhibit 10-S to the registrant's Annual Report on Form 10-K/A, Amendment No. 2, for the fiscal year ended March 31, 1999 and incorporated
herein by reference.)   
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10-V |  | Warrant Agreement, dated as of December 7, 1999, between the registrant and American Stock Transfer and Trust Company, as warrant agent. (Filed as Exhibit 10-A to the registrant's Current Report on Form 8-K filed December 16, 1999 and incorporated
herein by reference.)
|21   |  | Subsidiaries of the registrant.*                                                                                                                                                                                                                                             
|23   |  | Consent of Independent Auditors.*                                                                                                                                                                                                                                            

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