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

                                    FORM 10-K

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

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2001
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                          COMMISSION FILE NUMBER 1-8549

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

              DELAWARE                                 25-1425889
   (State or other jurisdiction of       (I.R.S. Employer Identification No.)
    incorporation or organization)

5910 NORTH CENTRAL EXPRESSWAY, SUITE 1780, DALLAS, TEXAS            75206
        (Address of principal executive offices)                 (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 |X| No

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

On June 1, 2001, the aggregate value of voting stock held by non-affiliates of
the registrant was approximately $4,863,000.

On June 1, 2001, there were 19,637,360 shares of the registrant's common stock
outstanding before deducting 2,340,327 shares which represent the Corporation's
47.3% equity interest in common stock of the Corporation owned by Phar-Mor, Inc.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Annual Meeting of Stockholders of the
registrant are incorporated by reference into Part III.

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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. Through
Phar-Mor, Inc. ("Phar-Mor"), our 47%-owned affiliate, we are involved in
operating a chain of discount retail drugstores. Through Phar-Mor and our
41%-owned affiliate, Chemlink Acquisition Company, LLC ("CLAC"), we own
approximately 38%, and control 50%, of the membership interests of Chemlink
Laboratories, LLC ("Chemlink"). 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 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 U.S.
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 HBOC, Inc. ("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,
2001, own approximately 47.1% of Phar-Mor's outstanding common stock. In the
last three fiscal years, we and Phar-Mor have made equity investments in
Chemlink through CLAC and currently own on a combined basis approximately
38.4% of Chemlink's outstanding membership interests. Our current investments
are described in the "Description of Business" section below.

                             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 our strategies to
continue as a going concern. In industries in which we operate or invest, we
also face risks associated with competitive pressures; 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, customer concentration issues and
the effects of general economic conditions. 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 (the
"SEC"), 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

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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
2001 or 2001, fiscal 2000 or 2000, etc. herein refer to our fiscal year
ending on March 31 of that year.

EQUITY INVESTMENT IN PHAR-MOR, INC.

         We own approximately 47.1% of Phar-Mor's outstanding common stock at
March 31, 2001. Phar-Mor operates a chain of 139 discount retail drugstores
in 24 states, under the names "Phar-Mor", "Pharmhouse" and "The Rx Place",
devoted to the sale of prescription and over-the-counter drugs, health and
beauty care products, and other general merchandise and grocery items.
Approximately 57% of Phar-Mor stores are located in Pennsylvania, Ohio, New
York and New Jersey, and 22% are located in Virginia, West Virginia, North
Carolina and South Carolina.

         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. This brings Phar-Mor's ownership to 25.2% of our issued Class A
common stock. To the extent that we own 47.1% of Phar-Mor, we have treated an
equivalent 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 47.1% equity ownership interest in our own Class A common
stock owned by Phar-Mor.

EQUITY INVESTMENT IN CHEMLINK LABORATORIES, LLC

         We, through CLAC and Phar-Mor, own on a combined basis approximately
38.4%, and control 50%, of the membership interests in Chemlink. 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 few 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 type 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.

         In addition to the original investments by CLAC of $7.2 million for
50.0% of Chemlink in March and December 1998, investments of approximately
$0.5 million each were made by CLAC in 2000 and 2001. CLAC also contributed
during 2000 approximately $0.1 million of indebtedness owed to CLAC by
Chemlink. The additional investments in 2000 and 2001 did not change CLAC's
ownership percentage in Chemlink. In May 2001, CLAC invested an additional
$0.8 million in Chemlink in exchange for a Series B membership interest that
entitles CLAC to a preferred return. We own a 41.1% interest in CLAC, and
Phar-Mor owns a 35.8% interest in CLAC. In addition to our original investment
of $3.0 million in CLAC for our 41.1% interest, we invested approximately
$0.2 million each in 2000 and 2001. The additional investments did not change
our ownership percentage in CLAC. In May 2001, we contributed an additional
$0.6 million to CLAC in exchange for a Series B membership that entitles us
to a preferred return. In addition, we loaned directly to Chemlink
approximately $0.3 million in March through May 2001 all of which was repaid
in May 2001.

INVESTMENT IN RAS HOLDING CORP.

         We own the equivalent of an approximate 13.4% fully-diluted interest
in RAS Holding Corp. ("RAS"), assuming conversion of the outstanding RAS
convertible preferred stock and the exercise of all the outstanding RAS
options and warrants. We have invested a total of $2.4 million in several
purchases of the Series B convertible preferred stock of RAS (the "Series B
Preferred") beginning with an original investment in April 1998.

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         RAS is a privately-held company that, through its wholly-owned
subsidiary Presby Corp., has developed a surgical technique called the
Surgical Reversal of Presbyopia ("SRP"), 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. RAS is in the process of marketing the SEBs in certain
international markets where the SEB has received regulatory approval. We have
been advised that RAS has completed the surgical procedures required for its
Phase I clinical trials and is seeking approval from the FDA to begin its SRP
Phase II clinical trials in the United States. However, the final outcomes of
the trials and achieving commercial success of the technique are each highly
uncertain. In addition, RAS has advised us that an Investigational Device
Exemption has been filed with the FDA to allow clinical trials in the United
States for use of the SEBs to treat certain forms of glaucoma. Similar
studies related to the treatment of presbyopia and glaucoma have begun in
Canada.

         Our Series B Preferred has voting rights equivalent to the common
stock of RAS and accrues dividends at 12% per annum (10% prior to January 1,
2001) 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
October 31, 2000 when the total unpaid amount would have been due. In June
2000, we amended the Series B Preferred certificate of designation to defer
the cash payment period to the last day of the month following December 2001
(or in quarterly increments from that date to the last day of the month
following September 2002 at the option of RAS). 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 RAS not
meeting certain goals set forth in the 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 RAS. RAS Service has a service contract with
RAS under which it provides advisory and consulting services to RAS 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 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 RAS to RAS Service were originally deferred until the
last day of the month following September 30, 2000. In June 2000, we amended
the service agreement to defer payment of the fees until the last day of the
month following December 31, 2001 (or in quarterly increments from that date
that matches the Series B Preferred deferral date). The amendment also
extended the life of the service contract from December 31, 2004 to March 31,
2006 (or in quarterly increments to December 31, 2006 that match the change
in the Series B Preferred deferral date).

INVESTMENT IN iLIFE SYSTEMS, INC.

         We own the equivalent of an approximate 14.3% interest, on a
fully-diluted basis, in iLife Systems, Inc. ("iLife"), which is a privately
held corporation that develops and markets personal health and safety
monitors. iLife has informed us that they have approximately twenty patents
issued, pending, or in process 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 two product
lines: personal emergency response systems and wireless vital signs monitors.
iLife has recently initiated commercial sales and/or licensing of certain of
their personal emergency response products.

         We 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 in iLife. The B
preferred stock pays no dividends, has voting rights equivalent to iLife's
common stock, and is convertible into common stock on a one-for-one basis. In
addition, we made various loans to iLife during fiscal years 2000 and 2001.
The final outstanding loan accrued interest at 2.0% above prime, matured
March 15, 2001 and contained rights to

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convert to common stock of iLife under certain conditions. The loan had a
carrying value of approximately $1.9 million at maturity and, in connection
with additional investments into iLife by third parties, was converted into
an equivalent number of shares of redeemable Series C convertible preferred
stock ("C Preferred") at $1.30 per share. The C Preferred is redeemable at
$1.30 per share plus all accrued and unpaid dividends five years from issue.
The liquidation value of the C Preferred is $2.60 per share plus all accrued
and unpaid dividends. The liquidation value determines the amount of the
dividends to be paid and also the amount to be received by the C Preferred in
case of the sale or liquidation of iLife. Dividends are paid semi-annually
starting at 6.0% of the liquidation value. The first two dividend payments
will be deferred and added to the liquidation value. Subsequent dividends
will be paid in cash or the dividend rate will increase over the next year to
9.0% of the liquidation value. If the dividends due by September 30, 2003 are
not paid in cash, then the C Preferred has the right to elect a majority of
iLife's board of directors. The C Preferred has voting rights equivalent to
iLife's common stock and is convertible into common on a one-for-one basis at
the option of the holder or automatically upon an initial public offering. We
have 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. We also loaned iLife another $0.2 million in
February 2001 which was repaid in April 2001.

OTHER

         We previously owned an approximate 11.4% common stock interest in
Carson, Inc., a global manufacturer of ethnic hair care products, which was
sold in a tender offer to a subsidiary of L'Oreal in August 2000. We
recognized a gain of $3.4 million on the sale of our investment.

         We had an approximate 3.8% indirect ownership interest in AM
Cosmetics, Inc. ("AM"), a leading privately held manufacturer of low cost
cosmetics. Due to AM's current financial situation, we do not believe this
investment has any current value to our stockholders. For financial statement
purposes, this investment was written off in a prior fiscal year.

         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. There may, however, be further attempts
to license to others.

         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 expire
February 1, 2010. Consequently, we then owned approximately 2.3% of the
common stock of HPD assuming exercise of all outstanding options and
warrants. 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 investments resulting in a gain of
approximately $0.6 million that will be recognized in the first quarter of
fiscal 2002.

         The interests in HPD and RAS 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 7.1% interest in RAS on a fully-diluted basis.
Phar-Mor also owned approximately $1.9 million of HPD preferred stock, a $0.1
million HPD debenture and 2.3% of HPD's common stock on a fully diluted
basis. Phar-Mor's total investment in HPD was purchased or retired as a
result of WD-40 Company's purchase of HPD in April 2001.

                            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.

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         It is anticipated 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 10 persons at March 31, 2001, excluding employees of our
investments carried on the equity basis, Phar-Mor and Chemlink.

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 RAS and iLife.

ITEM 3.  LEGAL PROCEEDINGS

MCKESSON/VENDOR LITIGATION

         In January 1997, we filed a lawsuit against McKesson and certain
major pharmaceutical manufacturers styled FOXMEYER HEALTH CORPORATION v.
MCKESSON CORPORATION, et al., Cause No. 9700311 (the "McKesson Litigation"),
and now pending in the 192nd Judicial District Court of Dallas County, Texas.
We allege in the lawsuit, among other things, that McKesson and the
pharmaceutical manufacturers conspired to drive our pharmaceutical
distribution subsidiary, FoxMeyer Drug, out of business, and that McKesson
obtained confidential financial and competitive information and used the
information to cause damage to us. We seek to recover in excess of $400
million in compensatory damages, plus punitive damages. In February 1997,
certain defendants removed the lawsuit to the United States Bankruptcy Court
for the Northern District of Texas and moved to transfer the McKesson
Litigation to the United States Bankruptcy Court for the District of Delaware
as a proceeding related to the Chapter 11 case of FoxMeyer Drug. In August
1997, the Dallas Bankruptcy Court entered an order denying the defendants'
motion to transfer and, in November 1998, the Court granted our motion to
remand the McKesson Litigation back to Texas state court. As a result of a
decision by the Delaware Bankruptcy Court (described below), the Dallas
Bankruptcy Court also dismissed three of the counts in the Texas lawsuit. In
March 2001, the United States District Court affirmed the Dallas Bankruptcy
Court's decision, and we have appealed the portion of that decision
dismissing three of the counts in the Texas lawsuit.

      In addition, in December 1998, McKesson filed a counterclaim against us
and a third party complaint against three of our current and former officers,
Abbey J. Butler, Melvyn J. Estrin and Edward L. Massman. McKesson's
counterclaims and third party claims allege fraudulent misrepresentation,
negligent misrepresentation, breach of letter agreement and inducing breach
of contract. The third party defendants and we believe that these claims are
without merit and will vigorously oppose them.

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         On February 26, 1997, the Official Unsecured Creditors' Committee of
the FoxMeyer and FoxMeyer Drug bankruptcy estates filed a lawsuit against us
in the Delaware Bankruptcy Court under Adversary No. 97-20. The Committee
sought a declaration that the claims we asserted in the McKesson Litigation
are property of the FoxMeyer and FoxMeyer Drug estates and an injunction
barring us from continuing to prosecute them. Bart A. Brown, Jr., the Chapter
7 Trustee (the "Trustee") of FoxMeyer and FoxMeyer Drug, succeeded to the
interests of the Committee, and McKesson and the other Texas defendants
subsequently intervened in the Committee's lawsuit. McKesson also filed its
own complaint and asserted that (a) as of August 1996, the claims we asserted
in the McKesson Litigation were property of the FoxMeyer and FoxMeyer Drug
estates, and (b) as of November 1996, when McKesson purchased substantially
all of the assets of FoxMeyer Drug, the claims were transferred to McKesson.
In August 1998, the Delaware Bankruptcy Court denied the Texas defendants'
first motion for summary judgment and ruled that the parties should return to
Texas and move the McKesson Litigation forward as much as possible. In
November 1998, the Delaware Bankruptcy Court granted in part and denied in
part the Texas defendants' second motion for summary judgment and ruled that
(i) we are judicially estopped from prosecuting certain counts in the
McKesson Litigation and (ii) if discovery shows that there is "substantial
overlap" between the factual allegations underlying the dismissed counts and
the remaining counts, those counts may be barred as well. In response, the
Texas defendants filed a renewed motion for summary judgment with respect to
the remaining four counts of the lawsuit. In August 1999, the Delaware
Bankruptcy Court denied the renewed motion, ruling that "the parties should
proceed to discovery and trial in Texas."

         We have entered into settlement agreements with all twelve of the
manufacturer defendants in the litigation, under which we received
confidential settlement payments. The Texas state court has specially set the
trial date on January 14, 2002.

1996 SHAREHOLDER 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 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 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. Discovery is proceeding in the lawsuit, and the parties are
awaiting a ruling on the plaintiffs' class certification motion. We intend to
continue to vigorously defend ourselves in the 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 such assets, NAC retained responsibility
for certain environmental matters, as 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, styled GRANTORS 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 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.

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(b) FISHER-CALO. In October 1990, the Environmental Protection Agency (the
"EPA") sent a Special Notice Letter to approximately 350 PRPs, including NAC,
demanding payment of the EPA's past costs and requesting voluntary
participation in performing or financing the remedial design/remedial action
at 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. Under the
Consent Decree and Cost Sharing Agreement among the PRPs, NAC paid its
allocated share of approximately $890,000 of the estimated $25 to $35 million
total cost of the cleanup. Excluding any potential cost overruns, funding of
the contribution action against the non-participating PRPs and annual
administrative fees of approximately $2,500 to $4,000, NAC does not
anticipate any additional material costs at the site. In addition, the PRPs
are currently exploring a structured financing of the remaining costs at the
site, which would include a pre-funded annuity contract and a cost-cap
insurance policy. NAC anticipates that it could receive a refund if the
structured financing alternative is adopted.

(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
styled AT&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. The total cost of the remaining remedial work at the site is estimated
to be approximately $5.7 million, and NAC's allocated share is likely to be
approximately 1.0% of the total remaining cost plus related litigation
assessments for cost recovery actions against non-participating PRPs. NAC
paid approximately $11,600 with respect to this site in fiscal 2001, which
included its share of the PRP group's settlement with the State of Ohio.

(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 and the
remedial action and the payment of 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. Periodic groundwater monitoring may also be
necessary to demonstrate that the remedial action at the site is effective.
NAC will be responsible for its volumetric share of these costs, which likely
will be incurred as part of ongoing operation and maintenance work at the
site. NAC estimates that its share of these ongoing costs will be less than
$20,000 per year.

(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. NAC paid approximately $20,200 of response costs
during fiscal 2001. 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 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. NAC did not pay any material amounts with respect to this
site in fiscal 2001. 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

                                      7

<PAGE>

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 currently seeks a total of
approximately $287,000 in alleged indemnified costs. We believe that we may
have one or more valid defenses to the indemnity request, and are defending
ourselves in the lawsuit.

FOXMEYER CORPORATION

         In April 1998, the Trustee filed a lawsuit against the five former
directors of FoxMeyer in the Delaware Bankruptcy Court (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 Trustee
against us relating to the dividend, the defendants received covenants not to
execute from the Trustee. In September 1999, the Delaware Bankruptcy Court
entered an order establishing procedures for a joint insolvency trial in the
Directors Lawsuit and in certain other lawsuits brought by the Trustee
against other persons and entities related to the FoxMeyer bankruptcy cases.

         In February 2001, United Pacific Insurance Company ("UPIC"), the
primary directors liability insurance carrier during the period of time
covered by the Directors Lawsuit, filed a declaratory judgment action 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.
UPIC's lawsuit was filed in the United States District Court for the Northern
District of Texas. 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 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.

BEN FRANKLIN RETAIL STORES, INC.

         In 1997, the bankruptcy trustee and certain creditors of our former
17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("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. In connection with paying our own defense
costs, we also initially paid a portion of the 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. In June 2000, the United States Bankruptcy Court for the
Northern District of Illinois entered orders in the cases filed by the
trustee and certain of Ben Franklin's lenders. The orders denied the
plaintiffs' motions to amend their complaints and re-entered Recommendations
Upon Remand, which recommended that the cases be dismissed against all of the
defendants except for two counts in one case against David Brainard. The
plaintiffs in these cases have filed objections to the Recommendations with
the District Court. In the third lawsuit, pending in Illinois state court,
the court has entered an order dismissing the plaintiffs' fourth amended
complaint with prejudice, and the plaintiffs have appealed the court's
ruling. If liability is ever imposed in any of

                                      8

<PAGE>

the lawsuits, we may, if appropriate, agree at a future date to indemnify
certain of the remaining defendants in the lawsuit in accordance with
Delaware law.

OTHER

         On June 4, 2001, we received a copy of an Order entered by a
Pennsylvania state court with respect to Reliance Insurance Company
("Reliance"). Our primary directors and officers' liability insurance carrier
for the three-year period ending on or about April 25, 1998 was UPIC, which
is a subsidiary of Reliance. The Order states, among other things, that
Reliance is being placed into "Rehabilitation" under Pennsylvania's Insurance
Department Act, and that all actions pending against Reliance and/or UPIC are
stayed and all actions pending against an insured of Reliance and/or UPIC are
stayed for at least 60 days. While we have not yet had an opportunity to
review and analyze the Order, the Order and the stay may apply to the 1996
Shareholder Litigation, the Directors Lawsuit and two related insurance
coverage lawsuits, the Ben Franklin related lawsuits and the third party
claims filed in the McKesson Litigation. We cannot estimate at this time the
impact, if any, which might result from Reliance being placed into
Rehabilitation.

         We also are a party to various other lawsuits arising in the
ordinary course of business. We, however, do not believe that the outcome of
these lawsuits, 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

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

                                     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.
Prior to December 7, 1999, our previously issued $5 par value common stock
also traded on the OTC Bulletin Board system. At April 30, 2001, we had 5,568
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. 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.


                                      9
<PAGE>


STOCK PRICES FOR FISCAL 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                              Dividends Declared Per
                                                        Market Price Range                            Share
                                           -------------------------------------------------------------------------
                                              Fiscal 2001                Fiscal 2000
                                           -----------------------------------------------     Fiscal       Fiscal
                                           High          Low          High          Low         2001         2000
                                           --------------------------------------------------------------------------
<S>                                        <C>         <C>           <C>          <C>          <C>          <C>
Common Stock  (Symbol: AVAT)
     1st Quarter                           $ 0.7500    $ 0.5000      $ 1.1875     $ 0.6875       $ 0.00       $ 0.00
     2nd Quarter                             0.6562      0.3750        1.3125       0.9375         0.00         0.00
     3rd Quarter                             0.5625      0.2969        1.3750       0.8125         0.00         0.00
     4th Quarter                             0.4531      0.3594        1.2500       0.6250         0.00         0.00
---------------------------------------------------------------------------------------------------------------------
</TABLE>

         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.






                                      10

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     For the years ended March 31,
(In thousands of dollars,  except per share amounts)                    2001         2000         1999        1998          1997
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>         <C>         <C>           <C>
 SUMMARY OF OPERATIONS
      Operating costs                                                $ (3,824)    $ (6,695)   $  (7,326)   $ (11,433)   $  (4,999)
      Other income (expense)                                               13          449       (1,799)     (12,267)      11,878
      Interest and dividend income                                      1,966        2,167        2,052        1,626          972
      Interest expense                                                 (4,986)      (2,081)        (768)      (3,048)      (4,146)
                                                                     -------------------------------------------------------------
      Income (loss) from continuing operations before
           National Steel Corporation ("NSC"), income tax
           provision, equity in income of affiliates and
           minority interest                                           (6,831)      (6,160)      (7,841)     (25,122)       3,705
      NSC net preferred dividend income and loss on settlement              -            -            -      (53,184)       9,620
      Income tax benefit (provision)                                        -            -            -           40      (29,839)
      Equity in income (loss) of affiliates                           (16,311)        (743)       1,270       (3,495)      (5,658)
      Minority interest in results of operations of
         consolidated subsidiaries                                          -            -            -          (10)       2,759
                                                                     -------------------------------------------------------------
      Loss from continuing operations                                 (23,142)      (6,903)      (6,571)     (81,771)     (19,413)
      Discontinued operations                                           2,188        8,131          (16)       4,271     (259,943)
      Extraordinary items                                              13,820          257            -            -            -
                                                                     -------------------------------------------------------------
      Net income (loss)                                                (7,134)       1,485       (6,587)     (77,500)    (279,356)
      Preferred stock dividends                                             -      (20,912)     (28,178)     (25,604)     (19,081)
      Gain on exchange of preferred stock                                   -      225,009           -            -            -
                                                                     -------------------------------------------------------------
      Income (loss) applicable to common stockholders                $ (7,134)    $205,582    $ (34,765)   $(103,104)   $(298,437)
----------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
      Basic and diluted income (loss) per share:
         Income (loss) from continuing operations
           applicable to common stockholders                         $  (1.32)     $  13.59    $  (2.65)   $   (7.78)   $   (2.58)
         Discontinued operations                                         0.12          0.56           -         0.31       (17.41)
         Extraordinary items                                             0.79          0.02           -            -            -
                                                                     -------------------------------------------------------------
         Income (loss) per share                                     $  (0.41)     $  14.17    $  (2.65)   $   (7.47)   $  (19.99)
      Cash dividends per share                                              -             -           -            -            -
      Average number of common shares outstanding
         (in thousands):
         Basic and diluted                                             17,573        14,505      13,102       13,806       14,931
----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
      Working capital                                                $ 13,725      $ 19,282    $ 33,220     $ 40,621    $  46,418
      Total assets                                                     52,828        76,546      89,557      119,303      167,167
      Capital expenditures                                                  -            13      12,374        5,593       34,748
      Long-term debt                                                   20,915        20,577       9,001       22,923       27,482
      Redeemable preferred stock                                            -             -     243,169      214,996      189,402
      Stockholders' equity (deficit)                                   20,731        30,842    (177,933)    (141,902)    (113,507)
----------------------------------------------------------------------------------------------------------------------------------
KEY FINANCIAL RATIOS
      Current ratio                                                    5.97:1        2.33:1     10.87:1       5.36:1       4.80:1
      Long-term debt as a percent of total capitalization               50.2%         40.0%       12.1%        23.9%        26.6%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         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

                                      11

<PAGE>

percentage of total capitalization would be 339.7%, 247.8% and 209.8%,
respectively, for fiscal years 1999, 1998 and 1997.

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, 2001
               (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

OVERVIEW

         Avatex Corporation is a holding company that, along with its
subsidiaries, owns interests in other corporations and partnerships. Through
Phar-Mor, our 47%-owned affiliate, we are involved in operating a chain of
discount retail drugstores. Through Phar-Mor and CLAC, we own approximately
38%, and control 50%, of the membership interests of Chemlink. 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.

         Under the terms of our October 1997 settlement with the FoxMeyer
Bankruptcy Trustee, we were obligated under a promissory note (the "Trustee
Note") to pay to the Trustee $8,000 plus interest, which was to be accrued at
the prime rate, compounded annually and paid at maturity. The original
maturity date of the Trustee Note was October 8, 2000, which was extended to
December 8, 2000. The Trustee Note was secured by 1,132,500 shares of
Phar-Mor common stock and our 30% interest, up to the greater of $10,000 or
the amount owed under the Trustee Note, in any net recovery in certain
litigation filed by the Trustee. On December 5, 2000, we entered into a
settlement agreement with the Trustee under which we agreed to pay to the
Trustee $6,000 in cash, and assign our 30% interest in the litigation to the
Trustee, in full satisfaction of the Trustee Note. The maturity date of the
Trustee Note was extended pending approval of the settlement by the
Bankruptcy Court with jurisdiction over the FoxMeyer bankruptcy case. In
January 2001, the Bankruptcy Court approved the settlement and, in February
2001, we paid $6,000 and transferred the 30% litigation interest to the
Trustee. Pursuant to the settlement and the Subrogation Agreement dated
December 7, 1999, among the Trustee, the indenture trustee of the Avatex
Funding, Inc. ("Avatex Funding") 6.75% notes and us, the Trustee delivered
the 1,132,500 shares of Phar-Mor common stock to the indenture trustee. These
shares represented additional collateral securing the 6.75% notes of Avatex
Funding. The difference in the carrying value of the Trustee Note and the
$6,000 payment to the Trustee resulted in an extraordinary item, gain from
the extinguishment of debt, of $4,551.

         In addition, the extraordinary item for the year ended March 31,
2001 contained $384 in gains realized on the early extinguishment of
approximately $2,651 face value of the 6.75% notes issued by our subsidiary,
Avatex Funding, that we purchased in the open market for approximately
$1,587. The gain represents the difference in the purchase price and the
discounted carrying value of the notes at the time of purchase. Equity in
extraordinary item of affiliate represents our equity in Phar-Mor's gain on
the early extinguishment of its debt.

         See Notes B and E to the consolidated financial statements for a
discussion of our ownership interests, including amounts invested during the
current fiscal year.

                                      12

<PAGE>

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

OPERATING COSTS

         Operating costs including depreciation and amortization decreased
$2,871 to $3,824 for the year ended March 31, 2001, compared to $6,695 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 $708 in increased legal
fees and related costs and $525 less in settlement payments made to us by
certain defendants in our lawsuit against McKesson and certain pharmaceutical
manufacturers than in the prior year. The increase in legal fees and related
costs resulted primarily from additional fees related to the Directors
Lawsuit and in pursuing the McKesson Litigation (see "Item 3. Legal
Proceedings").

OTHER INCOME (EXPENSE)

         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 B to the consolidated
financial statements). 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 Technologies,
Inc. ("Imagyn") 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 the Trustee Note due to increases in the prime
rate and the effect of compounding prior to its repayment in February 2001.

EQUITY IN INCOME (LOSS) OF AFFILIATES

         Equity in income (loss) decreased $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 income (loss) of affili-

                                      13

<PAGE>

ates was primarily the result of $15,402 in increased losses at Phar-Mor that
was 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

         Income from discontinued operations was $259 for the year ended
March 31, 2000. This amount related only to the discontinued real estate
segment until its sale in May 1999.

         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.

EXTRAORDINARY ITEM

         Gain on the extinguishment of debt for the year ending March 31,
2001 is comprised of a gain of $4,551 on the settlement of the Trustee Note
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 (see "Overview" above). 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 so there were no dividends incurred in the current fiscal year. This
elimination of the preferred stock, as a result of our merger with Xetava,
also resulted in a $225,009 gain in the prior fiscal year in connection with
the exchange of preferred stock for either our Class A common stock or other
consideration.

RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2000 COMPARED
TO YEAR ENDED MARCH 31, 1999

OPERATING COSTS

         Operating costs including depreciation and amortization decreased
$631 to $6,695 for the year ended March 31, 2000 compared to $7,326 for the
year ended March 31, 1999. The decrease was primarily the result of $1,925 in
settlement payments made to us by certain defendants in our lawsuit against
McKesson and certain pharmaceutical manufacturers. In addition, we had $267
in lower costs than in the prior year for salaries and benefits and
consulting expenses. Compensation costs decreased as a result of two of our
officers being separated from our employment at the end of June 1999. These
decreases were partially offset by $315 in increased expenses for legal,

                                      14

<PAGE>

from higher costs of $1,198 associated with the Xetava merger and from a $48
increase in other expenses. The $315 increase in legal costs resulted
primarily from additional work involved in our defending ourselves in our
stockholder lawsuits and pursuing our claims against McKesson. The higher
costs associated with the merger consisted primarily of $2,000 in settlement
and related costs in certain Delaware lawsuits, partially offset by lower
costs for consulting and legal expenses related to the merger in fiscal year
2000 as compared to fiscal year 1999.

OTHER INCOME (EXPENSE)

         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 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. Other expense of $1,799 for the year ended March
31, 1999 related to a $3,386 reduction in the carrying value of certain of
our investments, including a $1,795 reduction in the carrying value of
Imagyn, partially offset by $1,587 in gains primarily from recoveries on
investments which had been written-off in prior years and a payment received
on an asset sold in the prior fiscal year.

INTEREST AND DIVIDEND INCOME

         Interest and dividend income increased $115 to $2,167 for the year
ended March 31, 2000 compared to $2,052 for the year ended March 31, 1999.
Interest income increased $7 and dividend income increased $108. Interest
income on cash invested increased $314 primarily due to additional funds
available to invest from proceeds from the sale of our discontinued real
estate operations and the $5,000 contingent fee payment received on the 1997
sale of a discontinued operation as well as interest on new notes receivable
made in the current fiscal year to companies in which we have made equity
investments. This income was partially offset by a $307 decrease in interest
income earned in the prior year on a receivable that was part of a settlement
with NSC, which was paid in full in November 1998. Dividend income increased
as a result of further investments in preferred stock of certain private
companies.

INTEREST EXPENSE

         Interest expense increased $1,313 to $2,081 for the year ended March
31, 2000 compared to $768 for the year ended March 31, 1999. Interest expense
increased primarily as a result of the $1,269 in interest expense on the
6.75% notes issued by Avatex Funding in December 1999 and the impact of
compounding on the Trustee Note.

EQUITY IN INCOME (LOSS) OF AFFILIATES

         Equity in income (loss) decreased $2,013 to a loss of $743 for the
year ended March 31, 2000 compared to equity in income of $1,270 for the year
ended March 31, 1999. The change in equity income (loss) of affiliates was
primarily the result of the $1,992 decrease in our equity income in Phar-Mor.
The decrease was the result of our equity in Phar-Mor's earnings before
investment income, taxes and extraordinary items being $7,595 lower than in
the prior year due to lower profit margins and higher overhead and interest
expense. Part of this unfavorable variance was caused by Phar-Mor's
acquisition and subsequent integration of Pharmhouse Corp.'s stores. This
decrease was partially offset by our equity interest in Phar-Mor's investment
income before taxes of approximately $4,303 and our interest in their tax
benefit of $1,300.

INCOME TAXES

         We recorded no federal income tax provision or benefit for the 2000
or 1999 fiscal years. Any income tax expense or benefit related to the those
year's income (loss) was offset by a corresponding change in the deferred tax
asset valuation allowance.

                                      15

<PAGE>

DISCONTINUED OPERATIONS

         Income from discontinued operations was $259 for the year ended
March 31, 2000 compared to a loss of $16 for the year ended March 31, 1999.
These amounts related only to the discontinued real estate segment. The
results are not comparable as we owned the real estate properties for only
two months during fiscal year 2000 compared to the whole year in the prior
fiscal year.

          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.

EXTRAORDINARY ITEM

         The equity in extraordinary item of affiliate of $257 for the year
ended March 31, 2000 represented our equity interest in Phar-Mor's
extraordinary item from the gain on the early extinguishment of their debt.

PREFERRED STOCK DIVIDENDS

         Preferred stock dividends of $20,912 were incurred for the year
ended March 31, 2000 compared to $28,178 for the year ended March 31, 1999.
The preferred stock was eliminated as of December 7, 1999 as part of the
merger with Xetava. The accrual of the cumulative dividend was, therefore,
only for a partial period in the 2000 fiscal year. The Xetava merger also
resulted in a $225,009 gain in connection with the exchange of preferred
stock for either our Class A common stock or other consideration.

                         LIQUIDITY AND CAPITAL RESOURCES

         As of March 31, 2001, we had cash and short-term investments of
approximately $13,666. During the year ended March 31, 2001, we purchased
preferred stock of RAS for $1,011, invested $150 for a 41.5% interest in a
new limited liability company that acquired the rights to the "Cyclone Fence"
name, made an additional investment in CLAC of $205, invested approximately
$81 in HPD and purchased $1,229 in Phar-Mor common stock raising our
ownership from 38.4% to 47.1%.

         Our debt consists of the 6.75% notes issued by Avatex Funding in
connection with our merger with Xetava. Based on the 6.75% notes outstanding
at March 31, 2001, semi-annual cash interest payments are approximately $878,
and the remaining principal balance of approximately $26,025 is 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. In April
2001, we purchased $11,744 face amount of the 6.75% notes for $7,055. This
purchase reduced the outstanding balance on the 6.75% notes to approximately
$14,281 and resulted in an extraordinary gain on the early extinguishment of
debt of $2,476 in the first quarter of fiscal 2002. This will also reduce our
semi-annual interest payments by $396. At the same time we purchased the
6.75% notes in April 2001, two of our pension plans also purchased a total of
$5,256 face amount of the 6.75% notes for $3,154.

         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, the sale of our investment in HPD, and from interest and
dividend income earned on our investments. We continuously evaluate current
and potential investments in connection with an ongoing review of our
investment strategies and, as opportunities arise, may continue to invest in
publicly and privately held companies.

                                      16

<PAGE>

         We will rely on cash on hand, any excess cash from investments and,
if necessary, the sale of our investments to meet future obligations. We are
involved in litigation which, if we were to lose, would have a material
impact on our financial condition, liquidity and results of operations. These
financial statements have been prepared on a going concern basis which
contemplates the realization of our assets and the settlement of our
liabilities and commitments in the normal course of business. See Note O to
the consolidated financial statements for a discussion of our ability to
continue as a going concern and management's plans addressing those issues.

                                      OTHER

         We have approximately $1,218 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 2001, we paid approximately $59 with
respect to environmental claims and related legal fees.

         In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" which, as
amended, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Therefore, we will be required to adopt SFAS No. 133 for
our fiscal year beginning April 1, 2001. We do not believe the impact from
the adoption of SFAS No. 133 will be material.

         FASB also issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in
September 2000. SFAS No. 140 replaced SFAS No. 125 and is effective for
events occurring after March 31, 2001. We believe that the adoption of SFAS
No. 140 will not have a material impact on our financial condition or results
of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's primary market risk is in the fluctuation in the fair
or market value of its 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 securities due to changes in current
interest rates is not considered material. The Company also holds 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,
2001 (in thousands except for interest rates):

<TABLE>
<CAPTION>
                                                  Expected maturity date
                        -------------------------------------------------------------------------                  Fair
                             2002         2003          2004          2005      2006      Thereafter     Total     Value (3)
                        -----------------------------------------------------------------------------------------------------
<S>                     <C>              <C>           <C>         <C>         <C>        <C>           <C>        <C>
Assets
Securities available
  for sale (1)
-----------------------------------------------------------------------------------------------------------------------------
    Fixed Rate             $   -         $   -         $   -       $   -       $4,438        $1,644     $ 6,082      $ 6,082
-----------------------------------------------------------------------------------------------------------------------------
 Average interest
       rate                    -             -             -           -        12.0%         15.0%       12.5%

-----------------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt (2)
-----------------------------------------------------------------------------------------------------------------------------
    Fixed Rate             $   -         $  20,915     $   -       $    -      $    -        $    -     $20,915      $20,915
-----------------------------------------------------------------------------------------------------------------------------
 Average inter-
       est rate                -             21.0%         -            -           -             -      21.0%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                           17
<PAGE>


(1)  Maturities of redeemable preferred stock and debentures available for sale
     were based on the first redemption date available to us. We also hold
     investments in various other available for sale equity securities and are
     subject to price risk arising from ownership of these investments. The
     market value of these securities at March 31, 2001 was $4.

(2)  Maturities were based on debt agreements with no redemption prior to actual
     maturity being assumed.

(3)  Fair value is based on the estimated current market value for redeemable
     preferred stock and debentures issued by similar companies and on borrowing
     rates currently available for debt instruments with similar terms and
     maturities.

On Balance Sheet Financial Instruments for the fiscal year ended March 31, 2000
(in thousands except for interest rates):

<TABLE>
<CAPTION>
                                              Expected maturity date
                        -------------------------------------------------------------------------              Fair
                          2001         2002        2003        2004         2005      Thereafter     Total     Value (3)
                        --------------------------------------------------------------------------------------------------
<S>                     <C>           <C>        <C>         <C>         <C>          <C>          <C>         <C>
Assets
Securities available
  for sale (4)
--------------------------------------------------------------------------------------------------------------------------
    Fixed Rate            $   -       $   -      $   -       $   -       $ 1,401       $ 1,479     $ 2,880      $ 2,880
--------------------------------------------------------------------------------------------------------------------------
 Average interest
       rate                   -           -          -           -         10.0%         14.9%       12.3%
--------------------------------------------------------------------------------------------------------------------------

Liabilities
Long-term debt (5)
--------------------------------------------------------------------------------------------------------------------------
    Fixed Rate           $    -       $   -       $20,577    $    -      $    -        $    -      $20,577       $20,577
--------------------------------------------------------------------------------------------------------------------------
 Average interest
       rate                   -           -         21.0%         -           -             -        21.0%
--------------------------------------------------------------------------------------------------------------------------
  Variable Rate          $9,745       $   -       $  -       $    -      $    -        $    -      $ 9,745       $ 9,555
--------------------------------------------------------------------------------------------------------------------------
 Average interest
       rate                9.0%           -          -            -           -             -         9.0%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(4)  Maturities of redeemable preferred stock and debentures available for sale
     were based on the first redemption date available to us. We also hold
     investments in various other available for sale equity securities and are
     subject to price risk arising from ownership of these investments. The
     market value of these securities at March 31, 2000 was $7.6 million.

(5)  Maturities were based on debt agreements with no redemption prior to actual
     maturity being assumed. Variable rates were based on rates in effect on
     March 31, 2000. Actual rates in the future could vary.

                                      18


<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          Index to Financial Statements

<TABLE>
<CAPTION>

                                                                                                              Page
<S>                                                                                                           <C>
Independent Auditors' Report                                                                                   20


Consolidated Statements of Operations - For the Three Years Ended March 31, 2001                               21


Consolidated Balance Sheets  -  March 31, 2001 and 2000                                                        22


Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) - For the Three
Years Ended March 31, 2001                                                                                     23


Consolidated Statements of Cash Flows - For the Three Years Ended March 31, 2001                               24


Notes to Consolidated Financial Statements - For the Three Years Ended March 31, 2001                          25


</TABLE>


                                        19


<PAGE>

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, 2001 and
2000, 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, 2001 and 2000, 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 and pending litigation 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 11, 2001
(except the ninth paragraph of Note L,
   which is as of June 4, 2001)




                                        20

<PAGE>

                       AVATEX CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                           For the years ended March 31,
(in thousands, except per share amounts)                             2001                2000               1999
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>                <C>
OPERATING COSTS
       General and administrative costs                            $  3,799           $  6,659           $  7,283
       Depreciation and amortization                                     25                 36                 43
-------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS                                                (3,824)            (6,695)            (7,326)
OTHER INCOME (EXPENSE)                                                   13                449             (1,799)
INTEREST AND DIVIDEND INCOME                                          1,966              2,167              2,052
INTEREST EXPENSE                                                     (4,986)            (2,081)              (768)
-------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN INCOME (LOSS)
    OF AFFILIATES                                                    (6,831)            (6,160)            (7,841)
Equity in income (loss) of affiliates                               (16,311)              (743)             1,270
-------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS                                     (23,142)            (6,903)            (6,571)
DISCONTINUED OPERATIONS
    Income (loss) from discontinued operations, net of tax                -                259                (16)
    Gain on disposal of discontinued operations, net of tax           2,188              7,872                  -
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS                            (20,954)             1,228             (6,587)
EXTRAORDINARY ITEMS:
    Gain on extinguishment of debt                                    4,935                  -                  -
    Equity in extraordinary item of affiliate                         8,885                257                  -
-------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                    (7,134)             1,485             (6,587)
Preferred stock dividends                                                 -             20,912             28,178
Gain on exchange of preferred stock in connection with merger
    with Xetava Corporation                                               -            225,009                  -
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS                    $ (7,134)          $205,582           $(34,765)
-------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
    Income (loss) from continuing operations applicable to
         common stockholders                                       $  (1.32)          $  13.59           $  (2.65)
    Discontinued operations                                            0.12               0.56                  -
    Extraordinary items                                                0.79               0.02                  -
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS          $  (0.41)          $  14.17           $  (2.65)
-------------------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                          17,573             14,505             13,102
-------------------------------------------------------------------------------------------------------------------

</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                        21

<PAGE>

                       AVATEX CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                                          March 31,
(in thousands of dollars)                                                                        2001                 2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                  <C>
ASSETS
CURRENT ASSETS
        Cash and short-term investments                                                      $  13,666             $  10,754
        Receivables, less allowance for possible losses of $47
          in 2001 and in 2000                                                                      364                 2,374
        Other current assets                                                                     2,459                20,614
------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                            16,489                33,742
INVESTMENT IN AFFILIATES                                                                        14,037                24,577
PROPERTY AND EQUIPMENT                                                                             163                   172
        Less accumulated depreciation and amortization                                             112                    96
------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT                                                                          51                    76

OTHER ASSETS                                                                                    22,251                18,151
------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                 $  52,828             $  76,546
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
        Accounts payable                                                                     $     960             $   1,698
        Other accrued liabilities                                                                1,196                 2,307
        Salaries, wages and employee benefits                                                      608                   710
        Long-term debt due within one year                                                           -                 9,745
------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                        2,764                14,460
LONG-TERM DEBT                                                                                  20,915                20,577
OTHER LONG-TERM LIABILITIES                                                                      8,418                10,667
COMMITMENTS AND CONTINGENCIES                                                                        -                     -
STOCKHOLDERS' EQUITY
        Class A common stock $0.01 par value; authorized 50,000,000 shares;
           issued 19,637,360 shares in 2001 and 2000                                               196                   196
        Capital in excess of par value                                                         193,170               193,170
        Accumulated other comprehensive income (loss)                                              (61)                1,982
        Accumulated deficit                                                                   (167,519)             (160,385)
------------------------------------------------------------------------------------------------------------------------------
                                                                                                25,786                34,963
        Less: equity in cost of common stock of the Corporation held by Phar-Mor, Inc.          (5,055)               (4,121)
------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                                      20,731                30,842
------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $  52,828             $  76,546
==============================================================================================================================
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        22

<PAGE>

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




<TABLE>
<CAPTION>
                                                                                ACCUMULATED                    COMMON
                                                                  CAPITAL IN       OTHER                        STOCK
                                                                  EXCESS OF    COMPREHENSIVE                   HELD BY
                                                         COMMON      PAR           INCOME       ACCUMULATED   PHAR-MOR,
(IN THOUSANDS OF DOLLARS)                                STOCK      VALUE          (LOSS)         DEFICIT       INC.         TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>          <C>             <C>            <C>         <C>
BALANCE AT MARCH 31, 1998                              $ 69,032   $ 119,100     $   1,168      $ (331,202)     $   -      $(141,902)
   Components of comprehensive income (loss):
   Net loss                                                                                        (6,587)                   (6,587)
   Net unrealized holding gain on securities                                          652                                       652
                                                                                                                           ---------
        Comprehensive loss                                                                                                   (5,935)

   Dividends in arrears on Convertible Preferred
      and Series A Preferred                                                                      (25,268)                  (25,268)
   Amortization of discount on Series A Preferred                                                  (2,910)                   (2,910)
   Conversion of preferred stock                                          3                                                       3
   Equity in cost of common stock of the Corporation
      held by Phar-Mor, Inc.                                                                                    (1,921)      (1,921)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999                                69,032     119,103         1,820        (365,967)      (1,921)    (177,933)
   Components of comprehensive income (loss):
   Net income                                                                                       1,485                     1,485
   Net unrealized holding gain on securities                                          162                                       162
                                                                                                                           ---------
        Comprehensive income                                                                                                  1,647
   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)                  (18,649)
   Amortization of discount on Series A Preferred                                                  (2,263)                   (2,263)
   New Class A common stock issued in exchange for
      preferred stock in merger with Xetava Corporation      58       4,315                                                   4,373
   Value of warrants issued in merger with Xetava
      Corporation                                                       858                                                     858
   Gain on exchange of preferred stock in merger with
      Xetava Corporation                                                                          225,009                   225,009
   Equity in cost of common stock of the Corporation
        held by Phar-Mor, Inc.                                                                                  (2,200)      (2,200)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000                                   196     193,170         1,982        (160,385)      (4,121)      30,842
   Components of comprehensive income (loss):
   Net loss                                                                                        (7,134)                   (7,134)
   Net unrealized holding loss on securities                                       (2,034)                                   (2,034)
   Additional minimum pension liability                                                (9)                                       (9)
                                                                                                                           ---------
        Comprehensive loss                                                                                                   (9,177)
   Equity in cost of common stock of the Corporation
      held by Phar-Mor, Inc.                                                                                      (934)        (934)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001                               $   196   $ 193,170      $    (61)     $ (167,519)    $ (5,055)    $ 20,731
====================================================================================================================================
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                             23
<PAGE>




                                 AVATEX CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       FOR THE YEARS ENDED MARCH 31,
(IN THOUSANDS OF DOLLARS)                                                       2001               2000                 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                  <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                            $  (7,134)           $  1,485           $  (6,587)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
      OPERATING ACTIVITIES:
      Equity in loss (income) of affiliates                                      7,426                 486              (1,270)
      Depreciation and amortization                                                 25                  36                  43
      Loss (gain) on investments                                                    15                 (77)              1,755
      Other non-cash charges (credits)                                           1,102                 (75)               (892)
      Gain on disposal of discontinued operations                               (2,188)             (7,872)                  -
      Extraordinary item, gain on extinguishment of debt                        (4,935)                  -                   -
      Depreciation and amortization,  provision for losses on accounts
         receivable and other items related to discontinued operations              -                    -               1,239
      Cash provided (used) by working capital items, net of acquisitions:
         Receivables                                                                86               4,991               9,308
         Other assets                                                           11,793             (13,157)                 52
         Accounts payable and accrued liabilities                               (2,345)             (1,055)             (5,728)
      Other                                                                          -                  31                  20
---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                 3,845             (15,207)             (2,060)
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Reduction in cash from reclassification to discontinued operations             -                   -                (834)
      Purchase of property, plant and equipment                                      -                 (13)            (12,374)
      Purchase of investments                                                   (2,676)             (2,041)             (5,004)
      Proceeds from the disposition of investments                               9,330              14,774               3,011
      Other                                                                          -                   2                 (38)
---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                                 6,654              12,722             (15,239)
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from the issuance of long-term debt                                   -                   -              11,055
      Debt repayments                                                           (6,000)                  -                (489)
      Debt issuance costs                                                            -                   -                (101)
      Debt repurchases on open market                                           (1,587)                  -                   -
      Cash paid to preferred stockholders and certain other
         parties in the merger with Xetava Corporation                               -             (13,920)                 -
      Dividends paid to minority interest                                            -                   -                (200)
---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                (7,587)            (13,920)             10,265
---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS                       2,912             (16,405)             (7,034)
      Cash and short-term investments, beginning of year                        10,754              27,159              34,193
---------------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR                                  $ 13,666            $ 10,754            $ 27,159
=================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                           24
<PAGE>


                       AVATEX CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE THREE YEARS ENDED MARCH 31, 2001


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.
Through Phar-Mor, Inc. ("Phar-Mor"), our 47%-owned affiliate, we are involved
in operating a chain of discount retail drugstores. Through Phar-Mor and our
41%-owned affiliate, Chemlink Acquisition Company, LLC ("CLAC"), we own
approximately 38%, and control 50%, of the membership interests of Chemlink
Laboratories, LLC ("Chemlink"). 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.

BASIS OF PRESENTATION: The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires us 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 we have a controlling
interest. Investments in other companies and partnerships in which we have
significant influence but do not have a controlling interest are accounted
for on the equity basis. All significant intercompany balances and
transactions have been eliminated.

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

CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments 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, 2000, we also had
$12.6 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 us to a
concentration of credit risk. To lessen this risk, we placed substantially
all of our cash investments with major financial institutions and diversified
money market mutual funds.

INVESTMENTS: Our 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 of securities. For securities
classified as available for sale, unrealized gains or losses are shown as a
component of our stockholders' equity. For trading securities, the unrealized
gains or losses are reported in the results of operations as "other income
(expense)". We periodically review our 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


                                       25
<PAGE>

designed to distribute the cost of properties over their estimated service
lives of 3 to 7 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):

<TABLE>
<CAPTION>
                                                              MARCH 31,
                                                          2001          2000
          --------------------------------------------------------------------
          <S>                                             <C>         <C>
          Leasehold improvements                          $  15       $    15
          Equipment and furniture                           148           157
          --------------------------------------------------------------------
               Total property and equipment               $ 163       $   172
          ====================================================================
</TABLE>

LONG-LIVED ASSETS: We review 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.

STOCK-BASED COMPENSATION: As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", we have
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 our
stock option plans (see Note H).

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):

<TABLE>
<CAPTION>
                                                                                  For the years ended March 31,
                                                                               2001           2000           1999
-------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>            <C>
Other comprehensive income (loss), net of tax:
Unrealized gains on securities                                            $   1,377         $  738         $  685
Reclassification adjustment for gains included in net income (loss)          (3,411)          (576)           (33)
-------------------------------------------------------------------------------------------------------------------
      Net unrealized gains (losses)                                          (2,034)           162            652
Minimum pension liability adjustment                                             (9)             -              -
-------------------------------------------------------------------------------------------------------------------
      Total other comprehensive income (loss)                              $ (2,043)        $  162         $  652
-------------------------------------------------------------------------------------------------------------------
</TABLE>

         Accumulated other comprehensive income (loss) in the consolidated
statements of stockholders' equity (deficit) consisted of unrealized gains
(losses) on securities of $(52) in 2001, $1,982 in 2000 and $1,820 in 1999
and a minimum pension liability charge of $(9) in 2001.


                                       26
<PAGE>

         As a result of our 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, 2001.

COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: In December 1999,
Phar-Mor acquired 2,862,400 shares of our common stock at a cost of $5.7
million. Additionally, during fiscal 1999, Phar-Mor acquired 2,086,200 shares
of our 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 our issued Class A common stock.
We account for our investment in Phar-Mor on an equity basis and treat
Phar-Mor's investment in our common stock similar to treasury stock, with a
reduction in our stockholders' equity of $5.1 million at March 31, 2001 (the
equivalent of 2,332,241 shares of our common stock) and $4.1 million at March
31, 2000 (the equivalent of 1,900,263 shares of our common stock). The
reduction was equal to our 47.1% and 38.4% ownership interests, respectively,
in the cost of our common stock held by Phar-Mor. In addition, the weighted
average number of shares outstanding used in calculating earnings per share
was reduced by 2,064,105 shares in 2001, 1,149,469 shares in 2000 and 704,340
shares in 1999. The reduction was equal to the percentage of our ownership
interest in our common stock since its acquisition by Phar-Mor.

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

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):

<TABLE>
<CAPTION>
                                                                             For the years ended March 31,
                                                                             2001             2000          1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>                <C>
Loss from continuing operations                                       $   (23,142)    $     (6,903)      $  (6,571)
Add gain on exchange of preferred stock in connection with
     merger with Xetava Corporation                                             -          225,009              -
Deduct dividends on preferred shares                                            -           20,912         28,178
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations applicable to common
     stockholders for BASIC earnings per share                            (23,142)         197,194        (34,749)
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 for DILUTED earnings per share                        $ (23,142)       $ 197,194      $ (34,749)
--------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
     for calculation of BASIC earnings per share                           17,573           14,505         13,102
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 of DILUTED earnings per share                         17,573           14,505         13,102
--------------------------------------------------------------------------------------------------------------------

Income (loss) from continuing operations:
     Basic                                                                ( $1.32)         $ 13.59        $ (2.65)
     Diluted                                                              ( $1.32)         $ 13.59        $ (2.65)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

         Options to purchase approximately 3.9 million shares of common stock
each at March 31, 2001, 2000 and 1999 were not included in the computation of
diluted earnings per share because the average market price of our 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 our former
convertible preferred stock, until its cancellation on


                                       27
<PAGE>

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 our 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 our common stock was less than the exercise price of the
warrants.

SEGMENT INFORMATION: We currently operate 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 our investments in
other entities, reviews new investment opportunities and allocates resources
to these or new investments based on this review and our current financial
situation. We have no foreign source revenues. Interest and dividend income
and other income are derived primarily from investments we have made.

NEWLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for
fiscal years beginning after June 15, 2000. Therefore, we will be required to
adopt SFAS No. 133 for our fiscal year beginning April 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
that require every derivative to be recorded on the balance sheet as an asset
or liability measured at its fair value. The statement also defines the
accounting for the change in the fair value of derivatives depending on their
intended use. We believe that the adoption of SFAS No. 133 will not have a
material impact on our financial condition or results of operations.

         The FASB also issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in
September 2000. SFAS No. 140 replaced SFAS No. 125 and is effective for
events occurring after March 31, 2001. We believe that the adoption of SFAS
No. 140 will not have a material impact on our financial condition or results
of operations.

NOTE B - EQUITY INVESTMENTS AND DISCONTINUED OPERATIONS

PHAR-MOR, INC.

         Since September 1995, we have been acquiring Phar-Mor common stock.
Phar-Mor operates a chain of 139 discount retail drugstores in 24 states,
under the names "Phar-Mor", "Pharmhouse" and "The Rx Place", devoted to the
sale of prescription and over-the-counter drugs, health and beauty care
products, and other general merchandise and grocery items. We account for our
investment in Phar-Mor's common stock using the equity method of accounting.

         We purchased an additional 1,065,000 shares of Phar-Mor common stock
in the open market during the year ended March 31, 2001 for approximately
$1.2 million, which brought our 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. We have pledged
4,704,033 of our Phar-Mor shares as collateral for our long-term debt (see
Note F). As a result of the increase in our equity ownership, the amount and
number of shares of our common stock held by Phar-Mor that are considered
treasury stock have also increased (see Note A).

         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, we
reviewed the carrying value of our investment in Phar-Mor to determine if
there has been an other than temporary decline in the value of that
investment. Based on information available to us about Phar-Mor's current and
future operations and information gathered about similar companies,
management believed that there was such a decline in value during the three
months ended September 30, 2000 and arrived at an estimated fair value for
our investment in Phar-Mor of $9.9 million as of September 30, 2000. We
recognized a loss of $3.7 million in "Other income (expense)" in the
consolidated statements of operations to reduce our carrying value to $9.9
million.


                                       28
<PAGE>

          With the results of operations and additional investments made in
Phar-Mor's common stock since September 30, 2000, the carrying value of Phar-Mor
on our books at March 31, 2001 was $11.6 million or $2.00 per share of Phar-Mor
common stock we owned. This amount is less than our estimate of Phar-Mor's
tangible book value at March 31, 2001, and management believes, therefore, that
the carrying value approximates fair value. The market value of our investment,
based on Phar-Mor's closing price at March 30, 2001, of $0.875 on the NASDAQ
National Market, is approximately $5.0 million.

         Summarized unaudited financial information for Phar-Mor was as follows
for the three years ended March 31, 2001 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                52 Weeks        53 Weeks       52 Weeks
                                                                 Ended            Ended         Ended
                                                                March 31,        April 1,      March 27,
Condensed Statements of Operations                                2001             2000          1999
-----------------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>            <C>
Net sales                                                     $ 1,265,869     $ 1,326,119    $ 1,132,317
Operating earnings (loss)                                          (9,093)          7,007         21,958
Extraordinary item, gain on extinguishment of debt                 20,178             670              -
Net income (loss)                                                 (17,400)           (719)         4,077
-----------------------------------------------------------------------------------------------------------
</TABLE>

Note: The net loss for the 52 weeks ending March 31, 2001 and the 53 weeks
ending April 1, 2000 included $759 in income and a $281 loss, respectively,
related to Phar-Mor's investment in us.

<TABLE>
<CAPTION>
                                                   March 31,         April 1,
   Condensed Balance Sheets                          2001              2000
  ----------------------------------------------------------------------------
<S>                                                <C>              <C>
   Current assets                                  $ 244,016        $ 267,006
   Property and equipment                             82,066           92,757
   Other assets                                       39,335           57,450
  ----------------------------------------------------------------------------
   Total assets                                    $ 365,417        $ 417,213
  ----------------------------------------------------------------------------

   Current liabilities                             $ 120,485        $ 144,439
   Long-term obligations                             182,552          192,705
   Stockholders' equity                               62,380           80,069
  ----------------------------------------------------------------------------
   Total liabilities and stockholders' equity      $ 365,417        $ 417,213
  ============================================================================
</TABLE>

         Our equity percentage ownership in the extraordinary item for Phar-Mor
relating to the early extinguishment of their debt is shown in our statement of
operations as "Equity in extraordinary item of affiliate." The extraordinary
item for the 2000 fiscal year was considered immaterial and was originally shown
in "Equity in income (loss) of affiliates" but has been reclassified to conform
to the current year presentation.

CHEMLINK ACQUISITION COMPANY, LLC

         We account for our 41.1% interest in CLAC, a Delaware limited liability
company, and CLAC accounts for its 50.0% interest in Chemlink, using the equity
method of accounting. CLAC has no investments or business other than its
investment in Chemlink. In addition, Phar-Mor has a 35.8% interest in CLAC.
Therefore, our combined ownership interest in Chemlink is approximately 38.4%;
however, we effectively control 50% of the membership interests in Chemlink. In
March and December 1998, we invested a total of $3.0 million to acquire our
41.1% interest in CLAC which in turn acquired its 50.0% interest in Chemlink for
$7.2 million. In addition to the original investments by CLAC, investments of
approximately $0.5 million each were made in Chemlink by CLAC in 2000 and in
2001. In 2000, CLAC also contributed approximately $0.1 million of indebtedness
owed to CLAC by


                                       29
<PAGE>

Chemlink. The additional investments in 2000 and 2001 did not change CLAC's
50.0% ownership percentage in Chemlink. In May 2001, CLAC invested an
additional $0.8 million in Chemlink in exchange for a Series B membership
interest that entitles CLAC to a preferred return. In addition to our
original investment of $3.0 million in CLAC for our 41.1% interest, we
invested approximately $0.2 million each in 2000 and 2001. The additional
investments did not change our ownership percentage in CLAC. In May 2001, we
made an additional investment of $0.6 million in CLAC in exchange for a
Series B membership that entitles us to a preferred return. We also loaned
directly to Chemlink approximately $0.3 million in March through May 2001 all
of which was repaid in May 2001.

         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.

         Our equity investment in CLAC had a carrying value of $2.4 million at
March 31, 2001. In addition, we have a consulting contract with Chemlink to
provide certain management services. Chemlink currently owes approximately $0.1
million under the consulting contract for which we have not been paid.

         The acquisitions of the equity interests in Chemlink by CLAC were
accounted for by the purchase method of accounting. The $6.6 million difference
between CLAC's purchase price and the net book value of Chemlink's assets
acquired less liabilities assumed was allocated to patents controlled by
Chemlink. The amount allocated to the patents is currently $5.7 million and is
being amortized to expense over the patents' average remaining life of 14 years.
Summarized unaudited statements of operations for the three years ended March
31, 2001 and balance sheets as of March 31, 2001 and 2000 for Chemlink,
excluding our purchase adjustments, are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                      For the years ended March 31,
 Condensed Statements of Operations                2001            2000           1999
---------------------------------------------------------------------------------------
<S>                                              <C>              <C>          <C>
 Net sales                                       $   563          $ 891        $   538
 Operating income                                    450            652            439
 Net loss                                         (1,162)          (929)        (1,037)
---------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                 March 31,       March 31,
 Condensed Balance Sheets                          2001            2000
---------------------------------------------------------------------------
<S>                                              <C>             <C>
 Current assets                                    $  51          $ 441
 Property and equipment                              182            148
 Other assets                                        213            123
---------------------------------------------------------------------------
 Total assets                                      $ 446          $ 712
---------------------------------------------------------------------------

 Current liabilities                               $ 304           $ 209
 Long-term debt                                        -              29
 Stockholders' equity                                142             474
---------------------------------------------------------------------------
 Total liabilities and stockholders' equity        $ 446           $ 712
===========================================================================
</TABLE>

CYCLONE ACQUISITION COMPANY, LLC ("CYCLONE")

         In May 2000, we 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, we wrote off our investment in Cyclone. There may, however,
be further attempts to license to others.


                                       30
<PAGE>

DISCONTINUED OPERATIONS

         We received, as part of the proceeds on the sale in August 1996 of our
discontinued pharmacy benefit management operation, a right to an additional
minimum payment of $2.5 million 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 our former pharmacy benefit
management operation. In August 1999, we collected the $5.0 million payment
after an initial public offering that included our former operation. We
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 subsidiaries of ours 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, we announced that we had
entered into an agreement to sell our interests in our three remaining real
estate developments. On May 27, 1999, one property was sold to a third party and
our 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, we
received $11.4 million in cash and a one-year, $0.6 million secured note. We
recognized a gain on the disposal of discontinued operations on these
transactions of approximately $6.2 million ($5.6 million net of taxes). We 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 compared to revenues for the year ended
March 31, 1999 of $10.5 million. Income taxes related to discontinued operations
in 2000 and 1999 were immaterial.

         In addition, during 2001, we reduced by approximately $2.2 million
certain reserves for contingent liabilities related to our wholly-owned
subsidiary, National Aluminum Corporation ("NAC"), as these reserves were no
longer required. NAC's operations were substantially discontinued prior to
fiscal 1991.

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):

<TABLE>
<CAPTION>
                                                                           For the years ended March 31,
                                                                          2001         2000          1999
 -----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>          <C>
  Interest paid                                                         $ 1,896      $     349     $  1,590
  Income taxes paid                                                           -            619           36
  Non-cash transactions:
       Note receivable converted into equity investment                   1,945              -            -
       Note received on sale of other investments                             -            600            -
       Reduction in book value of redeemable preferred stock                  -        264,082            -
       Value of common stock and warrants issued in Xetava merger             -          5,231            -
       Value of long-term debt issued in Xetava merger                        -         19,922            -
       Cumulative dividends accrued but not paid                              -         18,649       25,268
 ===========================================================================================================
</TABLE>
         The following supplemental information is provided for other long-term
assets, other accrued liabilities and other long-term liabilities (in thousands
of dollars):

<TABLE>
<CAPTION>
                                                                              March 31,
                                                                         2001           2000
-----------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>
Other assets:
     Prepaid pension cost                                              $ 14,183       $ 12,358
     Securities available for sale                                        4,304          2,880
     Other investments, at cost                                           1,288          1,288
     Other                                                                2,476          1,625
-----------------------------------------------------------------------------------------------
          Total                                                        $ 22,251       $ 18,151
===============================================================================================


                                       31
<PAGE>

<CAPTION>

                                                                              March 31,
                                                                         2001           2000
-----------------------------------------------------------------------------------------------

Other accrued liabilities:
     Accrued interest payable                                          $    517       $    613
     Reserve for settlement of lawsuit                                        -            875
     Liabilities related to discontinued operations                         428            433
     Other                                                                  251            386
-----------------------------------------------------------------------------------------------
          Total                                                        $  1,196       $  2,307
===============================================================================================

Other long-term liabilities:
     Pension and postretirement benefits                               $  4,812       $  4,862
     Environmental liabilities                                            1,153          1,134
     Liabilities related to discontinued operations                         453          2,611
     Other                                                                2,000          2,060
-----------------------------------------------------------------------------------------------
          Total                                                        $  8,418       $ 10,667
===============================================================================================
</TABLE>


NOTE D - OTHER INCOME (EXPENSE)

         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
our 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 on assets either sold or written-off in a
prior fiscal year. This was partially offset by a $1.1 million write-off of the
carrying value of our investment in Imagyn Technologies, Inc. ("Imagyn") 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 $0.2 million.

         In 1999, other expense was a loss of $1.8 million which consisted of a
$3.4 million reduction in the carrying value of certain of our investments,
including a $1.8 million reduction in the carrying value of Imagyn, partially
offset by $1.6 million in gains primarily from recoveries on investments which
had been written-off in prior fiscal years and a payment received on an asset
sold in the prior fiscal year.

NOTE E - INVESTMENTS

         Our 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):

<TABLE>
<CAPTION>
                                                    March 31,
                                                2001        2000
   ----------------------------------------------------------------
<S>                                           <C>         <C>
    Carrying value                            $ 6,086     $ 10,456
    Unrealized gains                                4        1,982
    Unrealized losses                              56            -
   ================================================================
</TABLE>


                                       32
<PAGE>

         Available for sale securities included $4.3 million and $2.9 million
in "Other assets" at March 31, 2001 and March 31, 2000, respectively, and
$1.8 million and $7.6 million in "Other current assets" at March 31, 2001 and
March 31, 2000, respectively, 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):

<TABLE>
<CAPTION>
                                                        For the years ended March 31,
                                                        2001        2000        1999
  --------------------------------------------------------------------------------------
<S>                                                   <C>          <C>         <C>
   Available for sale securities:
        Proceeds from sales                           $ 9,005      $ 2,646     $ 1,413
        Realized gains                                  3,411          576          33
        Realized losses                                     -            -           -
        Net unrealized gains (losses)                  (2,034)         162         652
   Trading securities:
        Net unrealized losses included in net income        -       (1,077)     (1,795)
  ======================================================================================
</TABLE>

         Included in the available for sale securities at March 31, 2001 are our
investments in the redeemable preferred stock of RAS Holding Corp. ("RAS"),
iLife Systems, Inc. ("iLife") and HPD Holdings Corp. ("HPD"). In addition, we
have made an investment in convertible equity securities of iLife which are not
included in available for sale securities as there is no readily determinable
market value for this company. A discussion of these significant investments
follows.

RAS HOLDING CORP.

         In April 1998, we invested in RAS by purchasing Series B convertible
preferred stock ("Series B Preferred"). In July 1998 and February 1999, we made
additional purchases of the Series B Preferred after RAS met certain performance
goals. Our total investment was approximately $1.4 million. We also received
two-year warrants which were exercised in April 2000 to purchase additional
Series B Preferred for approximately $0.9 million. In addition, we 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, we would own
approximately 13.4% of the common stock of RAS

         RAS is a privately-held company that, through its wholly-owned
subsidiary Presby Corp., has developed a surgical technique called the Surgical
Reversal of Presbyopia ("SRP"), 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. RAS is in the process of
marketing the SEBs in certain international markets where the SEB has received
regulatory approval. We have been advised that RAS has completed the surgical
procedures required for its Phase I clinical trials and is seeking approval from
the FDA to begin its SRP Phase II clinical trials in the United States. However,
the final outcomes of the trials and achieving commercial success of the
technique are each highly uncertain. In addition, RAS has advised us that an
Investigational Device Exemption has been filed with the FDA to allow clinical
trials in the United States for use of the SEBs to treat certain forms of
glaucoma. Similar studies related to the treatment of presbyopia and glaucoma
have begun in Canada.

         Our Series B Preferred has voting rights equivalent to the common stock
of RAS and accrues dividends at 12% per annum (10% prior to January 1, 2001)
less 85% of any amounts paid to RAS Service Co, LP ("RAS Service") as described
below. The accrued dividends on the Series B Preferred did not have to be paid
in cash until October 31, 2000 when the total unpaid amount would have been due.
In June 2000, we amended the Series B Preferred certificate of designation to
defer the cash payment period to the last day of the month following December
2001 (or in quarterly increments from that date to the last day of the month
following September 2002 at the


                                       33
<PAGE>

option of RAS). 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 RAS not meeting certain goals set forth
in the 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 RAS. RAS Service has a service contract with RAS under which it
provides advisory and consulting services to RAS 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 approximately the first $15 thousand of fees due to 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 RAS to RAS Service were deferred
until the last day of the month following September 30, 2000. In June 2000, we
amended the service agreement to defer payment of the fees until the last day of
the month following December 31, 2001 (or in quarterly increments from that date
that matches the Series B Preferred deferral date). The amendment also extended
the life of the service contract from December 31, 2004 to March 31, 2006 (or in
quarterly increments to December 31, 2006 that match the change in the Series B
Preferred deferral date).

         Our investment in RAS was carried at $2.8 million and $1.6 million, at
March 31, 2001 and 2000, respectively. We also license office space at our
Dallas, Texas office to RAS and receive a consulting fee to provide certain
management services to RAS.

iLIFE SYSTEMS, INC.

         iLife is a privately held corporation that develops and markets
personal health and safety monitors. iLife indicated to us that they have
approximately twenty patents issued, pending, or in process 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 two product lines: personal emergency response systems and
wireless vital signs monitors. iLife has recently initiated commercial sales
and/or licensing of certain of their personal emergency response products.

         We 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 in iLife. The B preferred stock
pays no dividends, has voting rights equivalent to iLife's common stock, and is
convertible into common stock on a one-for-one basis. In addition, we have made
various loans to iLife during fiscal years 2000 and 2001. The final outstanding
loan accrued interest at 2.0% above prime, matured March 15, 2001 and contained
rights to convert to common stock of iLife under certain conditions. The loan
had a carrying value of approximately $1.9 million at maturity, and, in
connection with additional investments into iLife by third parties, was
converted into an equivalent number of shares of redeemable Series C convertible
preferred stock ("C Preferred") at $1.30 per share. The C Preferred is
redeemable at $1.30 per share plus all accrued and unpaid dividends five years
from issue. The liquidation value of the C Preferred is $2.60 per share plus all
accrued and unpaid dividends. The liquidation value determines the amount of the
dividends to be paid and also the amount to be received by the C Preferred in
case of the sale or liquidation of iLife. Dividends are paid semi-annually
starting at 6.0% of the liquidation value. The first two dividend payments will
be deferred and added to the liquidation value. Subsequent dividends will be
paid in cash or the dividend rate will increase over the next year to 9.0% of
the liquidation value. If the dividends due by September 30, 2003 are not paid
in cash, then the C Preferred has the right to elect a majority of iLife's board
of directors. The C Preferred has voting rights equivalent to iLife's common
stock and is convertible into common on a one-for-one basis at the option of the
holder or automatically upon an initial public offering. 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.
We also loaned iLife another


                                       34
<PAGE>

$0.2 million in February 2001 which was repaid in April 2001. On a
fully-diluted basis, we own approximately 14.3% of iLife.

         Our investment in iLife, including iLife's notes receivable, was
carried at $3.4 million and $3.0 million at March 31, 2001 and 2000,
respectively. We license office space and lease furniture and equipment at our
Dallas, Texas office to iLife.

HPD HOLDINGS CORP.

         At March 31, 2001, we 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 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 expire February 1, 2010.
Consequently, we then owned approximately 2.3% of the common stock of HPD
assuming exercise of all outstanding options and warrants. 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 investments resulting in a gain of approximately $0.6 million that will be
recognized in the first quarter of fiscal 2002.

NOTE F - LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                           March 31,
                                                                     2001            2000
  ------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>
   6.75% notes of Avatex Funding, Inc. ("Avatex Funding"), net
         of discount of $5,110 in 2001 and $8,099 in 2000           $ 20,915       $ 20,577
   Trustee note, including accrued interest of $1,745 in 2000             -           9,745
  ------------------------------------------------------------------------------------------
                                                                                     30,322
   Long-term debt due within one year                                     -           9,745
  ------------------------------------------------------------------------------------------
   Long-term debt                                                  $ 20,915        $ 20,577
  ==========================================================================================
</TABLE>

         Under the terms of our October 1997 settlement with the FoxMeyer
Corporation ("FoxMeyer") Bankruptcy Trustee (the "Trustee"), we were obligated
under a promissory note (the "Trustee Note") to pay to the Trustee $8.0 million
plus interest which was to be accrued at the prime rate, compounded annually and
paid at maturity. The original maturity date of the Trustee Note was October 8,
2000, which was extended to December 8, 2000. The Trustee Note was secured by
1,132,500 shares of Phar-Mor common stock and our 30% interest, up to the
greater of $10.0 million or the amount owed under the Trustee Note, in any net
recovery in certain litigation filed by the Trustee. On December 5, 2000, we
entered into a settlement agreement with the Trustee under which we agreed to
pay to the Trustee $6.0 million in cash, and assign our 30% interest in the
litigation to the Trustee, in full satisfaction of the Trustee Note. The
maturity date of the Trustee Note was extended pending approval of the
settlement by the Bankruptcy Court with jurisdiction over the FoxMeyer
bankruptcy case. In January 2001, the Bankruptcy Court approved the settlement.
In February 2001, we paid $6.0 million and transferred the 30% litigation
interest to the Trustee. Pursuant to the settlement and the Subrogation
Agreement dated December 7, 1999, among the Trustee, the indenture trustee of
the Avatex Funding 6.75% notes and us, the Trustee delivered the 1,132,500
shares of Phar-Mor common stock to the indenture trustee. These shares represent
additional collateral securing the 6.75% notes. The difference in the carrying
value of the Trustee Note and the $6.0 million payment resulted in a gain of
$4.6 million from the extinguishment of debt and was classified as an
extraordinary item in the statement of operations for fiscal 2001.

         The 6.75% notes were issued by Avatex Funding on December 7, 1999, to
our 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 us. 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.


                                       35
<PAGE>

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 paid on June 15 and December
15 of each year. We guarantee the notes.

         Included in the extraordinary item for the year ended March 31,
2001, were gains realized on the early extinguishment of approximately $2.7
million face value of the 6.75% notes that we purchased in the open market for
approximately $1.6 million. A gain of approximately $0.4 million was recognized
for the year ended March 31, 2001, which represents the difference in the
purchase price and the discounted carrying value of the notes at the time of
purchase. The remaining principal amount of the notes is approximately $26.0
million. In April 2001, we repurchased an additional $11.7 million face amount
of the 6.75% notes for $7.1 million. This purchase reduced the outstanding
balance of the 6.75% notes to approximately $14.3 million and resulted in an
extraordinary gain of approximately $2.5 million that will be recognized in the
first quarter of fiscal 2002.

         Maturity and approximate sinking fund requirements on all long-term
debt by fiscal year, based on the book value of the debt at March 31, 2001, is
$20.9 million in 2003. The estimated payment at maturity after additional
accretion of discount and adjusting for the additional notes purchased in April
2001 will be $14.3 million in 2003.

NOTE G - CAPITAL STOCK

         At our Annual Meeting of Stockholders held on December 6, 1999, our
common and former preferred stockholders approved our merger with our
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 our former preferred stock and holders of
approximately 65% of our issued shares of common stock voted in favor of the
merger.

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

PREFERRED STOCK: We are authorized to issue 10,000,000 shares of preferred
stock. Currently, no preferred stock is outstanding. Our two former series of
preferred stock that were eliminated in the merger with Xetava are discussed
below.

         At December 7, 1999, we had 652,273 shares of our 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 our former convertible preferred stock was either
converted into 9.134 shares of our 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 our wholly-owned
subsidiary, Avatex Funding, and warrants to purchase 0.67456 shares of our
Class A common stock at $2.25 per share.

         In addition, at December 7, 1999, we 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 our former Series A
preferred stock was either converted into 7.253 shares of our 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 our Class A common stock at $2.25 per
share.

                                       36

<PAGE>

         On December 7, 1999, we 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 our former
preferred stockholders who elected the Alternate Consideration. Our 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 13,806,487 shares
of our former common stock that were converted to the same number of shares of
Class A common stock, a total of 19,637,360 shares of our Class A common stock
were issued.

         In addition, the holders of shares of both of our former series of
preferred stock who elected the Alternate Consideration received a deferred
contingent right to a portion of any net recovery that we may receive in certain
litigation brought by us against McKesson HBOC, Inc. ("McKesson") and a number
of large pharmaceutical manufacturers. The deferred contingent right entitles
the electing former preferred stockholders to receive their pro-rata share of,
for our former convertible preferred stock, 2.6% of the net recovery, if any, up
to a maximum of approximately $1.0 million ($1.84 per share of preferred stock
previously held), and, for our former Series A preferred stock, 14.2% of any net
recovery up to a maximum of approximately $5.3 million ($1.46 per share of
preferred stock previously held).

         As a result of the merger, we recognized a gain on the exchange of our
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):

<TABLE>
<S>                                                                                     <C>
   ----------------------------------------------------------------------------------------------------
     Book value of preferred stock including cumulative unpaid dividends                   $ 264,082
     Cash 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
   ====================================================================================================
</TABLE>

COMMON STOCK: At March 31, 2001 and 2000, we had 19,637,360 shares of Class A
$0.01 par value common stock outstanding before consideration of our common
stock owned by Phar-Mor. Class A common stock was issued December 7, 1999 in
exchange for our previously outstanding $5.00 par value common stock on a
one-for-one basis and to our former preferred stockholders who elected not to
take the Alternate Consideration (see above). We have also reserved 3,863,114
shares of our Class A common stock for issuance under our 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 our ability to pay dividends on our common
stock, we do not presently intend to pay any dividends.

         As of March 31, 2001, Phar-Mor had acquired 4,948,600 shares of our
Class A common stock at a cost of approximately $10.7 million. We account for
our investment in Phar-Mor on an equity basis (see Note B) and treat Phar-Mor's
investment in our common stock similar to treasury stock, with a reduction in
our stockholders' equity of $5.1 million and $4.1 million at March 31, 2001 and
2000, respectively, and a reduction in the number of shares outstanding for
calculating earnings per share (see Note A).

NOTE H- EMPLOYEE COMPENSATION PLANS

         We maintain the 1993 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 our common stock to certain officers
and key employees of ours and our subsidiaries 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 our Board of Directors determines
the price at which options are to be granted, the period over


                                       37
<PAGE>

which options are exercisable, the duration of performance or restriction
periods and performance targets over which performance shares shall be
earned. Options for an aggregate of 4,000,000 shares of our common stock may
be granted under the Plan. At March 31, 2001, options for 90,078 shares were
still available for grant under the Plan.

         We have a Performance Incentive Plan that provides for participants to
receive 17.5% of the net proceeds, if any, from litigation related to our
lawsuit against McKesson and various other defendants. The plan does not expire
nor can the percentage award or the participants be changed unless the
participant has voluntarily terminated his employment or been terminated with
cause.

         The following table summarizes the information with respect to stock
options for the three years ended March 31, 2001. The exercise price of options
granted were at least equal to the published market price of our common stock on
the date of grant.

<TABLE>
<CAPTION>
                                                                   Outstanding
                                                          ---------------------------------
                                                                        Weighted Average
                                     Exercisable Shares      Shares      Exercise Price
         ----------------------------------------------------------------------------------
<S>                                 <C>                    <C>          <C>
         March 31, 1998                       1,452,909      3,853,114      $1.16
         Granted                                                     -       -
         Exercised                                                   -       -
         Canceled or forfeited                                       -       -
         ----------------------------------------------------------------------------------
         March 31, 1999                       2,750,611      3,853,114       1.16
         Granted                                                 5,000       0.78
         Exercised                                                   -       -
         Canceled or forfeited                                       -       -
         ----------------------------------------------------------------------------------
         March 31, 2000                       3,303,108      3,858,114       1.16
         Granted                                                 5,000       0.41
         Exercised                                                   -       -
         Canceled or forfeited                                       -       -
         ----------------------------------------------------------------------------------
         March 31, 2001                       3,855,614      3,863,114       1.16
         ----------------------------------------------------------------------------------
</TABLE>

         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, 2001 (no
grants were made during 1999):

<TABLE>
<CAPTION>
                                                             2001         2000        1999
         ----------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>
          Expected dividend yield (%)                          0.0          0.0         -
          Expected volatility (%)                             93.4         80.8         -
          Risk-free interest rates (%)                         5.8          6.2         -
          Expected option lives (years)                        5.0          5.0         -
         ==================================================================================
</TABLE>

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

         We account for stock-based compensation using the intrinsic value
method of APB 25 (see Note A). Accordingly, no compensation expense was
recognized. If we had used the fair value of options at the grant dates, as


                                       38
<PAGE>

defined by SFAS No. 123, to recognize compensation cost for the three years
ended March 31, 2001, our income (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):

<TABLE>
<CAPTION>
                                                                       2001           2000           1999
-------------------------------------------------------------------------------------------------------------
<S>                                                               <C>             <C>            <C>
    As reported
         Loss from continuing operations                            $ (23,142)      $ (6,903)      $ (6,571)
         Net income (loss)                                             (7,134)         1,485         (6,587)
    Pro forma
         Loss from continuing operations                            $ (23,226)      $ (7,222)      $ (7,258)
         Net income (loss)                                             (7,218)         1,166         (7,274)
-------------------------------------------------------------------------------------------------------------
    As reported for both basic and diluted earnings per share
         Income (loss) per share from continuing operations            ($1.32)      $  13.59       $  (2.65)
         Net income (loss) per share                                    (0.41)         14.17          (2.65)
    Pro forma for both basic and diluted earnings per share
         Income (loss) per share from continuing operations            ($1.32)      $  13.57       $  (2.71)
         Net income (loss) per share                                    (0.41)         14.15          (2.71)
=============================================================================================================
</TABLE>

         The following table summarizes information about significant option
groups outstanding and exercisable as of March 31, 2001 and related
weighted-average exercise price and weighted-average contractual life remaining:

<TABLE>
<CAPTION>

    Options with Exercise Prices            Outstanding                 Exercisable             Remaining
    Ranging from:                       Shares        Price        Shares         Price       Life in Years
-------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>         <C>            <C>            <C>
    $0.4062 to $0.7812                     10,000    $ 0.59          2,500       $ 0.78              4.1
-------------------------------------------------------------------------------------------------------------
    $1.1250 to $1.3125                  3,853,114    $ 1.16      3,853,114       $ 1.16              1.0
=============================================================================================================
</TABLE>

NOTE I - RETIREMENT PLANS

         We have 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. Our
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. Our outside directors are covered under a non-qualified and
unfunded defined benefit plan.

         We have 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. We make a
matching contribution to each employee, which immediately vests, in an amount
equal to 50% of the first 6% of the employee's contribution.

         Pension income under our retirement plans for the three years ended
March 31, 2001 are presented in the table below (in thousands of dollars):

<TABLE>
<CAPTION>
                                                              For the years ended March 31,
                                                            2001           2000          1999
------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>           <C>
     Net periodic pension cost (income) for defined
       benefit plans:
     Service cost - benefits earned for the year            $    71       $    65     $    61
     Interest cost on projected benefit obligation            3,316         3,358       3,603
     Expected return on plan assets                          (4,903)       (4,573)     (4,795)
     Net amortization and deferral                             (184)         (183)       (197)
------------------------------------------------------------------------------------------------
     Net periodic pension cost (income)                      (1,700)       (1,333)     (1,328)
     Pension cost for defined contribution plans                 34            37          21
------------------------------------------------------------------------------------------------
     Total pension cost (income)                            $(1,666)      $(1,296)    $(1,307)
================================================================================================
</TABLE>

                                       39
<PAGE>

         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, 2001.

         The following table sets forth the funded status of our defined benefit
pension plans and amounts recognized in our consolidated balance sheets at March
31, 2001 and 2000 utilizing a weighted average discount rate of 7.0% in 2001 and
7.25% in 2000 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                              March 31,
                                                        2001            2000
---------------------------------------------------------------------------------
<S>                                                  <C>            <C>
 Change in benefit obligation:
    Benefit obligation, beginning of year            $  48,086       $  52,426
      Service cost                                          71              65
      Interest cost                                      3,316           3,358
      Actuarial losses (gains)                             905          (3,142)
      Benefits paid                                     (4,573)         (4,621)
---------------------------------------------------------------------------------
    Benefit obligation, end of year                     47,805          48,086
---------------------------------------------------------------------------------
 Change in plan assets:
    Fair value of plan assets, beginning of year        65,464          61,224
      Actual return on plan assets                      (8,070)          8,643
      Benefits paid                                     (4,372)         (4,403)
---------------------------------------------------------------------------------
    Fair value of plan assets, end of year              53,022          65,464
---------------------------------------------------------------------------------
 Funded status                                           5,217          17,378
 Unrecognized transition asset                            (173)           (356)
 Unrecognized net actuarial loss (gain)                  8,392          (5,487)
---------------------------------------------------------------------------------
 Net amount recognized                               $  13,436      $   11,535
=================================================================================
</TABLE>

         The projected benefit obligation and accumulated benefit obligation of
the unfunded plans were $0.8 million as of March 31, 2001 and $0.9 million as of
March 31, 2000.

         The following table presents amounts recognized in our consolidated
balance sheets at March 31, 2001 and 2000 that net to the amount recognized in
the table above (in thousands of dollars):

<TABLE>
<CAPTION>
                                                             March 31,
                                                        2001            2000
---------------------------------------------------------------------------------
<S>                                               <C>             <C>
     Prepaid pension cost                           $ 14,183        $ 12,358
     Accrued pension liability                          (756)           (823)
     Accumulated other comprehensive loss                  9               -
---------------------------------------------------------------------------------
     Net amount recognized                          $ 13,436        $ 11,535
=================================================================================
</TABLE>

         At March 31, 2001, the assets of our defined benefit pension plans were
comprised of approximately 10% bonds, 63% stocks, 18% hedge funds and 9% other,
principally cash. Included in pension plan assets were 1,361,500 shares of our
common stock with a market value of $0.6 million at March 31, 2001.


NOTE J - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

         We have a plan for retired employees that provides for postretirement
health care and life insurance benefits. 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 we pay all benefits on a current
basis. No current employees are covered under the plan.


                                       40
<PAGE>

         The net periodic postretirement benefit cost for the three years ended
March 31, 2001 was as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                 For the years ended March 31,
                                                                 2001        2000        1999
     -------------------------------------------------------------------------------------------
<S>                                                            <C>        <C>         <C>
       Service cost - benefits earned for the year               $    -    $    -      $   -
       Interest cost                                                167       183        157
       Amortization of prior service cost and net gain              (44)      (40)       (72)
     -------------------------------------------------------------------------------------------
       Total postretirement benefit cost                         $  123    $  143      $  85
     ===========================================================================================
</TABLE>

         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, 2001 and 2000 utilizing a discount rate of 7.0% for 2001 and
7.25% for 2000 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                             March 31,
                                                                        2001           2000
   -------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>
   Benefit obligation, beginning of year                              $  2,748      $  2,717
        Service cost                                                         -             -
        Interest cost                                                      167           183
        Plan participants' contributions                                    38            33
        Benefits paid                                                     (140)         (123)
        Actuarial gain                                                    (346)          (62)
   -------------------------------------------------------------------------------------------
   Benefit obligation, end of year                                       2,467         2,748
   Unrecognized net gain                                                 1,154           852
   -------------------------------------------------------------------------------------------
   Amount of postretirement benefit obligation included in the
     consolidated balance sheet                                       $  3,621      $  3,600
   ===========================================================================================
</TABLE>

         Medical costs were assumed to increase at a rate of 7.5% during 2001
and then to decline over a period of 5 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 9.2%
increase or an 7.8% decrease in the postretirement benefit obligation and a
12.5% increase or an 10.5% 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, 2001.

         We recorded no federal income tax benefits for our losses from
continuing operations for the three years ending March 31, 2001 because of the
uncertainty of realizing our deferred tax assets. We adjusted our valuation
allowance to maintain a full valuation allowance against our net deferred tax
assets.

         While we have generated substantial loss, capital loss and tax credit
carryforwards in prior years, the availability of such loss and tax credit
carryforwards to reduce our 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). We believe 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, we 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, 2001, we have for federal income tax purposes operating
loss carryforwards after December 7, 1999 of approximately $7.7 million, of
which $5.4 million expires in 2021 and $2.3 million expires in 2020. We have
capital loss carryforwards of $0.8 million which expire in 2005.


                                       41
<PAGE>

         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):

<TABLE>
<CAPTION>
                                                              For the years ended March 31,
                                                              2001         2000        1999
---------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>          <C>
Statutory rate applied to pre-tax loss                      $(8,100)    $ (2,416)    $(2,300)
Change in deferred tax asset valuation allowance from
     continuing operations                                    1,151      (88,948)      3,112
Corporate dividend-received deduction                           (60)         (53)        (44)
Effect of change in control on net operating loss and
     credit carryforwards                                         -       91,154           -
Market adjustments to investments                                 -            -       1,185
Equity in affiliates                                          6,852          149        (548)
Other items                                                     157          114      (1,405)
---------------------------------------------------------------------------------------------
Total tax provision                                         $     -     $      -     $     -
=============================================================================================
</TABLE>

         Our current and noncurrent deferred taxes, which net to a zero balance
as of March 31, 2001 and 2000, consisted of the following temporary differences
and net operating losses at the statutory rate, tax credits, and valuation
allowance (in thousands of dollars):

<TABLE>
<CAPTION>
                                                               March 31,
                                                           2001         2000
       ------------------------------------------------------------------------
         <S>                                             <C>         <C>
         Deferred tax assets:
         Tax net operating losses                        $ 3,420     $  2,648
         Other liabilities                                 3,754        4,306
         Tax credits                                           3            3
       ------------------------------------------------------------------------
         Total deferred tax assets                         7,177        6,957
         Deferred tax liabilities:
         Retirement plans                                 (5,609)      (4,887)
         Other                                              (833)        (693)
       ------------------------------------------------------------------------
         Deferred tax liability                           (6,442)      (5,580)
         Valuation allowance                                (735)      (1,377)
       ------------------------------------------------------------------------
         Deferred tax asset, net                         $     -     $      -
       ========================================================================
</TABLE>

         The net change in the valuation allowance for 2001 was a decrease of
approximately $0.6 million. The net change consisted of a reduction of $1.8
million to recognize a decrease in the deferred tax asset related to gains in
extraordinary items and discontinued operations partially offset by a $1.2
million increase in the deferred tax asset valuation allowance related to
continuing 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

         We lease various types of properties, primarily corporate office space
and equipment, through noncancelable operating leases. Rental expense for
continuing operations under operating leases totaled $0.2 million in 2001, $0.2
million in 2000 and $0.2 million in 1999. Minimum rental payments under
operating leases with remaining terms of one year or more at March 31, 2001
total $0.7 million with payments due of $0.2 million in 2002, $0.3 million in
2003 and $0.2 million in 2004. We had sublease income from licensing our office
space of $0.1 million in 2001. We expect sublease income of from $0.1 million to
$0.2 million during 2002 through 2004.

         We have retained responsibility for certain potential environmental
liabilities attributable to former operating units. We are subject to federal,
state and local environmental laws, rules and regulations, including the Com-


                                      42
<PAGE>

prehensive 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. We and our
subsidiaries received various claims and demands from governmental agencies
relating to investigations and remedial actions to address environmental
clean-up costs and in some instances have been designated as a potentially
responsible party by the Environmental Protection Agency.

         At March 31, 2001, we had reserves of approximately $1.2 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. Our 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 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 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 further
information could ultimately change our current assessment. A change in the
estimated liability could have a material impact on our financial condition and
results of operations.

         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 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 our 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 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 our 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. We intend to continue to vigorously defend
ourselves in the lawsuit. We are unable at this time to estimate the possible
loss, if any, which may accrue from this lawsuit.

         In 1997, the bankruptcy trustee and certain creditors of our former
17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"), filed
lawsuits against us, certain former officers and directors of Ben Franklin and
certain of our current and former officers and directors. We along with our
officers and directors have since been dropped as defendants in the lawsuits. In
connection with paying our own defense costs and those of our officers and
directors, we also initially paid a portion of the 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. The bankruptcy trustee and creditors of Ben Franklin are still
litigating these cases against the remaining defendants. If liability is ever
imposed in any of the lawsuits, we may, if appropriate, agree at a future date
to indemnify certain of the remaining defendants in the lawsuit in accordance
with Delaware law. We are unable to estimate the possible loss, if any, which
may accrue from these lawsuits.

         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 us. In October 1997, in connection with the settlement of a separate
lawsuit brought by the Trustee against us, the Trustee released us from all
liability and provided the director-defendants in this lawsuit with covenants
not to execute. We have agreed to pay the initial defense costs of the
individuals who are named as defendants in the lawsuit by reason of the fact
that they may have been serving at our request as a director or officer of
FoxMeyer. In


                                      43
<PAGE>

September 1999, the Delaware Bankruptcy Court entered an order establishing
procedures for a joint insolvency trial in the lawsuit and in certain other
lawsuits brought by the Trustee against other persons and entities related to
the FoxMeyer bankruptcy cases.

         On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P.
filed a lawsuit, allegedly on our behalf, against seven of our current directors
and three of our former directors who were members of our Board's Personnel and
Compensation Committee, under Case No. 602773198 in the Supreme Court of New
York, County of New York. The plaintiffs were holders of our formerly
outstanding Series A preferred stock, and the lawsuit related primarily to
agreements and transactions between us and our Co-Chairmen and Co-Chief
Executive Officers, Abbey J. Butler and Melvyn J. Estrin. In December 2000, the
court granted the defendants' motion for summary judgment.

         In June 2001, we received a copy of an Order entered by a Pennsylvania
state court with respect to Reliance Insurance Company ("Reliance"). Our primary
directors and officers' liability insurance carrier for the three-year period
ending on or about April 25, 1998 was United Pacific Insurance Company ("UPIC"),
which is a subsidiary of Reliance. The Order states, among other things, that
Reliance is being placed into "Rehabilitation" under Pennsylvania's Insurance
Department Act, and that all actions pending against Reliance and/or UPIC are
stayed and all actions pending against an insured of Reliance and/or UPIC are
stayed for at least 60 days. While we have not yet had an opportunity to review
and analyze the Order, the Order and the stay may apply to the Zuckerman
lawsuit, the Ben Franklin related lawsuits and the FoxMeyer Trustee lawsuit
described above. We cannot estimate at this time the impact, if any, which might
result from Reliance being placed into Rehabilitation.

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

NOTE M - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         We 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 we 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
our financial instruments at March 31, 2001 or 2000, respectively.

         The carrying amounts of cash and short-term investments, accounts and
notes receivable, accounts payable and other accrued liabilities were reasonable
estimates of their fair value.

         The carrying value of long-term debt was $20.9 million and $30.3
million at March 31, 2001 and 2000, respectively, while the estimated fair value
was $20.9 million and $30.1 million, respectively, based upon interest rates
available to us 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 at both March 31,
2001 and 2000 was $1.3 million.

         The fair value estimates were based on pertinent information available
to management as of March 31, 2001 and 2000. 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.


                                      44
<PAGE>

NOTE N - QUARTERLY DATA  (UNAUDITED)

         The following is a quarterly tabulation of the results of operations
for the two years ended March 31, 2001 (in thousands of dollars, except per
share amounts):

<TABLE>
<CAPTION>
                                                                     Quarter
---------------------------------------------------------------------------------------------
                                                    First       Second      Third     Fourth
---------------------------------------------------------------------------------------------
<S>                                                <C>         <C>         <C>        <C>
2001:
Revenues                                           $     0     $     0     $     0   $     0
Operating loss                                        (920)     (1,648)       (292)     (964)
Loss from continuing operations before equity in
  loss of affiliates                                (1,670)     (2,416)     (1,021)   (1,724)
Loss from continuing operations                     (6,791)     (6,167)     (4,895)   (5,289)
Discontinued operations                                  -           -           -     2,188
Extraordinary items                                    344         112       7,591     5,773
Net income (loss)                                   (6,447)     (6,055)      2,696     2,672
Loss per common share from continuing operations:
      Basic and Diluted                              (0.38)      (0.35)      (0.28)    (0.31)
Net income (loss) per common share:
      Basic and Diluted                              (0.36)      (0.34)       0.15      0.15
---------------------------------------------------------------------------------------------
2000:
Revenues                                           $     0     $     0     $     0   $     0
Operating loss                                      (2,085)     (2,190)     (2,337)      (83)
Loss from continuing operations before equity in
  income (loss) of affiliates                       (2,537)     (1,326)     (1,996)     (301)
Income (loss) from continuing operations            (3,736)     (3,017)        982    (1,132)
Discontinued operations                              5,828       2,366         (63)        -
Extraordinary items                                      -           -          79       178
Net income (loss)                                    2,092        (651)        998      (954)
Income (loss) per common share from continuing
  operations after preferred stock dividends:
      Basic and Diluted                             (0.86)       (0.82)      15.41     (0.06)
Net income (loss) per common share:
      Basic and Diluted                             (0.41)       (0.64)      15.41     (0.05)
=============================================================================================
</TABLE>

         Our 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).

         The third and fourth quarter results for fiscal 2000 have been
reclassified to show our equity ownership in the extraordinary item of Phar-Mor.
When originally reported, the amounts were considered immaterial and were
reflected in equity in income (loss) of affiliates. These amounts have been
reclassified to conform to current year presentation.

         During the fourth quarter of fiscal 2000, we had a smaller operating
loss than in the prior quarters of fiscal 2000 because we incurred substantially
less expenses related to the merger with Xetava (see Note G) than we had in the
prior quarters, and we received approximately $1.0 million in settlement
payments related to our lawsuit against McKesson and certain pharmaceutical
manufacturers.

         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. The earnings per share for the first and second quarter of
fiscal 2000 reflected dividends


                                      45
<PAGE>

accrued for preferred stockholders. The earnings per share for the third
quarter of fiscal 2000 reflected the impact of the merger with Xetava and the
gain allocated to common stockholders (see Note G).

NOTE O - GOING CONCERN

         During the almost five years since the FoxMeyer bankruptcy, we have had
significant success in resolving a number of matters which threatened our
existence including:

         -  a significant reduction in operating cash outflows;

         -  the settlement with the FoxMeyer Trustee of certain claims against
            us and the release of our assets from a temporary restraining order
            and injunction;

         -  the restoration of our liquidity and the elimination of substantial
            healthcare, environmental and other liabilities through a negotiated
            settlement of our preferred stock investment in National Steel
            Corporation;

         -  the elimination of certain other supplemental pension and retiree
            healthcare benefit obligations owed by us or our subsidiaries;

         -  the elimination of our common stockholders' deficiency through the
            completion of the merger with Xetava that eliminated our preferred
            stock obligations and increased stockholders' equity by $225.0
            million, improved our financial condition and increased our
            capability to meet future liabilities as they mature;

         -  the elimination of our debt at a substantial discount to its face
            value in order to reduce the funds that need to paid currently or in
            the future including a negotiated discount on the payment of our
            Trustee Note (see Note F) that resulted in a savings of
            approximately $4.6 million and the repurchase during fiscal 2001 and
            in April 2001 of approximately $14.4 million face amount of our
            6.75% Avatex Funding notes at a substantial discount to their face
            value reducing cash that will be needed to pay the semi-annual
            interest payments and that will be needed to retire the debt in
            December 2002;

         -  the elimination or settlement of several lawsuits in fiscal 2001
            that included the 1994 stockholder litigation, one of the 1996
            stockholder litigation suits and the derivative lawsuit.

         We have also made investments in other companies in order to try to
provide income and cash for our continuing operations. In addition to our
investment in Phar-Mor, over the last several years we have made investments in
RAS, iLife, Chemlink and HPD. We have also made and sold investments in other
companies and partnerships during this period since the FoxMeyer bankruptcy some
of which have proved profitable and some of which were not (see Notes B, D, and
E).

          In the future we believe the remaining issues affecting our status as
a going concern involve:

         -  overcoming operating losses and providing cash for debt repayments
            and for future growth; and

         -  favorably resolving potential liabilities associated with pending
            litigation.

         Until these issues can be resolved, there is substantial doubt as to
our ability to continue as a going concern. In order to overcome these remaining
issues, we are taking the following steps:

         -  continue reviewing our investment portfolio in order to identify
            those investments which should be liquidated and those which merit
            new or additional investment which will generate earnings and/or
            cash for us in the future; and

         -  continue our vigorous defense of our remaining litigation and pursue
            our lawsuit against McKesson.

         As part of the plans outlined above, in April and May 2001, we sold our
investment in HPD for $2.6 million resulting in an approximate $0.6 million gain
and invested an additional $0.6 million in CLAC.


                                      46
<PAGE>

         However, while we pursue these plans to resolve our going concern
problem, there is no assurance that any of our remaining investments will be
able to produce adequate returns to overcome our operating losses and provide
adequate funds for debt repayment or for future growth or that we will be able
to settle our remaining lawsuits in a favorable manor. There is also no
assurance we will be able to continue to buy back our debt at substantial
discounts to face value.

         Our 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.

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

         None


                                      47
<PAGE>

                                    PART III

         The information called for by Part III (Items 10, 11, 12, and 13) is
incorporated herein by reference to our definitive Proxy Statement for our
Annual Meeting of Stockholders which is expected to be filed with the Securities
and Exchange Commission no later than July 29, 2001.

                                     PART IV

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

         (a)(1)   FINANCIAL STATEMENTS

                  Reference is made to the listing on page 50 of all
                  financial statements filed as part of this report.

              (2) FINANCIAL STATEMENT SCHEDULES

                  Reference is made to the listing on page 50 of all
                  financial statement schedules filed as part of this report.

              (3) EXHIBITS

                  Reference is made to the Exhibit Index beginning on
                  page 53 for a list of all exhibits filed as part of this
                  report.

         (b)      REPORTS ON FORM 8-K

                  During the three months ended March 31, 2001, we filed the
                  following Current Report on Form 8-K:

                  We filed a Current Report on Form 8-K dated January 12, 2001
                  which announced our response to an unsolicited offer made by
                  Edgewater Partners LP to purchase the 6.75% notes due December
                  2002 issued by Avatex Funding.

                  After March 31, 2001, we filed a Current Report on Form 8-K
                  dated April 24, 2001 announcing that we had purchased
                  $11,744,000 principal amount of 6.75% Avatex Funding notes. We
                  also announced that the National Intergroup, Inc. Retirement
                  Program and the Davenport, Inc. Pension Plan purchased a total
                  of $5,256,000 principal amount of the same notes.


                                      48
<PAGE>

                              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. Schleier
                               -------------------------------------------------
                               Grady E. Schleier
June 7, 2001                   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:

<TABLE>
<S>                                      <C>                                                     <C>
/s/ Abbey J. Butler
------------------------------------
Abbey J. Butler                          Co-Chairman of the Board and
                                           Co-Chief Executive Officer                              June 7, 2001
/s/ Melvyn J. Estrin
------------------------------------
Melvyn J. Estrin                         Co-Chairman of the Board and
                                           Co-Chief Executive Officer                              June 7, 2001
/s/ Grady E. Schleier
------------------------------------
Grady E. Schleier                        Senior Vice President and Chief Financial Officer
                                           (Principal Financial and Accounting Officer)            June 7, 2001
ADDITIONAL DIRECTORS:

/s/ Hyman H. Frankel
------------------------------------
Hyman H. Frankel                         Director                                                  June 7, 2001

/s/Fred S. Katz
------------------------------------
Fred S. Katz                             Director                                                  June 7, 2001

/s/ William A. Lemer
------------------------------------
William A. Lemer                         Director                                                  June 7, 2001

/s/ Charles C. Pecarro
------------------------------------
Charles C. Pecarro                       Director                                                  June 7, 2001

/s/ John L. Wineapple
------------------------------------
John L. Wineapple                        Director                                                  June 7, 2001

</TABLE>


                                       49
<PAGE>

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):

<TABLE>
<CAPTION>
                                                                                                       Page No. in
                                                                                                        Form 10-K
                                                                                                    ------------------
<S>                                                                                                <C>
 Independent Auditors' Report                                                                                20

 Consolidated Statements of Operations - For the Three Years Ended March 31, 2001                            21

 Consolidated Balance Sheets - March 31, 2001 and 2000                                                       22

 Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive
          Income (Loss)- For the Three Years Ended March 31, 2001                                            23

 Consolidated Statements of Cash Flows - For the Three Years Ended March 31, 2001                            24

 Notes to Consolidated Financial Statements - For the Three Years Ended March 31, 2001                       25

</TABLE>

The following financial statement schedules of Avatex Corporation and
subsidiaries are included in Item 14(d):

<TABLE>
<CAPTION>
                                                                                                       Page No. in
                                                                                                        Form 10-K
                                                                                                    ------------------
<S>                                                                                                 <C>
 Schedule II - Valuation and Qualifying Accounts                                                           51

 Independent Auditors' Consent                                                                             52

</TABLE>

         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 47%-owned affiliate) for the fiscal year ending June 30, 2001
will be filed as an amendment to the Corporation's Form 10-K within 90 days of
Phar-Mor, Inc.'s fiscal year end.


                                       50
<PAGE>

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                      COL A                  COL B                      COL C                         COL D            COL E
------------------------------------------------------------------------------------------------------------------------------------
                                                                      Additions
                                                         -------------------------------------
                                                                                Charged to
                                            Balance at        Charged to           Other                                  Balance
                                            Beginning         Costs and          Accounts-             Deductions-        at End
                   Description              of Period         Expenses           Describe               Describe         of Period
------------------------------------------------------------------------------------------------------------------------------------

                                              Year Ended March 31, 2001
<S>                                         <C>              <C>               <C>                  <C>              <C>
  Allowance for possible losses on notes
     and accounts receivable                   $     47       $    -              $     -             $     -            $   47

<CAPTION>
                                              Year Ended March 31, 2000

  Allowance for possible losses on notes
     and accounts receivable                   $     15       $    32             $     -             $     -            $   47

<CAPTION>
                                              Year Ended March 31, 1999

  Allowance for possible losses on notes
     and accounts receivable                   $     27       $    15             $     -             $     27 (1)       $   15

</TABLE>

Notes:
 (1) Related to discontinued real estate operations.


                                       51
<PAGE>

INDEPENDENT AUDITORS' CONSENT




We consent to the incorporation by reference in Registration Statements No.
33-56097 on Form S-8, No. 33-37531 on Form S-3 and No. 333-84849 on Form S-4 of
Avatex Corporation of our report dated May 11, 2001, except the ninth paragraph
of Note L which is as of June 4, 2001, which report expresses an unqualified
opinion and includes an explanatory paragraph regarding the Company's ability to
continue as a going concern, appearing in this Annual Report on Form 10-K of
Avatex Corporation for the year ended March 31, 2001.




Deloitte & Touche LLP
Dallas, Texas
June 8 , 2001


                                       52
<PAGE>


                          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.*

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       National Intergroup, Inc. 1993 Stock Option and Performance Award
           Plan. (Filed as Exhibit 10-A to the registrant's Annual Report on
           Form 10-K for the fiscal year ended March 31, 1994 and incorporated
           herein by reference).

10-C       Amendment dated October 12, 1994 to the 1993 Stock Option and
           Performance Award Plan of the registrant. (Filed as Exhibit 10-D to
           the registrant's Quarterly Report on Form 10-Q for the fiscal quarter
           ended September 30, 1994 and incorporated herein by reference.)

10-D       Second Amendment dated June 21, 1999 to the 1993 Stock Option and
           Performance Award Plan of the registrant. (Filed as Exhibit 10-D 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-E       Third Amendment dated March 28, 2000 to the 1993 Stock Option and
           Performance Award Plan of the registrant. (Filed as Exhibit 10-AA to
           the registrant's Annual Report on Form 10-K for the fiscal year ended
           March 31, 2000 and incorporated herein by reference.)

10-F       Performance Incentive Plan of the registrant, effective as of January
           1, 1997. (Filed as Exhibit 10-W to the registrant's Annual Report on
           Form 10-K for the fiscal year ended March 31, 1997 and incorporated
           herein by reference.)

10-G       Amendment No. 1 to Performance Incentive Plan of the registrant,
           effective as of June 23, 1997. (Filed as Exhibit 10-A to the
           registrant's Quarterly Report on Form 10-Q for the fiscal quarter
           ended June 30, 1997 and incorporated herein by reference.)


                                       53
<PAGE>

10-H       Amendment No. 2 to Performance Incentive Plan of the registrant,
           effective as of January 22, 1998. (Filed as Exhibit 10-U 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       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-J       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-K       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-L       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-M       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.)

10-N       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-O       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-P       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-Q       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-R       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-S       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-T       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.)


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<PAGE>

10-U       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-V       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-W       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-X       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-Y       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 is included in the List of Financial
           Statements and Financial Statement Schedules.*



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

*  Filed herewith.


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