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

                                 FORM 10-Q

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

             FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

           [ ] 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
         INCORPORATION OR ORGANIZATION)           IDENTIFICATION NO.)


       5910 N. Central Expressway, Suite
              1780, Dallas, Texas                        75206
       ---------------------------------        -----------------------
        (ADDRESS OF PRINCIPAL EXECUTIVE               (ZIP CODE)
                    OFFICES)

         Registrant's Telephone Number,              
              Including Area Code                    214-365-7450
                                                -----------------------

     Indicate by check mark whether the registrant (1) had 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    .
                                        ---      ---

Number of shares of Common Stock outstanding as of October 31, 1998: 13,806,375
                                                                     ----------
<PAGE>
                                       
                        PART 1.  FINANCIAL INFORMATION

                      AVATEX CORPORATION AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE LOSS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 For the three months
                                                                 ended September 30,
(in thousands, except per share amounts)                          1998           1997
---------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
REVENUES                                                       $  2,353       $  3,660
OPERATING COSTS
  Operating costs, including general and
    administrative costs                                          3,694          4,264
  Depreciation and amortization                                     194            250
  Unusual items                                                    --           (1,704)
---------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)                                          (1,535)           850
Other expense                                                      (582)          (326)
Interest income                                                     521             55
Interest expense                                                    523          1,452
---------------------------------------------------------------------------------------
LOSS BEFORE NATIONAL STEEL CORPORATION, EQUITY IN LOSS OF
  AFFILIATES, INCOME TAX PROVISION AND MINORITY INTEREST         (2,119)          (873)
National Steel Corporation net preferred dividend income           --            2,251
Equity in loss of affiliates                                       (608)        (2,928)
---------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST           (2,727)        (1,550)
Income tax provision                                                 19           --
---------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST                                    (2,746)        (1,550)
Minority interest in results of operations of
  consolidated subsidiaries                                          38             35
---------------------------------------------------------------------------------------
NET LOSS                                                         (2,784)        (1,585)
Preferred stock dividends                                         6,957          6,323
---------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS                         $ (9,741)      $ (7,908)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE                               $  (0.71)      $  (0.57)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Average number of common shares outstanding                      13,806         13,806
---------------------------------------------------------------------------------------
COMPREHENSIVE LOSS                                             $ (5,557)      $ (3,724)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       1


<PAGE>


                      AVATEX CORPORATION AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE LOSS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 For the six months
                                                                 ended September 30,
(in thousands, except per share amounts)                          1998         1997
---------------------------------------------------------------------------------------
<S>                                                            <C>          <C>
REVENUES                                                       $  4,929     $   6,823
OPERATING COSTS
  Operating costs, including general and
    administrative costs                                          7,277         7,405
  Depreciation and amortization                                     386           452
  Unusual items                                                    --          31,588
---------------------------------------------------------------------------------------
OPERATING LOSS                                                   (2,734)      (32,622)
Other expense                                                    (2,194)       (5,306)
Interest income                                                   1,086           648
Interest expense                                                  1,028         2,814
---------------------------------------------------------------------------------------
LOSS BEFORE NATIONAL STEEL CORPORATION, EQUITY IN LOSS OF
  AFFILIATES, INCOME TAX PROVISION AND MINORITY INTEREST         (4,870)      (40,094)
National Steel Corporation net preferred dividend income           --           4,509
Equity in loss of affiliates                                       (352)       (2,610)
---------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST           (5,222)      (38,195)
Income tax provision                                                 37          --
---------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST                                    (5,259)      (38,195)
Minority interest in results of operations of
  consolidated subsidiaries                                         107           336
---------------------------------------------------------------------------------------
NET LOSS                                                         (5,366)      (38,531)
Preferred stock dividends                                        13,749        12,498
---------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS                         $(19,115)    $ (51,029)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE                               $  (1.38)    $   (3.70)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Average number of common shares outstanding                      13,806        13,806
---------------------------------------------------------------------------------------
COMPREHENSIVE LOSS                                             $ (9,384)    $ (42,802)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       2

<PAGE>

                      AVATEX CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                    September 30,     March 31,
(in thousands of dollars)                               1998            1998
-------------------------------------------------------------------------------
<S>                                                 <C>               <C>
ASSETS
CURRENT ASSETS
  Cash and short-term investments                     $  28,243       $  34,193
  Receivables - net                                       7,729          11,783
  Other current assets                                    2,476           3,971
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                     38,448          49,947

INVESTMENTS IN AFFILIATES                                23,195          25,343

PROPERTY AND EQUIPMENT                                   30,420          20,657
  Less accumulated depreciation and 
    amortization                                          1,963           1,630
-------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT                               28,457          19,027

DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE             --              --
MISCELLANEOUS ASSETS                                     22,486          24,986
-------------------------------------------------------------------------------
TOTAL ASSETS                                          $ 112,586       $ 119,303
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
  Accounts payable                                    $   1,282       $   2,665
  Other accrued liabilities                               4,309           6,169
  Long-term debt due within one year                        516             492
-------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                 6,107           9,326
LONG-TERM DEBT                                           32,025          22,923
OTHER LONG-TERM LIABILITIES                              12,108          13,402
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES              558             558
COMMITMENTS AND CONTINGENCIES                              --              --
REDEEMABLE PREFERRED STOCK                              228,744         214,996
STOCKHOLDERS' DEFICIT
  Common stock $5.00 par value; authorized
   50,000,000 shares; issued: 13,806,375 shares          69,032          69,032
  Capital in excess of par value                        119,100         119,100
  Accumulated other comprehensive income (loss)          (2,850)          1,168
  Accumulated deficit                                  (352,238)       (331,202)
-------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT                            (166,956)       (141,902)
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT           $ 112,586       $ 119,303
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>

                    AVATEX  CORPORATION  AND  SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 For the six months
                                                                ended September 30,
(in thousands of dollars)                                        1998          1997
--------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                      $ (5,366)      $(38,531)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
 (USED) BY OPERATING ACTIVITIES:
    Minority interest in results of operations of
      consolidated subsidiaries                                    107            336
    Equity in loss of affiliates                                   352          2,610
    Depreciation and amortization                                  386            452
    Net preferred income from National Steel Corporation          --           (4,509)
    Unusual item                                                  --           33,292
    Loss on investments                                          2,334          5,322
    Other non-cash charges (credits)                              (564)           745
    Cash provided (used) by working capital items,
      net of acquisitions:
    Receivables                                                  4,292            171
    Other assets and restricted cash                              (990)         5,651
    Accounts payable and accrued liabilities                    (5,141)        (2,652)
--------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                (4,590)         2,887
--------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition, net of cash acquired                             --           (7,399)
    Purchase of property and equipment                          (9,079)        (1,881)
    Purchase of investments                                     (2,309)        (6,210)
    Proceeds from investments                                    1,590            782
    Other                                                         --               18
--------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES                           (9,798)       (14,690)
--------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of long-term debt                 8,779          7,693
    Debt repayments                                               (234)          (304)
    Debt issuance costs                                           --             (184)
    Dividends paid to minority interest                           (107)          (100)
--------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                        8,438          7,105
--------------------------------------------------------------------------------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS                 (5,950)        (4,698)
    Cash and short-term investments, beginning of period        34,193          7,173
--------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD                $ 28,243       $  2,475
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

                        AVATEX CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                  (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that, along 
with its subsidiaries (collectively, the "Corporation"), owns interests in 
hotels and office buildings and in other corporations and partnerships. 
Through Phar-Mor, Inc. ("Phar-Mor"), its 38% owned affiliate, the Corporation 
is involved in operating a chain of discount retail drugstores.

BASIS OF PRESENTATION: The preparation of the consolidated financial 
statements, in conformity with generally accepted accounting principles, 
requires management to make estimates and assumptions that affect the 
reported amounts of assets and liabilities, 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 accompanying condensed consolidated balance sheet of the Corporation as 
of September 30, 1998, the condensed consolidated statements of operations 
and comprehensive loss for the three and six months ended September 30, 1998 
and 1997, and the condensed consolidated statements of cash flows for the six 
months ended September 30, 1998 and 1997, are unaudited. In the opinion of 
management, these statements have been prepared on the same basis as the 
audited consolidated financial statements, and include all adjustments 
necessary for the fair presentation of financial position, results of 
operations and cash flows. Such adjustments were of a normal recurring 
nature. The results of operations for the three and six months ended 
September 30, 1998, are not necessarily indicative of the results that may be 
expected for the entire year. The condensed consolidated balance sheet as of 
March 31, 1998 was derived from audited financial statements but does not 
include all disclosures required by generally accepted accounting principles. 
Additional information is contained in the Corporation's Annual Report on 
Form 10-K filed with the Securities and Exchange Commission for the fiscal 
year ended March 31, 1998, and should be read in conjunction with this 
quarterly report.

RESTRICTED CASH: Use of approximately $0.4 million of cash included in "Other 
current assets" at September 30, 1998 and $0.3 million at March 31, 1998 was 
restricted in connection with certain real estate loans.

COMPREHENSIVE LOSS: The difference in comprehensive loss and net loss is due 
to unrealized losses on marketable securities for the three and six months 
ended September 30, 1998 and to an increase in the minimum pension liability 
adjustment for the three and six months ended September 30, 1997.

UNUSUAL ITEMS: The unusual items for the three months ended September 30, 
1997 represented income from settlement of litigation primarily with 
insurance carriers related to environmental liability claims. For the six 
months ended September 30, 1997, unusual items also included a charge related 
to the settlement of litigation between the Corporation and the Chapter 7 
Bankruptcy Trustee (the "Trustee") of FoxMeyer Corporation ("FoxMeyer") and 
certain of its subsidiaries. The litigation concerned the validity of the 
transfer of certain property from FoxMeyer to the Corporation as a dividend 
on June 19, 1996.

COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: As of September 30, 
1998, Phar-Mor had acquired 2,086,200 shares of the Corporation's common 
stock through open market transactions at a cost of approximately $5.0 
million. The Corporation accounts for its investment in Phar-Mor on an equity 
basis and treats Phar-Mor's investment in the Corporation's common stock 
similar to treasury stock, with a charge to the accumulated deficit on 
September 30, 1998 of $1.9 million. The charge is equal to the Corporation's 
38.4% ownership in the cost of its common stock held by Phar-Mor.

                                       5
<PAGE>

NOTE 2 - NET LOSS PER SHARE OF COMMON STOCK

There were no differences in either the net loss applicable to common 
stockholders or the average number of shares outstanding used in calculating 
basic and diluted loss per share for either the three or six months ended 
September 30, 1998 and 1997, respectively. Options to purchase approximately 
3.9 million shares were outstanding at September 30, 1998 and 1997, 
respectively. These options were not included in the computation of diluted 
loss per share because the effect of including the options in the calculation 
would be anti-dilutive. Conversion of the convertible preferred stock 
outstanding was also not included in the calculation of diluted loss per 
share as it would also have been anti-dilutive.

NOTE 3 - LONG-TERM DEBT

One of the Corporation's consolidated real estate partnerships borrowed $9.0 
million during the six months ended September 30, 1998, under a construction 
loan for the renovation of an office building into a hotel. The total balance 
outstanding under the loan is currently $11.2 million at an interest rate of 
1.75% over LIBOR. The loan has been treated as long-term in the condensed 
consolidated balance sheet as the partnership has already secured permanent 
financing to replace the construction loan upon completion of the project. In 
order to complete the project, the Corporation expects to contribute 
approximately $0.4 million in addition to the remaining $2.3 million of funds 
available under the construction loan.

NOTE 4 - CAPITAL STOCK

The Corporation has not declared or paid any dividends on its preferred stock 
since October 15, 1996. The two issues of preferred stock are cumulative. 
Therefore, the dividends that would have been paid if declared have been 
shown in the condensed consolidated statements of operations as if they had 
been declared, with a corresponding charge to the accumulated deficit. The 
liability for the cumulative unpaid dividends has been added to the carrying 
amount of the redeemable preferred stock in the condensed consolidated 
balance sheets. The cumulative dividends accrued but not paid at September 
30, 1998 were $6.5 million ($10.00 per share) and $39.7 million ($9.21 per 
share) on the convertible preferred stock and Series A preferred stock, 
respectively.

NOTE 5 - 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 six months
                                              ended September 30,
                                           1998               1997
--------------------------------------------------------------------
<S>                                     <C>                <C>
Interest paid                           $    734           $   1,709
Income taxes paid                             67                   -
Non-cash transactions:
   Cumulative dividends in     
    arrears accrued                       12,349              11,294
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>

                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                    September 30,        March 31,
                                        1998               1998
--------------------------------------------------------------------
<S>                                 <C>                 <C>
Miscellaneous assets:

     Prepaid pension cost            $ 10,169           $   9,440
     Securities available for sale      3,194               7,212
     Other investments, at cost         6,733               6,028
     Other                              2,390               2,306
--------------------------------------------------------------------
          Total                      $ 22,486           $  24,986
--------------------------------------------------------------------
--------------------------------------------------------------------

Other long-term  liabilities:
     Pension and postretirement 
      benefits                       $  5,174         $   5,290
     Environmental liabilities          1,256             1,417
     Liabilities related to             
      discontinued operations           3,379             4,334
     Other                              2,299             2,361
--------------------------------------------------------------------
          Total                      $ 12,108         $  13,402
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>


NOTE 6 - COMMITMENTS AND CONTINGENCIES

On April 14, 1998, the Corporation announced that it would merge with and 
into its wholly-owned subsidiary, Xetava Corporation ("Xetava"). Under the 
proposed merger, the Corporation's existing common and preferred stockholders 
would receive new common stock of Xetava, which upon consummation of the 
merger would be renamed Avatex. In late April 1998, a preferred stockholder 
of the Corporation and a putative class of preferred stockholders filed a 
total of three lawsuits in the Delaware Court of Chancery (the "Delaware 
Court") against the Corporation, Xetava and seven of the Corporation's 
directors. In May 1998, the Delaware Court consolidated the lawsuits under 
the caption IN RE AVATEX CORPORATION SHAREHOLDERS LITIGATION, C.A. No. 16334. 
The lawsuits challenge the merger of the Corporation with and into Xetava, 
contend that the merger is subject to a separate class vote by the holders of 
the Corporation's preferred stock and that the exchange ratios for the merger 
are unfair to the preferred stockholders. Plaintiffs seek a declaration that 
the defendant directors have breached their fiduciary duties, injunctive 
relief and damages and costs. In August 1998, the Delaware Supreme Court 
ruled that the holders of the Corporation's convertible preferred stock have 
the right to vote separately as a class on the proposed merger of the 
Corporation into Xetava, as it was structured and announced by the 
Corporation on April 14, 1998. Following this decision, the Corporation 
announced that its Board of Directors would consider the appropriate course 
of action to take with respect to the merger, which may include proceeding 
forward with a modified structure or different terms of a merger, or taking 
other action that the Board deems in the best interests of all of its 
stockholders. The Board has not yet taken any further action related to the 
merger.

The Corporation has retained responsibility for certain potential 
environmental liabilities attributable to former operating units. As a 
result, the Corporation is subject to federal, state and local environmental 
laws, rules and regulations, including the Comprehensive Environmental 
Response Compensation and Liability Act of 1980, as amended, and similar 
state superfund statutes. These statutes generally impose joint and several 
liability on present and former owners and operators, transporters and 
generators for remediation of contaminated properties regardless of fault. 
The Corporation and its subsidiaries have 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.

The Corporation's reserves for environmental assessments, remediation 
activities, penalties or fines that may be imposed for non-compliance with 
such laws or regulations have not changed materially since March 31, 1998. 
The Corporation's estimates of these costs are based upon currently available 
facts, 

                                       7
<PAGE>

existing technology, presently enacted laws and regulations and the 
professional judgment of consultants and counsel.

The amounts of reserves for environmental 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 the Corporation, 
the unknown extent of the Corporation's probable liability in proportion to 
the probable liability of other parties. Moreover, the Corporation may have 
environmental liabilities that the Corporation cannot in its judgment 
estimate at this time and losses attributable to remediation costs may arise 
at other sites. Management recognizes that additional work may need to be 
performed to ascertain the ultimate liability for such sites, and further 
information could ultimately change management's current assessment. A change 
in the estimated liability could have a material impact on the financial 
condition and results of operations of the Corporation.

On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation 
had proposed a merger in which FoxMeyer would be merged with and into a 
wholly-owned subsidiary of the Corporation, thereby making FoxMeyer a 
wholly-owned subsidiary of the Corporation. Shortly after the announcement, 
class action lawsuits were filed against the Corporation, FoxMeyer and 
certain of FoxMeyer's officers and directors. Following a number of 
procedural matters, and the execution (and subsequent withdrawal) of a 
Memorandum of Understanding dated June 30, 1994 under which the litigation 
would be dismissed, the litigation was consolidated and an amended complaint 
was filed on February 13, 1996 in IN RE FOXMEYER CORPORATION SHAREHOLDER 
LITIGATION, No. 13391, in the Delaware Court. The amended complaint alleges 
that the defendants breached their fiduciary duties to FoxMeyer's 
stockholders by agreeing to the merger at an unfair price and at a time 
designed so that the Corporation could take advantage of, among other things, 
an alleged substantial growth in the business of FoxMeyer. The complaint also 
alleges that the proxy statement issued in connection with the merger failed 
to disclose certain matters relating to the proposed merger. In October 1998, 
a stipulation was entered that governs certain scheduling matters, including 
briefing of plaintiff's class certification motion. The Corporation is unable 
at this time to estimate the possible loss, if any, which may accrue from 
this lawsuit.

The Corporation and certain of its current and former officers and directors
have been named in a series of purported class action lawsuits that were filed
and subsequently consolidated under ZUCKERMAN, ET AL. V. FOXMEYER HEALTH
CORPORATION, ET AL., in the United States District Court for the Northern
District of Texas, Dallas Division, Case No. 396-CV-2258-T. The lawsuit
purports to be brought on behalf of purchasers of the Corporation's common and
its Series A and convertible preferred stocks during the period July 19, 1995
through August 27, 1996. On May 1, 1997, plaintiffs in the lawsuit filed a
consolidated amended class action complaint, which alleges that the Corporation
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
its National Distribution Center and Delta computer systems and the resulting
impact on the Corporation's existing and future business and financial
condition. On March 31, 1998, the court denied the Corporation's motion to
dismiss the amended complaint in the lawsuit. The Corporation intends to
continue to vigorously defend itself in the lawsuit. The Corporation is unable
at this time to estimate the possible loss, if any, which may accrue from this
lawsuit.

The Corporation and its Co-Chairmen and Co-Chief Executive Officers have also 
been named as defendants in GROSSMAN V. FOXMEYER HEALTH CORP., ET AL., Cause 
No. 96-10866-J, in the 191st Judicial Court of Dallas County, Texas. The 
lawsuit purports to be brought on behalf of all holders of the Corporation's 
common stock during the period October 30, 1995 through July 1, 1996, and 
seeks unspecified money damages. Plaintiff asserts claims of common law fraud 
and negligent misrepresentation, based on allegations that she was induced 
not to sell her shares by supposed misrepresentations and omissions that are 
substantially the same as those alleged in the ZUCKERMAN action described 
above. On September 28, 1997, the court denied the Corporation's motion for 
summary judgment in the lawsuit. The Corporation intends to continue to 
vigorously defend itself in the lawsuit. The Corporation is unable at this 
time to estimate the possible loss, if any, which may accrue from this 
lawsuit.

                                       8
<PAGE>

In fiscal 1998, the bankruptcy trustee and certain creditors of the 
Corporation's 17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben 
Franklin"), filed lawsuits against certain former officers and directors of 
Ben Franklin, the Corporation and certain current and former officers and 
directors of the Corporation. The Corporation and its officers and directors 
have since been dropped as defendants in the lawsuits. In connection with 
paying its own defense costs and those of its officers and directors, the 
Corporation 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 the request of the Corporation as a 
director or officer of Ben Franklin. In accordance with Delaware law, the 
Corporation may, if appropriate, agree at a future date to indemnify certain 
of the remaining defendants in the lawsuit. In October 1998, the United 
States Bankruptcy Court for the Northern District of Illinois issued 
Memorandum Opinions that granted motions to dismiss two of the lawsuits 
against all but one defendant. The plaintiffs are appealing and have filed 
objections to the Opinions. The third remaining lawsuit is still pending in 
Illinois state court with a hearing on a motion to dismiss set for November 
1998.

In April 1998, the Trustee filed a lawsuit against the five former directors 
of FoxMeyer, in which the Trustee alleges that the defendants breached their 
fiduciary duty in connection with the June 19, 1996 dividend of certain 
assets to the Corporation. In October 1997, in connection with the settlement 
of a separate lawsuit brought by the Trustee against the Corporation, the 
Corporation was released by the Trustee from all liability and the 
director-defendants in this lawsuit received covenants not to execute from 
the Trustee. The Corporation has 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 the request of the Corporation as a 
director or officer of FoxMeyer.

In June 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed a 
lawsuit, allegedly on behalf of the Corporation, against seven of the 
directors of the Corporation and three of its former directors who were 
members of the Corporation's Personnel and Compensation Committee. The 
lawsuit is styled STEPHEN MIZEL IRA ET. AL. V. BUTLER, ET. AL., No. 
602773198, in the Supreme Court of the State of New York, County of New York. 
The plaintiffs are holders of the Corporation's Series A preferred stock, and 
the lawsuit relates primarily to agreements and transactions between the 
Corporation and its Co-Chairmen and Co-Chief Executive Officers, Abbey J. 
Butler and Melvyn J. Estrin. The Corporation is paying the initial defense 
costs of the defendants in accordance with Delaware General Corporation Law, 
the Corporation's charter and by-laws, and the terms and conditions of 
certain indemnification agreements between the Corporation and certain of the 
defendants.

Thomas L. Anderson, the former president of FoxMeyer, is the defendant in a 
lawsuit brought by Midwest Freight Systems, Inc. ("Midwest") and Leo Glynn in 
the United States District Court for the Western District of Missouri, Case 
No. 97-0089CV-W-2. The lawsuit relates to Midwest's purchase in 1991 of 
substantially all of the assets of Heatlhcare Transportation System, Inc., 
which was then a subsidiary of FoxMeyer. Midwest has asserted claims against 
Mr. Anderson for breach of contract, fraud, negligent misrepresentation and 
tortious interference with contract. Mr. Anderson has denied all liability in 
the lawsuit and has asserted that the Corporation is required to indemnify 
him under the terms of the 1994 Merger Agreement between the Corporation and 
FoxMeyer. The Corporation is currently paying Mr. Anderson's defense costs in 
the lawsuit. The Corporation is unable at this time to estimate the possible 
loss, if any, which may accrue from this lawsuit.

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

                                       9
<PAGE>

                      AVATEX CORPORATION AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                               SEPTEMBER 30, 1998
                            (IN THOUSANDS OF DOLLARS)

OVERVIEW

Avatex Corporation is a holding company that, along with its subsidiaries 
(collectively, the "Corporation"), owns interests in hotels and office 
buildings and in other corporations and partnerships. Through Phar-Mor, Inc. 
("Phar-Mor"), its 38% owned affiliate, the Corporation is involved in 
operating a chain of discount retail drugstores.

On April 14, 1998, the Corporation announced that it would merge with and 
into its wholly-owned subsidiary, Xetava Corporation ("Xetava"). Under the 
proposed merger, the Corporation's existing common and preferred stockholders 
would receive new common stock of Xetava, which upon consummation of the 
merger would be renamed Avatex. In late April 1998, a preferred stockholder 
of the Corporation and a putative class of preferred stockholders filed a 
total of three lawsuits in the Delaware Court of Chancery (the "Delaware 
Court") against the Corporation, Xetava and seven of the Corporation's 
directors. In May 1998, the Delaware Court consolidated the lawsuits under 
the caption IN RE AVATEX CORPORATION SHAREHOLDERS LITIGATION, C.A. No. 16334. 
The lawsuits challenge the merger of the Corporation with and into Xetava, 
contend that the merger is subject to a separate class vote by the holders of 
the Corporation's preferred stock and that the exchange ratios for the merger 
are unfair to the preferred stockholders. Plaintiffs seek a declaration that 
the defendant directors have breached their fiduciary duties, injunctive 
relief and damages and costs. In August 1998, the Delaware Supreme Court 
ruled that the holders of the Corporation's convertible preferred stock have 
the right to vote separately as a class on the proposed merger of the 
Corporation into Xetava, as it was structured and announced by the 
Corporation on April 14, 1998. Following this decision, the Corporation 
announced that its Board of Directors would consider the appropriate course 
of action to take with respect to the merger, which may include proceeding 
forward with a modified structure or different terms of a merger, or taking 
other action that the Board deems in the best interests of all of its 
stockholders. The Board has not yet taken any further action related to the 
merger.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND SIX  
MONTHS ENDED SEPTEMBER 30, 1997

OPERATING INCOME (LOSS)

Revenues from real estate operations decreased $1,307 and $1,894 to $2,353 
and $4,929 for the three and six months ended September 30, 1998, 
respectively, compared to $3,660 and $6,823 for the three and six months 
ended September 30, 1997, respectively. The decrease was primarily the result 
of the disposal of a property in fiscal 1998. In addition, revenues at the 
remaining two properties decreased slightly compared to the prior periods. In 
late October 1998, a real estate partnership in which the company owns a 50% 
interest opened a new hotel. Significant additional revenues from the new 
hotel are not expected for several months.

Operating costs including depreciation and amortization decreased $626 to 
$3,888 for the quarter ended September 30, 1998 compared to $4,514 for the 
quarter ended September 30, 1997. A reduction in real estate operating costs 
of $1,166, primarily attributable to the property disposed of in fiscal 1998, 
was offset by an increase in corporate overhead costs of $540. Such increased 
corporate expenses related primarily to 

                                       10
<PAGE>

$913 of additional costs, including costs associated with the proposed 
merger, as discussed above, as well as compensation and legal costs, 
partially offset by lower expenses for pensions, travel and other operating 
costs.

For the six months ended September 30, 1998, operating costs including 
depreciation and amortization decreased $194 to $7,663 compared to $7,857 for 
the six months ended September 30, 1997. A reduction in real estate operating 
costs of $1,497, that was primarily attributable to the property disposed of 
in fiscal 1998, was offset by an increase in corporate overhead costs of 
$1,303. Such increased corporate expenses were primarily the result of $2,000 
of additional costs, including costs associated with the proposed merger as 
well as compensation, legal and insurance costs, partially offset by lower 
expenses for pensions, consultants, travel and other operating costs.

The unusual items for the three months ended September 30, 1997 represented 
income from settlement of litigation primarily with insurance carriers 
related to environmental liability claims. For the six months ended September 
30, 1997, unusual items also included a charge related to the settlement of 
litigation between the Corporation and the Chapter 7 Bankruptcy Trustee of 
FoxMeyer Corporation ("FoxMeyer") and certain of its subsidiaries. The 
litigation concerned the validity of the transfer of certain property from 
FoxMeyer to the Corporation as a dividend on June 19, 1996.

OTHER EXPENSE

Other expense of $582 for the three months ended September 30, 1998 related 
to a reduction of $1,210 in the carrying value of certain of the 
Corporation's investments offset by $628 of income primarily from a royalty 
payment on a property sold in the prior fiscal year and dividends accrued on 
investments. Other expense of $326 for the three months ended September 30, 
1997 related primarily to the reduction in the carrying value of certain of 
the Corporation's investments.

Other expense of $2,194 for the six months ended September 30, 1998 related 
to a $3,925 reduction in the carrying value of certain of the Corporation's 
investments offset by $1,731 in gains primarily from the recovery on an 
investment which had been written-off in a prior year, a royalty payment from 
a property sold in the prior fiscal year and dividends accrued on 
investments. In the prior year, other expense of $5,306 for the six months 
ended September 30, 1997 related primarily to the reduction in the carrying 
value of certain of the Corporation's investments.

INTEREST INCOME (EXPENSE)

Interest income increased $466 to $521 for the three months ended September 
30, 1998 compared to $55 for the three months ended September 30, 1997. For 
the six months ended September 30, 1998, interest income increased $438 to 
$1,086 compared to $648 for the six months ended September 30, 1997. For both 
periods, the amount of funds invested increased substantially compared to the 
prior year due to cash received primarily from the National Steel Corporation 
("NSC") settlement and sale of US HealthData Interchange, Inc. in November 
1997 and interest earned on the note received as part of the NSC settlement.

Interest expense decreased $929 to $523 for the three months ended September 
30, 1998 compared to $1,452 for the three months ended September 30, 1997. 
For the six months ended September 30, 1998, interest expense decreased 
$1,786 to $1,028 compared to $2,814 for the six months ended September 30, 
1997. A decrease of $250 and $499, respectively, for the three and six months 
ended September 30, 1998, related to real estate operations primarily due to 
the absence of debt on the property disposed of in fiscal 1998 and interest 
capitalized in the current fiscal year in connection with the property being 
renovated. Interest expense related to corporate activities decreased $679 
and $1,287, respectively, for the three and six months ended September 30, 
1998, due primarily to the termination or settlement of certain employee 
deferred compensation plans and other benefit plans of subsidiaries of the 
Corporation, which obligations had originally been recorded at a discount, 
and the repayment of a secured debt facility during fiscal 1998. This 
decrease in interest expense for corporate activities was partially offset 
for both periods by additional interest expense related to the note payable 
to the FoxMeyer Chapter 7 Bankruptcy Trustee.

                                       11
<PAGE>

NATIONAL STEEL CORPORATION

The decrease in net preferred dividend income for the three and six months 
ended September 30, 1998 as compared to the prior year is due to the November 
1997 redemption of the NSC preferred stock by NSC and the settlement of all 
related liabilities.

EQUITY IN LOSS OF AFFILIATES

Equity in loss of affiliates was $608 and $352 for the three and six months 
ended September 30, 1998, respectively, compared to an equity in loss of 
$2,928 and $2,610 for the three and six months ended September 30, 1997, 
respectively. The decrease was primarily due to a reduction in Phar-Mor's net 
loss in the current year as compared to the prior year. The reduction, for 
the most part, is related to a charge for severance expense for the former 
chief executive officer incurred in the prior year.

INCOME TAXES

The Corporation recorded no federal income tax provision for the current or 
prior year. Any income tax benefit related to the current or prior year's 
loss was offset by a corresponding change in the deferred tax asset valuation 
allowance. The tax expense for the current year represents state income taxes 
related to real estate operations.

MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES

The minority interest in results of operations of consolidated subsidiaries 
for the three months ended September 30, 1998 was not significantly different 
than for the three months ended September 30, 1997. For the six months ended 
September 30, 1998, the minority interest decreased $229 to $107 compared to 
$336 in the prior year. Of the decrease, $219 related to reduced earnings on 
real estate still owned as well as a result of a property sold in fiscal 1998.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends have increased to $6,957 and $13,749 for the three 
and six months ended September 30, 1998, respectively, compared to $6,323 and 
$12,498 for the three and six months ended September 30, 1997, respectively. 
The increase was due to (i) an increase of $100 and $196, respectively, in 
the amortization of discount on the Series A preferred stock and (ii) an 
increase of $534 and $1,055, respectively, in the dividend on the Series A 
preferred stock attributable to the required compounding of dividends on 
previously unpaid amounts.
                                       
                        LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1998, the Corporation had cash and short-term investments 
of approximately $28,243. During the six months ended September 30, 1998, the 
Corporation committed approximately $2,309 to new investments and $1,031 to 
real estate development.

The debt of the Corporation consists of a note payable to the FoxMeyer 
Chapter 7 Bankruptcy Trustee and the debt of consolidated real estate 
partnerships, which debt is without recourse to the parent company, Avatex 
Corporation. The Corporation has two issues of redeemable preferred stock 
outstanding. Beginning with the quarterly payments due January 15, 1997, the 
Corporation has not declared nor paid any cash dividends on its Series A 
preferred stock or its convertible preferred stock. The Corporation also did 
not make the annual sinking fund payment on the convertible preferred stock 
due January 1998.

See the "Overview" section above for a discussion of a proposed merger of the 
Corporation with its Xetava subsidiary. If the proposed merger is approved as 
originally proposed, the preferred stockholders would receive common stock of 
Xetava in exchange for their preferred stock. As discussed above, the 
Corporation announced that its Board of Directors would review the proposed
merger and may consider other appropriate courses of action. The Board has
not yet taken any further action related to the merger.

                                       12
<PAGE>

The Corporation believes that its real estate operations will provide adequate
cash flow to fund recurring real estate operating expenses, including required
payments on related debt. Cash required for necessary real estate capital
improvements may be funded from excess cash flow from real estate operations,
additional borrowings, or contributions from the Corporation or minority
interests. For corporate operations other than real estate, 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 which are uncertain.

The Corporation continuously evaluates current and potential investments in 
connection with an ongoing review of its investment strategies and, as 
opportunities arise, will continue to invest in real estate and other 
publicly and privately held companies which the Corporation believes would be 
a strategic fit or sell those investments which the Corporation believes no 
longer fit its investment criteria. In addition, the Corporation may pursue 
the acquisition of an operating company.

The Corporation will rely on cash on hand, any excess cash from its real 
estate operations and, if necessary, the sale of real estate or other 
investments to meet its future obligations. The Corporation is involved in 
litigation which, if the Corporation were to lose, would have a material 
impact on the Corporation's financial condition, liquidity and results of 
operations. These financial statements have been prepared on a going concern 
basis which contemplates the realization of the Corporation's assets and the 
settlement of its liabilities and commitments in the normal course of 
business.
                                       
                                    OTHER

In June 1997, the Financial Accounting Standards Board (the "FASB") issued 
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures 
about Segments of an Enterprise and Related Information" which is effective 
for the current fiscal year. SFAS No. 131 does not have any impact on the 
financial results or financial condition of the Corporation, but will result 
in certain changes in required disclosure of segment information.

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative 
Instruments and Hedging Activities" which is effective for all fiscal 
quarters of all fiscal years beginning after June 15, 1999. Therefore, the 
Corporation will be required to adopt SFAS No. 133 for its fiscal year 
beginning April 1, 2000. The Corporation has not yet determined the impact, 
if any, from the adoption of SFAS No. 133.

What is commonly referred to as the "Year 2000" issue relates, in part, to 
many hardware and software systems that use only two digits to represent the 
year being unable to recognize dates beyond 1999. The Corporation's internal 
systems, both hardware and software, are Year 2000 compliant. The Year 2000 
readiness of the Corporation's vendors, and companies in which the 
Corporation has invested, however may vary. The Corporation is currently 
trying to ascertain and monitor the Year 2000 readiness of these companies. 
If any of the companies in which the Corporation has made a significant 
investment are not Year 2000 compliant, there may be a material impact on the 
value of that investment and, correspondingly, on the Corporation's results 
of operations and financial condition. If certain vendors are not Year 2000 
compliant, especially vendors that provide electricity, telephone services, 
food and management services, the Corporation may suffer reduced revenues and 
increased costs at its real estate operations as well as potentially 
significant disruptions to its overall operations, depending upon the length 
and severity of the problems. At this time, it is still uncertain to what 
extent the Corporation may be affected by such matters at these other 
entities.

                                       13
<PAGE>

                           PART II - OTHER INFORMATION

                       AVATEX CORPORATION AND SUBSIDIARIES


ITEM 1.  LEGAL PROCEEDINGS

With respect to the matters reported in the Corporation's Annual Report on 
Form 10-K for the fiscal year ended March 31, 1998 and the Quarterly Report 
on Form 10-Q for the quarter ended June 30, 1998, the following additional 
information is provided:

MCKESSON/VENDOR LITIGATION. With reference to the Delaware lawsuit that seeks 
to enjoin the Corporation from prosecuting its Texas lawsuit against McKesson 
Corporation and certain pharmaceutical manufacturers, (i) on August 24, 1998, 
the Delaware Bankruptcy Court denied the defendants' first motion for summary 
judgment and ruled that the parties should return to Texas and move the Texas 
lawsuit forward as much as possible, and (ii) on September 17, 1998, the 
Delaware Bankruptcy Court held a hearing on the defendants' second motion for 
summary judgment. In addition, following the Delaware Bankruptcy Court's 
August 24, 1998 ruling, the Dallas Bankruptcy Court held a hearing on October 
16, 1998 on the Corporation's motion to remand the Texas lawsuit back to 
state court. The parties are awaiting the Courts' rulings on the pending 
motions.

BEN FRANKLIN LITIGATION. With reference to the three pending lawsuits filed 
by the bankruptcy trustee and certain creditors of the Corporation's 
17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"), 
against certain former officers and directors of Ben Franklin, on October 13, 
1998, the United States Bankruptcy Court for the Northern District of 
Illinois issued Memorandum Opinions in two of the lawsuits. The Opinions, 
which were submitted in accordance with 28 U.S.C. 157(c)(1) in lieu of 
proposed findings of fact and conclusions of law, granted motions to dismiss 
two of the lawsuits against all of the defendants except David Brainard. The 
plaintiffs in these two lawsuits are attempting either to move to reconsider, 
to object to, or to appeal from the Opinions. The third lawsuit that is 
pending in Illinois state court is subject to a similar motion to dismiss 
that is set for hearing in November 1998.

PREFERRED STOCKHOLDER LITIGATION. With reference to the litigation filed by 
certain preferred stockholders of the Corporation against the Corporation and 
certain of its directors, in August 1998, the Delaware Supreme Court ruled 
that the holders of the Corporation's convertible preferred stock have the 
right to vote separately as a class on the proposed merger of the Corporation 
into Xetava Corporation, as it was structured and announced by the 
Corporation on April 14, 1998. Following this decision, the Corporation 
announced that its Board of Directors would consider the appropriate course 
of action to take with respect to the merger, which may include proceeding 
forward with a modified structure or different terms of a merger, or taking 
other action that the Board deems in the best interests of all of its 
stockholders. The Board has not yet taken any further action related to the 
merger.

1994 MERGER LITIGATION. With reference to the lawsuit filed in connection 
with the merger of FoxMeyer Corporation ("FoxMeyer") into a wholly-owned 
subsidiary of the Corporation, a stipulation was entered in October 1998 that 
governs certain scheduling matters, including briefing of plaintiffs' class 
certification motion.

MIDWEST FREIGHT LITIGATION. Thomas L. Anderson, the former president of 
FoxMeyer, is the defendant in a lawsuit brought by Midwest Freight Systems, 
Inc. ("Midwest") and Leo Glynn in the United States District Court for the 
Western District of Missouri, Case No. 97-0089CV-W-2. The lawsuit relates to 
Midwest's purchase in 1991 of substantially all of the assets of Heatlhcare 
Transportation System, Inc., which was then a subsidiary of FoxMeyer. Midwest 
has asserted claims against Mr. Anderson for breach of contract, fraud, 
negligent misrepresentation and tortious interference with contract. Mr. 
Anderson has denied all liability in the lawsuit, and has asserted that the 
Corporation is required to indemnify him under the terms 

                                       14
<PAGE>

of the 1994 Merger Agreement between the Corporation and FoxMeyer. The 
Corporation is currently paying Mr. Anderson's defense costs in the lawsuit.

ITEM 3.  DEFAULTS UNDER SENIOR SECURITIES

The Corporation did not declare, nor did it pay, the dividends due for the 
quarterly periods since October 15, 1996 on either the convertible preferred 
stock or the Series A preferred stock. These two issues are cumulative. The 
cumulative dividends accrued and unpaid at September 30, 1998 were 
approximately $6.5 million ($10.00 per share) and $39.7 million ($9.21 per 
share) on the convertible preferred stock and Series A preferred stock, 
respectively. In addition, the annual sinking fund payment due January 1998 
for 88,000 shares of the convertible preferred stock was not made.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
         (a)  Exhibits
              --------
<S>           <C>
                 27       -     Financial Data Schedule

         (b)  Reports on 8-K

                 No Current Reports on Form 8-K were filed by the Corporation
                 during the three months ended September 30, 1998.
</TABLE>



                                       15

<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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

November 12, 1998                    By:  /s/ Edward L. Massman
                                          -------------------------------
                                          Edward L. Massman
                                          Senior Vice President and Chief 
                                          Financial Officer
                                          (Principal Financial  Officer)

November 12, 1998                    By:  /s/ Scott E Peterson
                                          --------------------------------
                                          Scott E Peterson
                                          Vice President Finance and 
                                           Controller
                                          (Principal Accounting Officer)





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