<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 DECEMBER 31, 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 OFFICES)               (ZIP CODE)


   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 January 31, 1999: 13,806,375

<PAGE>

                          PART 1. FINANCIAL INFORMATION

                       AVATEX CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE INCOME
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             For the three months    
                                                                               ended December 31,    
(in thousands, except per share amounts)                                       1998        1997      
-------------------------------------------------------------------------------------------------    
<S>                                                                          <C>         <C>
REVENUES                                                                     $ 2,615     $  2,974    
OPERATING COSTS
    Operating costs, including general and administrative costs                3,893        4,538    
    Depreciation and amortization                                                316          251    
    Unusual items                                                                --        (5,592)   
-------------------------------------------------------------------------------------------------    
OPERATING INCOME (LOSS)                                                       (1,594)       3,777    
Other expense                                                                    (95)      (5,231)   
Interest income                                                                  452          379    
Interest expense                                                                 671        1,460    
-------------------------------------------------------------------------------------------------    
LOSS FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION, 
    EQUITY IN INCOME OF AFFILIATES, INCOME TAX PROVISION AND
    MINORITY INTEREST                                                         (1,908)      (2,535)   
National Steel Corporation net preferred dividend income                         --         1,345    
Loss on National Steel Corporation settlement                                    --       (59,038)   
Equity in income of affiliates                                                 1,288        1,079    
-------------------------------------------------------------------------------------------------    
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION AND
    MINORITY INTEREST                                                           (620)     (59,149)   
Income tax provision                                                               2           38    
-------------------------------------------------------------------------------------------------    
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST                        (622)     (59,187)   
Minority interest in results of operations of consolidated subsidiaries           16          (11)   
-------------------------------------------------------------------------------------------------    
NET LOSS FROM CONTINUING OPERATIONS                                             (638)     (59,176)   
Discontinued operations
    Gain on disposal of discontinued operations                                  --         3,719    
-------------------------------------------------------------------------------------------------    
NET LOSS                                                                        (638)     (55,457)   
Preferred stock dividends                                                      7,127        6,474    
-------------------------------------------------------------------------------------------------    
LOSS APPLICABLE TO COMMON STOCKHOLDERS                                       $(7,765)    $(61,931)   
-------------------------------------------------------------------------------------------------    
-------------------------------------------------------------------------------------------------    
BASIC AND DILUTED LOSS PER SHARE
    Loss from continuing operations                                          $ (0.56)    $  (4.76)   
    Discontinued operations                                                      --          0.27    
-------------------------------------------------------------------------------------------------    
LOSS PER SHARE                                                               $ (0.56)    $  (4.49)   
-------------------------------------------------------------------------------------------------    
-------------------------------------------------------------------------------------------------    
Average number of common shares outstanding                                   13,806       13,806    
-------------------------------------------------------------------------------------------------    
COMPREHENSIVE INCOME                                                         $ 1,876     $ 22,319    
-------------------------------------------------------------------------------------------------    
-------------------------------------------------------------------------------------------------    
</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 nine months     
                                                                                ended December 31,     
(in thousands, except per share amounts)                                       1998          1997      
---------------------------------------------------------------------------------------------------     
<S>                                                                          <C>          <C>
REVENUES                                                                     $  7,544     $   9,797    
OPERATING COSTS
    Operating costs, including general and administrative costs                11,170        11,943    
    Depreciation and amortization                                                 702           703    
    Unusual items                                                                 --         25,996    
---------------------------------------------------------------------------------------------------     
OPERATING LOSS                                                                 (4,328)      (28,845)   
Other expense                                                                  (2,289)      (10,537)   
Interest income                                                                 1,538         1,027    
Interest expense                                                                1,699         4,274    
---------------------------------------------------------------------------------------------------     
LOSS FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION, 
    EQUITY IN INCOME (LOSS) OF AFFILIATES, INCOME TAX PROVISION 
    AND MINORITY INTEREST                                                      (6,778)      (42,629)   
National Steel Corporation net preferred dividend income                          --          5,854    
Loss on National Steel Corporation settlement                                     --        (59,038)   
Equity in income (loss) of affiliates                                             936        (1,531)   
---------------------------------------------------------------------------------------------------     
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION AND
    MINORITY INTEREST                                                          (5,842)      (97,344)   
Income tax provision                                                               39            38    
---------------------------------------------------------------------------------------------------     
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST                       (5,881)      (97,382)   
Minority interest in results of operations of consolidated subsidiaries           123           325    
---------------------------------------------------------------------------------------------------     
NET LOSS FROM CONTINUING OPERATIONS                                            (6,004)      (97,707)   
Discontinued operations
    Gain on disposal of discontinued operations                                   --          3,719    
---------------------------------------------------------------------------------------------------     
NET LOSS                                                                       (6,004)      (93,988)   
Preferred stock dividends                                                      20,876        18,972    
---------------------------------------------------------------------------------------------------     
LOSS APPLICABLE TO COMMON STOCKHOLDERS                                       $(26,880)    $(112,960)   
---------------------------------------------------------------------------------------------------     
---------------------------------------------------------------------------------------------------     
BASIC AND DILUTED LOSS PER SHARE
    Loss from continuing operations                                          $  (1.95)    $   (8.45)   
    Discontinued operations                                                       --           0.27    
---------------------------------------------------------------------------------------------------     
LOSS PER SHARE                                                               $  (1.95)    $   (8.18)   
---------------------------------------------------------------------------------------------------     
---------------------------------------------------------------------------------------------------     
Average number of common shares outstanding                                    13,806        13,806    
---------------------------------------------------------------------------------------------------     
COMPREHENSIVE LOSS                                                           $ (7,508)    $ (20,483)   
---------------------------------------------------------------------------------------------------     
---------------------------------------------------------------------------------------------------     
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                                 2
<PAGE>

                       AVATEX CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   December 31,   March 31,   
(in thousands of dollars)                                             1998          1998      
-------------------------------------------------------------------------------------------   
<S>                                                                <C>           <C>
ASSETS
CURRENT ASSETS
    Cash and short-term investments                                $  29,246     $  34,193    
    Receivables - net                                                  2,805        11,783    
    Other current assets                                               1,237         3,971    
-------------------------------------------------------------------------------------------   
TOTAL CURRENT ASSETS                                                  33,288        49,947    

INVESTMENTS IN AFFILIATES                                             26,711        25,343    

PROPERTY AND EQUIPMENT                                                32,420        20,657    
    Less accumulated depreciation and amortization                     2,252         1,630    
-------------------------------------------------------------------------------------------   
NET PROPERTY AND EQUIPMENT                                            30,168        19,027    

DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE                           --            --     
MISCELLANEOUS ASSETS                                                  25,602        24,986    
-------------------------------------------------------------------------------------------   
TOTAL ASSETS                                                       $ 115,769     $ 119,303    
-------------------------------------------------------------------------------------------   
-------------------------------------------------------------------------------------------   

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
    Accounts payable                                               $   1,405     $   2,665    
    Other accrued liabilities                                          3,923         6,169    
    Long-term debt due within one year                                   476           492    
-------------------------------------------------------------------------------------------   
TOTAL CURRENT LIABILITIES                                              5,804         9,326    
LONG-TERM DEBT                                                        33,927        22,923    
OTHER LONG-TERM LIABILITIES                                           11,893        13,402    
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                           481           558    
COMMITMENTS AND CONTINGENCIES                                            --            --     
REDEEMABLE PREFERRED STOCK                                           235,871       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)                       (336)        1,168    
    Accumulated deficit                                             (360,003)     (331,202)   
-------------------------------------------------------------------------------------------   
TOTAL STOCKHOLDERS' DEFICIT                                         (172,207)     (141,902)   
-------------------------------------------------------------------------------------------   
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                        $ 115,769     $ 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 nine months     
                                                                                    ended December 31,     
(in thousands of dollars)                                                          1998         1997       
-------------------------------------------------------------------------------------------------------    
<S>                                                                              <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                         $ (6,004)    $(93,988)    
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
    BY OPERATING ACTIVITIES:
    Minority interest in results of operations of consolidated subsidiaries           123          325     
    Equity in loss (income) of affiliates                                            (936)       1,531     
    Depreciation and amortization                                                     702          703     
    Net preferred income from National Steel Corporation                              --        (5,854)    
    Loss on National Steel Corporation settlement                                     --        59,038     
    Gain on disposal of discontinued operations                                       --        (3,719)    
    Loss on investments                                                             2,490       10,560     
    Other non-cash credits                                                           (696)      (4,402)    
    Cash provided (used) by working capital items, net of acquisitions:
      Receivables                                                                   9,285           46     
      Other assets and restricted cash                                                 19       33,310     
      Accounts payable and accrued liabilities                                     (5,234)      (8,084)    
-------------------------------------------------------------------------------------------------------    
NET CASH USED BY OPERATING ACTIVITIES                                                (251)     (10,534)    
-------------------------------------------------------------------------------------------------------    

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition, net of cash acquired                                                 --        (7,399)    
    Purchase of property and equipment                                            (11,407)      (2,773)    
    Purchase of investments                                                        (4,537)      (8,541)    
    Proceeds from investments                                                       1,590       63,714     
    Other                                                                             (38)         140     
-------------------------------------------------------------------------------------------------------    
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                                  (14,392)      45,141     
-------------------------------------------------------------------------------------------------------    

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of long-term debt                                   10,355       16,368     
    Debt repayments                                                                  (358)     (15,919)    
    Debt issuance costs                                                              (101)        (185)    
    Investment by minority interest                                                   --           800     
    Dividends paid to minority interest                                              (200)        (100)    
-------------------------------------------------------------------------------------------------------    
NET CASH PROVIDED BY FINANCING ACTIVITIES                                           9,696          964     
-------------------------------------------------------------------------------------------------------    

NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS                         (4,947)      35,571     
    Cash and short-term investments, beginning of period                           34,193        7,173     
-------------------------------------------------------------------------------------------------------    
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD                                   $ 29,246     $ 42,744     
-------------------------------------------------------------------------------------------------------    
-------------------------------------------------------------------------------------------------------    
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                                 4
<PAGE>
                                       
                     AVATEX CORPORATION AND SUBSIDIARIES
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              DECEMBER 31, 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, an office building and 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 condensed consolidated balance sheet of the Corporation as of December 
31, 1998, the condensed consolidated statements of operations and 
comprehensive income (loss) for the three and nine months ended December 31, 
1998 and 1997, and the condensed consolidated statements of cash flows for 
the nine months ended December 31, 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 nine months ended 
December 31, 1998, may not be indicative of the results 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. The Corporation's 
Annual Report on Form 10-K filed with the Securities and Exchange Commission 
for the fiscal year ended March 31, 1998, contains additional information 
that should be read in conjunction with this quarterly report.

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

COMPREHENSIVE INCOME (LOSS):  The difference in comprehensive income (loss) 
and net loss is due to unrealized gains (losses) on marketable securities for 
the three and nine months ended December 31, 1998 and, for the three and nine 
months ended December 31, 1997, primarily to the change in the minimum 
pension liability.  

DISCONTINUED OPERATIONS:  The Corporation recognized a gain of $3.7 million 
on the sale of substantially all of the assets of US HealthData Interchange, 
Inc. ("USHDI") on November 19, 1997.  USHDI had been treated as a 
discontinued operation since March 1997.

UNUSUAL ITEMS:  The unusual items for the three months ended December 31, 
1997 represented income from the settlement of certain pension and other 
postretirement benefit claims of former officers and employees.  For the nine 
months ended December 31, 1997, unusual items also included (i) a $33.3 
million 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, and (ii) income of 
$1.7 million from the settlement of litigation primarily with insurance 
carriers related to environmental liability claims.  The litigation with the 
Trustee concerned the validity of the transfer of certain property from 
FoxMeyer to the Corporation as a dividend on June 19, 1996.

                                       5
<PAGE>

COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE:  As of December 31, 
1998, Phar-Mor had acquired 2,086,200 shares of the Corporation's common 
stock during the current fiscal year 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 of $1.9 million at December 31, 1998.  The charge is 
equal to the Corporation's 38.4% ownership in the cost of its common stock 
held by Phar-Mor.

NOTE 2 - NET LOSS PER SHARE OF COMMON STOCK

The net loss applicable to common stockholders, and the average number of 
shares outstanding, used in calculating both basic and diluted loss per share 
were the same for the three and nine months ended December 31, 1998 and 1997, 
respectively.  Options to purchase approximately 3.9 million shares were 
outstanding at December 31, 1998 and 1997, respectively.  These options were 
not considered in the computation of the diluted loss per share because their 
inclusion would be anti-dilutive.  Conversion of the convertible preferred 
stock outstanding was also not considered in the calculation of diluted loss 
per share as it would have been anti-dilutive as well.  

NOTE 3 - NATIONAL STEEL CORPORATION SETTLEMENT

On November 25, 1997, National Steel Corporation ("NSC"), certain of its 
affiliates, and the Corporation entered into an agreement whereby the 
Corporation received $59.0 million in cash and a non-interest bearing $10.0 
note in exchange for the redemption of the NSC preferred stock owned by the 
Corporation and NSC's release of the Corporation from pension and other 
various liabilities (the "NSC Settlement").  The final installment on the 
note was received on November 25, 1998.  The Corporation must maintain at 
least $15.0 million of net worth, as defined in the NSC Settlement agreement, 
through February 25, 1999.  As a result of the NSC Settlement, the 
Corporation recognized a $59.0 million loss for the three and nine months 
ended December 31, 1997.  In addition, the Corporation recognized a $79.7 
million reduction in minimum pension liability reserves as a result of being 
released from this liability.

NOTE 4 - LONG-TERM DEBT

One of the Corporation's consolidated real estate partnerships borrowed $10.7 
million during the nine months ended December 31, 1998, under a construction 
loan for the renovation of an office building into a hotel.  The total 
balance outstanding under the loan is currently $12.9 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.  The hotel opened in 
October 1998. Interest incurred during the construction period of $0.4 million 
was capitalized.

NOTE 5 - 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 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 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 December 31, 1998 were $7.3 million ($11.25 per 
share) for the convertible preferred stock and $45.3 million ($10.51 per 
share) for the Series A preferred stock.

On January 28, 1999, the New York Stock Exchange ("NYSE") informed the 
Corporation that it no longer met the continued listing requirements of the 
NYSE and that trading of its common, convertible preferred and Series A 
preferred stocks would be suspended prior to the opening of the NYSE on Monday,
February 1, 1999.  The Corporation's common and preferred stocks started 
trading on the OTC Bulletin Board system effective February 1, 1999.

                                       6
<PAGE>

NOTE 6 - 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 nine months
                                                            ended December 31,
                                                            1998         1997
-------------------------------------------------------------------------------
<S>                                                        <C>          <C>
      Interest paid                                        $ 1,055      $ 2,503
      Income taxes paid                                         67           38
      Non-cash transactions:
        Book value of note received in NSC Settlement            -        9,442
        Capitalized leases                                      99            -
        Cumulative dividends in arrears accrued             18,736       17,130
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                   December 31,    March 31,
                                                       1998          1998
----------------------------------------------------------------------------
<S>                                                <C>             <C>
      Miscellaneous assets:
        Prepaid pension cost                        $ 10,535       $  9,440
        Securities available for sale                  8,708          7,212
        Other investments, at cost                     3,622          6,028
        Other                                          2,737          2,306
----------------------------------------------------------------------------
          Total                                     $ 25,602       $ 24,986
----------------------------------------------------------------------------
----------------------------------------------------------------------------

      Other long-term liabilities:
        Pension and postretirement benefits         $  5,038       $  5,290
        Environmental liabilities                      1,217          1,417
        Liabilities related to discontinued            
          operations                                   3,361          4,334
        Other                                          2,277          2,361
----------------------------------------------------------------------------
          Total                                     $ 11,893       $ 13,402
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>

NOTE 7 - 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 

                                       7
<PAGE>

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, 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 that 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, 

                                       8
<PAGE>

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.

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.  On December 1, 1998, the Bankruptcy Court 
issued another Memorandum Opinion in one of these two lawsuits denying a 
motion for reconsideration.  The plaintiffs in these two lawsuits are now 
attempting to object to or to appeal from the Opinions.  The third remaining 
lawsuit is still pending in Illinois state court and is subject to a similar 
motion to dismiss that was filed in January 1999.

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, Stephen 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 
indemnification agreements between the Corporation and certain of the 
defendants.  On January 29, 1999, a stipulation was executed providing that 
the 

                                       9
<PAGE>

litigation, in so far as brought by Stephen Mizel IRA, was voluntarily 
discontinued with prejudice.

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 Healthcare 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.  In December 1998, a verdict was rendered and a judgment was 
entered in favor of the plaintiff in the amount of $50,000, and Mr. Anderson 
has filed a post-trial motion challenging the judgment.  Mr. Anderson 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. 

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.















                                       10
<PAGE>
                                       
                     AVATEX CORPORATION AND SUBSIDIARIES
                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                              DECEMBER 31, 1998
                          (IN THOUSANDS OF DOLLARS)


OVERVIEW

Avatex Corporation is a holding company that, along with its subsidiaries 
(collectively, the "Corporation"), owns interests in hotels, an office 
building and 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.

On January 28, 1999, the New York Stock Exchange ("NYSE") informed the 
Corporation that it no longer met the continued listing requirements of the 
NYSE and that trading of its common, convertible preferred and Series A 
preferred stocks would be suspended prior to the opening of the NYSE on 
Monday, February 1, 1999.  The Corporation's common, convertible preferred
and Series A preferred stocks started trading on the OTC Bulletin 
Board system effective February 1, 1999 under the symbols AVAX, AVAXP and 
AVAXO, respectively.

                            RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE AND NINE 
MONTHS ENDED DECEMBER 31, 1997

OPERATING INCOME (LOSS)

Revenues from real estate operations decreased $359 to $2,615 for the quarter 
ended December 31, 1998 compared to $2,974 for the quarter ended December 31, 
1997.  Revenues also decreased by $2,253 to $7,544 for the nine months ended 
December 31, 1998 compared to $9,797 for the nine months ended December 31, 
1997.  The decreases were primarily the result of the disposal of a property 
in fiscal 1998 partially offset by revenues from a new hotel opened in 
October 1998.

                                       11
<PAGE>

Operating costs, including depreciation and amortization, decreased $580 to 
$4,209 for the quarter ended December 31, 1998 compared to $4,789 for the 
quarter ended December 31, 1997.  The decrease was a result of a reduction in 
real estate operating costs of $459, primarily attributable to the property 
disposed of in fiscal 1998 partially offset by increased expenses for the 
hotel opened in October 1998, and a decrease in corporate overhead costs of 
$121.  The decrease in corporate expenses related primarily to lower expenses 
for pensions, consulting, travel and certain other operating costs partially 
offset by increased costs associated with the proposed merger, as discussed 
above, as well as compensation costs.

For the nine months ended December 31, 1998, operating costs, including 
depreciation and amortization, decreased $774 to $11,872 compared to $12,646 
for the nine months ended December 31, 1997.  A reduction in real estate 
operating costs of $1,956, primarily attributable to the property disposed of 
in fiscal 1998 partially offset by increased expenses for the hotel opened in 
October 1998, was partially offset by an increase in corporate overhead costs 
of $1,182. Such increased corporate expenses were primarily the result of 
costs associated with the proposed merger as well as compensation, legal and 
insurance costs, partially offset by lower expenses for pensions, 
consultants, travel and certain other operating costs.

The unusual items for the three months ended December 31, 1997 represented 
income from the settlement of certain pension and other postretirement 
benefit claims of former officers and employees.  For the nine months ended 
December 31, 1997, unusual items also included (i) a $33,292 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, and (ii) income of $1,704 from the settlement of litigation 
primarily with insurance carriers related to environmental liability claims.  

OTHER EXPENSE

Other expense of $95 for the three months ended December 31, 1998 related to 
a reduction of $156 in the carrying value of certain of the Corporation's 
investments offset by $61 of income primarily from dividends accrued on 
investments.  Other expense of $5,231 for the three months ended December 31, 
1997 related primarily to the reduction in the carrying value of certain of 
the Corporation's investments of $5,725 partially offset by $494 of income 
primarily from a gain on property sold. 

Other expense of $2,289 for the nine months ended December 31, 1998 related 
to a $4,081 reduction in the carrying value of certain of the Corporation's 
investments offset by $1,792 in gains primarily from recoveries on 
investments 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 $10,537 for the nine months 
ended December 31, 1997 related primarily to the reduction in the carrying 
value of certain of the Corporation's investments of $11,207 partially offset 
by $670 of income primarily from recoveries on investments which had been 
written-off in a prior year and gains on property sold. 

INTEREST INCOME (EXPENSE)

Interest income increased $73 to $452 for the three months ended December 31, 
1998 compared to $379 for the three months ended December 31, 1997.  For the 
nine months ended December 31, 1998, interest income increased $511 to $1,538 
compared to $1,027 for the nine months ended December 31, 1997.  For both 
periods, the amount of funds invested increased compared to the prior year 
due to cash received from the National Steel Corporation ("NSC") settlement 
and sale of US HealthData Interchange, Inc. ("USHDI") in November 1997 and 
interest earned on the note received as part of the NSC settlement.

Interest expense decreased $789 to $671 for the three months ended December 
31, 1998 compared to $1,460 for the three months ended December 31, 1997.  
For the nine months ended December 31, 1998, interest expense decreased 
$2,575 to $1,699 compared to $4,274 for the nine months ended December 31, 
1997.  For the three and nine months ended December 31, 1998, $79 and $578, 
respectively, of the decrease related to real estate operations. The decrease 
was due to the absence of debt on the property disposed of in fiscal 1998 
partially offset by interest incurred in the current fiscal year in 
connection with the 

                                       12
<PAGE>

property opened in October 1998.  Interest expense related to corporate 
activities declined $710 and $1,997, respectively, for the three and nine 
months ended December 31, 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 decline 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.

NATIONAL STEEL CORPORATION 

The decrease in net preferred dividend income for the three and nine months 
ended December 31, 1998 as compared to the prior year and the loss on the NSC 
Settlement are due to the November 1997 redemption of the NSC preferred stock 
by NSC and the settlement of all related liabilities (see Note 3).

EQUITY IN INCOME (LOSS) OF AFFILIATES

Equity in income of affiliates was $1,288 compared to an equity in income of 
$1,079 for the three months ended December 31, 1997.  The increase primarily 
related to the results of operations of Phar-Mor for the period.  Equity in 
income was $936 for the nine months ended December 31, 1998 compared to an 
equity in loss of $1,531 for the nine months ended December 31, 1997.  The 
increase was primarily due to an improvement in Phar-Mor's operating results 
for the current year compared to the prior year.  For the most part, the 
improved results primarily related to severance expense paid to Phar-Mor's 
former chief executive officer in the prior fiscal 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 and prior year represent 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 December 31, 1998 was not significantly different 
than for the three months ended December 31, 1997.  For the nine months ended 
December 31, 1998, the minority interest decreased $202 to $123 compared to 
$325 in the prior year. The decrease related primarily to reduced earnings on 
real estate still owned as well as a result of a property sold in fiscal 1998.

DISCONTINUED OPERATIONS

The gain on discontinued operations resulted from the sale of USHDI in 
November 1997.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends have increased to $7,127 and $20,876 for the three 
and nine months ended December 31, 1998, respectively, compared to $6,474 and 
$18,972 for the three and nine months ended December 31, 1997, respectively. 
The increase was due to (i) an increase of $104 and $300, respectively, in 
the amortization of discount on the Series A preferred stock, and (ii) an 
increase of $549 and $1,604, respectively, in the dividend on the Series A 
preferred stock attributable to the required compounding of dividends on 
previously unpaid amounts.

                                       13
<PAGE>

                          LIQUIDITY AND CAPITAL RESOURCES


As of December 31, 1998, the Corporation had cash and short-term investments 
of approximately $29,246. During the nine months ended December 31, 1998, the 
Corporation committed approximately $4,537 to new investments and $1,412 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 payments on the convertible preferred stock 
due January 1998 and January 1999.  

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.

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. The Corporation may also decide to sell those investments 
which 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.  There-

                                       14
<PAGE>

fore, 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.  






















                                       15

<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 Reports 
on Form 10-Q for the quarters ended June 30, 1998 and September 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 ("McKesson") and certain pharmaceutical manufacturers, 
(i) on August 24, 1998, the Delaware Bankruptcy Court denied the plaintiffs' 
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 
November 12 and 16, 1998, the Delaware Bankruptcy Court granted in part and 
denied in part the plaintiffs' second motion for summary judgment and ruled 
that the Corporation is judicially estopped from pursing counts one, two and 
three of the Texas lawsuit (for fraud, negligent misrepresentation and 
conspiracy).  The Delaware Bankruptcy Court also indicated that, if discovery 
shows that there is "substantial overlap" between the factual allegations 
underlying counts one, two and three and those underlying the remaining 
counts (for breach of confidential relationship, tortious interference with 
contract, interference with business and business disparagement), those 
counts may be barred as well.  The Corporation has filed a motion to revise 
the November 12 and 16, 1998 order and a motion for leave to appeal the 
order.  The plaintiffs have moved to stay the Texas lawsuit described below 
pending final resolution of the Delaware Bankruptcy Court proceedings and 
have filed a renewed motion for summary judgment asserting that the 
Corporation should be judicially estopped from pursuing the remaining counts 
in the Texas lawsuit.

In the Texas lawsuit, on November 17, 1998, the Dallas Bankruptcy Court 
issued a Memorandum Opinion and Order that granted the Corporation's motion 
to remand the Texas lawsuit back to Texas state court.  As a result of the 
Delaware Bankruptcy Court's November 12 and 16, 1998 decision, the Dallas 
Bankruptcy Court dismissed counts one, two and three of the Texas lawsuit to 
the extent that the claims were brought by the Corporation, and remanded the 
remaining counts to state court.  The defendants in the Texas lawsuit have 
appealed the remand order and the Corporation has cross-appealed the 
dismissal order.  On December 3, 1998, McKesson filed a counterclaim in the 
Texas lawsuit against the Corporation and a third party complaint against 
Bart A. Brown, Jr., the Chapter 7 Trustee of FoxMeyer Corporation 
("FoxMeyer"), and three of the Corporation's officers: Abbey Butler, Melvyn 
Estrin and Edward Massman, alleging claims of fraudulent misrepresentation, 
negligent misrepresentations, breach of letter agreement and inducing breach 
of contract.  On January 7, 1999, the Dallas Bankruptcy Court denied the 
defendants' motion to stay the Texas lawsuit pending final resolution of the 
Delaware Bankruptcy Court proceedings.  If the Corporation is successful in 
its appeal of the Delaware Bankruptcy Court's November 12 and 16, 1998 
decision, then the Corporation will request the state court to reinstate 
counts one, two and three in the Texas lawsuit.

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.  On 
December 1, 1998, the Bankruptcy Court issued another Memorandum Opinion in 
one of these two lawsuits denying a motion for reconsideration.  The 
plaintiffs in these two 

                                       16
<PAGE>

lawsuits are now attempting 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 was filed in January 1999.

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.

DERIVATIVE ACTION.  With reference to the purported derivative litigation 
filed by certain preferred stockholders of the Corporation against ten of its 
current and former directors, the Corporation has been 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 the 
conditions of indemnification agreements between the Corporation and certain 
of the defendants.  On January 29, 1999, a stipulation was executed providing 
that the litigation, insofar as brought by Stephen Mizel IRA, one of the two 
parties that commenced the litigation, was voluntarily discontinued with 
prejudice.

1994 MERGER LITIGATION.  With reference to the lawsuit filed in connection 
with the merger of 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 Healthcare 
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.  In December 1998, a 
verdict was rendered and a judgment was entered in favor of the plaintiff in 
the amount of $50,000, and Mr. Anderson has filed a post-trial motion 
challenging the judgment.  Mr. Anderson 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. 

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 December 31, 1998 were 
approximately $7.3 million ($11.25 per share) for the convertible preferred 
stock and $45.3 million ($10.51 per share) for the Series A preferred stock.  
In addition, the annual sinking fund payments to purchase 88,000 shares of 
the convertible preferred stock in January 1998 and January 1999 were not 
made.

                                       17
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  EXHIBITS
     
                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 December 31, 1998.
          











                                       18
<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
     
     
     
February 5, 1999       By:     /s/ Edward L. Massman
                               -------------------------------------------------
                               Edward L. Massman
                               Senior Vice President and Chief Financial Officer
                               (Principal Financial Officer)
          
February 5, 1999       By:     /s/ Scott E Peterson 
                               -------------------------------------------------
                               Scott E Peterson
                               Vice President Finance and Controller
                               (Principal Accounting Officer)





                                       19