<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, 1999

              [ ] 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 February 1, 1999: 19,637,360
shares before deducting 1,900,263 shares which represent the Corporation's 38.4%
equity interest in common stock of the Corporation owned by Phar-Mor, Inc.

<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)                                                   1999            1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
OPERATING COSTS
       Operating costs, including general and administrative costs                        $   2,328         $ 1,736
       Depreciation and amortization                                                              9              11
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS                                                                        (2,337)         (1,747)
OTHER INCOME (EXPENSE)                                                                          206            (150)
INTEREST AND DIVIDEND INCOME                                                                    616             492
INTEREST EXPENSE                                                                                481             189
--------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN INCOME
       OF AFFILIATES                                                                         (1,996)         (1,594)
Equity in income of affiliates                                                                3,057           1,290
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                                                      1,061            (304)
DISCONTINUED OPERATIONS
       Loss from discontinued operations, net of tax                                              -            (334)
       Loss on disposal of discontinued operations, net of tax                                  (63)              -
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                                               998            (638)
Preferred stock dividends                                                                     5,762           7,127
Gain on exchange of preferred stock in connection with merger
     with Xetava Corporation                                                                225,008               -
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS                                           $ 220,244         $(7,765)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------

BASIC AND DILUTED INCOME (LOSS) PER SHARE
       Income (loss) from continuing operations applicable to
          common stockholders                                                             $   15.42         $ (0.57)
       Discontinued operations                                                                (0.01)          (0.03)
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS                                 $   15.41         $ (0.60)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------

Average number of common shares outstanding                                                  14,291          13,005
--------------------------------------------------------------------------------------------------------------------

COMPREHENSIVE INCOME                                                                      $   1,648         $ 1,876
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                      1

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                             For the nine months
                                                                                             ended December 31,
(in thousands, except per share amounts)                                                    1999              1998
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>               <C>
OPERATING COSTS
       Operating costs, including general and administrative costs                           $   6,582        $  5,675
       Depreciation and amortization                                                                30              32
-----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS                                                                           (6,612)         (5,707)
OTHER EXPENSE                                                                                      (87)         (2,540)
INTEREST AND DIVIDEND INCOME                                                                     1,700           1,652
INTEREST EXPENSE                                                                                   860             584
-----------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN INCOME
       OF AFFILIATES                                                                            (5,859)         (7,179)
Equity in income of affiliates                                                                     167             940
-----------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS                                                                 (5,692)         (6,239)
DISCONTINUED OPERATIONS
       Gain from discontinued operations, net of tax                                               259             235
       Gain on disposal of discontinued operations, net of tax                                   7,872               -
-----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                                                2,439          (6,004)
Preferred stock dividends                                                                       20,912          20,876
Gain on exchange of preferred stock in connection with merger
     with Xetava Corporation                                                                   225,008               -
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS                                              $ 206,535        $(26,880)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------

BASIC AND DILUTED INCOME (LOSS) PER SHARE
       Income (loss) from continuing operations applicable to
          common stockholders                                                                $   14.77        $  (2.07)
       Discontinued operations                                                                    0.60            0.02
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS                                    $   15.37        $  (2.05)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------

Average number of common shares outstanding                                                     13,436          13,134
-----------------------------------------------------------------------------------------------------------------------

COMPREHENSIVE INCOME (LOSS)                                                                  $     654         $(7,508)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
</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)                                                                  1999                    1999
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                    <C>
ASSETS
CURRENT ASSETS
        Cash and short-term investments                                                  $  17,307              $  27,159
        Receivables - net                                                                    2,021                  2,526
        Net assets of discontinued operations held for sale                                      -                  5,552
        Other current assets                                                                 7,008                  1,348
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                        26,336                 36,585

INVESTMENT IN AFFILIATES                                                                    24,995                 27,038

PROPERTY AND EQUIPMENT                                                                         171                    214
        Less accumulated depreciation and amortization                                          94                     92
--------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT                                                                      77                    122

OTHER ASSETS                                                                                23,396                 25,812
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                             $  74,804              $  89,557
--------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
        Accounts payable                                                                 $   1,691              $   1,435
        Other accrued liabilities                                                            2,751                  1,930
        Current portion of long-term debt                                                    9,542                      -
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                   13,984                  3,365
LONG-TERM DEBT                                                                              20,060                  9,001
OTHER LONG-TERM LIABILITIES                                                                 10,912                 11,955
COMMITMENTS AND CONTINGENCIES                                                                    -                      -
REDEEMABLE PREFERRED STOCK                                                                       -                243,169
STOCKHOLDERS' EQUITY (DEFICIT):
        Class A common stock $0.01 par value; authorized 50,000,000 shares;
           issued: 19,637,360 shares at December 31, 1999                                      196                      -
        Common stock $5.00 par value; authorized 50,000,000 shares;
           issued: 13,806,487 shares at March 31, 1999                                           -                 69,032
        Capital in excess of par value                                                     193,170                119,103
        Accumulated other comprehensive income                                                  35                  1,820
        Accumulated deficit                                                               (159,432)              (365,967)
--------------------------------------------------------------------------------------------------------------------------
                                                                                            33,969               (176,012)
        Less: equity in cost of common stock of the Corporation
                    held by Phar-Mor, Inc.                                                  (4,121)                (1,921)
--------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                                        29,848               (177,933)
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                     $  74,804              $  89,557
--------------------------------------------------------------------------------------------------------------------------
</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)                                                                     1999                1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                            $  2,439           $ (6,004)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
      OPERATING ACTIVITIES:
      Equity in income of affiliates                                                             (167)              (940)
      Depreciation and amortization                                                                30                 32
      Loss on investments                                                                         451              2,490
      Other non-cash credits                                                                     (434)              (696)
      Gain on disposal of discontinued operations                                              (7,872)
      Items related to discontinued operations                                                      -                797
      Cash provided (used) by working capital items:
         Receivables                                                                            3,613              9,285
         Other assets                                                                          (7,242)                19
         Accounts payable and accrued liabilities                                                (997)            (5,234)
         Other                                                                                      7                  -
-------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES                                                         (10,172)              (251)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of property and equipment                                                           (7)           (11,407)
      Purchase of investments                                                                       -             (4,537)
      Proceeds from sale of investments                                                        14,246              1,590
      Other                                                                                         1                (38)
-------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                                               14,240            (14,392)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from the issuance of long-term debt                                                  -             10,355
      Debt repayments                                                                               -               (358)
      Cash paid to preferred stockholders and certain other parties in
         the merger with Xetava Corporation                                                   (13,920)                 -
      Debt issuance costs                                                                           -               (101)
      Dividends paid to minority interest                                                           -               (200)
-------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                              (13,920)             9,696
-------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS                                                (9,852)            (4,947)
      Cash and short-term investments, beginning of period                                     27,159             34,193
-------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD                                               $ 17,307           $ 29,246
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                      4

<PAGE>

                       AVATEX CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that, along
with its subsidiaries, owns interests in other corporations and partnerships.
Through Phar-Mor, Inc. ("Phar-Mor"), our 38% owned affiliate, we are involved in
operating a chain of discount retail drugstores. Through Phar-Mor and our 41%
owned affiliate, Chemlink Acquisition Company, LLC, we own approximately 38% of
Chemlink Laboratories, LLC. Chemlink Laboratories is primarily engaged in the
development, manufacture and distribution of effervescent tablet formulations
for consumers and businesses for use in cleaning, disinfectant and sterilization
applications.

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

         We sold our real estate operations in May 1999, as discussed in Note 4,
and have presented our real estate segment as a discontinued operation in the
accompanying financial statements. For comparative purposes, the statements of
operations for prior year periods have been restated to reflect income from real
estate operations in "Gain (loss) from discontinued operations, net of taxes".
The restatement does not change our net loss or loss per share for the prior
year periods. The balance sheet at March 31, 1999 reflects the assets and
liabilities related to the real estate segment as "Net assets of discontinued
operations held for sale".

         Our condensed consolidated balance sheet as of December 31, 1999, the
condensed consolidated statements of operations and comprehensive income (loss)
for the three and nine months ended December 31, 1999 and 1998, and the
condensed consolidated statements of cash flows for the nine months ended
December 31, 1999 and 1998, are unaudited. In our opinion, 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. These adjustments were
of a normal recurring nature. The results of operations for the three and nine
months ended December 31, 1999, are not necessarily indicative of the results
that may be expected for the entire year. The condensed consolidated balance
sheet as of March 31, 1999 was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. Additional information is contained in our Annual Report on Form
10-K/A filed with the Securities and Exchange Commission for the fiscal year
ended March 31, 1999, and should be read in conjunction with this quarterly
report.

COMPREHENSIVE INCOME (LOSS): The difference in comprehensive income (loss) and
net income (loss) is due to unrealized gains or losses on marketable securities
for the three and nine months ended December 31, 1999 and December 31, 1998.

COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: During the quarter
ended December 31, 1999, Phar-Mor acquired 2,862,400 shares of our common stock
at a cost of $5.7 million. Additionally, during fiscal year 1999, Phar-Mor
acquired 2,086,200 shares of our common stock through open market transactions
at a cost of approximately $5.0 million. As a result of these purchases,
Phar-Mor currently owns 4,948,600 shares or 25.2% of our issued Class A common
stock. We account for our investment in Phar-Mor on an equity basis and treat
Phar-Mor's investment in our common stock similar to treasury stock, with a
charge to the stockholders' equity (deficit) of $1.9 million at March 31, 1999
and $4.1 million at


                                      5

<PAGE>

December 31, 1999. The charge was equal to our 38.4% ownership in the cost of
our common stock held by Phar-Mor.

         Net loss per share for the three and nine months ended December 31,
1998 was originally reported based on 13,806,375 shares outstanding. We
determined that the effect of Phar-Mor's investment in our common stock reduced
the weighted average number of shares outstanding for calculating earnings per
share by 801,101 shares for the three months and 672,672 shares for the nine
months ended December 31, 1998 and, therefore, the net loss per share for the
three and nine months ended December 31, 1998 should have been $(0.60) and
$(2.05) per share, respectively, instead of $(0.56) and $(1.95) per share as we
originally reported.

NOTE 2 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK

To calculate earnings per share from continuing operations, the dividends on the
preferred stock have been deducted from, and the gain on the exchange of
preferred stock has been added back to, the income (loss) from continuing
operations. The weighted average number of shares outstanding for basic earnings
per share was the same as for diluted earnings per share. Options to purchase
approximately 3.9 million shares were outstanding at both December 31, 1999 and
1998. These options were not included in the computation of diluted earnings per
share because the average market price of our outstanding common stock was less
than the exercise price of the options. Conversion of our convertible preferred
stock outstanding, until its cancellation on December 7, 1999, was also not
included in the calculation of diluted earnings per share as it would have been
anti-dilutive prior to its cancellation. Warrants to purchase approximately 2.3
million shares of our Class A common stock at $2.25 per share were issued and
outstanding during the quarter ended December 31, 1999. These warrants were not
included in the computation of diluted earnings per share because the average
market price of our common stock was less than the exercise price of the
warrants.

NOTE 3 - MERGER WITH XETAVA CORPORATION

         At our Annual Meeting of Stockholders held on December 6, 1999, our
common and former preferred stockholders approved our merger with our
wholly-owned subsidiary, Xetava Corporation, under an Amended and Restated
Agreement and Plan of Merger that was executed on June 18, 1999 and subsequently
amended on October 19, 1999 (the "Revised Merger Agreement"). The Revised Merger
Agreement amended and restated the Agreement and Plan of Merger between us and
Xetava dated April 9, 1998. Holders of approximately 76% of the shares of each
series of our former preferred stock and holders of approximately 65% of the
shares of our common stock voted in favor of the merger.

         The merger was consummated on December 7, 1999. Under the Revised
Merger Agreement, our former preferred stockholders received in exchange for
their preferred stock either new Class A common stock or, alternatively, a
combination of cash, secured notes, warrants and other consideration (the
"Alternate Consideration"). Our then existing common stockholders received new
Class A common stock on a one-for-one basis for their common stock. In addition,
the three Delaware lawsuits filed in connection with the April 1998 merger
agreement were settled, and the four directors previously elected by our
preferred stockholders to our Board of Directors resigned effective December 7,
1999. As a result of the merger, our two former series of preferred stock were
eliminated.

         Under the Revised Merger Agreement, each share of our former
convertible preferred stock was either converted into 9.134 shares of our Class
A common stock or, at the election of the holder, into Alternate Consideration
consisting of $3.7408 in cash, $8.34 principal amount of 6.75% notes due 2002
issued by our wholly-owned subsidiary, Avatex Funding, Inc., and warrants to
purchase 0.67456 shares of our Class A common stock at $2.25 per share. Each
share of our former Series A preferred stock was either converted into 7.253
shares of our Class A common stock or, at the election of the holder, into
Alternate Consideration consisting of $2.9705 in cash, $6.623 principal amount
of the 6.75% notes, and warrants to


                                      6

<PAGE>

purchase 0.53567 shares of our Class A common stock at $2.25 per share. In
addition, the holders of shares of both of our former series of preferred
stock who elected the Alternate Consideration received a deferred contingent
right to a portion of any net recovery that we may receive in certain
litigation brought by us against McKesson HBOC, Inc. ("McKesson") and a
number of large pharmaceutical manufacturers. The deferred contingent right
entitles the electing former preferred stockholders to receive their pro-rata
share of, for our former convertible preferred stock, 2.6% of any net
recovery, if any, up to a maximum of approximately $1.0 million ($1.84 per
share of preferred stock previously held), and, for our former Series A
preferred stock, 14.2% of any net recovery up to a maximum of approximately
$5.3 million ($1.46 per share of preferred stock previously held). In
accordance with these exchange ratios, we paid approximately $12.9 million in
cash, issued approximately $28.7 million face amount of 6.75% notes, and
issued warrants to purchase 2,319,334 shares of Class A common stock to our
former preferred stockholders who elected the Alternate Consideration.

         Avatex Funding is our wholly-owned subsidiary, which has a separate
corporate existence from us, whose sole purpose is to issue the 6.75% notes and
to own 3,571,533 shares of common stock of Phar-Mor pledged to secure the notes.
Avatex Funding does not have any other material assets or liabilities not
related to the 6.75% notes. The Phar-Mor common stock was transferred from us to
Avatex Funding prior to the merger. The principal of the notes is due on
December 7, 2002, and the interest is payable semi-annually on June 15 and
December 15 in cash. The notes were recorded at their estimated discounted value
of $19.9 million. The discount is being amortized on an effective yield basis of
21% over the term of the notes. We also guarantee the notes. The 1,132,500
shares of Phar-Mor that are currently held as collateral for our note to the
FoxMeyer Bankruptcy Trustee (the "Trustee") will be transferred to Avatex
Funding and pledged as additional collateral to secure the 6.75% notes if and
when the Trustee note is paid in full. The warrants issued in the merger will
expire March 7, 2005.

         Our former preferred stockholders who did not elect to receive the
Alternate Consideration in the Xetava merger were issued 5,830,873 shares of
Class A common stock. With the 13,806,487 shares of our former common stock that
were converted to the same number of Class A common stock, a total of 19,637,360
shares of our Class A common stock were issued.

         In connection with the merger, we entered into settlement, stockholder
and voting agreements with the former preferred stockholder plaintiffs in the
three Delaware lawsuits that were pending against us, Xetava and certain of our
directors relating to the April 1998 proposed merger. Under the Stipulation of
Settlement entered into by us and the plaintiffs in the class action lawsuits on
behalf of all holders of our former preferred stock and by the plaintiff in the
non-class action lawsuit, all three Delaware lawsuits were settled and we paid
$1.1 million of plaintiffs' attorneys' fees. One of the plaintiffs also received
$0.3 million in exchange for a ten year standstill agreement, a general release
of liabilities (subject to certain specified exceptions) and other
consideration. Under a separate agreement with another plaintiff and another
party, these parties and their affiliates and associated companies received $0.6
million in exchange for a ten year standstill agreement, a general release of
liabilities and other consideration.

         We recognized a gain in stockholders' equity on the exchange of the
preferred stock in connection with the Xetava merger which was calculated as
follows (in thousands):

<TABLE>
     <S>                                                                                   <C>
     ----------------------------------------------------------------------------------------------------
     Book value of preferred stock including cumulative unpaid dividends                   $ 264,081
     Cash paid to preferred stockholders and expenses related to the S-4 filing              (13,920)
     Value of common stock issued in the exchange (at market value)                           (4,373)
     Value of warrants issued in the exchange (at estimated market value)                       (858)
     Value of 6.75% notes issued in the exchange (at estimated market value)                 (19,922)
     ----------------------------------------------------------------------------------------------------
     Gain on exchange of preferred stock in connection with Xetava merger                  $ 225,008
     ----------------------------------------------------------------------------------------------------
     ----------------------------------------------------------------------------------------------------
</TABLE>

                                      7

<PAGE>

NOTE 4 - DISCONTINUED OPERATIONS

         On May 12, 1999, we announced that we had entered into an agreement to
sell our interests in our three remaining real estate developments. On May 27,
1999, one property was sold to a third party and our interests in the
partnerships that owned the other two properties were sold to the other partners
or their affiliates. As a result of these sales, we received $11.4 million in
cash and a one-year, $0.6 million secured note. The note is secured by our
former interests in the two partnerships that were sold to our partners or their
affiliates. We recognized a gain on the disposal of discontinued operations on
these transactions of approximately $6.2 million ($5.6 million net of taxes). We
also recognized a gain on discontinued operations of $0.3 million, which
represents the results of operations of the three properties until their sale on
May 27, 1999. The debt related to these real estate properties ($25.7 million at
March 31, 1999) was either repaid, transferred to or assumed by another party in
connection with the sale. Revenues for the real estate segment for the period
from April 1, 1999 to their sale in May 1999 were $2.8 million compared to
revenues for the three and nine months ended December 31, 1998 of $2.6 million
and $7.5 million, respectively.

         We received, as part of the proceeds on the sale in August 1996 of our
discontinued pharmacy benefit management operation, a right to an additional
minimum payment of $2.5 million that was due at any time after August 2, 1997.
This payment could increase up to $5.0 million based on certain criteria after
an initial public offering of the pharmacy benefit management operation. In
August 1999, we collected the $5.0 million payment after the unit's initial
public offering and recognized a gain on the disposal of discontinued operations
of $2.5 million less certain contingent incentive fees due primarily to former
employees of the discontinued operation of approximately $0.2 million.

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 nine months ended
                                                                               December 31,
                                                                            1999          1998
     ----------------------------------------------------------------------------------------------
     <S>                                                                <C>           <C>
     Interest paid                                                        $    349    $    1,055
     Income taxes paid                                                         466            67
     Non-cash transactions:
       Note received on sale of real estate investments                        600             -
       Reduction in book value of redeemable preferred stock               264,081             -
       Value of common stock and warrants issued in Xetava merger            5,231             -
       Value of long-term debt issued in Xetava merger                      19,922             -
       Cumulative dividends in arrears accrued                              18,649        18,736
     ------------------------------------------------------------------ ------------- -------------
     ----------------------------------------------------------------------------------------------
</TABLE>


                                      8

<PAGE>

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

<TABLE>
<CAPTION>
                                                                  December 31,      March 31,
                                                                      1999            1999
          -------------------------------------------------------------------------------------
          <S>                                                     <C>              <C>
          Other assets:
               Prepaid pension cost                                 $ 11,994       $   10,900
               Securities available for sale                           8,779           12,134
               Other investments, at cost                              1,288            1,438
               Other                                                   1,335            1,340
          -------------------------------------------------------------------------------------
                    Total                                           $ 23,396       $   25,812
          -------------------------------------------------------------------------------------

          Other long-term liabilities:
               Pension and postretirement benefits                 $   4,910       $   4,902
               Environmental liabilities                               1,273           1,357
               Liabilities related to discontinued operations          2,611           3,486
               Other                                                   2,118           2,210
          -------------------------------------------------------------------------------------
                    Total                                           $ 10,912        $ 11,955
          -------------------------------------------------------------------------------------
</TABLE>


NOTE 6 - COMMITMENTS AND CONTINGENCIES

         On April 14, 1998, we announced that we would merge with and into our
wholly-owned subsidiary, Xetava. Under the proposed merger, our existing common
and preferred stockholders would have received new common stock of Xetava. In
late April 1998, a preferred stockholder and a putative class of preferred
stockholders filed a total of three lawsuits in the Delaware Court of Chancery
against us, Xetava and seven of our 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 challenged our merger with
and into Xetava. In August 1998, the Delaware Supreme Court ruled that the
holders of our convertible preferred stock have the right to vote separately as
a class on our proposed merger into Xetava, as it was structured and announced
by us on April 14, 1998. Following these events, our management considered
various alternatives to the proposed merger and ultimately negotiated and
entered into agreements with certain large holders of our preferred stock
relating to the terms of a revised merger between us and Xetava and the
settlement of the preferred stockholders' litigation against us. These lawsuits
were settled on December 7, 1999 (see Note 3 for a discussion of the settlement
agreements).

         We have retained responsibility for certain potential environmental
liabilities attributable to former operating units. As a result, we are 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. We and our 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.

         Our 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, 1999. The 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 us, the unknown extent of
our probable liability in proportion to the probable liability of other parties.


                                      9

<PAGE>

Moreover, we may have environmental liabilities that cannot, in our judgment, be
estimated at this time and losses attributable to remediation costs may arise at
other sites. We recognize that additional work may need to be performed to
ascertain the ultimate liability for such sites, and further information could
ultimately change our current assessment. A change in the estimated liability
could have a material impact on our financial condition and results of
operations.

         On March 1, 1994, we announced that we had proposed a merger in which
FoxMeyer Corporation ("FoxMeyer") would be merged with and into a wholly-owned
subsidiary of ours, making FoxMeyer a wholly-owned subsidiary. Shortly after the
announcement, class action lawsuits were filed against us, FoxMeyer and certain
of FoxMeyer's officers and directors in the Delaware Court of Chancery.
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. The amended complaint alleged that the
defendants breached their fiduciary duties to FoxMeyer's shareholders by
agreeing to the merger at an unfair price and at a time designed so that we
could take advantage of, among other things, an alleged substantial growth in
the business of FoxMeyer. The complaint also alleged that the proxy statement
issued in connection with the merger failed to disclose certain matters relating
to the proposed merger. In January 2000, we entered into a settlement agreement
under which we will pay the plaintiff class the amount of approximately $1.4
million, a portion of which will be paid by the directors' insurance carrier.
The settlement is subject to the approval of the Delaware Court.

         We and certain of our current and former officers and directors have
been named in a series of purported class action lawsuits that were filed and
subsequently consolidated under ZUCKERMAN, ET AL. V. FOXMEYER HEALTH
CORPORATION, ET AL., in the United States District Court for the Northern
District of Texas, Dallas Division, Case No. 396-CV-2258-T. The lawsuit purports
to be brought on behalf of purchasers of our common and 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 we and the defendant officers and directors made
misrepresentations of material facts in public statements or omitted material
facts from public statements, including the failure to disclose purportedly
negative information concerning our National Distribution Center and Delta
computer systems and the resulting impact on our existing and future business
and financial condition. On March 31, 1998, the court denied our motion to
dismiss the amended complaint in the lawsuit. We intend to continue to
vigorously defend ourselves in the lawsuit. We are unable at this time to
estimate the possible loss, if any, which may accrue from this lawsuit.

         We and our 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. As initially
filed, the lawsuit purports to be brought on behalf of all holders of our 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.
Following the court's denial of the plaintiff's motion to certify a class of
holders of our stock, we reached a settlement with the plaintiff under which we
will pay a de minimus amount and the lawsuit will be dismissed. A portion of the
settlement will be paid by our directors' insurance carrier.

         In 1997, the bankruptcy trustee and certain creditors of our 17%-owned
subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"), filed lawsuits
against us, certain former officers and directors of Ben Franklin and certain of
our current and former officers and directors. We along with our officers and
directors have since been dropped as defendants in the lawsuits. In connection
with paying our own defense costs and those of our officers and directors, we
also initially paid a portion of the defense costs of certain individuals who
are named as defendants in these lawsuits by reason of the fact that they may
have been serving at our request as a director or officer of Ben Franklin. In
October 1998, the United States Bankruptcy Court for the Northern District of
Illinois issued Memorandum Opinions that dismissed two of the lawsuits against
all but one defendant. In January 2000, the United States District Court for the


                                      10

<PAGE>

Northern District of Illinois entered an amended order in the bankruptcy
trustee's lawsuit, which found that the Bankruptcy's Court's conclusions of law
were correct with the exception of the trustee's failure to state a cognizable
claim. The same order also affirmed the Bankruptcy Court's dismissal of the
lawsuit brought by certain of Ben Franklin's lenders. In the third lawsuit,
pending in Illinois state court, the court dismissed the plaintiffs' third
amended complaint without prejudice, and the plaintiffs filed a fourth amended
petition in December 1999. If liability is ever imposed in any of the lawsuits,
we may, if appropriate, agree at a future date to indemnify certain of the
remaining defendants in the lawsuit in accordance with Delaware law.

         In April 1998, the Trustee of the FoxMeyer and FoxMeyer Drug Company
bankruptcy estates 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 us. In October 1997, in connection with the settlement of a separate lawsuit
brought by the Trustee against us, the Trustee released us from all liability
and provided the director-defendants in this lawsuit with covenants not to
execute. We have agreed to pay the initial defense costs of the individuals who
are named as defendants in the lawsuit by reason of the fact that they may have
been serving at our request as a director or officer of FoxMeyer. The Delaware
Bankruptcy Court has entered an order establishing procedures for a joint
insolvency trial in the lawsuit and in certain other lawsuits brought by the
Trustee against other persons and entities related to the FoxMeyer bankruptcy
cases.

         On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P.
filed a lawsuit, allegedly on our behalf, against seven of our current directors
and three of our former directors who were members of our Board's Personnel and
Compensation Committee, under Case No. 602773198 in the Supreme Court of New
York, County of New York. The plaintiffs were holders of our Series A preferred
stock, and the lawsuit relates primarily to agreements and transactions between
us and our Co-Chairmen and Co-Chief Executive Officers, Abbey Butler and Melvyn
Estrin. The plaintiffs allege that, in connection with such agreements and
transactions, (i) the defendants breached their fiduciary duty to our
stockholders, (ii) the compensation arrangements between us and Messrs. Butler
and Estrin constitute corporate waste, and (iii) the defendants caused our
subsidiaries and affiliates to improperly purchase our common stock based on
confidential non-public information. The plaintiffs seek damages, injunctive
relief and an accounting. In January 1999, a stipulation was executed providing
that the litigation, insofar as it was brought by Stephen Mizel IRA, was
voluntarily discontinued with prejudice. In April 1999, the court denied the
remaining plaintiff's motion to amend its complaint to allege additional claims.
In October 1999, the defendants moved for summary judgment, and a hearing on the
motion was held on January 26, 2000. The court has not yet ruled on this motion.
Subject to our rights of reimbursement under the applicable directors' insurance
policies, we have been paying the defense costs of the defendants in accordance
with Delaware General Corporation Law, our charter and by-laws, and the terms
and conditions of Indemnification Agreements between us and certain of the
defendants.

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

NOTE 7 - SEGMENT INFORMATION

         We currently operate in only one segment, as defined under Statement of
Financial Accounting Standards ("SFAS") No. 131, which consists of owning
interests in other corporations and partnerships. We review the results of each
of our investments, review new investment opportunities and allocate resources
to these current or new investments based on this review and our current
financial situation.

         We have no foreign source revenues. Interest and dividend income and
other income are derived primarily from investments we have made.


                                      11

<PAGE>

                       AVATEX CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                DECEMBER 31, 1999
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

OVERVIEW

         Avatex Corporation is a holding company that, along with its
subsidiaries, owns interests in other corporations and partnerships. Through
Phar-Mor, our 38% owned affiliate, we are involved in operating a chain of
discount retail drugstores. Through Phar-Mor and our 41% owned affiliate,
Chemlink Acquisition Company, LLC, we own approximately 38% of Chemlink
Laboratories, LLC. Chemlink Laboratories is primarily engaged in the
development, manufacture and distribution of effervescent tablet formulations
for consumers and businesses for use in cleaning, disinfectant and sterilization
applications.

         At our Annual Meeting of Stockholders held on December 6, 1999, our
common and former preferred stockholders approved our merger with our
wholly-owned subsidiary, Xetava Corporation, under an Amended and Restated
Agreement and Plan of Merger that was executed on June 18, 1999 and subsequently
amended on October 19, 1999 (the "Revised Merger Agreement"). The Revised Merger
Agreement amended and restated the Agreement and Plan of Merger between us and
Xetava dated April 9, 1998. Holders of approximately 76% of the shares of each
series of our former preferred stock and holders of approximately 65% of the
shares of our common stock voted in favor of the merger.

         The merger was consummated on December 7, 1999. Under the Revised
Merger Agreement, our former preferred stockholders received in exchange for
their preferred stock either new Class A common stock or, alternatively, a
combination of cash, secured notes, warrants and other consideration (the
"Alternate Consideration"). Our then existing common stockholders received new
Class A common stock on a one-for-one basis for their common stock. In addition,
the three Delaware lawsuits filed in connection with the April 1998 merger
agreement were settled, and the four directors previously elected by our
preferred stockholders to our Board of Directors resigned effective December 7,
1999. As a result of the merger, our two former series of preferred stock were
eliminated.

         Under the Revised Merger Agreement, each share of our former
convertible preferred stock was either converted into 9.134 shares of our Class
A common stock or, at the election of the holder, into Alternate Consideration
consisting of $3.7408 in cash, $8.34 principal amount of 6.75% notes due 2002
issued by our wholly-owned subsidiary, Avatex Funding, Inc., and warrants to
purchase 0.67456 shares of our Class A common stock at $2.25 per share. Each
share of our former Series A preferred stock was either converted into 7.253
shares of our Class A common stock or, at the election of the holder, into
Alternate Consideration consisting of $2.9705 in cash, $6.623 principal amount
of the 6.75% notes, and warrants to purchase 0.53567 shares of our Class A
common stock at $2.25 per share. In addition, the holders of shares of both of
our former series of preferred stock who elected the Alternate Consideration
received a deferred contingent right to a portion of any net recovery that we
may receive in certain litigation brought by us against McKesson and a number of
large pharmaceutical manufacturers. The deferred contingent right entitles the
electing former preferred stockholders to receive their pro-rata share of, for
our former convertible preferred stock, 2.6% of any net recovery, if any, up to
a maximum of approximately $984 ($1.84 per share of preferred stock previously
held), and, for our former Series A preferred stock, 14.2% of any net recovery
up to a maximum of approximately $5,342 ($1.46 per share of preferred stock
previously held). In accordance with these exchange ratios, we paid
approximately $12,862 in cash, issued approximately $28,676 face amount of 6.75%
notes and issued warrants to purchase 2,319,334 shares of Class A common stock
to our former preferred stockholders who elected the Alternate Consideration.

         Avatex Funding is our wholly-owned subsidiary, which has a separate
corporate existence from us, whose sole purpose is to issue the 6.75% notes and
to own 3,571,533 shares of common stock of Phar-Mor


                                      12

<PAGE>

pledged to secure the notes. Avatex Funding does not have any other material
assets or liabilities not related to the 6.75% notes. The Phar-Mor common
stock was transferred from us to Avatex Funding prior to the merger. The
principal of the notes is due on December 7, 2002, and the interest is
payable semi-annually on June 15 and December 15 in cash. The notes were
recorded at their estimated discounted value of $19,922. The discount is
being amortized on an effective yield basis of 21% over the term of the
notes. We also guarantee the notes. The 1,132,500 shares of Phar-Mor that are
currently held as collateral for our note to the FoxMeyer Bankruptcy Trustee
(the "Trustee") will be transferred to Avatex Funding and pledged as
additional collateral to secure the 6.75% notes if and when the Trustee note
is paid in full. The warrants issued in the merger will expire March 7, 2005.

         Our former preferred stockholders who did not elect to receive the
Alternate Consideration in the Xetava merger were issued 5,830,873 shares of
Class A common stock. With the 13,806,487 shares of our former common stock that
were converted to the same number of Class A common stock, a total of 19,637,360
shares of our Class A common stock were issued.

         In connection with the merger, we entered into settlement, stockholder
and voting agreements with the former preferred stockholder plaintiffs in the
three Delaware lawsuits that were pending against us, Xetava and certain of our
directors relating to the April 1998 proposed merger. Under the Stipulation of
Settlement entered into by us and the plaintiffs in the class action lawsuits on
behalf of all holders of our former preferred stock and by the plaintiff in the
non-class action lawsuit, all three Delaware lawsuits were settled and we paid
$1,100 of plaintiffs' attorneys' fees. One of the plaintiffs also received $300
in exchange for a ten year standstill agreement, a general release of
liabilities (subject to certain specified exceptions) and other consideration.
Under a separate agreement with another plaintiff and another party, these
parties and their affiliates and associated companies received $600 in exchange
for a ten year standstill agreement, a general release of liabilities and other
consideration.

         As a result of the transactions discussed above, we recognized a gain
of $225,008 in stockholders' equity on the exchange of the preferred stock in
connection with the Xetava merger.

         Phar-Mor purchased 2,862,400 shares of our common stock during the
quarter ended December 31, 1999 at $2.00 per share. As a result of this
transaction, Phar-Mor currently owns 4,948,600 shares or 25.2% of our issued
Class A common stock.

         On May 12, 1999, we announced that we had entered into an agreement to
sell our interests in our three remaining real estate developments. On May 27,
1999, one property was sold to a third party and our interests in the
partnerships that owned the other two properties were sold to the other partners
or their affiliates. As a result of these sales, we received $11,400 in cash and
a one-year, $600 secured note. The note is secured by our former interests in
the two partnerships that were sold to our partners or their affiliates. We
recognized a gain on disposal of discontinued operations on these transactions
of approximately $6,181 ($5,558 net of taxes).

         We received, as part of the proceeds on the sale of our discontinued
pharmacy benefit management operation in August 1996, a right to an additional
minimum payment of $2,500 that was due at any time after August 2, 1997. This
payment could increase to $5,000 based on certain criteria after an initial
public offering of the pharmacy benefit management operation. In August 1999, we
collected the $5,000 payment after the unit's initial public offering and
recognized a gain on the disposal of discontinued operations of $2,500 less
certain contingent incentive fees due primarily to former employees of the
discontinued operation of $186.


                                      13

<PAGE>

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED DECEMBER 31, 1998

OPERATING COSTS

         Operating costs including depreciation and amortization increased $590
to $2,337 for the quarter ended December 31, 1999 compared to $1,747 for the
quarter ended December 31, 1998. Operating costs increased $905 to $6,612 for
the nine months ended December 31, 1999 compared to $5,707 for the nine months
ended December 31, 1998. Increased expenses were primarily the result of higher
costs ($1,786 and $1,429 for the three and nine months ended December 31, 1999,
respectively) associated with the Xetava merger. The increase was due primarily
to the $1,100 in legal fees paid to plaintiffs' lawyers and $900 paid for
standstill agreements related to settling the three Delaware lawsuits described
above partially offset by lower legal and consulting fees related to the merger
in the current periods. The increase in expense related to the Xetava merger was
partially offset by lower costs than in the prior year primarily for salaries
and benefits and for other legal expenses not related to the merger. Our legal
costs would have increased except for settlement payments made by certain
defendants in our lawsuit against McKesson and certain pharmaceutical
manufacturers and from reimbursement by an insurance carrier of certain legal
fees previously incurred in the pending derivative litigation. The increase in
legal costs before these payments resulted primarily from additional work
involved in settling our stockholder lawsuits, as noted in Note 6 to the
accompanying condensed consolidated financial statements, and pursuing our
claims against McKesson. Compensation costs have decreased as a result of the
separation from us of two of our officers at the end of June 1999.

OTHER INCOME (EXPENSE)

         Other income of $206 for the three months ended December 31, 1999 was
the result primarily of a $200 payment received on an investment that had been
written off in a prior fiscal year. Other expense of $150 for the three months
ended December 31, 1998 related primarily to a reduction of $156 in the carrying
value of our investment in Imagyn Medical Technologies, Inc. ("Imagyn") to its
market value. Other expense of $87 for the nine months ended December 31, 1999
related to a $1,077 reduction in the carrying value of our investment in Imagyn
and a write-down in the carrying value of an investment in a non-public company
of $150 partially offset by $1,140 in income consisting primarily of $576 in
gains on the sale of securities sold during the period, a royalty payment of
$350 and a $200 recovery on an investment written off in a prior fiscal year.
Our equity interest in Imagyn was eliminated in its Chapter 11 Plan of
Reorganization during the quarter. Other expense of $2,540 for the nine months
ended December 31, 1998 related to a $2,490 reduction in the carrying value of
our investment in Imagyn to its market value and a write-down of $1,591 in the
carrying value of an investment in a non-public company partially offset by
$1,541 in gains principally from recoveries on investments which had been
written-off in prior periods and a royalty payment received.

INTEREST AND DIVIDEND INCOME

         Interest and dividend income increased $124 to $616 for the three
months ended December 31, 1999 compared to $492 for the three months ended
December 31, 1998. Interest income increased $92 and dividend income increased
$32. Interest income on investments increased $162 primarily due to additional
funds available to invest from proceeds from the sale of the real estate
properties and the $5,000 payment discussed above as well as interest on new
note receivables made in the current fiscal year to companies in which we have
made equity investments. This income was partially offset by a $70 decrease in
interest income earned in the prior year on a receivable that was part of a
settlement with National Steel Corporation ("NSC"), which was paid in full in
November 1998. For the nine months ended December 31, 1999, interest and
dividend income increased $48 to $1,700 compared to $1,652 for the nine months
ended December 31, 1998. Dividend income increased $96 as compared to the prior
year from additional amounts invested in the same preferred stock as held in the
prior year. Interest income decreased $48 when


                                      14

<PAGE>

compared to the prior year primarily as a result of a $307 decrease in
interest income from the NSC receivable partially offset by additional
interest earned on other investments. The average balance of these other
investments had increased approximately $6,000 when compared to the prior
year due mainly to the additional funds available to invest in the current
year as discussed above. The increased amount available to invest was
partially offset by a decrease in the interest rate earned during the nine
month period of about 0.1%.

INTEREST EXPENSE

         Interest expense increased $292 to $481 for the three months ended
December 31, 1999 compared to $189 for the three months ended December 31, 1998.
Interest expense increased primarily as a result of the $267 in interest expense
on the 6.75% notes issued in December 1999 as discussed above and the impact of
compounding on the note payable to the Trustee. Interest expense increased $276
to $860 for the nine months ended December 31, 1999 compared to $584 for the
nine months ended December 31, 1998. Interest expense increased due primarily to
the interest on the 6.75% notes.

EQUITY IN INCOME OF AFFILIATES

         Equity in income was $3,057 and $167 for the three and nine months
ended December 31, 1999, respectively, compared to equity in income of $1,290
and $940 for the three and nine months ended December 31, 1998. The change in
equity in income of affiliates was primarily the result of our equity in
earnings at Phar-Mor. For the quarter, earnings from our equity investment in
Phar-Mor were $1,679 higher than in the prior year due primarily to an increase
of approximately $1,227 in our equity in Phar-Mor's investment income. For the
nine months, our equity in Phar-Mor's earnings were $688 lower than in the prior
year. This decrease was the result of our equity in Phar-Mor's operating
earnings being approximately $2,954 lower than in the prior year due to lower
profit margins and higher overhead and interest expense. Part of this
unfavorable variance was caused by the integration of the Pharmhouse
acquisition. This decrease was partially offset by our equity interest of
approximately $2,266 in additional investment income earned by Phar-Mor during
the nine months ended December 31, 1999.

INCOME TAXES

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

DISCONTINUED OPERATIONS

         The $334 loss on discontinued operations for the three months ended
December 31, 1998 related entirely to the real estate segment. There were no
operations in this segment for the comparable period in the current fiscal year.
Gain on discontinued operations was $259 for the nine months ended December 31,
1999 compared to $235 for the nine months ended December 31, 1998. These amounts
also only related to the discontinued real estate segment. The results are not
comparable as we owned the real estate properties for only two months during the
current fiscal year compared to the whole period in the prior fiscal year.

         The loss on disposal of discontinued operations for the three months
ended December 31, 1999 resulted from a fee paid in connection with the
contingent payment received in the prior quarter from the sale of a discontinued
operation, as discussed in the "Overview" section above. For the nine months
ended December 31, 1999, the $7,872 gain includes the gain on the contingent
payment of $2,314 and the gain on the disposal of the real estate segment of
$5,558, net of taxes.

PREFERRED STOCK DIVIDENDS

         Preferred stock dividends were $5,762 and $20,912 for the three and
nine months ended December 31, 1999, respectively, compared to $7,127 and
$20,876 for the three and nine months ended December 31,


                                      15

<PAGE>

1998. The preferred stock was eliminated as of December 7, 1999 as part of
the merger with Xetava as discussed above. The accrual of the cumulative
dividend was, therefore, only for a partial period in the current fiscal
year. The Xetava merger also resulted in a $225,008 gain in connection with
the exchange of preferred stock for either the new Class A common stock or
the Alternate Consideration.


                         LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1999, we had cash and short-term investments of
approximately $17,307. In addition, we have approximately $6,698 of cash
investments which will mature in January and February 2000 which are carried in
"Other current assets" in the balance sheet. During the nine months, we loaned
approximately $1,200 to companies in which we had previously invested.

         Our debt consists of a note payable to the FoxMeyer Chapter 7
Bankruptcy Trustee and the debt issued in the merger with Xetava by Avatex
Funding, Inc. All the debt of real estate partnerships has been repaid,
transferred to or assumed by other parties in connection with the sale. During
the quarter, our two issues of redeemable preferred stock outstanding were
exchanged for our new Series A common stock or the Alternate Consideration as
discussed above. The note due to the Trustee is payable in October 2000 and is
carried in "Current portion of long-term debt" in the balance sheet at December
31, 1999. The issuance of the 6.75% notes by Avatex Funding will require
payments of interest semi-annually in cash with the principal balance due in
three years from the date of issuance. Since we have guaranteed the 6.75% notes
and Avatex Funding has no assets other than the Phar-Mor common stock securing
the notes, we may make capital contributions to Avatex Funding so it can satisfy
its interest and principal obligations on the notes. The semi-annual interest
payment will be approximately $968.

         For corporate operations, cash requirements include the funding of
monthly operating activities, the payment of benefit obligations, and the
funding of environmental liabilities of previously owned businesses, the amounts
and timing of which are uncertain. We will likely be required to fund any cash
to be paid to Avatex Funding note holders. We expect to receive cash from the
collection of receivables and from interest and dividend income earned on our
investments.

         We continuously evaluate current and potential investments in
connection with an ongoing review of our investment strategies and, as
opportunities arise, will continue to invest in publicly and privately held
companies which we believe would be worthwhile investments. In addition, we
may pursue the acquisition of an operating company. There may be restrictions
imposed on our ability to make certain types of investments and on other
activities as a result of our merger with Xetava.

         We will rely on cash on hand, any excess cash from investments and,
if necessary, the sale of our investments to meet future obligations. We are
involved in litigation which, if we were to lose, would have a material
impact on our financial condition, liquidity and results of operations. These
financial statements have been prepared on a going concern basis which
contemplates the realization of our assets and the settlement of our
liabilities and commitments in the normal course of business. See Note R to
the consolidated financial statements in our Form 10-K/A for the year ended
March 31, 1999 for a discussion of our ability to continue as a going concern
and management's plans addressing those issues.


                                      OTHER

         In June 1998, the Financial Accounting Standards Board 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,
2000. Therefore, we will be required to adopt SFAS No. 133 for our fiscal year
beginning April 1, 2001. We do not believe the impact from the adoption of SFAS
No. 133 will be material.


                                      16

<PAGE>

         There have been no material changes in the Quantitative and
Qualitative Disclosures about Market Risk since March 31, 1999, except that
our investments in available for sale securities other than redeemable
preferred stock at December 31, 1999 were $5.6 million compared to $9.5
million at March 31, 1999; the interest rate on the variable rate note
payable to the Trustee has increased to 8.5% at December 31, 1999 from 7.75%
at March 31, 1999; and we issued new 6.75% notes in connection with the
Xetava merger as discussed above.

         What is commonly referred to as the "Year 2000" issue related, in
part, to many hardware and software systems that used only two digits to
represent the year being unable to recognize dates beyond 1999. Our internal
systems were Year 2000 compliant. We have not suffered any disruptions in
services provided by our outside vendors. Based on results of conversations
with companies in which we have invested, they also have not suffered any
material losses as a result of Year 2000 failures. At this time, it appears
the Year 2000 issue has not had any material impact on our operations.

         This document contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 that are
based on the assumptions, beliefs and opinions of our management. When used
in this document, the words "anticipate", "believe", "continue", "estimate",
"expect", "intend", "may", "should" and similar expressions are intended to
identify forward-looking statements. Such statements contain our current
views with respect to future events and are subject to certain risks and
uncertainties which have been described in our reports and statements filed
with the Securities and Exchange Commission, including this report. However,
there can be no guarantee that these assumptions will be achieved, and actual
results could differ materially from those anticipated.


                                      17

<PAGE>

                           PART II - OTHER INFORMATION

                       AVATEX CORPORATION AND SUBSIDIARIES

ITEM 1.  LEGAL PROCEEDINGS

         With respect to the matters reported in our Annual Report on Form
10-K/A for the fiscal year ended March 31, 1999, and in our Quarterly Reports on
Form 10-Q/A for June 30, 1999 and Form 10-Q for September 30, 1999, the
following additional information is provided:

         McKesson/Vendor Litigation. With respect to the Texas lawsuit we
brought against McKesson and certain pharmaceutical manufacturers, we have now
entered into settlement agreements with a total of four manufacturer defendants,
under which we received or will receive confidential settlement payments.

         1994 Merger Litigation: With reference to the Delaware lawsuit filed in
1994 relating to the merger of FoxMeyer Corporation into a wholly-owned
subsidiary of ours, in January 2000, we entered into a settlement agreement
under which we will pay the plaintiff class the amount of $1,450,000 and the
lawsuit will be dismissed. A portion of the settlement payment will be paid by
the FoxMeyer Corporation directors' insurance carrier. The settlement is subject
to the approval of the Delaware Court of Chancery.

         1996 Stockholder Litigation. With reference to lawsuit styled GROSSMAN
V. FOXMEYER HEALTH CORP., following the Court's denial of the plaintiff's motion
for class certification, we reached a settlement with the plaintiff under which
we will pay the plaintiff a de minimus amount and the lawsuit will be dismissed.
A portion of the settlement will be paid by our directors' insurance carrier.

         Preferred Stockholder Litigation. With reference to the lawsuits filed
by certain of our preferred stockholders relating to our April 1998 proposed
merger with Xetava Corporation, the Delaware Court of Chancery approved the
settlement of the lawsuits in connection with the terms of our revised merger
with Xetava that closed on December 7, 1999.

         Derivative Litigation. With reference to the purported derivative
litigation filed by certain of our preferred stockholders against ten of our
current and former directors, a hearing on the defendants' motion for summary
judgment was held on January 26, 2000. The court has not yet ruled on the
motion.

         FoxMeyer Corporation. With reference to the lawsuit the FoxMeyer
Corporation bankruptcy trustee brought against the five former directors of
FoxMeyer Corporation, the Delaware Bankruptcy Court entered an order
establishing procedures for a joint insolvency trial in the lawsuit and in
certain other lawsuits brought by the trustee against other persons and entities
related to the FoxMeyer Corporation bankruptcy cases.

         Ben Franklin Litigation. With reference to the three lawsuits relating
to Ben Franklin Retail Stores, Inc. ("Ben Franklin"), in January 2000, the
United States District Court for the Northern District of Illinois entered an
amended order in the lawsuit commenced by Ben Franklin's bankruptcy trustee,
which found that the Bankruptcy Court's conclusion of law were correct with the
exception of the trustee's failure to state a legally cognizable claim. In the
lawsuit commenced by certain of Ben Franklin's lenders, the same order affirmed
the Bankruptcy Court's dismissal of Counts I and II of the complaint filed in
that case for failure to plead fraud with particularity, its dismissal of Count
III for failure to state a claim upon which relief can be granted, and its
dismissal of Count IV both for failure to plead fraud with particularity and for
failure to state a claim upon which relief can be granted. In the third lawsuit,
pending in Illinois state court, the court entered an order in October 1999
dismissing the plaintiff's third amended complaint without prejudice, and the
plaintiffs filed a fourth amended petition in December 1999.


                                      18

<PAGE>

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         As a result of the closing of our merger with Xetava on December 7,
1999, holders of our pre-existing common stock, par value $5.00 per share, and
holders of our $5.00 cumulative convertible preferred stock and our $4.20
cumulative exchangeable preferred stock that did not elect to receive cash,
6.75% notes, warrants and other consideration in the merger, received shares of
our new Class A common stock, par value $.01 per share. Except for the reduction
in par value, our Class A common stock is substantially similar to our
pre-existing common stock. The terms of the notes, warrants and other
consideration are described in Part I above and are incorporated herein by
reference.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

         As a result of the closing of our merger with Xetava on December 7,
1999, our $5.00 cumulative convertible preferred stock and our $4.20 cumulative
exchangeable preferred stock ceased to be outstanding and there are no longer
any dividend arrearages with respect to our preferred stock.

ITEM 4.  RESULTS OF VOTES OF SECURITY HOLDERS

         We held our annual meeting on December 6, 1999. At the annual meeting,
our common and preferred stockholders voted on a proposal to approve and adopt
the Amended and Restated Agreement and Plan of Merger, dated as of June 18,
1999, by and between Xetava Corporation and us, as amended by Amendment No. 1
dated October 19, 1999, and our common stockholders also voted on the election
of directors.

         The votes for, against and abstaining on the merger proposal were as
follows:

<TABLE>
         <S><C>
         Common Stock:
                  ---------------------------------------------------------------
                  For:                                             8,941,754

                  ---------------------------------------------------------------
                  Against:                                            90,815

                  ---------------------------------------------------------------
                  Abstain:                                            42,792

                  ---------------------------------------------------------------
                  Broker Nonvotes:                                 4,192,274

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

         $5.00 Cumulative Convertible Preferred Stock:
                  ---------------------------------------------------------------
                  For:                                               493,290

                  ---------------------------------------------------------------
                  Against:                                            17,996

                  ---------------------------------------------------------------
                  Abstain:                                               696

                  ---------------------------------------------------------------
                  Broker Nonvotes:                                   140,291

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

         $4.20 Cumulative Exchangeable Preferred Stock
                  ---------------------------------------------------------------
                  For:                                             3,282,277

                  ---------------------------------------------------------------
                  Against:                                            28,799

                  ---------------------------------------------------------------
                  Abstain:                                            13,902

                  ---------------------------------------------- ----------------
                  Broker Nonvotes:                                   987,374

                  ---------------------------------------------------------------
</TABLE>

         The following two individuals were elected by our common stockholders
to serve as directors until the annual meeting of stockholders in the year 2001,
and the number of votes cast for or withheld for each of these individuals was
as follows:

<TABLE>
<CAPTION>
                  ---------------------------------------------------------------
                                                    Number of Votes
                                                          For          Withheld
                 <S>                                 <C>               <C>
                  ---------------------------------------------------------------
                  William A. Lemer                    13,124,165        124,197
                  ---------------------------------------------------------------
                  John L. Wineapple                   13,125,513        122,849
                  ---------------------------------------------------------------
</TABLE>


                                      19

<PAGE>

         The following two individuals were elected by our common stockholders
to serve as directors until the annual meeting of stockholders in the year 2002,
and the number of votes cast for or withheld for each of these individuals was
as follows:

<TABLE>
<CAPTION>
                  ---------------------------------------------------------------
                                                    Number of Votes
                                                          For          Withheld
                  <S>                               <C>                <C>
                  ---------------------------------------------------------------
                  Abbey J. Butler                     13,123,854        124,509
                  ---------------------------------------------------------------
                  Melvyn J. Estrin                    13,125,125        123,237
                  ---------------------------------------------------------------
</TABLE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  EXHIBITS

                27      -  Financial Data Schedule

         (b)  REPORTS ON 8-K

                 We filed the following Current Report on Form 8-K during the
                 three months ended December 31, 1999:

                 We filed a Current Report on Form 8-K dated December 7, 1999,
                 which described the consummation of our merger with Xetava
                 Corporation and the exchange of our outstanding preferred
                 stock.


                                      20

<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 9, 1999             By:  /s/ Grady E. Schleier
                                         -------------------------------------
                                          Grady E. Schleier
                                          Senior Vice President, Chief Financial
                                          Officer and Treasurer
                                          (Principal Financial and Accounting
                                          Officer)


                                      21