---

---

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

---

FORM 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
|OR                                               
|o                                                 | 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(State or Other Jurisdiction of Incorporation or Organization)                       
|5910 N. Central Expressway, Suite 1780, Dallas, Texas(Address of Principal Executive Offices)
|Registrant's Telephone Number, Including Area Code                                           

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 ý        No o.

Number
of shares of Common Stock outstanding as of September 30, 2002: 19,637,357 shares.

---



PART 1. FINANCIAL INFORMATION

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

|                                                                                          |                                                                       | For the three months ended September 30, |       
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------- | ------
|
|
|Revenues                                                                                  |                                                                       | $                                        | 241   
|Operating costs                                                                           |                                                                       |                                          |       
|                                                                                          | Cost of goods sold (exclusive of depreciation shown separately below) |                                          |       
|                                                                                          | Selling, general and administrative costs                             |                                          |       
|                                                                                          | Research and development costs                                        |                                          |       
|                                                                                          | Depreciation and amortization                                         |                                          |       
|                                                                                          |                                                                       |                                          |       
|Total operating loss                                                                      |                                                                       |                                          | (1,243
|Other income                                                                              |                                                                       |                                          | 28    
|Interest and dividend income                                                              |                                                                       |                                          | 14    
|Interest expense                                                                          |                                                                       |                                          | (750  
|                                                                                          |                                                                       |                                          |       
|Loss from continuing operations before equity in loss of affiliates and minority interest |                                                                       |                                          | (1,951
|Equity in loss of affiliates                                                              |                                                                       |                                          |      
|                                                                                          |                                                                       |                                          |       
|Loss from continuing operations before minority interest                                  |                                                                       |                                          | (1,951
|Minority interest                                                                         |                                                                       |                                          | 46    
|                                                                                          |                                                                       |                                          |       
|Loss from continuing operations                                                           |                                                                       |                                          | (1,905
|Discontinued operations                                                                   |                                                                       |                                          |       
|                                                                                          | Gain on disposal of discontinued operations                           |                                          |       
|                                                                                          |                                                                       |                                          |       
|Net loss                                                                                  |                                                                       | $                                        | (1,905
|                                                                                          |                                                                       |                                          |       
|Basic and diluted income (loss) per share:                                                |                                                                       |                                          |       
|                                                                                          | Loss from continuing operations                                       |                                          | $     
|                                                                                          | Discontinued operations                                               |                                          |       
|                                                                                          |                                                                       |                                          |       
|Loss per share                                                                            |                                                                       | $                                        | (0.10 
|                                                                                          |                                                                       |                                          |       
|Average number of common shares outstandingbasic and diluted                             |                                                                       |                                          | 19,405
|                                                                                          |                                                                       |                                          |       
|Comprehensive loss                                                                        |                                                                       | $                                        | (1,919
|                                                                                          |                                                                       |                                          |       

See notes to condensed consolidated financial statements.

1

---

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

|                                                                                          |                                                                       | For the six months ended September 30, |       
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------- | ------
|
|
|Revenues                                                                                  |                                                                       | $                                      | 629   
|Operating costs                                                                           |                                                                       |                                        |       
|                                                                                          | Cost of goods sold (exclusive of depreciation shown separately below) |                                        |       
|                                                                                          | Selling, general and administrative costs                             |                                        |       
|                                                                                          | Research and development costs                                        |                                        |       
|                                                                                          | Depreciation and amortization                                         |                                        |       
|                                                                                          |                                                                       |                                        |       
|Total operating loss                                                                      |                                                                       |                                        | (2,463
|Other income (expense)                                                                    |                                                                       |                                        | (199  
|Interest and dividend income                                                              |                                                                       |                                        | 108   
|Interest expense                                                                          |                                                                       |                                        | (1,437
|                                                                                          |                                                                       |                                        |       
|Loss from continuing operations before equity in loss of affiliates and minority interest |                                                                       |                                        | (3,991
|Equity in loss of affiliates                                                              |                                                                       |                                        |      
|                                                                                          |                                                                       |                                        |       
|Loss from continuing operations before minority interest                                  |                                                                       |                                        | (3,991
|Minority interest                                                                         |                                                                       |                                        | 105   
|                                                                                          |                                                                       |                                        |       
|Loss from continuing operations                                                           |                                                                       |                                        | (3,886
|Discontinued operations                                                                   |                                                                       |                                        |       
|                                                                                          | Gain on disposal of discontinued operations                           |                                        |       
|                                                                                          |                                                                       |                                        |       
|Loss before extraordinary item                                                            |                                                                       |                                        | (3,886
|Extraordinary item:                                                                       |                                                                       |                                        |       
|                                                                                          | Gain on extinguishment of debt                                        |                                        |       
|                                                                                          |                                                                       |                                        |       
|Net loss                                                                                  |                                                                       | $                                      | (3,886
|                                                                                          |                                                                       |                                        |       
|Basic and diluted income (loss) per share:                                                |                                                                       |                                        |       
|                                                                                          | Loss from continuing operations                                       |                                        | $     
|                                                                                          | Discontinued operations                                               |                                        |       
|                                                                                          | Extraordinary item                                                    |                                        |       
|                                                                                          |                                                                       |                                        |       
|Loss per share                                                                            |                                                                       | $                                      | (0.21 
|                                                                                          |                                                                       |                                        |       
|Average number of common shares outstandingbasic and diluted                             |                                                                       |                                        | 18,338
|                                                                                          |                                                                       |                                        |       
|Comprehensive loss                                                                        |                                                                       | $                                      | (3,900
|                                                                                          |                                                                       |                                        |       

See notes to condensed consolidated financial statements.

2

---



AVATEX CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited)

|                                            |                                                                                        | September 30,
2002 |        | March 31,
2002 |  
|------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------ | ------ | -------------- | -
|
|ASSETS                                      |                                                                                        |                    |        |                |  
|Current assets                              |                                                                                        |                    |        |                |  
|                                            | Cash and cash equivalents                                                              |                    | $      | 2,669          |  
|                                            | Receivablesnet                                                                        |                    |        | 29             |  
|                                            | Inventories                                                                            |                    |        | 96             |  
|                                            | Other current assets                                                                   |                    |        | 475            |  
|                                            |                                                                                        |                    |        |                |  
|Total current assets                        |                                                                                        |                    | 3,269  |                |  
|Investment in affiliate                     |                                                                                        |                    |       |                |  
|Property and equipment                      |                                                                                        |                    | 389    |                |  
|                                            | Less accumulated depreciation and amortization                                         |                    |        | 165            |  
|                                            |                                                                                        |                    |        |                |  
|Net property and equipment                  |                                                                                        |                    | 224    |                |  
|Other assets                                |                                                                                        |                    | 11,265 |                |  
|                                            |                                                                                        |                    |        |                |  
|Total assets                                |                                                                                        | $                  | 14,758 |                | $
|                                            |                                                                                        |                    |        |                |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT       |                                                                                        |                    |        |                |  
|Current liabilities                         |                                                                                        |                    |        |                |  
|                                            | Accounts payable                                                                       |                    | $      | 642            |  
|                                            | Other accrued liabilities                                                              |                    |        | 1,212          |  
|                                            | Long-term debt due within one year                                                     |                    |        | 13,925         |  
|                                            |                                                                                        |                    |        |                |  
|Total current liabilities                   |                                                                                        |                    | 15,779 |                |  
|Long-term debt                              |                                                                                        |                    | 5      |                |  
|Other long-term liabilities                 |                                                                                        |                    | 7,534  |                |  
|Minority interest                           |                                                                                        |                    | 348    |                |  
|Commitments and contingencies               |                                                                                        |                    |       |                |  
|Stockholders' deficit                       |                                                                                        |                    |        |                |  
|                                            | Common stock $0.01 par value; authorized: 50,000,000 shares; issued: 19,637,357 shares |                    |        | 196            |  
|                                            | Capital in excess of par value                                                         |                    |        | 188,016        |  
|                                            | Accumulated other comprehensive loss                                                   |                    |        | (10,730        | )
|                                            | Accumulated deficit                                                                    |                    |        | (186,390       | )
|                                            |                                                                                        |                    |        |                |  
|                                            |                                                                                        |                    | (8,908 | )              |  
|                                            | Less equity in cost of common stock of the Corporation held by Phar-Mor, Inc.          |                    |        |               |  
|                                            |                                                                                        |                    |        |                |  
|Total stockholders' deficit                 |                                                                                        |                    | (8,908 | )              |  
|                                            |                                                                                        |                    |        |                |  
|Total liabilities and stockholders' deficit |                                                                                        | $                  | 14,758 |                | $
|                                            |                                                                                        |                    |        |                |  

See notes to condensed consolidated financial statements.

3

---

AVATEX CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                                                       |                                                | For the six months ended September 30,   |      
|-------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | -----
|
|
|Cash flows from operating activities:                                                  |                                                |                                          |      
|Net loss                                                                               |                                                | (3,886                                   | )    
|Adjustments to reconcile net loss to net cash provided (used) by operating activities: |                                                |                                          |      
|                                                                                       | Equity in loss of affiliates                   |                                          |     
|                                                                                       | Depreciation and amortization                  |                                          | 43   
|                                                                                       | Loss (gain) on investments                     |                                          | 208  
|                                                                                       | Other non-cash expense items, net              |                                          | 924  
|                                                                                       | Gain on extinguishment of debt                 |                                          |     
|                                                                                       | Increase in reserve for bad debts              |                                          | 15   
|                                                                                       | Minority interest                              |                                          | (105 
|                                                                                       | Cash provided (used) by working capital items: |                                          |      
|                                                                                       |                                                | Receivables                              |      
|                                                                                       |                                                | Other assets                             |      
|                                                                                       |                                                | Accounts payable and accrued liabilities |      
|                                                                                       |                                                |                                          |      
|Net cash used by operating activities                                                  |                                                | (3,562                                   | )    
|                                                                                       |                                                |                                          |      
|Cash flows from investing activities:                                                  |                                                |                                          |      
|                                                                                       | Purchase of investments                        |                                          |     
|                                                                                       | Purchase of property and equipment             |                                          | (15  
|                                                                                       | Proceeds from sale of investments              |                                          | 24   
|                                                                                       | Other                                          |                                          |     
|                                                                                       |                                                |                                          |      
|Net cash provided by investing activities                                              |                                                | 9                                        |      
|                                                                                       |                                                |                                          |      
|Cash flows from financing activities:                                                  |                                                |                                          |      
|                                                                                       | Debt repayments                                |                                          | (2   
|                                                                                       | Debt repurchases                               |                                          |     
|                                                                                       |                                                |                                          |      
|Net cash used by financing activities                                                  |                                                | (2                                       | )    
|                                                                                       |                                                |                                          |      
|Net decrease in cash and cash equivalents                                              |                                                | (3,555                                   | )    
|                                                                                       | Cash and cash equivalents, beginning of period |                                          | 6,224
|                                                                                       |                                                |                                          |      
|Cash and cash equivalents, end of period                                               |                                                | 2,669                                    |      
|                                                                                       |                                                |                                          |      

See notes to condensed consolidated financial statements.

4

---



AVATEX CORPORATION AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        SEPTEMBER 30, 2002        (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. The Company consolidated Chemlink Laboratories, LLC ("Chemlink") at March 31, 2002 as a result of its control of 50% of the voting interests of Chemlink through
its 59% interest in Chemlink Acquisition Company, LLC ("CLAC"). Prior to March 31, 2002, Chemlink was carried on an equity basis. Chemlink is primarily engaged in the development, manufacture
and distribution of effervescent tablet and granule formulations for consumers and businesses for use in cleaning, disinfecting and sterilization applications. The Company also owns 48% of
Phar-Mor, Inc. ("Phar-Mor") which operated a chain of discount retail drugstores. Phar-Mor filed for bankruptcy protection under Chapter 11 of the Bankruptcy
Code on September 24, 2001 and, in July 2002, sold substantially all of its assets.

Going Concern:These financial statements have been prepared on a going concern basis which contemplates the realization of
the Company's assets and the settlement of its liabilities and commitments in the normal course of business. See Note 7 for a discussion of the Company's ability to continue as a going concern
and its plans addressing those issues. Specifically, the 6.75% notes issued by Avatex Funding, Inc. ("Avatex Funding"), and guaranteed by the Company, are due on December 7, 2002. Since
there is no assurance that the Company will be able to generate sufficient cash flows from its investments, restructure its liabilities, or obtain additional financing by that date, the Company may
have insufficient cash to fund the principal and interest payments due on the notes in December 2002. Therefore, the Company may be in default on the notes at that time, which in turn could
force the Company to seek protection under the federal bankruptcy laws.

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

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

The
Company's condensed consolidated balance sheet as of September 30, 2002, the condensed consolidated statements of operations and comprehensive loss for the three and six
months ended September 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the six months ended September 30, 2002 and 2001, 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 six months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the entire year. The condensed consolidated balance sheet as of March 31, 2002 was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles. Additional information is contained in the Company's Annual Report on

5

---

Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2002, and should be read in conjunction with this quarterly report.

Revenues:Revenues are reported when goods are shipped and title passes. For products produced by or for others for which the
Company will receive a royalty payment, revenues represent the royalty payments earned.

Inventory:Inventories are stated at the lower of cost or market. Cost is determined using the average cost method.
Inventories consisted principally of raw materials at September 30, 2002. There was no work-in-process inventory and finished goods were approximately
$21 thousand.

Minority interest:The minority interest represents the approximate 41% interest in CLAC and the 50% interest in Chemlink
that the Company does not own.

Extraordinary item:The extraordinary item for the six months ended September 30, 2001 represents a gain realized on
the early extinguishment of certain of the 6.75% notes issued by the Company's subsidiary, Avatex Funding. See Note 5.

Comprehensive Income (Loss):The difference in comprehensive loss and net loss is due to the change in the components of
other comprehensive income (loss), the details of which follow (in thousands of dollars):

For the three months ended September 30,

For the six months ended September 30,2002

2001

2002

2001Unrealized gains (losses) on securities

$
(14
)
$
(8
)
$
(14
)
$
8Reclassification adjustment for gains included in net loss





(10
)




(10
)Net unrealized losses


(14
)

(18
)

(14
)

(2
)Minimum pension liability adjustment











Total other comprehensive loss

$
(14
)
$
(18
)
$
(14
)
$
(2
)


Newly Adopted and Issued Accounting Standards:In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No.142 "Goodwill and Other Intangible Assets". In August 2001, the FASB
issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". These pronouncements were adopted in the Company's fiscal year beginning April 1, 2002.
The adoption by the Company of these three standards did not impact our results of operations or financial condition. In addition, in June 2001, the FASB also issued SFAS No. 143
"Accounting for Asset Retirement Obligations". The Company has elected the early adoption of this standard effective April 1, 2002. There was no impact on the Company's results of operations or
financial condition as a result of the early adoption of the standard.

6

---

In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The applicable portion of SFAS No. 145 relates to the rescission of SFAS No. 4 "Reporting Gains and Losses from the Extinguishment of Debt", as amended by SFAS No. 64. With the
rescission of SFAS No. 4, the question of whether a gain or loss on the extinguishment of debt is extraordinary depends on whether the transaction meets the criteria for classification as a
extraordinary item in APB Opinion No. 30 "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The Company will be required to adopt the statement in its fiscal year beginning April 1, 2003. Any amounts presented as an extraordinary item
from the extinguishment of debt in prior years that do not meet the criteria in APB No. 30 shall be reclassified to income from continuing operations as a result of the adoption of this
standard. Management is reviewing whether the items classified as extraordinary items from the extinguishment of debt in the Company's financial statements meet the criteria of APB No. 30. Any
changes from the adoption of this standard will not alter the net income (loss) or net income (loss) per share already reported but may result in a reclassification of certain gains from extraordinary
items to income (loss) from continuing operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires recording costs associated with exit
or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company
does not believe that this statement will have any impact on its results of operations or its financial condition.

Common Stock of Avatex Corporation Held By An Affiliate:As of March 31, 2002, Phar-Mor owned 4,948,600
shares or 25.2% of the Company's issued common stock. The Company accounts for its investment in Phar-Mor on an equity basis and treated Phar-Mor's investment in the Company's
common stock similar to treasury stock, with a reduction in its stockholders' equity of approximately $5.2 million at March 31, 2002 (the equivalent of a reduction of 2,378,164 shares of
its common stock outstanding). The reduction was based on the Company's 48.1% ownership interest in the cost and number of shares of its common stock held by Phar-Mor. Before
July 10, 2002, our Co-Chairmen of the Board and Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin, held the same positions at Phar-Mor.
Effective on July 10, 2002, Mr. Butler and Mr. Estrin entered into a Settlement Agreement (the "Settlement") with Phar-Mor, the Official Committee of the Unsecured
Creditors of Phar-Mor, and the Company. Under the Settlement, Mr. Butler and Mr. Estrin (the "Chairmen") agreed to be
terminated as officers and directors of Phar-Mor in exchange for a cash payment and Phar-Mor's interests in Presby Corp. ("Presby") and certain of its affiliates, CLAC and the
Company's common stock owned by Phar-Mor. As a result of the Settlement, the shares formerly held by Phar-Mor are no longer considered treasury shares resulting in an increase
in shares outstanding for calculating earnings per share for the three and six month periods ending September 30, 2002. The Company's stockholders' deficit did not change as a result of the
transaction as the offset to the

7

---

elimination of the $5.2 million in treasury stock was a corresponding reduction in "capital in excess of par value".

The
weighted average number of shares outstanding used in calculating earnings per share was reduced by 232,646 and 2,369,702 for the three months ended September 30, 2002 and
2001, respectively, and 1,299,543 and 2,355,304 for the six months ended September 30, 2002 and 2001, respectively. The decrease was the result of the Settlement which eliminated the treasury
shares outstanding on July 10, 2002.

NOTE 2INCOME (LOSS) PER SHARE OF COMMON STOCK

The loss per share from continuing operations for basic and diluted earnings per share was calculated by dividing the loss from continuing operations for the
three and six months ended September 30, 2002 and 2001 by the weighted average number of common shares outstanding. The weighted average number of shares outstanding was reduced by the
Company's equity in the number of shares of its stock held by Phar-Mor as explained in Note 1.

Options
to purchase approximately 0.1 million and 4.0 million shares of common stock were outstanding at September 30, 2002 and 2001, respectively. These options
were not included in the computation of diluted earnings per share because the average market price of the Company's common stock was less than the exercise price of the options and/or the effect of
including the options in the calculation would be anti-dilutive. Warrants to purchase approximately 2.3 million shares of the Company's common stock at $2.25 per share were
outstanding at September 30, 2002 and 2001. These warrants were not included in the computation of diluted earnings per share because the average market price of the Company's common stock was
less than the exercise price of the warrants and the effect of including the warrants in the calculation would be anti-dilutive.

NOTE 3SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION

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

For the six months ended
September 30,2002

2001Interest paid

$
482

$
764Income taxes paid (refund)





(46
)Non-cash transactions:Stock of WD-40 Company received on sale of an investment


24


45


8

---

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

September 30, 2002

March 31, 2002Other assets:Prepaid pension cost

$
4,381

$
4,352Securities available for sale


3,161


2,355Patents


1,454


1,415Cash surrender value of life insurance


2,122


1,980Accrued dividends on preferred stock





702Other


147


32Total

$
11,265

$
10,836Other accrued liabilities:Accrued interest payable

$
284

$
284Liabilities related to discontinued operations


102


108Salaries, wages and employee benefits


498


494Environmental liabilities


215


210Other


113


160Total

$
1,212

$
1,256Other long-term liabilities:Pension and postretirement benefits

$
4,547

$
4,632Environmental liabilities


1,034


1,043Liabilities related to discontinued operations


453


453Liabilities for potential claims


1,500


2,000Total

$
7,534

$
8,128


Long-term
assets include a prepaid pension cost of $4.4 million. Other accrued liabilities and long-term liabilities include liabilities for pension
benefits of $0.7 million that are accounted for under accounting principles promulgated by SFAS No. 87, as amended. Under SFAS No. 87, the pension plans are required to be valued
only at year end unless measures of both the obligation and plan assets are available as of a more current date or a significant event occurs, such as an amendment, that would normally call for such a
measurement. No measure of the pension obligation has occurred since our financial statements for the year ended March 31, 2002. However, as a result of the substantial decline in the stock
market since March 31, 2002, the value of plan assets has decreased substantially. While our pension plans were overfunded by $0.2 million under generally accepted accounting principles
at
March 31, 2002, the Company has estimated that the plans may be underfunded by as much as approximately $10.0 million at September 30, 2002.

9

---

NOTE 4COMMITMENTS AND CONTINGENCIES

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

At
September 30, 2002, the Company had reserves of approximately $1.2 million for environmental assessments, remediation activities, penalties or fines at seven sites that
may be imposed for non-compliance with such laws or regulations. Reserves are established when it is probable that liability for such costs will be incurred and the amount can be
reasonably estimated. The Company's estimates of these costs are based upon currently available facts, existing technology, presently enacted laws and regulations and the professional judgment of
consultants and counsel. Where the available information is sufficient to estimate the amount of the liability, that estimate has been used. Where the information is only sufficient to establish a
range of probable liability and no point within the range is more likely than the other, the lower end of the range was used.

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

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

The
Company and certain of its current and former officers and directors have been named in a series of purported class action lawsuits that were filed and subsequently consolidated
under Zuckerman, et al. v. FoxMeyer Health Corporation, et al., in the United States District Court for the Northern District of Texas, Dallas Division, Case
No. 396-CV-2258-T. The lawsuit purports to be

10

---

brought on behalf of purchasers of the Company's common and formerly outstanding preferred stocks during the period July 19, 1995 through August 27, 1996. In May 1997, plaintiffs
in the lawsuit filed a consolidated amended class action complaint, which alleges that the Company and the defendant officers and directors made misrepresentations of material facts in public
statements or omitted material facts from public statements, including the failure to disclose purportedly negative information concerning the Company's National Distribution Center and Delta computer
systems and the resulting impact on its existing and future business and financial condition. In January 2002, the Court granted the plaintiffs' unopposed motion to certify a class of
purchasers of common stock as to federal claims and reserved judgment on all other class certification issues. On September 11, 2002, all the defendants, including the Company, entered into a
Memorandum of Understanding (the "MOU") with counsel for the plaintiff class for the settlement of the lawsuit. Pursuant to the MOU, the Company deposited $0.5 million into an escrow account
that will be used to fund a portion of a settlement of the lawsuit. On October 11, 2002, the court gave its preliminary approval of an alternative dispute resolution proceeding to determine an
appropriate settlement amount as to the defendants other than the Company. These other defendants agreed in the MOU to pay a portion of this additional settlement amount and to waive their claims
against the Company to be indemnified for such payment. The Company also agreed in the MOU to assign to the plaintiff class any claims it may have relating to this lawsuit against the Company's
insurer, UPIC (and the estate and statutory liquidator of its parent, Reliance), the Texas Property and Casualty Insurance Guaranty Association or any other state's Insurance Guaranty Association, and
the Company's excess insurer, Gulf Insurance Company. The Company will have no further liability for the settlement amount or plaintiffs' attorneys' fees. The Company has denied and continues to deny
that it committed any act or omission or breach of duty giving rise to any liability in the lawsuit, and the Company has agreed to settle the lawsuit to eliminate the burden and expense of further
litigation, in particular because of the cessation of business and liquidation of Reliance. The settlement is subject to execution of definitive settlement documentation and final court approval.

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

11

---

filed answers to both of these lawsuits, and has moved for a judgment on the pleadings with respect to the Trustee's second claim for relief. The Company is currently paying its own defense costs and
the costs of the directors in these lawsuits, although all of these lawsuits have been dormant since the entry of the UPIC Order of Liquidation.

In
1997, the bankruptcy trustee and certain creditors of our former 17%-owned subsidiary, Ben Franklin, filed three lawsuits against the Company and certain of its and Ben Franklin's
current and former officers and directors. The Company and its officers and directors were subsequently dropped as defendants. In the state court lawsuit, on June 28, 2002, the Appellate Court
of Illinois, First District, affirmed the trial court's decision dismissing the plaintiffs' fourth amended complaint with prejudice. In the two federal court lawsuits, on September 3, 2002, the
parties entered into a settlement agreement under which certain of the defendants will pay $75 thousand to the plaintiffs. If the settlement is approved by the bankruptcy court, the Company
will indemnify these defendants for the settlement payment. If the settlement is not approved, the lawsuit may continue and we are unable to estimate the possible loss, if any, which may accrue from
this lawsuit.

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

NOTE 5DEBT

The extraordinary item for the six months ended September 30, 2001 represented a gain realized on the early extinguishment of approximately
$11.7 million face value of the 6.75% notes issued by the Company's subsidiary, Avatex Funding, that were purchased by the Company for approximately $7.1 million. The gain of
$2.5 million represented the difference in the purchase price and the discounted carrying value of the notes at the time of purchase. The face value of the remaining notes is approximately
$14.3 million. See Note 7 for a discussion of the Company's ability to repay the debt when it matures in December 2002.

NOTE 6INVESTMENTS

The carrying value of Phar-Mor on the Company's books at September 30, 2001 was reduced to zero as a result of Phar-Mor's losses
during the six months ended September 30, 2001. Phar-Mor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 24, 2001. In
July 2002, the bankruptcy court approved the sale of substantially all of the assets of Phar-Mor to a group composed of Giant Eagle, CVS and two liquidation companies. As a result,
there is no value to the Company's investment in the common stock of Phar-Mor. In addition, as part of Phar-Mor's Settlement with the Chairmen (see Note 1),
Phar-Mor transferred to the Chairmen its 25.2% interest in the Company's common stock as well as its interests in CLAC and Presby. This transaction had no impact on the Company's financial
condition, the carrying value of the Company's investments, or on its results of operations.

In
July 2002, the Company and the other holders of Presby Series B preferred stock (the "B Preferred") entered into an agreement with Presby whereby the holders of the B
Preferred received additional shares of B Preferred in exchange for their right to receive accrued and future dividends on the B Preferred. Under the agreement, the Company received 947,993 additional
shares of B Preferred

12

---

in exchange for its $0.8 million of dividends due at June 30, 2002 and for its rights to any future dividends on the B Preferred. The conversion ratio of the B Preferred remained at
2.52 common shares for each preferred share. In addition, the service agreement between Presby and RAS Service, LP ("RAS Service") was terminated effective July 15, 2002, and 25,237 shares of B
Preferred were issued in lieu of $0.1 million in service fees due. RAS Service then distributed all the B Preferred it received as a preferred return due to its general partner, a subsidiary of
the Company. On a fully-diluted basis, assuming exercise of all convertible preferred stock and options outstanding, the Company would own approximately 20.6% of the common stock of Presby in
July 2002 compared to approximately 13.5% at March 31, 2002.

In
fiscal 2002,iLife Systems, Inc. ("iLife") modified its corporate structure and
set up a wholly-owned subsidiary,iLife Solutions ("Solutions"), which now owns or licenses all the assets and assumed all the liabilities formerly held
byiLife. The Company, along with other investors, loaned Solutions $1.0 million (the Company's portion was approximately $0.2 million)
secured by the assets of Solutions. The Company wrote off its equity investment iniLife's preferred stock during fiscal 2002 to reflect what the
Company's management believed to be an other than temporary decline in value. During the quarter ended June 30, 2002, based on the then current financial status of Solutions, the continued
deterioration of its business plan and dynamics betweeniLife's management, its board of directors and the holders of Solutions' note, the Company wrote
off its investment in the note. At that time the Company believed that there may not be adequate assets, or that possible additional investments by others may not be forthcoming, to continue to fund
the needed expenditures to preserve the value of Solutions.

As
a result of additional investments made in CLAC in September 2001, the Company consolidated the results of operations of CLAC effective September 1, 2001. In addition,
effective March 31, 2002, the
Company also consolidated Chemlink as a result of an additional investment by CLAC that gave CLAC the right to appoint a majority of Chemlink's directors.

Assuming
that the Company had increased its interest in CLAC's voting rights to 59% on April 1, 2001 by making its entire $1.6 million in fiscal 2002 contributions as of
that date, and assuming that CLAC had made its entire $2.0 million in fiscal 2002 contributions to Chemlink on April 1, 2001 and

13

---

obtained control of Chemlink's board as of that date, the following are the Company's estimated pro forma results for the three months ended September 30, 2001 (in thousands of dollars):

For the three months ended
September 30, 2001As reported

Pro formaRevenues

$


$
Loss from continuing operations before equity in loss of affiliates and minority interest


(786
)

(6,616
)Equity in loss of affiliates


(2,355
)

(9
)Minority interest


16


3,168Loss from continuing operations


(3,125
)

(3,457
)Net loss


(3,077
)

(3,409
)Basic and diluted loss per share:Loss from continuing operations

$
(0.18
)
$
(0.20
)Net loss per share

$
(0.18
)
$
(0.20
)


Assuming
that the Company had increased its interest in CLAC's voting rights to 59% on April 1, 2001 by making its entire $1.6 million in fiscal 2002
contributions as of that date, and assuming that CLAC
had made its entire $2.0 million in fiscal 2002 contributions to Chemlink on April 1, 2001 and obtained control of Chemlink's board as of that date, the following are the Company's
estimated pro forma results for the six months ended September 30, 2001 (in thousands of dollars):

For the six months ended
September 30, 2001As reported

Pro formaRevenues

$


$
Loss from continuing operations before equity in loss of affiliates and minority interest


(1,118
)

(7,460
)Equity in loss of affiliates


(14,033
)

(11,573
)Minority interest


16


3,551Loss from continuing operations


(15,135
)

(15,482
)Net loss


(12,611
)

(12,958
)Basic and diluted loss per share:Loss from continuing operations

$
(0.87
)
$
(0.89
)Net loss per share

$
(0.73
)
$
(0.75
)


There
is no impact on the amounts reported for the three and six months ended September 30, 2002 as these amounts reflect Chemlink and CLAC on a consolidated basis
during the whole period.

NOTE 7GOING CONCERN

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

The
Company will likely continue to report operating losses as it has for the last several years. The Company also continues to have exposure to losses arising from pending litigation,
as discussed in

14

---

Note 4. In addition, the 6.75% notes issued by Avatex Funding, and guaranteed by the Company, mature in December 2002. The Company had previously anticipated that its lawsuit against
McKesson and others and its 48% interest in Phar-Mor might generate funds to assist in funding the payoff of the 6.75% notes due in December 2002. However, the Company settled the
McKesson lawsuit in fiscal 2002 resulting in the Company retaining approximately $2.6 million, after payment of contingent litigation and other expenses and distributions. Also, as previously
reported, the Company believes Phar-Mor has no value as a result of the sale of substantially all of its assets in July 2002 after it filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in September 2001. Finally, the $4.4 million in prepaid pension costs included in the amount of "Other assets" at September 30, 2002 cannot be
converted into funds that would be available to the Company. As a result, the Company believes it may not have sufficient cash to repay the notes at their maturity in December 2002.

The
Company had adequate funds at September 30, 2002 to meet its obligations then due and believes it has adequate funds to continue to pay its debts as they become due until the
maturity date of the 6.75% notes.

The
principal companies in which we have invested are Presby, Chemlink andiLife. As indicated in Note 6, the Company has written
off its investment iniLife and does not believe it will be able to continue as a going concern. Presby is undertaking a private offering to obtain
additional financing to complete its clinical trials to obtain approval of its products by the U.S. Food and Drug Administration. If the private offering or some other financing is not obtained in the
next few months, Presby may lack needed funds to complete its clinical trials or to continue operations; or, for Presby to obtain adequate financing, the Company's investment may be significantly
diluted. In addition, while Chemlink has started delivering products using its new patented technology and signed a license agreement with another company which may provide certain minimum royalties
in future years, it is not currently able to generate enough cash flow for operations to continue. Therefore, it will need to seek additional capital which may or may not be available and could result
in a significant dilution of the Company's investment.

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

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

15

---



AVATEX CORPORATION AND SUBSIDIARIES  MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS  SEPTEMBER 30, 2002  (dollars in thousands)

Overview

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

In
July 2002, we and the other holders of Presby's B Preferred entered into an agreement with Presby whereby the holders of the B Preferred received additional shares of B
Preferred in exchange for their right to receive accrued and future dividends on the B Preferred. Under the agreement, we received 947,993 additional shares of B Preferred for our $772 of dividends
due at June 30, 2002 and for our rights to any future dividends on the B Preferred. The conversion ratio of the B Preferred remained at 2.52 common shares for each preferred share. In addition,
the service agreement between Presby and RAS Service was terminated effective July 15, 2002, and 25,237 shares of B Preferred were issued in lieu of $112 in service fees due. RAS Service then
distributed all the B Preferred it received as a preferred return due to its general partner, a subsidiary of ours. On a fully-diluted basis, assuming exercise of all convertible preferred stock and
options outstanding, we would own approximately 20.6% of the common stock of Presby in July 2002 compared to approximately 13.5% at March 31, 2002.

In
fiscal 2002,iLife modified its corporate structure and set up a wholly-owned subsidiary, Solutions, which now owns or licenses all the
assets and assumed all the liabilities formerly held byiLife. We, along with other investors, loaned Solutions $1,000 (our portion was approximately
$209) which is
secured by the assets of Solutions. We wrote off our equity investment iniLife's preferred stock during fiscal 2002 to reflect what our management
believed to be an other than temporary decline in value. During the quarter ended June 30, 2002, based on the then current financial status of Solutions, the continued deterioration of its
business plan and dynamics betweeniLife's management, its board of directors and the holders of Solutions' note, we wrote off our investment in the
note. At that time we believed that there may not be adequate assets, or that possible additional investments by others may not be forthcoming, to continue to fund the needed expenditures to preserve
the value of Solutions.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The process of preparing financial statements in conformity with accounting principles generally accepted in the Untied States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses, as well as the disclosure of contingent assets and liabilities, we report in our
financial statements. We believe these estimates and assumptions are reasonable under the circumstances and are based upon information available at the time but could change materially as conditions
within and beyond our control change. Accordingly, actual results could differ materially from these estimates. The critical accounting policies for the following items require the most significant
assumptions and estimates.

16

---

Patent costs, trademarks and property and equipmentThese assets are subject to periodic review to determine the ability to
recover our costs. We must make estimates about such recovery based on future cash flows and other subjective data requiring a high degree of judgment about future events. We may, in the future,
determine that some of these costs may not be recoverable, which may require us to adjust our carrying value by writing off all or a portion of the value of those assets.

InvestmentsSecurities held for sale, that are not publicly-traded common stock, are to be valued at their estimated fair
market value, which requires us to use considerable judgment in evaluating the criteria to be used to determine the value of those investments. As conditions change in the market and with the
investment itself, the value of those securities held for sale may change materially resulting in a material increase or decrease in the value of that investment. In addition, a decrease in value of
these investments, and other investments carried at cost or on an equity basis, that is other than temporary requires us to write-down the investment to its fair value. Considerable
judgment is required to determine whether the decline in value is other than temporary. A change in our judgment as to whether the decrease in value is temporary could result in a material change in
the valuation of that investment and/or a material charge to earnings.

Income taxesDeferred income taxes are provided for temporary differences between the basis of assets and liabilities for tax
and financial reporting purposes. A valuation allowance is established for any portion of a deferred tax asset for which realization is not likely. We maintain a 100% allowance on
our deferred tax asset. The valuation allowance is subject to periodic review, and we may determine at a future date that a portion of the deferred tax asset may be realizable.

Legal contingenciesWe have retained responsibility for environmental liabilities at several sites related to former operating
units. The amount of the contingent liability is difficult to estimate due to such factors as the unknown extent of required remedial actions, the actual costs of carrying out the remediation, the
extent of our liability in proportion to the liability of other parties and whether all sites have been identified. A change in the estimated liability related to these sites could be material. In
addition, potential liabilities related to our lawsuits as discussed in Note 4 to the condensed consolidated financial statements require estimates of the cost to settle these lawsuits. The
actual cost to settle these lawsuits, if any, could differ materially from the estimates.

RESULTS OF OPERATIONS

Three and Six Months Ended September 30, 2002 Compared to the Three and Six Months Ended September 30, 2001

Revenues

Revenues represented product sales for Chemlink for the three and six months ended September 30, 2002. A portion of the revenues, $112 for the three months
and $288 for the six months ended September 30, 2002, were for samples for one customer for evaluation purposes. While there might be additional orders for these products if test markets are
expanded, these sales were essentially non-recurring. The remainder of the revenue of $129 for the three months and $341 for the six months ended September 30, 2002, was for
non-sample product sales. The non-sample product sales are not necessarily indicative of future sales as the revenue was primarily from a new customer. In addition, $72 of
non-sample sales for the quarter was additional revenue earned for current price increases applied to sales made primarily during the prior quarter to compensate for lower than expected
purchases from a customer. Chemlink, therefore, is unable to accurately predict future demand.

In
September 2002, Chemlink signed a license and a joint development agreement with the customer for which it had been providing sample products. The license agreement provides
for minimum royalty payments starting for the period ending December 31, 2003 and then for each year thereafter if the customer wants to maintain exclusivity on certain products or in certain
markets. Only

17

---

samples for product testing are being produced at this time for this customer so no products are yet covered under the license agreement.

Chemlink
is developing additional products for current customers and for other potential markets. Whether any of these efforts will result in sales or royalties, and the timing of those
sales and royalty payments, cannot be estimated at this time. Sales and royalty payments, and thus operating profit, may be inadequate to fund Chemlink's ongoing cash needs requiring additional
contributions from CLAC or other investors. Since we are not in a position to continue to provide financing to CLAC, if needed, for further investment in Chemlink, our ownership percentage may decline
if financing is provided from other sources.

Operating Costs

Cost of goods sold of $42 for the three months and $165 for the six months ended September 30, 2002 represented the costs related to sample product sales.
The remaining balance of $53 for the three months and $218 for the six months ended September 30, 2002 represented cost of goods sold from non-sample sales. Since the primary
customer for non-sample sales is new and future order quantities are uncertain, we are unable to determine whether the gross margins realized on these sales will remain the same over time.
However, the margin was less than Chemlink had originally anticipated on this product due to smaller production runs resulting in higher raw material costs than planned. As a result, Chemlink received
an additional $72 from the customer during the three months ended September 30, 2002 for current price increases for production primarily during the prior quarter to compensate for the lower
volumes.

Total
selling, general and administrative costs, including depreciation and amortization, increased $637 to $1,334 for the three months ended September 30, 2002 compared to $697
for the three months ended September 30, 2001. Operating costs increased primarily as a result of an increase of $308 in expenses related to our pension plans and expenses of $267 for Chemlink
(which was not consolidated in the prior year). Other expenses increased $62 primarily as a result of a franchise tax refund received in the prior year.

Total
selling, general and administrative costs, including depreciation and amortization, increased $706 to $2,594 for the six months ended September 30, 2002 compared to $1,888
for the six months ended September 30, 2001. Operating costs increased primarily as a result of an increase of $508 in expenses related to our pension plans and expenses of $532 for Chemlink
(which was not consolidated in the prior year). This was partially offset by a decrease in legal expenses of $340. Other expenses increased $6 compared to the prior year.

Research
and development represented costs incurred by Chemlink in developing and reformulating new or improved products. The research was related to developing products that use its
patented effervescent technology in cleaning, disinfecting and sterilization applications.

Other Income (Expense)

Other income of $28 for the three months ended September 30, 2002 was primarily due to a gain of $24 on the sale of additional shares of WD-40
stock received by us as additional compensation from the sale of HPD Holdings Corp. ("HPD"). HPD was sold in April 2001 but a portion of the proceeds was withheld as contingent consideration
for possible claims, which is being released over time. Other income of $343 for the three month ended September 30, 2001 was primarily due to a gain of $325 related to a payment received on an
asset sold in a prior year and $10 in gains on the sale of securities.

Other
expense was $199 for the six months ended September 30, 2002 compared to other income of $1,695 for the six months ended September 30, 2001. The current year's other
expense related primarily to the write-down of our note receivable from Solutions of $209 and a reduction in the value

18

---

of our investment in Presby of $22 as a result of the agreement discussed in the "Overview" above. This was partially offset by the $24 gain on the sale of WD-40 stock as noted above. The
prior fiscal year's other income consisted primarily of a gain on the sale of our investments in HPD and WD-40 of $565 and payments received of $1,115 on assets sold or written off in a
prior fiscal year.

Interest and Dividend Income

Interest and dividend income decreased $188 to $14 for the three months ended September 30, 2002 compared to $202 for the three months ended
September 30, 2001. The decrease was due to a decline of $57 in interest income primarily as a result of lower cash balances and lower interest rates in the current versus prior fiscal year.
Dividend income decreased $131 as compared to the prior year as a result of the write-off of our investment in the preferred stock ofiLife
and the reduction in dividends on Presby's B Preferred as discussed in the "Overview" above.

Interest
and dividend income decreased $347 to $108 for the six months ended September 30, 2002 compared to $455 for the six months ended September 30, 2001. The decrease
was due to a decline of $135 in interest income primarily as a result of lower cash balances and lower interest rates in the current versus prior fiscal year. Dividend income decreased $212 as
compared to the prior year as a result of the write-off of our investment in the preferred stock ofiLife, the impact of the sale of the
preferred stock of HPD and the reduction in dividends on Presby's B Preferred as discussed in the "Overview" above.

Interest Expense

Interest expense increased $116 to $750 for the three months ended September 30, 2002 from $634 for the three months ended September 30, 2001. The
increase was principally due to the impact of the increasing amortization of the discount on the Avatex Funding debt.

Interest
expense increased $57 to $1,437 for the six months ended September 30, 2002 from $1,380 for the six months ended September 30, 2001. The increase was principally
due to the impact of the increasing amortization of the discount on the debt partially offset by a decrease in interest accrued as a result of the purchase and subsequent cancellation of $11,744 face
value of the 6.75% notes of Avatex Funding in the prior year.

Equity in Loss of Affiliates

Equity in loss of affiliates was $2,355 for the three months ended September 30, 2001. We recognized a $2,275 equity loss in CLAC due primarily to the
write-down of the value of certain of Chemlink's patents. CLAC was consolidated with our operations effective September 1, 2001. The remaining equity loss of $80 primarily
represents the equity loss in Chemlink from September 1, 2001.

Equity
in loss of affiliates was $14,033 for the six months ended September 30, 2001. As a result of Phar-Mor's operating losses for the six months, its
write-down of goodwill and fixed assets as a result of the proposed store closings related to its bankruptcy filing in September 2001, and the establishment of additional reserves
against its deferred tax asset, we recognized an equity loss of $11,575 that reduced our carrying value in Phar-Mor to zero. In addition, we recognized a $2,389 equity loss in CLAC due
primarily to the write-down of the value of certain of Chemlink's patents. CLAC was consolidated with our operations effective September 1, 2001. The remaining equity loss of $69
primarily represents the equity loss in Chemlink from September 1, 2001.

As
both CLAC and Chemlink are consolidated in the fiscal 2003 results, and Phar-Mor's basis was reduced to zero in the prior fiscal year, there was no equity loss realized
from any of the affiliates for the three and six months ended September 30, 2002.

19

---

Income Taxes

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

Minority interest

This caption in the statement of operations for the three and six months ended September 30, 2002 represents the portion of the loss in Chemlink and CLAC
for the period that were allocated to Chemlink's and CLAC's minority interests. The minority interest for the three and six months ended September 30, 2001 represents the portion of the loss of
CLAC for the period from September 1, 2001 that was allocated to CLAC's minority interest. There was no corresponding minority interest in the prior year in Chemlink as it was carried on an
equity basis.

Discontinued operations

We recognized a gain of $48 in the prior year due to a tax refund received on one of our former real estate investments.

Extraordinary Item

We recognized a gain of $2,476 on the purchase and subsequent cancellation of $11,744 face value of the 6.75% notes of Avatex Funding during the six months ended
September 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2002, we had cash and cash equivalents of approximately $2,669. During the six months ended September 30, 2002, we had no
significant cash flows from investing or financing activities.

Our
debt consists primarily of the 6.75% notes issued by Avatex Funding. The final interest payment of approximately $461 plus the remaining principal balance of approximately $14,281
are due on
December 7, 2002. Since we have guaranteed the 6.75% notes and Avatex Funding has only Phar-Mor common stock as collateral for the notes (which is worthless, see Note 6), we
have made and may make additional capital contributions to Avatex Funding so it can satisfy its interest and principal obligations on the notes. However, see the discussion below concerning our
ability to pay the interest or repay the notes when they mature.

For
corporate operations, cash requirements include the funding of monthly operating activities, the payment of benefit obligations, and the funding of environmental liabilities of
previously owned businesses. The amounts and timing of the cash requirements for environmental liabilities and for some pension obligations are uncertain. We guarantee the debt of Avatex Funding and
may be called upon under the guarantee to fund any cash to be paid by Avatex Funding to its note holders. We expect no material cash inflows from our investments in the near future.

We
will likely continue to report operating losses, which together with the remaining pending litigation, as discussed in Note 4 to the condensed consolidated financial
statements, continue to raise substantial doubt as to our ability to continue as a going concern. In addition, the 6.75% notes issued by Avatex Funding, and guaranteed by us, mature in
December 2002. We had previously anticipated that our lawsuit against McKesson and others and our 48% ownership interest in Phar-Mor might generate funds to assist in funding the
retirement of the 6.75% notes. However, we settled the McKesson lawsuit in fiscal 2002 which resulted in our retaining $2,562 after payment of contingent litigation and other expenses and
distributions. Also, as previously reported, we believe Phar-Mor has no value as a result of the sale of substantially all of its assets in July 2002 after it filed a voluntary

20

---

petition for relief under Chapter 11 of the Bankruptcy Code in September 2001. Finally, $4,381 in prepaid pension costs included in the amount of "Other assets" at September 30, 2002
cannot be converted into funds that would be available to us.

We
had adequate funds at September 30, 2002 to meet our obligations then due and believe we have adequate funds to continue to pay our debts as they become due until the maturity
date of the 6.75% notes.

The
principal companies in which we have invested are Presby, Chemlink andiLife. None of these companies has yet reached a stage where
cash flows from ongoing operations are positive. Each of these companies has had to meet its respective liquidity needs by raising additional capital. We believe it is unlikely that iLife will be able
to continue as a going concern. In addition, there is no assurances that either Presby or Chemlink will be successful in generating
positive operational cash flows or that they will be able to raise additional capital. Presby is undertaking a private offering to obtain additional financing to complete its clinical trials to obtain
approval of its products by the U.S. Food and Drug Administration. If the private offering or some other financing is not obtained in the next few months, Presby may lack needed funds to complete its
clinical trials or to continue operations; or, for Presby to obtain adequate financing, our investment may be significantly diluted. In addition, while Chemlink has started delivering products using
its new patented technology and signed a license agreement with another company which may provide certain minimum royalties in future years, it is not currently able
to generate enough cash flow for operations to continue. Therefore, it will need to seek additional capital which may or may not be available and could result in a significant dilution of our
investment.

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

These
financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course
of business. The financial statements do not reflect any adjustments that might ultimately result from the resolution of the uncertainties discussed above. In particular, the financial statements do
not purport to show the realizable value on a liquidation basis of our assets or their availability to satisfy liabilities. The financial statements also do not show amounts that could be allowed for
claims or contingencies or the status or priority of those claims. See Note 7 to the condensed consolidated financial statements.

OTHER

In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The applicable portion of SFAS No. 145 relates to the rescission of SFAS No. 4 "Reporting Gains and Losses from the Extinguishment of Debt", as amended by SFAS
No. 64. With the rescission of SFAS No. 4, the question of whether a gain or loss on the extinguishment of debt is extraordinary depends on whether the transaction meets the criteria for
classification as a extraordinary item in APB Opinion No. 30 "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." We will be required to adopt the statement in our fiscal year beginning April 1, 2003. Any amounts presented as an extraordinary
item from the

21

---

extinguishment of debt in prior years that do not meet the criteria in APB No. 30 shall be reclassified to income from continuing operations as a result of the adoption of this standard.
Management is reviewing whether the items classified as extraordinary items from the extinguishment of debt in our financial statements meet the criteria of APB No. 30. Any changes from the
adoption of this standard will not alter the net income (loss) or net income (loss) per share already reported but may result in a reclassification of certain gains from extraordinary items to income
(loss) from continuing operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires recording costs associated with exit
or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. We do not
believe that this statement will have any impact on our results of operations or our financial condition.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the amounts reported in Item 7A. of the Form 10-K for the year ended March 31, 2002 except that
the security held for sale has increased in value due to additional shares received in lieu of dividends due and for future dividends that will not be paid. See Note 6 to the condensed
consolidated financial statements.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

The
term "disclosure controls and procedures" is defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the "Act"). The rules refer to
the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the

22

---

Act is recorded, processed, summarized and reported within the time periods specified. Our co-chief executive officers and chief financial officer have evaluated the effectiveness of
these disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date"). They have concluded that, as of the Evaluation Date,
such controls and procedures were effective at ensuring that material information related to us and our consolidated subsidiaries is made known to them and is disclosed on a timely basis in our
reports filed under the Act.

Changes
in internal controls.

We
maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our
policies and procedures are followed. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we
carried out this evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses in our internal controls.

23

---



PART IIOTHER INFORMATION  AVATEX CORPORATION AND SUBSIDIARIES

Item 1. Legal

With respect to the matters reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002, the following
additional information is provided:

1996 Stockholder Litigation.In the 1996 class action lawsuit against usZuckerman, et al. v.
FoxMeyer Health Corporation, et al., on September 11, 2002, all the defendants, including the Company, entered into a Memorandum of Understanding (the "MOU") with
counsel for the plaintiff class for the settlement of the lawsuit. Pursuant to the MOU, we deposited $500,000 into an escrow account that will be used to fund a portion of a settlement of the lawsuit.
On October 11, 2002, the court gave its preliminary approval of an alternative dispute resolution proceeding to determine an appropriate settlement amount as to the defendants other than the
Company. These other defendants agreed in the MOU to pay a portion of this additional settlement amount and to waive their claims against us to be indemnified for such payment. We also agreed in the
MOU to assign to the plaintiff class any claims we may have relating to this lawsuit against our insurer, United Pacific Insurance Company (and the estate and statutory liquidator of its parent,
Reliance Insurance Company), the Texas Property and Casualty Insurance Guaranty Association or any other state's Insurance Guaranty Association, and our excess insurer, Gulf Insurance Company. We will
have no further liability for the settlement amount or plaintiffs' attorneys' fees. We have denied and continue to deny that we committed any act or omission or breach of duty giving rise to any
liability in the lawsuit, and we agreed to settle the lawsuit to eliminate the burden and expense of further litigation, in particular because of the cessation of business and liquidation of Reliance
Insurance Company. The settlement is subject to execution of definitive settlement documentation and final court approval.

Ben Franklin Litigation.In the appeal of the decision in the state court lawsuit filed by certain creditors of Ben Franklin
Retail Stores, Inc. against certain of its former officers and directors, on June 28, 2002, the Appellate Court of Illinois, First District, affirmed the trial court's decision
dismissing the plaintiffs' fourth amended complaint with prejudice. In the two federal court lawsuits, on September 3, 2002, the parties entered into a settlement agreement under which certain
of the defendants will pay $75,000 to
the plaintiffs. If the settlement is approved by the bankruptcy court, we will indemnify these defendants for the settlement payment.

Green River.National Aluminum Corporation ("NAC"), various other potentially responsible parties, the Environmental
Protection Agency and the United States Department of Justice have executed a consent decree with respect to the special notice letter and record of decision for the Green River Disposal Site in
Davies County, Kentucky. On September 27, 2002, the United States District Court for the Western District of Kentucky entered the consent decree, under which the PRPs will be required to
establish and maintain financial security in the amount of $4 million within 30 days. NAC estimates that its share of this amount is approximately $195,000, and NAC may be responsible
for additional costs to comply with the consent decree in the future.

Item 6. Exhibits and Reports on Form 8-K





24

---





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly
authorized.

|                 |  | AVATEX CORPORATION
|---------------- |  | ------------------
|October 25, 2002 |  | By:               

CERTIFICATION

I, Abbey J. Butler, certify that:



25

---



Dated:
October 25, 2002

| |  | /s/ABBEY J. BUTLERAbbey J. Butler
Co-Chief Executive Officer
| |  | ------------------------------------------------------------

CERTIFICATION

I, Melvyn J. Estrin, certify that:



26

---

Dated:
October 25, 2002

| |  | /s/MELVYN J. ESTRINMelvyn J. Estrin
Co-Chief Executive Officer
| |  | --------------------------------------------------------------

CERTIFICATION

I, Grady E. Schleier, certify that:



Dated:
October 25, 2002

| |  | /s/GRADY E. SCHLEIERGrady E. Schleier
Chief Financial Officer
| |  | -------------------------------------------------------------

27

---

Certification Required by 18 U.S.C. Section 1350  (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

Each of the undersigned in his capacity as an officer of Avatex Corporation (the "Company"), certifies, pursuant to 18 U.S.C. Section 1350 (as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to his knowledge:

Dated:
October 25, 2002

| |  | /s/ABBEY J. BUTLERAbbey J. Butler
Co-Chief Executive Officer  
| |  | --------------------------------------------------------------
| |  | /s/MELVYN J. ESTRINMelvyn J. Estrin
Co-Chief Executive Officer
| |  | /s/GRADY E. SCHLEIERGrady E. Schleier
Chief Financial Officer 

28

---

QuickLinks