<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

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



                         COMMISSION FILE NUMBER 1-8549


                               AVATEX CORPORATION
      -------------------------------------------------------------------
                   (Exact Name of Registrant as Specified in
                                  its Charter)







                 DELAWARE                                       25-1425889
----------------------------------------             ---------------------------
   (State or Other Jurisdiction of                           (I.R.S. Employer
    Incorporation or Organization)                         Identification No.)


      5910 N. Central Expressway, 
       Suite 1780, Dallas, Texas                                    75206
----------------------------------------             ---------------------------
(Address of Principal Executive Offices)                         (Zip Code)


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


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




     Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes  X  No    .
                                       ---    ---


Number of shares of Common Stock outstanding as of August 11, 1997: 13,806,375




<PAGE>   2
                         PART 1. FINANCIAL INFORMATION

                      AVATEX CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                            For the three months
                                                                                ended June 30,
(in thousands, except per share amounts)                                    1997            1996  
--------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>        
REVENUES                                                                  $   3,163    $   3,705  
OPERATING COSTS                                                                                   
       Operating costs, including general and administrative costs            3,141        4,182  
       Depreciation and amortization                                            202          426  
       Unusual item                                                          33,292            -  
--------------------------------------------------------------------------------------------------
OPERATING LOSS                                                              (33,472)        (903) 
OTHER INCOME (EXPENSE), NET                                                  (4,980)         840  
FINANCING COSTS                                                                                   
       Interest income                                                          593          360  
       Interest expense                                                       1,362        2,117  
--------------------------------------------------------------------------------------------------
Financing costs, net                                                            769        1,757  
--------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL                                             
       CORPORATION, EQUITY IN INCOME (LOSS) OF AFFILIATES, INCOME                                 
       TAX PROVISION AND MINORITY INTEREST                                  (39,221)      (1,820) 
National Steel Corporation net preferred dividend income                      2,258        2,419  
Equity in income (loss) of affiliates                                           318       (1,603) 
--------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX                                                 
       PROVISION AND MINORITY INTEREST                                      (36,645)      (1,004) 
Income tax provision                                                              -       29,838  
--------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST                    (36,645)     (30,842) 
Minority interest in results of operations of consolidated subsidiaries         301          785  
--------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS                                         (36,946)     (31,627) 
Discontinued operations                                                                           
       Loss from discontinued operations, net of tax                              -      (18,043) 
       Loss on disposal of discontinued operations, net of tax                    -     (238,682) 
--------------------------------------------------------------------------------------------------
NET LOSS                                                                    (36,946)    (288,352) 
Preferred stock dividends                                                     6,175        4,080  
--------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS                                    $ (43,121)   $(292,432) 
==================================================================================================
PER SHARE OF COMMON STOCK                                                                         
       Loss from continuing operations                                    $   (3.12)   $   (2.11) 
       Discontinued operations                                                    -       (15.16) 
--------------------------------------------------------------------------------------------------
LOSS PER SHARE                                                            $   (3.12)   $  (17.27) 
--------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                                  13,806       16,929  
--------------------------------------------------------------------------------------------------
</TABLE>                                                       

See notes to condensed consolidated financial statements.





                                      1
<PAGE>   3
                      AVATEX CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                              June 30,       March 31,
(in thousands of dollars)                                                       1997            1997
---------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>        
ASSETS
CURRENT ASSETS
      Cash and short-term investments                                         $    4,283     $     7,173
      Restricted cash and investments                                             33,567          33,115
      Receivables - net                                                            3,113           3,059
      Other current assets                                                        10,320          15,293
---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                              51,283          58,640
INVESTMENT IN NATIONAL STEEL CORPORATION                                          44,989          44,961
INVESTMENTS IN AFFILIATES                                                         28,383          28,711

PROPERTY AND EQUIPMENT                                                            27,947          19,414
      Less accumulated depreciation and amortization                               1,172           1,024
---------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT                                                        26,775          18,390

DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE                                        -               -
MISCELLANEOUS ASSETS                                                               8,028           7,735
---------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                  $  159,458     $   158,437
=========================================================================================================

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
      Accounts payable                                                        $    1,045     $     1,501
      Other accrued liabilities                                                   32,700           7,752
      Long-term debt due within one year                                           5,374           2,969
---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                         39,119          12,222
LONG-TERM DEBT                                                                    32,589          27,482
OTHER LONG-TERM LIABILITIES                                                       43,779          35,985
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                                     7,153           6,853
COMMITMENTS AND CONTINGENCIES                                                         -               -
REDEEMABLE PREFERRED STOCK                                                       195,567         189,402
STOCKHOLDERS' EQUITY (DEFICIT)
      Common stock $5.00 par value; authorized 50,000,000 shares;
         issued: 13,806,375 shares at June 30, 1997 and 13,805,988
         shares at March 31, 1997                                                 69,032          69,030
      Capital in excess of par value                                             119,100         119,092
      Minimum pension liability                                                  (75,663)        (73,531)
      Retained deficit                                                          (271,218)       (228,098)
---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT                                                     (158,749)       (113,507)
---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                   $  159,458     $   158,437
=========================================================================================================


</TABLE>
See notes to condensed consolidated financial statements.



                                      2
<PAGE>   4
                      AVATEX CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                        For the three months
                                                                           ended June 30,
(in thousands of dollars)                                               1997           1996
-------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                $ (36,946)    $ (288,352)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
    BY OPERATING ACTIVITIES:
    Minority interest in results of operations of consolidated 
        subsidiaries                                                          301            785
    Equity in loss (income) of affiliates                                    (318)         1,603
    Depreciation and amortization                                             202            426
    Net preferred income from National Steel Corporation                   (2,258)        (2,419)
    Loss on disposal of discontinued operations                                -         238,682
    Unusual item                                                           33,292             -
    Loss (gain) on investments                                              4,991         (2,877)
    Other non-cash charges                                                    431          2,266
    Deferred income tax provision                                              -          29,836
    Depreciation and amortization,  provision for losses on accounts
       receivable and other items related to discontinued operations           -          10,198
    Cash provided (used) by working capital items, net of acquisitions:
       Receivables                                                            183          5,773
       Inventories                                                             -          26,018
       Other assets and restricted cash                                      (550)           374
       Accounts payable and accrued liabilities                            (1,508)         1,191
    Proceeds from accounts receivable financing program                        -          75,000
    Other                                                                      -          (1,571)
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                           (2,180)        96,933
-------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Reduction in cash from reclassification to discontinued operations         -         (24,366)
    Acquisition, net of cash acquired                                      (7,387)            -
    Purchase of property and equipment                                       (599)       (31,418)
    Purchase of investments                                                  (150)        (6,248)
    Proceeds from the sale of investments                                     160         10,763
    Other                                                                     140            393
-------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES                                      (7,836)       (50,876)
-------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings under revolving credit facilities                               -         447,492
    Repayments under revolving credit facilities                               -        (312,693)
    Proceeds from the issuance of long-term debt                            7,500         14,520
    Debt repayments                                                          (190)      (206,467)
    Debt issuance costs                                                      (184)        (8,140)
    Dividends paid on redeemable preferred stock                               -            (926)
    Dividends paid to minority interests                                       -          (1,446)
    Exercise of stock options                                                  -           1,680
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                            7,126        (65,980)
-------------------------------------------------------------------------------------------------

NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS                            (2,890)       (19,923)
    Cash and short-term investments, beginning of period                    7,173         26,987
-------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD                          $   4,283     $    7,064
-------------------------------------------------------------------------------------------------

</TABLE>

See notes to condensed consolidated financial statements.



                                       3
<PAGE>   5



                      AVATEX CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 1997
                                  (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

Avatex Corporation and its subsidiaries (the "Corporation") are primarily
engaged in owning and operating hotels and office buildings. The Corporation
also holds interests in other corporations and partnerships.

The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at the dates of the
financial statements and the reported amounts of revenues and expenses during
such reporting periods. Actual results could differ from these estimates.
Estimates are adjusted when necessary to reflect actual experience.

The consolidated financial statements include the results of discontinued
operations. The condensed consolidated financial statements for prior periods
have been reclassified to reflect all discontinued operations. Certain other
previously reported amounts have been reclassified to conform to current year
presentations.

The accompanying condensed consolidated balance sheet of the Corporation as of
June 30, 1997, the condensed consolidated statements of operations for the
three months ended June 30, 1997 and 1996, and the condensed consolidated
statements of cash flows for the three months ended June 30, 1997 and 1996, are
unaudited. In the opinion of management, these statements have been prepared on
the same basis as the audited consolidated financial statements, and include
all adjustments necessary for the fair presentation of financial position,
results of operations and cash flows. Such adjustments were of a normal
recurring nature. The results of operations for the three months ended June 30,
1997, are not necessarily indicative of the results that may be expected for
the entire year. The condensed consolidated balance sheet as of March 31, 1997,
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. Additional
information is contained in the Corporation's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended March 31,
1997, and should be read in conjunction with this quarterly report.

The "Unusual item" in the condensed consolidated statement of operations for
the three months ended June 30, 1997 represents a one-time charge incurred in
connection with the settlement reached with the trustee of the Corporation's
bankrupt subsidiary, FoxMeyer Corporation (see Note 7).


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

Net income (loss) per share is based on income (loss) after preferred stock
dividend requirements and the weighted average number of shares of common stock
outstanding during the period after giving effect to stock options considered
to be dilutive common stock equivalents. Fully diluted net income per share is
not presented as it is substantially the same as primary earnings per share or
is anti-dilutive, as applicable.




                                      4




                         
<PAGE>   6






In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" was issued. SFAS No. 128 modifies the presentation of
earnings per share under generally accepted accounting principles requiring a
presentation of "basic" and "diluted" earnings per share effective for periods
ending after December 15, 1997. Pro forma earnings per share amounts calculated
using SFAS No. 128 are as follows:

<TABLE>
<CAPTION>
                                                           For the three months
                                                              ended June 30,

                                                           1997            1996    
-----------------------------------------------------------------------------------
<S>                                                        <C>             <C>     
Loss per share as reported                                                         
         Loss from continuing operations                   $ (3.12)        $ (2.11)
         Discontinued operations                               -            (15.16)
         Net loss                                            (3.12)         (17.27)
                                                                                   
Pro Forma loss per share                                                           
     Basic                                                                         
          Loss from continuing operations                    (3.12)          (2.13)
          Discontinued operations                              -            (15.33)
          Net loss                                           (3.12)         (17.46)
     Diluted                                                                       
          Loss from continuing operations                    (3.12)          (2.13)
          Discontinued operations                              -            (15.33)
          Net loss                                           (3.12)         (17.46)
-----------------------------------------------------------------------------------
</TABLE>


NOTE 3 - ACQUISITIONS

A partnership (the "Partnership") in which the Corporation has a 50%
controlling interest was a 34.5% minority partner in a hotel in Arlington,
Virginia. On June 5, 1997, the Partnership acquired the 65.5% of the property
not already owned for approximately $7.4 million, net of cash acquired in the
acquisition. The Partnership accounted for the acquisition using the purchase
method of accounting. The Corporation accounts for the Partnership on a
consolidated basis. If the property had been acquired at the beginning of the
current or prior fiscal year, revenues would have been approximately $1.2
million and $1.6 million greater than reported, respectively. The pro forma
impact on income from continuing operations if the acquisition had taken place
at the beginning of the current or prior fiscal year is not material.

NOTE 4 - LONG-TERM DEBT

The Corporation has a secured loan (the "Secured Loan") with an outstanding
balance of $14.9 million at June 30, 1997. The Secured Loan is collateralized
by the Corporation's interest in Phar-Mor, Inc.'s common stock held by Hamilton
Morgan LLC, a 69.8% owned consolidated subsidiary, and other marketable
securities. The Corporation is currently in compliance with all collateral
requirements.

The Partnership borrowed $7.5 million in connection with the purchase of the
remaining 65.5% interest in a hotel (see Note 3). The note is non-recourse, has
an interest rate of 9.16%, requires monthly principal and interest payments,
has a balloon payment at maturity in July 2004 and is secured by the property.

NOTE 5 - CAPITAL STOCK

The Corporation has not declared or paid any dividends on its preferred stock
since January 15, 1997, including those due on January 15, 1997. The two issues
of preferred stock are cumulative. Therefore, the dividends that would have
been paid if declared have been shown in the condensed consolidated statement
of operations for June 30, 1997 as if they had been declared, with a
corresponding charge to the retained deficit. The liability for the cumulative
unpaid dividends has been added to the carrying amount of the redeemable
preferred stock in the condensed consolidated balance sheets. The cumulative
dividends 




                                       5
<PAGE>   7

accrued but not paid were $2.4 million ($3.75 per share) and $13.9
million ($3.23 per share) on the convertible preferred stock and Series A
preferred stock, respectively.

NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION

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

<TABLE>
<CAPTION>
                                                              For the three months
                                                                 ended June 30,

                                                              1997            1996
-------------------------------------------------------------------------------------
<S>                                                           <C>             <C>    
                                                                                     
Interest paid                                                 $   794         $16,201
Income taxes paid                                                   -               -
Non-cash transactions:                                                               
     Payment of dividends in kind on preferred stock                -           2,659
     Cumulative dividends in arrears accrued                    5,584               -
-------------------------------------------------------------------------------------
                                                                                     
</TABLE>


NOTE 7 - COMMITMENTS AND CONTINGENCIES

On July 29, 1997, the Corporation announced a settlement of certain litigation
initially brought against it by the Official Unsecured Creditors' Committee
(the "Committee") of FoxMeyer Corporation ("FoxMeyer"), et al., in the FoxMeyer
bankruptcy proceedings presently pending in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The litigation relates
to the dividend of certain assets from FoxMeyer to the Corporation on June 19,
1996. Upon the conversion of the FoxMeyer cases to Chapter 7, the Chapter 7
Trustee (the "Trustee") succeeded to the Committee's interest in the
litigation, and thereafter entered into a settlement (the "Settlement") with
the Corporation. The Settlement is subject to approval of the Bankruptcy Court,
which is scheduled to hear a motion to approve the Settlement on September 16,
1997.

The Settlement provides for the dissolution of an injunction order that
currently prohibits the Corporation from transferring, selling, or otherwise
disposing of, or encumbering or pledging (i) any assets or proceeds from the
sale of the assets which the Corporation received as part of the June 19th
dividend without the consent of the Trustee or approval of the Bankruptcy Court
and (ii) any of its other assets, except in the ordinary course of business,
unless the Corporation provides five days prior notice to the Trustee and
either obtains the Trustee's consent or Bankruptcy Court approval. In addition,
under the Settlement, the Corporation will pay $25.3 million to the Trustee and
execute an $8.0 million three year note payable to the Trustee. In exchange,
the Trustee will release the Corporation from all claims and will grant it a
30% interest, up to the greater of $10.0 million or the amount owed under the
note, in certain litigation that may be brought by the Trustee against
specified third parties. The proceeds from the Corporation's 30% interest must
be first used to satisfy its obligation under the $8.0 million note. Finally,
the Settlement specifically provides for the immediate use of approximately
$6.1 million in connection with a potential purchase of 1,132,500 shares of
common stock of Phar-Mor, Inc. now owned by Hamilton Morgan LLC, which if
purchased by the Corporation would be pledged to the Trustee as additional
collateral for the $8.0 million note. If such stock is not purchased, the funds
would be applied against the amount owed under the note. In the June 30, 1997 
condensed consolidated balance sheet, the cash portion of the Settlement has 
been accrued in "Other accrued liabilities" and the note payable in "Other 
long-term liabilities."

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




                                       6
<PAGE>   8
actions to address environmental clean-up costs and in some instances have been
designated as a potentially responsible party by the Environmental Protection 
Agency.

The Corporation's reserves for environmental assessments, remediation
activities, penalties or fines that may be imposed for non-compliance with such
laws or regulations have not changed materially since March 31, 1997. The
Corporation's estimates of these costs are based upon currently available
facts, existing technology, presently enacted laws and regulations and the
professional judgment of consultants and counsel.

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

In connection with litigation claims by the Corporation and certain other
plaintiffs against various insurance carriers for coverage of certain
environmental liabilities, the Corporation and the other plaintiffs have
reached tentative settlements with all but one of the defendants in the case.
Definitive settlement agreements have been executed with certain carriers and
are being negotiated with the remaining carriers. In addition, the plaintiffs
are currently negotiating among themselves regarding allocation of the proceeds
of the settlements. At this time, the Corporation is unable to determine how
much of the settlement proceeds, if any, will accrue to its benefit.

In connection with the October 1994 merger of FoxMeyer into a wholly-owned
subsidiary of the Corporation (the "Merger"), several class action lawsuits
were filed against the Corporation, FoxMeyer and certain of FoxMeyer's officers
and directors alleging, among other things, that the defendants breached their
fiduciary duties owed to holders of FoxMeyer common stock. In December 1994,
the State of Wisconsin Investment Board ("SWIB") filed a complaint against the
Corporation. The SWIB complaint alleges that the defendants breached their
fiduciary duty to FoxMeyer's shareholders by agreeing to the Merger at an
unfair price and that the proxy statement issued in connection with the Merger
failed to disclose certain important facts. On April 30, 1995, the SWIB action
was consolidated with the class action lawsuit. An amended complaint was filed
in the consolidated case on February 13, 1996. The amended complaint
essentially alleges the same claims previously raised. The Corporation believes
these lawsuits are without merit and intends to contest these allegations.

The Corporation and certain of its current and former officers and directors
have been named in a series of purported class action lawsuits that were filed
and subsequently consolidated under Zuckerman, et al. v. FoxMeyer Health
Corporation, et al., in the United States District Court for the Northern
District of Texas, Dallas Division, Case No. 396-CV-2258-T. The lawsuit
purports to be brought on behalf of purchasers of the Corporation's common
stock and Series A and convertible preferred stock during the period 
July 19, 1995 through August 27, 1996. On May 1, 1997, plaintiffs in the
lawsuit filed a consolidated amended class action complaint, which alleges that
the Corporation and the defendant officers and directors made
misrepresentations of material facts in public statements or omitted material
facts from public statements. The complaint alleges that the Corporation failed
to disclose purportedly negative information concerning its National
Distribution Center and Delta computer systems and the resulting impact on the
Corporation's existing and future business and financial condition. At the
Corporation's request, the Court has entered a stay of all discovery pending a
ruling on the Corporation's motion to dismiss, which was filed on June 20,
1997. The Corporation intends to prosecute the motion and defend itself in the
consolidated lawsuit.

The Corporation and certain officers also have been named as defendants in
Grossman v. FoxMeyer Health Corp., et al., Cause No. 96-10866-J, in the 191st
Judicial Court of Dallas County, Texas. This action purports to be brought on
behalf of all holders of the Corporation's common stock during the period from




                                      7
<PAGE>   9

October 30, 1995, to July 1, 1996, and which seeks unspecified money damages.
Plaintiff asserts claims of common law fraud and negligent misrepresentation,
based on allegations that she was induced not to sell her shares by supposed
misrepresentations and omissions that are substantially the same as those
alleged in the federal actions described above. On January 27, 1997, the
Corporation moved for summary judgment in the lawsuit on the ground that the
proposed plaintiff class, as plaintiff herself alleges, did not purchase or
sell any of the Corporation's securities during the class period. The court
held a hearing on the Corporation's summary judgment motion on May 29, 1997 and
has taken the matter under advisement. The Corporation intends to continue to
vigorously defend the lawsuit.

In August 1994, a group of four individuals filed a class action lawsuit
against their former employer, FoxMeyer Drug Company, in Texas State Court. The
lawsuit alleged that the termination of the plaintiffs' employment, made as
part of a reduction-in-force, violated the Age Discrimination in Employment
Act. The lawsuit also named FoxMeyer and the Corporation as defendants, all of
which denied the plaintiffs' allegations. The lawsuit was subsequently removed
to the United States District Court for the Northern District of Texas, Dallas
Division and, in August 1996, the case against FoxMeyer Drug Company and
FoxMeyer was stayed following their filing for relief under Chapter 11 of the
Bankruptcy Code. On September 9, 1996, the Court granted the Corporation's
motion for summary judgment and entered a partial final judgment in the
Corporation's favor on the ground that it could not be considered a "single
employer" of the plaintiffs under the Age Discrimination in Employment Act. The
plaintiffs have appealed the judgment to the United States Court of Appeals for
the Fifth Circuit, No. 96-11278. The parties have completed their briefings,
and oral arguments on the appeal were heard August 6, 1997. If the lower
court's ruling is reversed, the Corporation will continue to vigorously contest
the lawsuit.

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




                                      8
<PAGE>   10









                      AVATEX CORPORATION AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                 JUNE 30, 1997
                           (IN THOUSANDS OF DOLLARS)



OVERVIEW

On July 29, 1997, the Corporation announced a settlement of certain litigation
initially brought against it by the Official Unsecured Creditors' Committee
(the "Committee") of FoxMeyer Corporation ("FoxMeyer"), et al., in the FoxMeyer
bankruptcy proceedings presently pending in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The litigation relates
to the dividend of certain assets from FoxMeyer to the Corporation on June 19,
1996. Upon the conversion of the FoxMeyer cases to Chapter 7, the Chapter 7
Trustee (the "Trustee") succeeded to the Committee's interest in the
litigation, and thereafter entered into a settlement (the "Settlement") with
the Corporation. The Settlement is subject to approval of the Bankruptcy Court,
which is scheduled to hear a motion to approve the Settlement on September 16,
1997. The charge to operations related to the Settlement is shown as an
"Unusual item" in the condensed consolidated statements of operations.

The Settlement provides for the dissolution of an injunction order that
currently prohibits the Corporation from transferring, selling, or otherwise
disposing of, or encumbering or pledging (i) any assets or proceeds from the
sale of the assets which the Corporation received as part of the June 19th
dividend without the consent of the Trustee or approval of the Bankruptcy Court
and (ii) any of its other assets, except in the ordinary course of business,
unless the Corporation provides five days prior notice to the Trustee and
either obtains the Trustee's consent or Bankruptcy Court approval. In addition,
under the Settlement, the Corporation will pay approximately $25,292 to the
Trustee and execute an $8,000 three year note payable to the Trustee. In
exchange, the Trustee will release the Corporation from all claims and will
grant it a 30% interest, up to the greater of $10,000 or the amount owed under
the note, in certain litigation that may be brought by the Trustee against
specified third parties. The proceeds from the Corporation's 30% interest must
be first used to satisfy its obligation under the $8,000 note. Finally, the
Settlement specifically provides for the immediate use of approximately $6,100
in connection with a potential purchase of 1,132,500 shares of common stock of
Phar-Mor, Inc. ("Phar-Mor") now owned by Hamilton Morgan LLC ("Hamilton
Morgan"), which if purchased by the Corporation would be pledged to the Trustee
as additional collateral for the $8,000 note. If such stock is not purchased,
the funds would be applied against the amount owed under the note.

A partnership (the "Partnership") in which the Corporation has a 50%
controlling interest was a 34.5% minority partner in a hotel in Arlington,
Virginia. On June 5, 1997, the Partnership acquired the 65.5% of the property
not already owned for approximately $7,387, net of cash acquired in the
acquisition. The Partnership accounted for the acquisition using the purchase
method of accounting. The Corporation accounts for the Partnership on a
consolidated basis.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996

OPERATING LOSS

Revenues from real estate operations decreased $542 to $3,163 for the quarter
ended June 30, 1997 compared to $3,705 for the quarter ended June 30, 1996. The
decrease was the result of the disposal of several properties in fiscal 1997
partially offset by increased revenues at the remaining properties and the
purchase of an additional interest in a hotel accounted for on the equity basis
in the prior year as described above.




                                      9
<PAGE>   11

Operating costs decreased $1,265 to $3,343 for the quarter ended June 30, 1997
compared to $4,608 for the quarter ended June 30, 1996. A reduction in real
estate operating costs of $451 was the result of properties disposed of in the
prior year partially offset by costs related to increased revenues at the
remaining properties and the addition of another property acquired in the
current fiscal year. The remainder of the decrease was primarily due to a
reduction in corporate overhead costs.

The unusual item charge for the three months ended June 30, 1997 relates to the
Settlement with the Trustee as discussed above.

OTHER INCOME (EXPENSE)

Other expense of $4,980 for the three months ended June 30, 1997 primarily
related to the loss of $5,151 for the quarter from the Corporation's adjusting
the carrying value of its investment in Urohealth Systems, Inc. to market value
as of June 30, 1997. In the prior year, the income of $840 for the three months
ended June 30, 1996 was primarily the result of $2,883 in gains on trading
securities and on the early collection of a real estate note receivable
partially offset by the $2,043 write-off of the Corporation's investment in Ben
Franklin Retail Stores, Inc.

NET FINANCING COSTS

Net financing costs decreased $988 to $769 for the quarter ended June 30, 1997
compared to $1,757 for the quarter ended June 30, 1996. Interest income
increased $233 primarily from increased invested funds related to restricted
cash balances partially offset by decreased interest income on real estate
notes receivable either from their early collection or disposal in fiscal 1997.

Interest expense decreased $755. Approximately $214 of the decrease related to
real estate operations primarily due to operations disposed of in fiscal 1997.
The remainder of the decrease primarily related to the payoff of the revolving
debt of the Corporation in August 1996 and a decrease in the amount outstanding
under the Corporation's other debt.

NATIONAL STEEL CORPORATION

The net preferred dividend income for National Steel Corporation was
$2,258 for the three months ended June 30, 1997 compared to $2,419 for the
prior year. A decrease in the Weirton pension income for the current period was
the primary reason for the $161 decrease.

EQUITY IN INCOME (LOSS) OF AFFILIATES

Equity in income was $318 for the quarter ended June 30, 1997 compared to
equity in loss of $1,603 for the quarter ended June 30, 1996. The improvement
of $1,921 was primarily the result of significantly better results from the
Corporation's equity investment in Phar-Mor. In addition, the prior year equity
loss included a loss from the Corporation's equity investment in FoxMeyer
Canada Inc., which was sold in October 1996.

INCOME TAXES

The Corporation recorded no income tax provision for the current year. The
income tax benefit on the current year's loss was offset by an increase in the
deferred tax asset valuation allowance. The $29,838 income tax provision for
the prior year was primarily the result of the increase in the deferred tax
asset valuation allowance resulting from the loss of FoxMeyer's anticipated
taxable income in future years due to FoxMeyer's bankruptcy filing in August
1996.




                                      10
<PAGE>   12


MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES

The minority interest decreased $484 to $301 for the quarter ended June 30,
1997 compared to $785 for the quarter ended June 30, 1996. The decrease in
minority interest related to decreased income from real estate operations
partially offset by an increase in minority interest related to  Hamilton
Morgan as a result of increased earnings for Phar-Mor compared to the prior
fiscal year.

DISCONTINUED OPERATIONS

The loss for the three months ended June 30, 1996 relates to the loss from
operations and/or the loss on disposal of FoxMeyer and US HealthData
Interchange, Inc. which were both treated as discontinued operations beginning
in the prior fiscal year.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends have increased to $6,175 for the three months ended
June 30, 1997 compared to $4,080 for the three months ended June 30, 1996. The
increase was primarily the result of pay-in-kind dividends on the Series A
preferred stock that were paid in the prior fiscal year. The Series A preferred
stock's charge to equity in the prior year was based on the market value on the
ex-dividend date of the additional preferred stock paid as a dividend. After
the October 1996 payment, all future payments on Series A preferred stock must
be in cash. The current year charge is, therefore, based on the cash dividend
that would have been paid if declared (see Note 5 to the condensed consolidated
financial statements).


                        LIQUIDITY AND CAPITAL RESOURCES


As of July 31, 1997, the Corporation had cash and short-term investments of
approximately $2,800. In addition, the Corporation had $33,567 in restricted
cash and investments. Approximately $25,292 of restricted cash, plus any
interest earned after June 30, 1997, will be paid to the Trustee after approval
of the Settlement by the Bankruptcy Court as discussed in the "Overview". Of
the remaining balance in restricted cash, approximately $2,175 will be used by
the Corporation for general corporate purposes and approximately $6,100 will be
available for a potential purchase of 1,132,500 shares of Phar-Mor common stock
now owned by Hamilton Morgan. If the purchase of Phar-Mor common stock does not
take place by a certain date, then those funds will be used to reduce the note
payable to the Trustee.

The Corporation's mandatory cash requirements include the funding of monthly
operating activities, benefit obligations, and cash outlays attributable to
environmental liabilities of previously owned businesses, the amounts and
timing of which are uncertain. A principal payment of $2,500 is required in
September 1997 under a secured loan. The Corporation, at its option, may
request payment on a $2,500 note receivable in August 1997. As set forth above,
the Corporation also believes that funds will be available for general
corporate purposes from restricted cash in September 1997.

Including and beginning with the quarterly payments due January 15, 1997, the
Corporation has not declared nor paid any cash dividend payments on its Series
A preferred stock or its convertible preferred stock. If the Corporation does
not pay dividends on its preferred stock for six consecutive quarters, the
preferred shareholders would have the ability to elect a specified number of
members to the Board of Directors.

On December 19, 1996, the Corporation announced that it had exercised its
option to either sell its 69.8% interest in Hamilton Morgan or buy the minority
interest from Hamilton Morgan's other major investor, Robert Haft, Chairman and
Chief Executive Officer of Phar-Mor. The Corporation and Mr. Haft are currently
in negotiations. The Corporation, as noted above, will be able to fund its
purchase from funds to be released from restricted cash in connection with the
Settlement. The shares of Phar-Mor owned directly by the Corporation are not
involved in this transaction.




                                      11
<PAGE>   13

Until the Settlement with the Trustee is approved by the Bankruptcy Court, the
Corporation operates under an Agreed Preliminary Injunction Order (the "Order")
which enjoins the Corporation from transferring, selling or otherwise disposing
of, or encumbering or pledging (i) any assets or proceeds from the sale of the
assets which the Corporation received as part of the June 19, 1996, dividend
from FoxMeyer to the Corporation without the consent of the Trustee or approval
of the Bankruptcy Court and (ii) any of its other assets, except in the
ordinary course of business, unless the Corporation provides five days prior
notice to the Trustee and either obtains the Trustee's consent or Bankruptcy
Court approval.

The Order significantly impairs the Corporation's liquidity and its ability to
conduct business by restricting the Corporation's use of its assets. The
Settlement described above will remove the constraints placed on the
Corporation's assets by the Order, although it will reduce the Corporation's
assets by the approximate $25,292 cash payment to be made to the Trustee. The
Bankruptcy Court is scheduled to hear a motion to approve the Settlement on
September 16, 1997.

The Corporation intends to continue to invest in real estate and make other
investments, and pursue the acquisition of an operating company once the
Settlement with the Trustee has been approved by the Bankruptcy Court. The
Corporation will rely on cash on hand, the funds to be released from restricted
cash, the sale of real estate or other investments, and any excess cash from
its real estate operations to meet its future obligations. In addition, the
Corporation will liquidate assets, to the extent necessary, to meet its cash
requirements. Because there can be no assurance as to the value of these assets
or the ability of the Corporation to timely liquidate these investments when
funds are needed, the Corporation's future ability to meet its ongoing
obligations is not assured. The Corporation'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.


                                     OTHER

In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" which is effective for fiscal years beginning after
December 15, 1997. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. SFAS No. 130 will require that changes in the balances of items that
are reported directly in a separate component of stockholders' equity (foreign
currency translation adjustments, unrealized gains and losses and minimum
pension liability adjustments) be added to net income to arrive at
comprehensive income. If the Corporation had adopted SFAS No. 130 in the
current fiscal year, comprehensive loss for the three months ended June 30,
1997 and 1996 would be as follows:


<TABLE>
<CAPTION>
                                                                     For the three months
                                                                        ended June 30,

                                                                    1997             1996
---------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>       
Net loss                                                           $(36,946)       $(288,352)
Other comprehensive income (loss), net of tax                                                
      Unrealized losses on securities                                     -              (66)
      Less: reclassification adjustment for losses included in                               
       net loss                                                           -               17 
---------------------------------------------------------------------------------------------
      Net unrealized losses                                               -              (49)
      Minimum pension liability adjustment                           (2,132)               - 
---------------------------------------------------------------------------------------------
           Total other comprehensive loss                            (2,132)             (49)
---------------------------------------------------------------------------------------------
Comprehensive loss                                                 $(39,078)       $(288,401)
=============================================================================================
</TABLE>

In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" which is
effective for periods ending after December 15, 1997. SFAS No. 128 does not
have any impact on the financial results or financial condition of the
Corporation, but will result in a change in the calculation of earnings per
share. 




                                      12
<PAGE>   14

The effect of the changes for the three months ended June 30, 1997 and
1996, respectively, is shown in Note 2 to the condensed consolidated financial
statements.

In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. Accordingly, the Corporation plans to adopt
SFAS No. 131 with the fiscal year beginning April 1, 1998. SFAS No. 131 does
not have any impact on the financial results or financial condition of the
Corporation, but will result in certain changes in required disclosures of
segment information.





                                      13
<PAGE>   15




                          PART II - OTHER INFORMATION

                      AVATEX CORPORATION AND SUBSIDIARIES



ITEM 1.  LEGAL PROCEEDINGS

With respect to the matters reported in the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, the following additional
information is provided:

BANKRUPTCY/TRUSTEE LITIGATION. On July 29, 1997, the Corporation announced a
settlement of certain litigation initially brought against it by the Official
Unsecured Creditors' Committee (the "Committee") of FoxMeyer Corporation
("FoxMeyer"), et al., in the FoxMeyer bankruptcy proceedings presently pending
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The litigation relates to the dividend of certain assets
from FoxMeyer to the Corporation on June 19, 1996. Upon the conversion of the
FoxMeyer cases to Chapter 7, the Chapter 7 Trustee (the "Trustee") succeeded to
the Committee's interest in the litigation, and thereafter entered into a
settlement (the "Settlement") with the Corporation. The Settlement is subject
to approval of the Bankruptcy Court, which is scheduled to hear a motion to
approve the Settlement on September 16, 1997.

The Settlement provides for the dissolution of an injunction order that
currently prohibits the Corporation from transferring, selling, or otherwise
disposing of, or encumbering or pledging (i) any assets or proceeds from the
sale of the assets which the Corporation received as part of the June 19th
dividend without the consent of the Trustee or approval of the Bankruptcy Court
and (ii) any of its other assets, except in the ordinary course of business,
unless the Corporation provides five days prior notice to the Trustee and
either obtains the Trustee's consent or Bankruptcy Court approval. In addition,
under the Settlement, the Corporation will pay $25.3 million to the Trustee and
execute an $8.0 million three year note payable to the Trustee. In exchange,
the Trustee will release the Corporation from all claims and will grant it a
30% interest, up to the greater of $10.0 million or the amount owed under the
note, in certain litigation that may be brought by the Trustee against
specified third parties. The proceeds from the Corporation's 30% interest must
be first used to satisfy its obligation under the $8.0 million note. Finally,
the Settlement specifically provides for the immediate use of approximately
$6.1 million in connection with a potential purchase of 1,132,500 shares of
common stock of Phar-Mor, Inc. now owned by Hamilton Morgan LLC, which if
purchased by the Corporation would be pledged to the Trustee as additional
collateral for the $8.0 million note. If such stock is not purchased, the funds
would be applied against the amount owed under the note.

MCKESSON/VENDOR LITIGATION. With reference to the separate action filed by the
Committee in the Bankruptcy Court, which seeks a declaration that the FoxMeyer
bankruptcy estate owns the claims asserted by the Corporation in certain
litigation commenced in Texas State Court, on July 18, 1997, the Corporation
filed its answers to the two complaints filed by the Committee and intervenor
McKesson Corporation ("McKesson"), and its response to the motion for summary
judgment filed by McKesson. The Corporation set forth in these documents the
bases for its belief that it owns the claims asserted by it in the Texas State
Court litigation.

ENVIRONMENTAL INSURANCE LITIGATION. With reference to the environmental
insurance litigation filed by the Corporation and certain other plaintiffs
against Continental Casualty Co., the Insurance Company of North America and
various other insurance carriers, the Corporation and the other plaintiffs have
reached tentative settlements with all but one of the defendants in the case.
Definitive settlement agreements have been executed with certain carriers and
are being negotiated with the remaining carriers. In addition, the plaintiffs
are currently negotiating among themselves regarding allocation of the proceeds
of the settlements.





                                      14
<PAGE>   16
ITEM 3.  DEFAULTS UNDER SENIOR SECURITIES

The Corporation did not declare, nor did it pay, the dividends due for the
quarterly periods ended January 15, 1997, April 15, 1997 and July 15, 1997 on
either the Convertible Preferred Stock or the Series A Preferred Stock. These
two issues are cumulative. The cumulative dividends accrued and unpaid were
approximately $2.4 million ($3.75 per share) and $13.9 million ($3.23 per
share) on the Convertible Preferred Stock and Series A Preferred Stock,
respectively.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Corporation held its 1997 annual meeting of stockholders on August 12, 1997
(the "Annual Meeting").

At the Annual Meeting, the following individuals were elected as directors of
the Corporation, each to serve until the annual meeting of stockholders to be
held in 2000:

                  Hyman H. Frankel
                  Fred S. Katz
                  Charles C. Pecarro

The terms of the following directors of the Corporation continued after the
Annual Meeting:

                  Abbey J. Butler
                  Melvyn J. Estrin
                  William A. Lemer
                  John L. Wineapple

 The number of votes cast for, or withheld, with respect to the election of
directors, was as follows:


                                          For               Withheld
                                       ---------            -------- 
Hyman H. Frankel                       9,904,531             368,327
Fred S. Katz                           9,969,809             303,049
Charles C. Pecarro                     9,969,434             303,424



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)    Exhibits

                10-A   -     Amendment No. 1 to the Performance Incentive Plan 
                             of Avatex Corporation                             
                                                                               
                11     -     Statement Re: Computation of Earnings Per Common  
                             Share                                             

                27     -     Financial Data Schedule                           

         (b)    Reports on 8-K

                There were no Current Reports filed by the
                Corporation on Form 8-K during the three months ended June 30,
                1997.




                                      15
<PAGE>   17


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.



                                  
                                    AVATEX CORPORATION


August 14, 1997                   By: /s/ Edward L. Massman
                                      ----------------------------------------
                                      Edward L. Massman
                                      Senior Vice President and Chief Financial
                                        Officer (Principal Financial Officer)

August 14, 1997                   By: /s/ Scott E Peterson
                                      -----------------------------------------
                                      Scott E Peterson
                                      Vice President Finance and Controller
                                      (Principal Accounting Officer)




                                      16





<PAGE>   18

                                 EXHIBIT INDEX

EXHIBIT
  NO.                             DESCRIPTION
--------                          -----------
10-A           -    Amendment No. 1 to the Performance Incentive Plan of 
                    Avatex Corporation

11             -    Statement Re: Computation of Earnings Per Common Share

27             -    Financial Data Schedule