U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C.  20549

                                   Form 10-KSB

[ X ]            ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
                         SECURITIES EXCHANGE ACT of 1934
                   For the fiscal year ended December 31, 1997

[    ]         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
        For the transition period from _______________ to _______________

                         Commission File Number 0-23788

                           XECHEM INTERNATIONAL, INC.
                 (Name of small business issuer in its charter)

        Delaware                                        22-3284803
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

100 Jersey Avenue, Building B, Suite 310, New Brunswick, New Jersey    08901
          (Address of principal executive offices)                   (Zip Code)

Issuer's telephone number:                                 (732) 247-3300

Securities registered under Section 12(b) of the Exchange Act:

      Title of each class             Name of each exchange on which registered




Securities registered under Section 12(g) of the Exchange Act:

                         Common Stock, $.00001 par value
                                (Title of Class)


                                (Title of Class)


    Check  whether  the issuer  (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.
    YES     X   NO  ____

    Check  if  disclosure  of  delinquent  filers  in  response  to Item  405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

    State issuer's revenues for its most recent fiscal year.  $ 114,187

    State the aggregate market value of the voting stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days. $10,538,700 as of March 31 , 1998.

    The  number  of  shares  outstanding  of  the  Company's  Common  Stock  was
119,870,839 as of March 31, 1998.




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                                      INDEX

                                                                         Page
PART I
      Item 1.  Description of Business....................................01
      Item 2.  Description of Property....................................26
      Item 3.  Legal Proceedings..........................................26
      Item 4.  Submission of Matters to a Vote of Stockholders............26

PART II
      Item 5.  Market for Common Equity and Related Stockholder Matters...27
      Item 6.  Management's Discussion and Analysis.......................29
      Item 7.  Financial Statements.......................................34
      Item 8.  Changes In and Disagreements With Accountants on Accounting
               and Financial Disclosure...................................35

PART III
      Item 9.  Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act..........36
      Item 10. Executive Compensation.....................................37
      Item 11. Security Ownership of Certain Beneficial Owners and
               Management.................................................40
      Item 12. Certain Relationships and Related Transactions.............41
      Item 13. Exhibits and Reports on Form 8-K...........................43


SIGNATURES



                                       (i)

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                                     PART I

Item 1.  Description of Business1

General

         Xechem International,  Inc. ("Xechem" or the "Company") owns all of the
capital stock of Xechem,  Inc, a development  stage  bio-pharmaceutical  company
currently engaged in research,  development, and the limited production of niche
generic  and  proprietary  drugs from  natural  sources.  The Company is engaged
primarily in applying its  proprietary  extraction,  isolation and  purification
technology to the production and manufacture of paclitaxel (commonly referred to
in scientific literature as "Taxol(TM)," a registered trademark of Bristol-Myers
Squibb Company ("Bristol  Myers")).  Paclitaxel is an anti-cancer  compound used
for the treatment of refractory  ovarian and breast cancers and Kaposi  sarcoma.
The Company has  successfully  isolated  greater than 97% pure paclitaxel  (less
than one  kilogram),  and is preparing  dosage forms of paclitaxel for stability
testing and submission of an Abbreviated  New Drug  Application  ("ANDA") to the
Food and Drug  Administration  ("FDA").  The Company has  submitted to the FDA a
Drug Master File ("DMF") for the facility and the bulk paclitaxel  product.  The
Company  has  also  filed a number  of  patents  on  paclitaxel  and its  second
generation analogs to the U.S. Patent and Trademark Office and internationally.

         In addition to the Company's focus on the development and production of
paclitaxel,  the Company has  continued and will continue to apply its expertise
to research and develop other niche compounds,  such as bleomycin and mitomycin,
which are  difficult to replicate  and no longer  enjoy patent  protection,  but
experience  limited  competition.  The Company has also  focused  certain of its
research  and  development  efforts on the  development  of drugs  from  sources
derived from Chinese and Indian traditional medicinal plants in the anti-cancer,
anti-fungal, anti-viral (including anti-AIDS), anti-inflammatory, anti-aging and
memory  enhancing  areas.  Some of these efforts are performed in  collaboration
with the National Cancer Institute ("NCI") and the National Institutes of Mental
Health ("NIMH").

         The Company  has an  affiliate  office,  Xechem  (Europe) U. Stift,  in
Copenhagen,  Denmark for European  operations  and a subsidiary,  Xechem (India)
Pvt., Ltd., in New Delhi, India.

         The  Company  has  also  established  a  subsidiary,   XetaPharm,  Inc.
("XetaPharm"),  to develop and market over-the-counter  natural products such as
GinkgoOnce(TM),  GarlicOnce(TM),  GinsengOnce(TM),  Gugulon(TM),  Melatonin  and
DHEA.  To date,  XetaPharm  has had  only  limited  operations  and  sales.  See
"XetaPharm" below.


         1 Some of the statements  included in Item 1,  Description of Business,
may be  considered  to be "forward  looking  statements"  since such  statements
relate to matters which have not yet occurred. For example, phrases such as "the
Company anticipates,:  "believes" or "expects" indicate that it is possible that
the event anticipated, believed or expected may not occur. Should such event not
occur, then the result which the Company expected also may not occur or occur in
a different  manner,  which may be more or less  favorable to the  Company.  The
Company does not undertake any obligations to publicly release the result of any
revisions to these forward  looking  statements  that may be made to reflect any
future events or circumstances.

         Readers should carefully review the items included under the subsection
Risks Affecting  Forward  Looking  Statements and Stock Prices as they relate to
forward looking  statements as actual results could differ materially from those
projected in the forward looking statement.


                                        1

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Recent Developments

Blech Stock Purchase Agreement

         On November 18, 1996,  the Company  entered into and closed the initial
stage of a Stock Purchase Agreement (the "Blech Purchase  Agreement") with David
Blech or his designees  ("Blech")  providing for the sale of up to 55,000 shares
of Class C Series 2 Voting  Cumulative  Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying shares of Common Stock, over approximately nine months. At the
initial closing,  The Edward A. Blech Trust (the "Trust") purchased 5,000 Series
2 Preferred Shares for $500,000.  The Trust purchased an additional 5,000 Series
2 Preferred  Shares on December  30, 1996;  5,000  Series 2 Preferred  Shares on
January 8, 1997;  and 7,500 Series 2 Preferred  Shares on February 7, 1997.  The
Blech Purchase  Agreement was amended,  effective  March 27, 1997, to modify the
dates  for  closing  of other  purchases  of  portions  of the  shares  issuable
thereunder.  Pursuant to the Blech Purchase Agreement,  on February 7, 1997, Dr.
Ramesh Pandey,  the Company's  Chairman and Chief Executive  Officer,  exchanged
certain  indebtedness owed by the Company to him and the 1,070 shares of Class B
Preferred  Stock  of the  Company  held by him for  12,144  shares  of  Series 3
Preferred Shares.  Pursuant to their terms, effective February 8, 1997, the then
outstanding  22,500  Series 2  Preferred  Shares and 12,144  Series 3  Preferred
Shares were  converted into  45,000,000  and 19,430,400  shares of Common Stock,
respectively.  For the period  March 28, 1997 through  December  31,  1997,  The
Edward  Blech  Trust  purchased  2,300,000  shares of Common  Stock and 15 other
assignees  purchased  48,320,000  shares of Common  Stock,  which  included  two
affiliated  individuals  who purchased  1,960,000  shares of Common  Stock,  two
trusts, not otherwise  affiliated with Blech, each purchased 5,000,000 shares of
Common  Stock on March 27,  1997 and a Blech  purchase  of  5,000,000  shares of
Common  Stock on April 14,  1997.  On May 1, 1997,  Blech sold (at his cost) his
5,000,000  shares  to  the  two  referenced  unaffiliated  trusts  and  a  third
unaffiliated  trust.  To date,  cash payments of $5,500,000 have been made under
the Blech Purchase Agreement and 110,000,000 shares of Common Stock have been or
will be issued thereunder.

         Pursuant to the Blech Purchase Agreement,  the Company,  Dr. Pandey and
Blech have also  entered  into a  stockholders'  agreement,  which,  among other
things:  (i)  generally  prohibits  the sale of any of Dr.  Pandey's  shares  of
capital stock of the Company for a period of five years, except with the consent
of  Blech;  (ii)  provides  Blech  with the  right to sell his pro rata  portion
(relative to the holdings of Dr.  Pandey) of any proposed  sale of shares by Dr.
Pandey,  and a  reciprocal  right in favor  of Dr.  Pandey  to sell his pro rata
portion of any shares sold by Blech; (iii) requires Blech to vote for Dr. Pandey
as a director  of the  Company,  and to use his  efforts to cause Dr.  Pandey to
remain  Chairman,  President and chief  executive  officer of the Company;  (iv)
requires the Company and its directors (subject to their fiduciary duties to the
Company and the  shareholders  of the Company) to take such actions as Blech may
request to elect his nominees to  constitute a majority of the  directors of the
Company (to date,  Blech has not  exercised  such  right);  and (v) provides for
certain demand and piggyback registration rights in favor of Blech.

         The Company has received an opinion from The Griffing  Group,  Inc., an
independent  valuation  and financial  advisory  firm, as to the fairness of the
above  transactions,  from a financial point of view, to the shareholders of the
Company.

                                        2

<PAGE>




Nasdaq Delisting

         Effective  following  the close of business  on  February 4, 1997,  the
Company's Common Stock and Common Stock Purchase  Warrants (the "Warrants") were
delisted from trading on the Nasdaq SmallCap  Market.  In its  determination  to
delist the Company's securities,  Nasdaq noted that the bid price for the Common
Stock had fallen below the $1.00 per share level required for continued listing.
Although the Company  believed that,  with the capital  provided under the Blech
Purchase  Agreement,  it had  satisfied  the criteria for  alternative  listing,
namely  having  capital  and  surplus  of  $2,000,000  and  market  value of the
publicly-traded shares of at least $1,000,000,  Nasdaq stated that the Company's
evidence of such compliance was inadequate, and that, in light of certain delays
in the  funding by Blech  under the Blech  Purchase  Agreement,  Nasdaq  "lacked
confidence" in the Company's ability to maintain compliance. In addition, Nasdaq
raised concerns regarding Mr. Blech's involvement with the Company in light of a
pending Securities and Exchange Commission ("SEC")  investigation  regarding the
operations  of D. Blech & Co., a  broker-dealer  controlled  by Mr.  Blech which
terminated operations in 1994.

         The Company  filed an appeal of the delisting  with the Nasdaq  Listing
and Hearing Review  Committee and was notified that the Hearing Review Committee
affirmed  the  decision  to delist  the  Company's  securities  from the  Nasdaq
SmallCap  Market.  In September  1997,  the Company  filed an appeal to the U.S.
Securities and Exchange Commission and has not yet been notified when a decision
will be announced concerning this matter.

Paclitaxel and Other Anti-Cancer Agents

Paclitaxel

         Paclitaxel  was developed  through a program  sponsored by the National
Cancer  Institute  ("NCI") in which over 35,000  plant  species  were tested for
anti-cancer  activity.  One of the plant extracts (the bark of Taxus brevifolia,
commonly known as Western Yew) led to the isolation and discovery of paclitaxel.
Paclitaxel  has a unique  anti-cancer  action  which blocks the  replication  of
cancer cells. Bristol-Myers' formulation of paclitaxel (marketed under the trade
name  "Taxol(TM)")  was first approved in the United States,  Canada,  and other
countries for use against  refactory  ovarian and breast cancers in patients who
have failed to respond to initial  chemotherapy.  In 1997,  it was  approved for
Kaposi  sarcoma.  Paclitaxel has also shown  activity  against a wide variety of
cancers  in  animals,  and has been  shown to be  effective  in  humans  against
non-small-cell lung cancer, skin cancer and colon cancer.

         An established  market exists for paclitaxel which the Company believes
currently exceeds  $900,000,000 per year.  Additionally,  as clinical experience
grows,  paclitaxel  is expected to be  approved  for use in lung,  head and neck
cancers. Paclitaxel is also used in combination with other chemotherapy and as a
sensitizer to radiation  therapy.  The Company believes that significant  market
expansion can be expected in the near term and a number of  competitors  produce
or are developing processes to produce paclitaxel.

         The Company has isolated limited quantities (less than one kilogram) of
greater than 97% pure  paclitaxel  which it intends to utilize in its efforts to
obtain  regulatory  approval in the United States and foreign  jurisdictions for
the sale of the compound. Under the Waxman-Hatch amendment to the Food, Drug and
Cosmetic Act of 1984, a five-year period of marketing  exclusivity is granted to
any firm which  develops  and  obtains  FDA  approval  of a  non-patentable  new
molecular  entity,  to  compensate  the firm  for  development  efforts  on such
non-patentable  molecular  entities.  In  connection  with  its  development  of
paclitaxel,  Bristol-Myers  was granted such a period of marketing  exclusivity,
which was to expire on

                                        3

<PAGE>





December 29, 1997, but has been extended for an additional four year period. The
Company  intends to submit an ANDA for  paclitaxel  during  the year  1999.  The
Company estimates,  but can provide no assurances,  that FDA approval of an ANDA
for paclitaxel will take six to twenty-four  months. At such time as the Company
has such data, it intends to apply for regulatory  approval to market paclitaxel
in certain foreign countries. In addition,  although there can be no assurances,
the Company is considering  the  possibility of selling  paclitaxel as "bulk raw
material,"  processed to 97% or greater purity,  but not formulated and packaged
into  single  dosage  sizes.  Such  sales,  however,  are  not  expected  to  be
significant.  Management  believes that obtaining  regulatory approval to market
and distribute  paclitaxel in such foreign  markets will require a significantly
shorter  period of time than would be  required  in the United  States,  but can
offer no assurance thereof. See "Government Regulation."

         In cooperation  with researchers at the University of Texas MD Anderson
Cancer  Center  ("MD  Anderson"),  Xechem has  developed  a new  formulation  of
paclitaxel which does not contain Cremophor(TM) and ethanol.  Xechem believes it
may ultimately have significant  commercial potential.  In the second quarter of
1997, Xechem obtained a license from MD Anderson and the Board of Regents of the
University of Texas (the "UT Board") for the rights to such  formulation.  Under
the license, Xechem has the exclusive, worldwide rights to MD Anderson's and the
UT  Board's  patent  and  other  rights,  except  for  certain  rights of the US
government and the rights of MD Anderson and the UT Board to use such rights for
educational purposes. Xechem may lose the rights to such technology in countries
in which it does not commence  activities within five years from the date of the
license.  Under the license  agreement,  Xechem  would pay MD  Anderson  certain
milestone and similar payments,  as well as a royalty of 4% of Xechem's sales of
the new  formulation  use of paclitaxel.  Xechem would also pay to MD Anderson a
percentage of amounts received by Xechem from sublicensees, if any.

Bleomycin

         The Company has also focused its research  and  development  efforts on
developing the  technology to produce  bleomycin,  an  anti-cancer  compound for
which patent  protection has expired,  but for which there are currently limited
sources of supply due to the difficulty of replicating the technology. Bleomycin
is a fermentation  product.  The Company has developed a process to produce pure
bleomycins,  Bleomycin A2 and B2. Commercial bleomycin is a mixture of A2 and B2
in a fixed proportion.  The Company has the capability of formulating  bleomycin
in various proportions and has made this available to research  institutions for
sale in limited  quantities.  The Company commenced  development efforts for the
use of bleomycin on humans,  with a view toward submission of an ANDA.  However,
such  efforts  were  substantially   suspended  pending  funding.   The  Company
anticipates that when additional  funding is received,  the Company will restart
this project.

Apotex Agreements

         On February 17, 1995,  the Company  entered into a series of agreements
(the  "Apotex   Agreements")  with  Apotex  U.S.A.,   Inc.  and  its  affiliates
(collectively  referred to as "Apotex"),  which initially provided for the joint
development,  manufacture  and  distribution of bleomycin and paclitaxel and the
possible joint development of up to six additional anti-cancer compounds.

         The original Apotex Agreements contemplated an extended (99-year) joint
production,  warehousing and marketing arrangement through Apotex's distribution
network  for  paclitaxel  and  bleomycin,  as well as possible  other  products.
Pursuant to the original Apotex  Agreements,  among other things,  Apotex was to
provide   certain  funding  for  research  and  development  of  paclitaxel  and
bleomycin,  and the Company was to issue certain securities to Apotex, including
100,000 shares of Common Stock and warrants to purchase 500,000 shares of Common
Stock, which shares and warrants were issued in February 1995. The shares issued
to Apotex were subsequently publicly registered by the Company.
However, Apotex did not provide any funding to the Company.


                                        4

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         Accordingly,  in September  1995,  the Company and Apotex  modified the
Apotex Agreements.  Under the restructured  agreements,  Apotex has the right to
purchase,  at Xechem's cost of production,  up to 30% of the Company's quarterly
production of paclitaxel,  bleomycin and certain other  products,  if developed.
Apotex will pay to the Company 55% of Apotex's  profit on sales of such products
until  $5,000,000  is  received  plus one half of such  profit  thereafter.  The
restructured  agreements  have a ten year term. In addition,  Apotex returned to
the Company  75,000 of the 100,000  shares  issued to it and also  returned  the
500,000 share warrant. The restructured agreements also provide that the Company
has a right of first  refusal to utilize  available  fermentation  capacity of a
prospective  acquisition  target of Apotex  should it be successful in acquiring
such facility.

NIH Master Agreements

         In 1993,  NCI,  a part of the  National  Institute  of Health  ("NIH"),
selected  and awarded the Company  three  five-year  master  agreements  for the
isolation and  purification  of  anti-cancer  and anti-AIDS  agents from natural
plant sources or microbial, fermentation processes.

         Master   agreements   are  issued   competitively   based  on  criteria
established  by the  NCI  for  each  proposed  agreement.  Receipt  of a  master
agreement  does not  constitute an award of a specific  project,  nor a grant of
specific funding,  to the recipient.  Rather,  the master agreements qualify the
recipient  to be one  of a very  small  number  (generally  three  to  five)  of
applicants for projects within the scope of the master  agreement.  To date, the
Company has not received any funding from these agreements, which will expire in
1998.

Generic Niche Anti-Cancer Drugs

         In addition  to  paclitaxel  and  bleomycin,  the  Company  anticipates
developing its own formulations of other conventional  anti-cancer agents, whose
patents  will  expire  at a  time  projected  to  coincide  with  the  Company's
formulation of such products. In some instances,  the bulk raw material for such
products  will be  readily  commercially  available;  in other  instances,  such
products will require independent strain development from cultures and scale up,
such as in the  case  of  bleomycin.  The  Company's  ability  to  develop  such
additional  products  will be  dependent,  at least in part,  upon the Company's
ability  to set aside  sufficient  funds to  commence  these  sometimes  lengthy
projects.  Due to both the niche market size and the difficulty in isolating and
replicating  these  compounds,  the Company  believes that there will be limited
future competition in these markets.

         Approval of the FDA will be required  before the Company may market any
generic  niche  drugs  through  submission  of an  ANDA  in the  United  States.
Opportunities  may  exist  to  market  generic  drugs  abroad,  subject  to less
stringent requirements in certain instances.

Other Niche Generic Drugs

         In addition  to  anti-cancer  drugs,  the Company is seeking to develop
compounds for generic antifungal, anti-AIDS and cardiovascular drugs which enjoy
significant  market demand but are no longer  subject to patent  protection,  to
obtain ANDA  approval of such drugs and to market  such drugs  independently  or
through joint ventures with other pharmaceutical firms. Management believes this
will  afford the  Company  the  ability to develop  one or more  products in the
marketplace on a faster basis than through the  development  of new drugs,  with
the concomitant regulatory hurdles.


                                        5

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Research and Development of Proprietary Drugs

Paclitaxel Analogs

         During the isolation and  purification  of paclitaxel,  the Company has
isolated and purified at least nine analogs of paclitaxel which have been tested
in vitro in collaboration  with NCI.  Preliminary animal studies have shown that
these analogs may have  significant  advantage over Taxol(R) or  Taxotere(TM) in
the  treatment of certain  cancers.  The Company has filed for United States and
international patents on these analogs.

Products from Natural Plant Origin (Traditional Medicines)

         In addition to its efforts to develop generic  equivalents to compounds
no longer  enjoying  patent  protection,  the  Company  is seeking to develop an
efficient  drug  discovery  program and to apply that program to the  discovery,
development and  commercialization  of new classes of  pharmaceuticals.  Towards
this goal,  the Company is seeking to develop  proprietary  drugs from compounds
extracted from medicinal plants and marine sources,  as well as diagnostic tests
for  determination  of the  presence  of certain  biochemical  compounds  and/or
diseases.

         Though  the  pharmaceutical   industry's   emphasis  has  shifted  from
plant-based drug discovery to the increased  screening of fermentation based and
synthetic compounds,  the modification of existing compounds,  the generation of
analogs and the utilization of biotechnology  tools and techniques,  the Company
believes  its  approach of  screening  plants has a better  chance of success in
developing new drugs.

         The Company's particular focus is the development of therapeutic agents
based on traditional  plant medicines,  especially the folklore of India and the
People's  Republic  of  China.  Over  the past few  decades,  research  in these
countries has developed a number of drugs from such plants.  However, only a few
of these drugs have been introduced into Western medicine.  The Company believes
it has an  opportunity  to use its expertise  and knowledge of these agents,  as
well as sourcing of natural compounds,  to develop  pharmaceuticals  that can be
successfully introduced in the United States and other developed countries.

         Traditional  plant  medicines  have  been  valued in  various  cultures
throughout  the ages for their  therapeutic  and healing  properties.  In recent
decades, modern investigations have led to the systematic screening of thousands
of plants and other  natural  products for a variety of  biological  activities.
Several commercially successful  pharmaceuticals based upon these medicines have
exhibited  activities  useful in treating  cancer,  fungal and viral  infections
(including AIDS), and in retarding aging and senescence. Ethical pharmaceuticals
currently in use having plant origins include: L-dopa, used for the treatment of
Parkinson's disease; pilocarpine, used to treat glaucoma; quinine, used to fight
malaria; and vinblastine and vincristine, used to treat certain cancers, both of
which come from India and the People's  Republic of China.  In  addition,  drugs
such as aspirin,  ephedrine,  digitalis,  and paclitaxel  originated from plants
found   in   temperate   regions   of  the   world.   Valuable   natural-product
pharmaceuticals  may be  derived  from a variety  of  medicinal  plants,  marine
sources and fermentation processes.

         Through a  detailed  investigation  of  traditional  Chinese  medicinal
plants  and  herbs,  Indian  Ayurvedic  medicines  and  Western  pharmacological
literature,  the  Company has  selected  over 600  natural  products,  extracts,
semi-synthetic  and synthetic  compounds for further research and development in
the areas of anti-cancer,  anti-viral  (including  AIDS) and  anti-inflammatory,
cholesterol-lowering, and anti-aging/anti-senescence agents.


                                        6

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         All of these extracts and pure compounds are undergoing early stages of
laboratory  screening for activity against cancer,  AIDS,  infections,  or other
conditions.  Those  compounds  which  demonstrate  significant  activity will be
further tested in animal studies.  The Company will select those compounds which
show greatest promise for further  investigation and commencement of the process
of submitting  applications to the FDA,  conducting human clinical  trials,  and
obtaining final FDA approval.  Historically  in the United States,  seven to ten
years  are  needed  to  advance  a new  pharmaceutical  from the  laboratory  to
marketing. See "Government Regulation" below.

Products from Deep Sea Marine Organisms

         The  Company  has an  agreement  with  the  Fisheries  and  Aquaculture
Technology Extension Center ("FATEC"), Cook College - Rutgers University wherein
FATEC transfers  biological materials to the Company for screening and isolation
of compounds that may have anticancer,  antiviral,  antimicrobial,  anti-HIV and
immunomodulatory properties.  Antimicrobial and anticancer screening assays have
been  developed  and  implemented  by the  Company  for use with  the  organisms
transferred  by FATEC.  Extracts of a number of organisms  transferred  by FATEC
were biologically active against streptococcus infections and prostate cancer.

Product Discovery and Development Process

         The Company's drug  development  process  involves a  multidisciplinary
exchange among folklore  healers,  ethnobotanists,  natural product  scientists,
pharmacologists,  physicians  and  research  pharmacists.  Since  the  Company's
targeted  plant material has, in certain  instances,  already been used for many
years in humans,  the Company  believes that there is greater  likelihood that a
compound  isolated from such material will work on humans and,  correspondingly,
that  there  is  a  decreased  likelihood  of  toxicity.  In  addition,  because
traditional medicinal  preparations are typically  administered either orally or
topically,  they are more likely to yield  pharmaceuticals  that are also active
orally  or  topically.  These  methods  of  administering  a  drug  are  product
attributes viewed by the medical community as convenient and desirable.

         The Company's product  discovery and development  process involves four
major  phases:  (i) folklore  screening;  (ii)  ethnobotanical  research;  (iii)
biological  screening  and  isolation  of  active  compounds;  and (iv)  product
development.

         Folklore  Screening.  The Company's drug discovery  process begins with
fieldwork in  collaboration  with folklore healers who have been utilizing plant
remedies used for  generations by native people.  The Company's  scientists,  as
well as other  scientists  and  non-scientists  working with the  Company,  have
participated  directly in such  fieldwork in India,  working with local folklore
healers to identify and obtain  samples of plants used by such  healers,  and to
understand  the folklore  applications  and means of using such  plants.  In the
People's  Republic of China,  this early fieldwork has largely been performed by
researchers at the institutions with which the Company  collaborates,  and which
have made their results of this fieldwork available to the Company.  The Company
has ongoing agreements with two scientific institutions in the People's Republic
of China,  which  have  granted  the  Company  exclusive  rights  outside of the
People's  Republic of China with respect to certain plant extracts and synthetic
compounds  isolated  by  such  institutions  from  traditional   Chinese  herbal
medicines. See "Raw Material Supply" below.

         Ethnobotanical  Research.  The  Company  investigates  candidate  plant
materials  with the  ethnobotanists  and  physicians  who have  conducted  field
expeditions  in the  People's  Republic  of China and India.  The  ethnobotanist
records the specific  plants and plant parts used  medicinally,  the form of use
(dried, brewed, fresh), duration and method of treatment, location and abundance
of the plant.


                                        7

<PAGE>





         The Company  prioritizes its plants by determining  their  anti-cancer,
anti-viral,  anti-fungal  and memory  enhancing  activities.  The  field-derived
information is also  cross-checked  through  literature  searches as to chemical
constituents,  previously  discovered  biological  activity  and other  reported
medicinal   uses.   In  the   Company's   multidisciplinary   environment,   the
ethnobotanists continue to work with other scientists after the expedition phase
in the later stages of drug discovery to assist in directing activity screens.

         Biological  Screening  and  Isolation of Active  Compounds.  The plants
selected  after  folklore  screening  and   ethnobotanical   research  are  then
extracted.  The extracts are screened for specific  activities in vitro.  The in
vitro  positive  extracts  are tested  again to confirm  the  activities.  Those
extracts  which show  confirmed in vitro  activities  are  subjected to bioassay
guided fractionation to isolate pure compounds.  The isolated compounds are then
further tested for biological activity in studies meeting Western standards. The
Company is currently  screening  extracts and pure compounds in the anti-fungal,
anti-cancer,  anti-viral,  anti-inflammatory  and memory  enhancing  areas.  The
Company  conducts  certain of its  screening in  collaboration  with the NIH and
industrial laboratories.

         Product  Development.  Once a pure compound has demonstrated  promising
activity, it is subject to the same product regulatory requirements as potential
drugs from other sources.  These  requirements  include  current Good Laboratory
Practices  ("cGLP"),  Preclinical,  Investigational  New Drug ("IND"),  Phase I,
Phase II clinical  trials (i.e.  trials on patients),  and New Drug  Application
("NDA") filings with FDA.  Appropriate  clinical studies will be designed by the
Company's product  development team in consultation with regulatory,  toxicology
and other experts, as necessary. See "Government Regulation" below.

Xechem (Europe) U. Stift

         In 1997,  the Company  formed an affiliate,  Xechem  (Europe) U. Stift,
with its office in Copenhagen,  Denmark. The purpose of this division is to seek
out potential  business  partners in Europe to form strategic  alliances for the
development,  manufacturing  and marketing of  pharmaceutical  and nutraceutical
products.  This has  resulted  in  negotiations  with two  companies  to license
production, marketing and selling of bulk and injectable paclitaxel.

         The companies will be responsible  for the  registration  of injectable
paclitaxel in their  respective  countries.  Xechem will also grant a license to
the companies to manufacture and sell Xechem's  patented new paclitaxel  analogs
as well as a new paclitaxel  formulation  without  Cremophor(TM) or ethanol.  In
return,  Xechem will be cross-licensed  by the companies to produce,  market and
sell certain key pharmaceutical  products in the United States and India. Xechem
will be  responsible  for the  registration  of these products with the FDA. The
aggregate market for these products currently exceeds $1,000,000,000.



                                        8

<PAGE>





XetaPharm

         The  Company  established  XetaPharm  in 1996 to bridge the gap between
pharmaceuticals and nutraceuticals.  XetaPharm's principal business objective is
to develop "quality"  nutraceutical  products for the consumer market.  Based on
meetings between the Office of Alternative  Medicine ("OAM"), a part of NIH, and
FDA, which were attended by Company scientists,  the Company determined that its
technological strength and agreements with Chinese and Indian institutions could
assure the  introduction  of quality  nutraceutical  products.  The  Company has
established a "Gold Leaf" Trademark for these products.

         XetaPharm  is  developing a limited  line of  over-the-counter  natural
products (not  requiring FDA approval) for sale through direct  consumer  sales,
health food outlets and distribution companies. The Company has selected several
products  to  be   manufactured  by  contract   manufacturers   under  XetaPharm
trademarks.  The emphasis of the products will be the natural  health  benefits.
Initial marketing efforts commenced in the second quarter of 1996. XetaPharm has
introduced   six   products,    to   date:    GarlicOnce(TM);    GingkoOnce(TM);
GinsengOnce(TM);  Gugulon(TM);  melatonin;  and DHEA. The Company has designed a
time  release  component  for the first three of these  products,  reducing  the
number of pills that must be taken.  There can be no  assurances as to the level
of success for this program.  XetaPharm's  marketing efforts and sales have been
limited,  due to the  financial  constraints  of the  Company.  The  Company  is
evaluating its long term commitment which includes continued investment in sales
and marketing,  limited investment to product development for other companies or
divestiture of XetaPharm.

Technical and Consulting Services

         In addition to its research, development and production activities, the
Company,  to a limited  extent,  provides  technical and consulting  services to
pharmaceutical  and chemical product  companies,  as well as to companies in the
food, cosmetic, and household product industries.  The Company's microbiologists
can perform tests such as potency assays for antibiotics and vitamins, microbial
counts for  pharmaceuticals,  water,  cosmetics  and  toiletries,  and mutagenic
studies of  pharmaceuticals.  The  Company's  chemists can provide tests such as
infrared,  ultraviolet  and  gas  chromatography  analysis  of  pharmaceuticals,
chemical  analysis  of  vitamins,  and high  performance  liquid  chromatography
("HPLC")  analysis of  pharmaceuticals  and  cosmetics.  Many of these tests are
standardized  tests  required to obtain  approval of products by FDA or the U.S.
Environmental Protection Agency ("EPA").

         The  Company  also  consults  with,  and  assists,   clients  in  their
development and improvement of  pharmaceuticals.  The Company assists clients in
developing and validating  methods and protocols for  researching  and producing
pharmaceuticals  and other products.  Technical and consulting  services are not
the Company's  principal focus and are not expected to have a material impact on
the Company's operations.

         Although the Company  stresses  quality  control in its  technical  and
consulting services,  the Company may face professional liability as a result of
its service work. The Company does not maintain,  and does not currently  intend
to obtain, insurance against such liabilities.



                                        9

<PAGE>




Other Areas

Small Business Innovative Research

         To obtain  funding from  alternative  sources,  the Company is actively
submitting Small Business  Innovative  Research ("SBIR") Phase I grant proposals
to various  government  agencies  for certain of its drug  development  research
projects. A governmental agency may award a firm up to a maximum of $100,000 for
SBIR Phase I work for six  months.  From  various  proposals  made in 1996,  the
Company  had  received  an award of $86,700  for a research  project  related to
screening  paclitaxel plant cell cultures  entitled  Enhanced Xechem  Integrated
Screening Techniques (EXIST(TM)). The Company received no awards in 1997.

Hexoid Plate

         The Company has developed,  under a SBIR Phase I grant in 1992 from the
National Aeronautics and Space  Administration  ("NASA"), a microbial diagnostic
Hexoid(R)  plate assay useful in rapid  screening of  microbial  infections  and
antibiotic  activity.  The test allows a researcher to conduct several different
tests simultaneously and inexpensively.  This test, used in evaluating microbial
infections,  could replace bulky,  cumbersome and expensive  laboratory  testing
equipment  presently in use. The Company  believes  that  applications  exist in
identification and characterization of microorganisms in clinical and veterinary
specimens (e.g. urine,  blood,  sputum),  in water samples, in cosmetics and for
pesticide detection and biocide evaluation.

         The Company has received a Notice of Allowance from the U.S. Patent and
Trademark  Office for its patent  applications  relating to the Hexoid(R) plate.
See "Patents and Proprietary  Technology"  below.  Further  development  will be
required before the Hexoid(R)  plate can be marketed.  There can be no assurance
as to whether or when the  Company  will be able to market the  Hexoid(R)  plate
successfully.

Manufacturing

         The Company  conducts its  pilot-scale  manufacturing  of its potential
products (other than nutraceuticals) under current Good Manufacturing  Practices
("cGMP").  Management  believes  that its  in-house  pilot  plant  facility  has
adequate  capacity to manufacture a limited quantity of bulk drugs for sale. The
Company also plans to continue its in-house manufacturing of bulk paclitaxel for
sale  abroad,  once  necessary  stability  testing  is  completed,   subject  to
compliance with applicable  regulatory  requirements.  It is anticipated that no
such sales will be made prior to the fourth quarter of 1999,  although there can
be no assurance that any such sales will occur. The Company has submitted a drug
master  file  for the  facility  with  the FDA and  anticipates  submitting  the
facility  for  certification  of its cGMP during the second  half of 1998.  Such
certification is a necessary  precondition to production of paclitaxel and other
pharmaceutical  products for sale in the United States market.  See  "Paclitaxel
and Other Anti-Cancer Agents" above.

         The Company is seeking other collaborative  partners for certain of its
proposed  products if and when such  products are ready for  marketing  for wide
clinical use. To the extent that manufacturing is not performed by collaborative
partners, the Company intends to lease commercial-scale manufacturing facilities
or utilize third party  facilities as the needs arise and financing  therefor is
available.  There can be no assurance that such  facilities will be available on
commercially  acceptable  terms,  that such  facilities will be adequate for the
Company's  long-term  needs,  or that  financing  for  such  facilities  will be
available on terms satisfactory to the Company, if at all.

         XetaPharm products are currently produced to Company  specifications by
a contract manufacturer.  If XetaPharm's sales volume increases sufficiently and
financing  is available on terms  satisfactory  to the Company,  the Company may
consider establishing its own manufacturing site.


                                       10

<PAGE>





Marketing

         The  Company's   initial   potential   products  are  targeted  at  the
anti-cancer,  anti-viral,  and  antifungal  markets.  Although  there  can be no
assurances,  the Company  anticipates  selling  paclitaxel,  as well as possibly
certain  other  compounds,  primarily in Europe (see Xechem  (Europe) U. Stift),
initially  due to the  possibly  fast  timetable  in which to obtain  regulatory
approval for sale of such products. To date, no regulatory submissions have been
made;  however,  a submission for paclitaxel is anticipated to be made in select
European  markets in the first half of 1999.  The  Company is seeking  corporate
alliances with large pharmaceutical  companies for some of its programs in order
to take advantage of such  companies'  abilities to reach  broad-based  markets.
There  can be no  assurance  that the  Company  will be able to enter  into such
collaborative agreements. If the Company decides to conduct any direct marketing
of its potential  products,  there can be no assurance  that the Company will be
successful in  establishing a successful  in-house  marketing and sales force or
that  sufficient  financing will be available to develop its marketing and sales
capabilities.

         XetaPharm  sells its  nutraceutical  product line  through  health food
stores, pharmacies and a distributor. The marketing of these products is through
print, radio and television advertising and trade publications. XetaPharm has no
in-house  marketing  and sales  force at this time and is seeking  to  establish
alliances with more  distributors,  as well as marketing  firms,  to promote its
product  line.  The  Company may in the future  co-market  these  products  with
established  marketing  organizations and/or provide some of these products on a
private label basis.

Patents and Proprietary Technology

         The  Company's  policy is to seek patent  protection  aggressively  and
enforce all of its intellectual  property rights. Dr. Pandey was issued a patent
in 1992 for  purifying  Dermostatin  A and B, the  rights  to  which  have  been
assigned to the Company.  A second patent,  related to the method for separating
and  purifying  antifungal  polyene  macrolide  antibiotics,  was granted to Dr.
Pandey in 1993 and  assigned  by Dr.  Pandey to the  Company.  The  Company  has
received a Notice of Allowance from the U.S. Patent and Trademark Office for its
patent  application  relating to the Hexoid(R) plate. The Company has also filed
several United States patent applications and foreign  counterparts in the areas
of paclitaxel  isolation and purification,  paclitaxel  analogs and plant tissue
culture (which also will be assigned to the Company).

         No  assurance  can be given  that any  patent  held by,  issued  to, or
licensed  by,  the  Company  will  provide   protection   that  has   commercial
significance. Furthermore, no assurance can be given that the Company's patents,
if issued,  will afford protection against competitors with similar compounds or
technologies,  that others will not obtain  patents which make claims similar to
those  covered by the  Company's  patent  applications,  or that the  patents of
others will not have an adverse  effect on the ability of the Company to conduct
its business.

         In addition to seeking protection for patents and licenses, the Company
relies on trade secrets to maintain its  competitive  position.  The Company has
adopted and adheres to procedures for maintaining the proprietary aspects of its
trade secret and know-how information.  No assurance can be given, however, that
these  measures  will  prevent  the  unauthorized  disclosure  or  use  of  such
information.


                                       11

<PAGE>





Trademarks

         The Company  maintains  trademark rights to Xechem(R) and Hexoid(R) and
may adopt other trademarks for its potential  products.  The Company had planned
to  market   paclitaxel  under  the  trademark   Paxetol(TM).   Registration  of
Paxetol(TM)  in United States and Canada has been opposed by Smithkline  Beecham
P.L.C. ("SKB") based on SKB's registered Paxil(R) mark for use with a dissimilar
product. In order to avoid this conflict, the Company will select a new name for
the United  States and Canada,  but will retain the  trademark  Paxetol(TM)  for
other  countries.  The  Company may seek to  register  other  existing or future
trademarks.  The  Company  is not aware of any  competitive  uses of  trademarks
similar  to the  Company's  existing  trademarks,  other than as claimed by SKB,
which may interfere with the Company's use of its trademarks.

         XetaPharm maintains trademark rights to GarlicOnce(TM), GinsengOnce(TM)
and GinkgoOnce(TM),  for which federal  registration is being sought.  XetaPharm
may adopt other trademarks for use with its potential products.  The Company has
been  advised by a foreign  company  that it claims  prior use of the  trademark
"Zetapharm"  and the  Company  is  evaluating  whether  it will  continue  doing
business with this name.

Raw Material Supply

         Initially,  the Company  obtained the raw material for paclitaxel  from
domestic  sources.  In  September  1994,  the Company  entered into a three-year
agreement with Guizhou Fanya  Pharmaceutical Co. Ltd. ("Guizhou") for Guizhou to
supply to the Company partially processed raw material for paclitaxel.  Pursuant
to that  Agreement,  the Company  purchased  2.5 kilograms of at least 50% crude
paclitaxel  (i.e.,  paclitaxel  already  extracted  from the bark) from  Guizhou
during 1995 and 2.5 kilograms in 1996. The Company's  obligation was to purchase
a minimum  of four  kilograms  in the year 1996 and four  kilograms  in the year
1997. Due to its financial condition, the Company was unable to make the minimum
purchases. Guizhou has agreed to continue to work with the Company as a supplier
of crude paclitaxel. Guizhou provided the Company with the necessary material to
prepare the Drug Master File  ("DMF") for  submission  to the United  States FDA
establishing  the origin and  processing  of the raw material  which the Company
needed in connection  with its  preparation of an ANDA on paclitaxel and for its
compliance files once it engages in production of the drug. Guizhou has provided
such materials exclusively to the Company during the term of the agreement.  The
Company is not  obligated  to make any minimum  purchases  after it fulfills its
initial purchase  obligation;  however, if the Company purchases at least twelve
kilograms  of  crude  paclitaxel  within  the  initial  three-year  term  of the
agreement,  the  Company  will  have the right to extend  the  agreement  for an
additional three-year period.

         Should the agreement  with Guizhou be  terminated or not extended,  the
Company may not be able to purchase sufficient quantities of paclitaxel pursuant
to the Guizhou agreement to meet its current needs, or if the Company determines
to produce paclitaxel in larger quantities than presently  planned,  the Company
has  located  additional  suppliers  in China and one  supplier in India for the
crude paclitaxel  material or its precursor.  The Company  currently imports the
plant materials for its products under  development  primarily from the People's
Republic  of China  and  India.  A  continued  source of plant  supply  from the
People's  Republic of China and India,  as well as a supply of the raw  material
for paclitaxel,  is subject to the risks inherent in international  trade. Those
risks include  unexpected  changes in regulatory  requirements,  exchange rates,
tariffs and barriers,  difficulties in  coordinating  and managing other foreign
operations,   potentially   adverse  tax  consequences  and  possible   problems
associated  with DMF data.  There can be no assurance  of a continual  source of
supply of these materials.  Interruptions in supply or material increases in the
cost of supply could have a material  adverse effect on the Company's  financial
condition and results of operations.


                                       12

<PAGE>





         As paclitaxel is derived from the  extraction and  purification  of raw
material   (bark),   the  manufacture  of  paclitaxel  is  contingent  upon  the
availability  of raw  material.  There are limited  sources of  paclitaxel  bark
worldwide, and certain of such sources are under contract with Bristol-Myers and
other competitors.  In addition,  the gathering season for paclitaxel in certain
regions (e.g.,  the Pacific  Northwest) is limited to certain times of the year,
and harvesting must be arranged in advance. While management believes it will be
able to obtain its required  quantities of paclitaxel in the foreseeable  future
at  reasonable  prices,  there can be no assurances  that its current  source of
supply or others will be able to supply the same.

         The Company has entered into agreements  with two Chinese  institutions
for the  supply of plant  extracts  and  synthetic  compounds.  The  Company  is
committed to spend  $150,000 for extracts and compounds  under these  agreements
over five-year terms. In addition, the Company will have to pay royalties, to be
negotiated, if it develops and markets any products based on these materials.

         The Company  currently  also  receives a supply of plant  extracts from
India through an agreement with the International Institute of Ayurveda ("IIA").
Dr. Pandey and his brothers incorporated a corporation in India ("Xechem India")
which is seeking to obtain contracts for dependable supplies of plants and other
raw materials from India.  Based on its discussions with Indian sources for such
materials,  the  Company  believes  that an Indian  corporation  will be able to
obtain  such  contracts  on  significantly  better  terms  than  would a  United
States-based  corporation.  Xechem  India  may also  conduct  certain  research,
manufacturing, and marketing activities in India. Dr. Pandey has transferred his
interest  in  Xechem  India  to  the  Company  in  exchange  for  the  Company's
reimbursement to him of the organizational  expenses (approximately $5,000). The
Company does not currently intend to invest  significant  additional  amounts in
Xechem  India.  It is  anticipated  that Xechem India will seek  financing  from
Indian sources,  including,  in particular,  individuals or organizations  which
will be active in Xechem  India's  business,  which  may  dilute  the  Company's
interest  in  Xechem  India.  It is  anticipated  that  Xechem  India  will make
available to the Company the  materials  Xechem India  obtains.  The Company has
adopted a policy that all transactions with affiliates shall be on terms no less
favorable to the Company than could be obtained from an  unaffiliated  party and
must be approved  by a majority of the  Company's  independent  directors.  Such
policy  specifically  applies to any transaction  between the Company and Xechem
India if and so long as Dr. Pandey or any of the members of his immediate family
own 10% or more of the capital  stock of Xechem India.  However,  if the Company
does not control Xechem India,  there can be no assurance that Xechem India will
make such  materials  available  to the  Company,  or that it will not make such
materials available to competitors of the Company.  In addition,  if the Company
does not control  Xechem India,  there can be no assurance  that Xechem  India's
research,  development,  manufacturing,  and other activities will be of benefit
to, or would not be competitive  with,  the Company.  Xechem India has signed an
agreement  with Fujisawa (USA) to market their  vancomycin and other  injectable
drugs in India.  Xechem  India  commenced  marketing  vancomycin  in 1997  after
registration of the drug with the Drug Controller of India.

         The Company is also  exploring the  possibility of plant tissue culture
and  semi-synthesis  of  paclitaxel  from its  precursor.  The Company has spent
minimum efforts in this area at this time. When it is economically  advantageous
and technically  feasible to  semi-synthesize  paclitaxel rather than extract it
from  plant  material,   the  Company   expects  it  will  utilize   large-scale
semi-synthesis  to obtain a  sufficient  supply of  paclitaxel  to  satisfy  its
requirements.  There can be no assurance  that the Company will be successful in
semi-synthesizing  any of  such  products.  It  should  be  noted  that  several
companies have obtained patents for the production of paclitaxel  through tissue
cell culture  growth,  rather than the gathering of the bark or the needles from
yew trees in the wild or under  cultivation.  To date,  such  processes have not
been  commercialized  on a wide scale.  However,  if such  commercialization  is
effected,  the Company may be unable to acquire  raw  material at a  competitive
cost if it is unable to license or develop similar technology.


                                       13

<PAGE>





Competition

Pharmaceuticals

         Competition in the pharmaceutical  industry is extremely  intense.  The
principal  factors  upon  which such  competition  is based  include  marketing,
distribution,  price,  therapeutic efficacy,  side effect, profile, ease of use,
safety, physician acceptance, and patient compliance.  Many treatments exist for
cancer,  viruses, and fungi, and additional  therapeutics are under development,
including other naturally-sourced pharmaceuticals.

         Most  competitors,  one of which  currently  dominates  the  paclitaxel
market (Bristol-Myers),  have substantially greater capital resources,  research
and  development  capabilities,   manufacturing  and  marketing  resources,  and
experience  than the Company.  In addition,  these companies have vastly greater
resources for the  production  and  distribution  of  pharmaceuticals  following
development and regulatory approval.  These companies may represent  significant
long-term  competition for the Company. The Company's competitors may succeed in
developing  products that are more effective or less costly than any that may be
developed  by the  Company,  or  that  gain  regulatory  approval  prior  to the
Company's products.  Bristol-Myers is already marketing paclitaxel  commercially
in the United States, Canada and certain other countries for treating refractory
ovarian and breast cancer and Kaposi sarcoma. In addition,  other companies have
competitive  products that are in more advanced stages of clinical  testing than
the  Company's  paclitaxel.  The Company  also expects that the number of market
entrants, and thus the number of its competitors and potential competitors, will
increase as more paclitaxel products receive commercial marketing approvals from
the FDA or analogous foreign regulatory  agencies.  Any of these entrants may be
more successful than the Company in  manufacturing,  marketing and  distributing
its products.  In addition,  the Company  understands  that:  (i) in October and
December 1993, Napro  Biotherapeutics,  Inc.  ("Napro") filed a confidential DMF
containing certain of Napro's proprietary  manufacturing  processes with the FDA
and the Australian  Therapeutic Goods  Administration  (the "TGA"),  Australia's
equivalent of the FDA, relating to Napro's  manufacture of paclitaxel,  and that
Napro has been selling certain  quantities of paclitaxel in Australia;  and (ii)
Rhone Poulenc has developed a paclitaxel  analogue  trademarked  as  "taxotere,"
which has similar but different  properties to paclitaxel,  has been selling the
product in Europe,  and in 1996 received approval to sell taxotere in the United
States. To the Company's  knowledge,  a number of other pharmaceutical firms are
poised to introduce  paclitaxel for sale in the United States once Bristol Myers
Squibb's exclusivity for taxol lapses.

         There can be no assurance  that  developments  by other  pharmaceutical
companies  will not render the Company's  products or  technologies  obsolete or
noncompetitive or that the Company will be able to keep pace with  technological
developments  of  its  competitors.  The  Company  believes  that  some  of  its
competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products.  Some of these
products may have an entirely  different  approach or means of accomplishing the
desired  therapeutic effect than products being developed by the Company.  These
competing  products  may be more  effective  and less costly  than the  products
developed by the Company.

Nutraceuticals

         The health food and nutritional  product  industries in which XetaPharm
operates  are  extremely  competitive,  both  internationally  and in the United
States.  XetaPharm  faces  substantial  competition  to  each  of its  products.
Competitive factors include quality, price, style, name recognition and service.
As  a  new  entrant  in  these  markets,  XetaPharm  has  not  established  name
recognition  and its competitive  position  cannot yet be known.  XetaPharm will
primarily  compete  with  health-aid   companies,   specialty  retailers,   mass
merchandisers,  chain drug stores, health food stores and supermarkets.  Many of
such companies have trademarked  products known  worldwide.  XetaPharm will also
compete with companies which  manufacture and distribute  non-branded  (generic)
products.  Many competitors have substantially greater financial,  distribution,
marketing and other resources than XetaPharm and have achieved  significant name
recognition  and goodwill for their brand names.  There can be no assurance that
XetaPharm  will  be able to  successfully  compete  with  these  companies  when
marketing its products.


                                       14

<PAGE>





Government Regulation

         The  research  and  development,  manufacture,  and  marketing  of  the
Company's potential products are subject to substantial regulation by the FDA in
the United  States  and by  comparable  authorities  in other  countries.  These
national agencies and other federal,  state, and local entities regulate,  among
other things, research and development activities and the testing,  manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
and promotion of the Company's  potential  products.  Historically in the United
States,  it takes  seven to ten years to advance a new  pharmaceutical  from the
laboratory to the time when it can be marketed.

         Prior to marketing any pharmaceutical  products for other than research
purposes, the Company must prepare and submit a DMF to the FDA to obtain overall
approval of the facility as a manufacturer of pharmaceuticals.  Thereafter,  the
process  required  by  the  FDA  before  any  of  the  Company's  potential  new
pharmaceutical  products may be marketed in the United States generally involves
the following:  (i) preclinical  laboratory and animal tests; (ii) submission of
an  Investigational  New Drug ("IND")  application  which must become  effective
before clinical trials may begin; (iii) well-controlled human clinical trials to
establish  the  safety  and  efficacy  of the  proposed  drug  in  its  intended
indication; and (iv) FDA approval of a New Drug Application ("NDA"). If the drug
or compound  utilized in the product  has been  previously  approved  for use in
another  dosage  form,  the  approval  process is similar,  except that  certain
preclinical  toxicity tests normally required for the IND may be avoided through
the use of an ANDA.

         Clinical  trials are  typically  conducted in three  sequential  phases
which may overlap.  Phase I involves the initial  introduction  of the drug into
healthy human subjects where the product is tested for safety, dosage tolerance,
absorption,  metabolism distribution and excretion. Phase II involves studies in
a limited  patient  population to: (i) determine the efficacy of the product for
specific,  targeted  indications;  (ii) determine  dosage  tolerance and optimal
dosage; and (iii) identify possible adverse effects and safety risks. When Phase
II evaluations  demonstrate  that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate dose ranging
and  clinical  efficacy  and to further  test for safety in an expanded  patient
population at  geographically  dispersed  clinical  study sites.  The FDA or the
sponsor  may  suspend  clinical  trials at any point in this  process  if either
entity  concludes  that clinical  subjects are being exposed to an  unacceptable
health risk, or for other reasons.

         The results of product  development,  preclinical studies, and clinical
studies are  submitted to the FDA as part of a NDA for approval of the marketing
and  commercial  shipment of the product.  The FDA may deny a NDA if  applicable
regulatory criteria are not satisfied,  or may require additional clinical data.
Even if such data is submitted,  the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval.  Once issued,  a product  approval may be
withdrawn  if  compliance  with  regulatory  standards is not  maintained  or if
problems occur after the product  reaches the market.  In addition,  the FDA may
require  testing  and  surveillance  programs  to monitor the effect of approved
products  which  have been  commercialized,  and it has the power to  prevent or
limit   further   marketing  of  a  product   based  on  the  results  of  these
post-marketing programs.

          Under the Waxman-Hatch amendment to the Food, Drug and Cosmetic Act of
1984, a five-year  period of marketing  exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable  new molecular  entity, to
compensate the firm for  development  efforts on such  non-patentable  molecular
entities.  In connection with its development of paclitaxel,  Bristol-Myers  was
granted a period of marketing  exclusivity,  which was to expire on December 29,
1997,  but has been extended for four years.  Management  believes some, but not
all,  foreign  countries have given Bristol Myers exclusive rights to market the
compound.  The Company intends to submit an ANDA for paclitaxel  during the year
1999. The Company estimates, but can provide no assurances, that FDA approval of
an ANDA for paclitaxel will take six to twenty-four  months. At such time as the
Company  has such data,  it intends to apply for  regulatory  approval to market
paclitaxel in certain  foreign  countries.  Management  believes that  obtaining
regulatory  approval  to market and  distribute  paclitaxel  in certain  foreign
markets  will  require a  significantly  shorter  period  of time than  would be
required in the United States, but can offer no assurance thereof.


                                       15

<PAGE>





         Each drug product  manufacturing  establishment  that supplies drugs to
the U.S.  market must be  registered  with,  and  approved  by, the FDA prior to
commencing  production,  and is subject to biennial  inspections  by the FDA for
cGMP  compliance  after a NDA or an ANDA has been  approved.  In addition,  drug
product  manufacturing  establishments  must  meet  applicable  state  and local
standards.

         In nutraceuticals, the processing, formulation, packaging, labeling and
advertising of XetaPharm's products will be subject to regulation by one or more
federal  agencies,  including  the FDA, the Federal  Trade  Commission,  and the
Consumer Product Safety Commission,  among others. These activities will also be
regulated by the  Hatch-Harkin  Dietary  Supplement  Health and Education Act of
1994 and by various agencies of the states and localities in which the Company's
products will be sold. The Company intends to, and believes that it will be able
to, comply with these laws and regulations in all material respects.

Environmental Regulation

         In  connection  with  its  research,   development  and   manufacturing
activities,  the Company is subject to federal,  state,  and local laws,  rules,
regulations, and policies governing the use, generation,  manufacture,  storage,
air emission,  effluent discharge,  handling,  and disposal of certain materials
and wastes.  Although the Company  believes that it has complied with these laws
and  regulations in all material  respects and the Company has not been required
to take any action to correct any noncompliance,  there can be no assurance that
the  Company  will not be  required  to incur  significant  costs to comply with
health  and  safety  regulations  in the  future.  The  Company's  research  and
development involves the controlled use of hazardous materials,  chemicals,  and
micro-organisms.  Although the Company  believes that its safety  procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal  regulation,  the risk of accidental  contamination  or injury
from these  materials  cannot be completely  eliminated.  This risk is less when
handling anti-cancer  compounds.  In the event of such an accident,  the Company
could be held liable for any damages  that result and any such  liability  could
exceed the resources of the Company.

Employees

         As of March 31, 1998, the Company had 23 employees. Of these employees,
15  are  dedicated  to  research,  development,   manufacturing  and  regulatory
compliance.  Nine of the Company's employees hold doctorate degrees. None of the
Company's  employees  are  covered by a  collective  bargaining  agreement.  The
Company believes all relations with its employees are satisfactory.

Scientific Advisory Board

         The Company has established the Scientific Advisory Board ("SAB") which
consists of scientists, researchers, and clinicians with recognized expertise in
the Company's areas of research.  Certain members of the SAB are asked from time
to time to review  the  Company's  research  programs,  advise  with  respect to
technical or clinical matters, and recommend personnel.  The Company has granted
options to the members of the SAB to purchase an aggregate  of 63,000  shares of
Common Stock at an exercise  price of $.01 per share.  In addition,  SAB members
will be entitled to reimbursement  for  out-of-pocket  costs incurred by them in
performing their advisory activities. The following are the members of the SAB:

         Elias J.  Anaissie,  M.D.,  is a Professor of Medicine and Chief of the
Section on Oncologic  Emergency,  a Division of Hematology and Oncology,  at the
University of Arkansas School of Medical Sciences. Before joining the University
of Arkansas,  Dr. Anaissie was an Associate Internist and Associate Professor of
Medicine  in  the  Section  of  Infectious   Diseases,   Department  of  Medical
Specialties, at the University of Texas System Center M.D. Anderson Hospital and
Tumor Institute.


                                       16

<PAGE>





         Nitya Anand Ph.D.,  F.N.A., is a Scientist Emeritus at the Central Drug
Research Institute in Lucknow,  India, of which he was the Director between 1974
and 1984. He was previously the Senior  Scientist of the Indian National Science
Academy.  Dr. Anand has been involved in medicinal  science research for over 40
years,  during which he has worked in the areas of drug design,  drug synthesis,
mode of action,  and  metabolism  of drugs,  and in evolving new  approaches  to
therapeutics.  Dr. Anand received his Ph.D.  from Bombay  University in 1948 and
from Cambridge University in 1980.

         Brian Arenare,  M.D., is currently providing consulting services to the
pharmaceutical and healthcare industries.  From January 1994 to August 1994, Dr.
Arenare  was the General  Manager of  Ropharmex  U.S.A.  Corp.,  which  provides
international  pharmaceutical trade and consulting services.  From February 1992
to February 1993, Dr. Arenare was a consultant with The Wilkerson  Group,  Inc.,
which provides strategic  management  consulting  services to pharmaceutical and
biotechnology  companies.  From  January 1990 to January  1992,  he was Managing
Partner of AIM Consulting,  which provided technical and strategy  consulting to
pharmaceutical  companies. He has been an attending physician at the Beth Israel
Medical  Center in New York City since July 1993 and was an attending  physician
at Lenox Hill Hospital in New York City from January 1989 to December  1991. Dr.
Arenare  received  his M.D.  from Yale  University  in 1983 and an  M.B.A.  from
Columbia University in 1992. Dr. Arenare was a director of the Company from 1994
to 1997.

         Joan Wennstrom Bennett, Ph.D., is a professor in the Department of Cell
and  Molecular  Biology  at Tulane  University  and is a  Collaborator  with the
Southern  Regional  Research  Laboratory in New Orleans.  Dr.  Bennett is a Past
President of the American  Society for Microbiology and a past Vice President of
the British Mycological  Society.  She has edited five books,  published over 95
research papers,  chapters, and reviews, and has served on a number of editorial
and  other  professional  boards.  Dr.  Bennett  received  her  Ph.D.  from  the
University of Chicago in 1967.

         William T. Bradner,  Ph.D., is an Adjunct Professor for the Departments
of Chemistry  and Biology at Syracuse  University  and is also the  President of
Research  Advisors,  an independent  consulting  firm. Dr. Bradner has published
over 194 articles,  book  chapters,  abstracts,  and patents.  He was previously
Director  of  Administration  and Deputy  Director  of  Preclinical  Anti-Cancer
Research at Bristol-Myers. Dr. Bradner received his Ph.D. from Lehigh University
in 1952.

         Geoffrey A. Cordell,  Ph.D.,  is a Professor and Department Head of the
Medicinal  Chemistry and  Pharmacognosy  and since May 1992 has been the Interim
Dean of The College of Pharmacy at the University of Illinois at Chicago. He has
lectured  throughout the world on the isolation of  biologically  active natural
products and has received various  fellowships and awards. He has published over
310 scientific  papers.  He received his Ph.D. from the University of Manchester
in 1970.

         Sukh Dev, Ph.D.,  D.Sc.,  F.N.A., is a Research Scientist and Professor
at Delhi  University and has studied the organic  chemistry of natural  products
and  Ayurvedic  medicinal  plants for more than 40 years.  He has held  Research
Professorship  at the Indian  Institute  of  Technology  in Delhi (1988 - 1992),
Director of the Malti-Chem  Research  Center in Baroda,  India (1974 - 1988) and
has been a Visiting  Professor  at the  Stevens  Institute  of  Technology,  the
University of Georgia, and the University of Oklahoma. He has published over 350
scientific  papers,  books, and chapters and holds over 50 patents.  He received
his Ph.D.  and D.Sc.  from the  Indian  Institute  of  Science in 1948 and 1960,
respectively.

         Sun Han-Dong, Ph.D., is a professor at the Kunming Institute of Botany,
the Academy of Sciences of China.  He was previously the Director of the Kunming
Institute  of Botany.  Dr.  Han-Dong is known for his academic  achievements  on
ent-kauranoids,  cumarins,  and  phenolic  constituents  from  lichens.  He  has
published  over 150 papers and received  ten awards in the People's  Republic of
China for his  research  achievements,  including  the Second and Third Award of
Science and  Technology  of Yunnan  Province  and the First Award of Science and
Technology of Kunming City.


                                       17

<PAGE>





         Allen I. Laskin, Ph.D., is President of Laskin/Lawrence  Associates. He
has  previously  served as the Vice  President of Research and  Development  and
Chief Scientific Officer of Ethigen Corporation and President of Matrix Research
Laboratories.  Among his  honors,  Dr.  Laskin has  received  the  Charles  Thom
Research Award, presented by the Society for Industrial  Microbiology.  His work
in microbial  transformations  of steroids led to two dozen patents and a number
of  publications  while  working at the Squibb  Institute  for Medical  Research
between 1962 and 1969.  Dr. Laskin is Senior Editor of The Journal of Industrial
Microbiology  and  Co-Editor  of Advances in Applied  Microbiology.  Dr.  Laskin
received his Ph.D. from the University of Texas in 1956.

         Zhang  Li-He,  Ph.D.,  is  a  Professor  and  Dean  of  the  School  of
Pharmaceutical  Sciences at Beijing Medical  University of the People's Republic
of China.  He has studied for over two decades  the  chemistry  of  nucleosides,
nucleotides,  and  anti-tumor  and  anti-viral  drugs and has published  over 85
scientific  papers  in these  areas.  He has been a  recipient  of the  National
Scientific Research Excellence Award from the Science and Technology  Commission
of the  People's  Republic  of China and the  Science  and  Technology  Prize of
Beijing from the Beijing Government. He received the Otani Prize and an honorary
Ph.D. from Hoshi University, Japan in 1988 and 1990, respectively.

         Renuka Misra,  Ph.D., is currently the Director of Natural  Products at
the  Company  and she is a research  scientist/consultant  at NIH engaged in the
study of  natural  products,  including  Ayurvedic  plant  substances  and their
anti-aging  and memory  enhancing  activities.  She has studied the chemistry of
bioactive  natural  products for over two decades.  She  previously  worked at a
number of research centers including the University of Nebraska,  North Carolina
State University,  the University of Toronto,  the University of Illinois,  John
Hopkins University and the NCI-Frederick  Facility. Dr. Misra received her Ph.D.
from the National Chemical Laboratory, Poona, India in 1965.

         Lester A.  Mitscher,  Ph.D. is currently the  University  Distinguished
Professor and former  Chairman of the  Department of Medicinal  Chemistry at the
University of Kansas,  one of the nation's  premier  research  institutions  for
chemistry. Among his past accomplishments,  he has served on the Senior Advisory
Council of G.D.  Searle & Co., and has been the Chairman of the  Biological  and
Natural  Products Study Section for the NIH, as well as Chairman of the American
Society for  Pharmacognosy.  Dr.  Mitscher  received his Ph.D.  from Wayne State
University  in 1968.  Dr.  Mitscher  was a director of the Company  from 1994 to
1997.

         George J. Picha, M.D., Ph.D.,  F.A.C.S., has been Chairman of the Board
of American Medical Technology,  Inc., a manufacturer of medical devices,  since
January  1993,  and was its  President  from 1979 to January  1993.  He has also
served as a  consultant  to Baxter  Healthcare  Corporation  and to Dow  Corning
Corporation  since 1988.  Dr.  Picha  previously  served as  Assistant  Clinical
Professor of Plastic and Reconstructive  Surgery and Adjunct Assistant Professor
of Biomedical  Engineering at Case Western Reserve University from 1982 to 1985.
He received  his Ph.D.  in 1975 and his M.D. in 1980 from Case  Western  Reserve
University.

         Otto J.  Plescia,  Ph.D.,  Professor  Emeritus of  Immunology,  Waksman
Institute,  Rutgers  University,  is  currently  Adjunct  Professor  of  Medical
Microbiology  &  Immunology  at the  University  of South  Florida,  College  of
Medicine, Tampa, Florida. His main research interests relate to the pathogenesis
of  virus  and  cancer  induced   immunodeficiency,   and  the   development  of
immunomodulating  drugs to treat such  immunodeficiencies.  He has served on the
Advisory Boards of several  immunological  journals, is a member of the American
Association of Immunologists and other professional societies, and has published
extensively on the subject of acquired  immunodeficiency.  He received his Ph.D.
from Cornell University in 1947.

         C. L.  Propst,  Ph.D.,  is the  Executive  Director  of the  Center for
Biotechnology  and Applied  Science and the Director of the Graduate  Program in
Biotechnology at Northwestern University. She previously served as President and
Chief Executive Officer of Affiliated Scientific,  Inc., a privately held health
care and  biotechnology  service company.  She has also served as Corporate Vice
President,  Research  and  Development  Worldwide  for Flow  General,  Inc.,  as
Divisional Vice President of Research and  Development for Ayerst  Laboratories,
and Head of  Microbial  and  Molecular  Biology  Research  Division  for  Abbott
Laboratories. Dr. Propst received her Ph.D. from Yale University in 1973.


                                       18

<PAGE>





Risks Affecting Forward Looking Statements and Stock Prices

         In addition to those matters  already set forth in Item 1,  Description
of Business and Item 6, Management's  Discussion and Analysis, the following may
result in the Company not achieving  certain  results  included in any statement
that may be considered a forward looking  statement and affect the trading price
of the Company's Common Stock and Warrants. The Company cautions the reader that
the following risk factors may not be exhaustive.

Nasdaq Delisting

         Effective  following  the close of business  on  February 4, 1997,  the
Company's  Common Stock and Warrants  were  delisted  from trading on the Nasdaq
SmallCap  Market which decision was affirmed on appeal by the Nasdaq Listing and
Hearing Review Committee. See "Recent Developments--Nasdaq  Delisting." Although
the Company has filed an appeal of the delisting  with the U.S.  Securities  and
Exchange  Commission,  the Company  cannot  predict  whether such appeal will be
successful and further anticipates that even if it is successful in this appeal,
the Company may not meet other listing criteria of Nasdaq.

         Unless the  Company's  appeal of the  delisting is  successful,  or the
Company is able to obtain a listing of its  securities on a national  securities
exchange, the trading market for the Company's securities will be limited to the
"pink sheets" and the OTC Bulletin Board. So long as the Company's  Common Stock
is not listed on Nasdaq or any  exchange  and the bid price for the Common Stock
remains below $5.00 per share, the Common Stock and Warrants would be subject to
additional  federal  and state  regulatory  requirements.  Among  other  things,
broker-dealers would be required to satisfy special sales practice requirements,
including making individualized written suitability determinations and receiving
any purchaser's  consent prior to any  transaction in the Company's  securities.
Also,  the  Company's  securities  would be  considered  "penny  stocks,"  which
requires  additional  disclosures  in  connection  with trades in the  Company's
securities,  including  the delivery of a  disclosure  schedule  explaining  the
nature  and  risks  of the  penny  stock  market.  Such  restricted  market  and
additional  regulatory  requirements  may limit the  liquidity of the  Company's
securities,  as well as  adversely  affect the  ability of the  Company to raise
additional financing through issuances of its securities.

Volatility of Stock Price

         The  securities of  biotechnology  companies have  experienced  extreme
price and volume fluctuations, which have often been unrelated to the companies'
operating  performance.  Announcements  of  technological  innovations  for  new
commercial products by the Company or its competitors,  developments  concerning
proprietary  rights or  general  conditions  in the  bio-technology  and  health
industries  may have a significant  effect on the Company's  business and on the
market  price of its  securities.  Sales of shares of Common  Stock by  existing
security  holders  could also have an adverse  effect on the market price of the
Company's  securities  given the limited  trading and low price of the Company's
securities.  In the past twelve months,  the Company's Common Stock has declined
from approximately $1.00 per share to present values.


                                       19

<PAGE>




Control by Blech

         As of  December  31,  1997,  Blech or  persons  who may be deemed to be
influenced by him  beneficially  owned  46,500,000  shares of Common  Stock,  or
approximately  39% of the 119,870,839  shares of issued and  outstanding  Common
Stock (entitling Blech to cast 38% of the aggregate votes entitled to be cast by
all stockholders in election of directors).  As a result, Blech may be deemed to
own or control a sufficient number of shares of Common Stock to assert effective
control over the business and affairs of the Company, including, but not limited
to having  sufficient  voting  power to  control  the  election  of the Board of
Directors of the Company and, in general, to substantially determine the outcome
of any corporate  transaction or other matters  submitted to the stockholders of
the Company  for  approval,  including  mergers,  consolidations  or the sale of
substantially  all of the Company's  assets or preventing or causing a change in
the control of the Company. In addition, under the Blech Purchase Agreement, the
Company  and its  current  directors  have  agreed,  subject to their  fiduciary
duties,  to take such  actions as Blech may request to cause his  nominees to be
elected to the Board of  Directors,  which may enable Blech to exercise  control
over the Board more  quickly  than he  otherwise  could.  In addition to Blech's
ability to control the affairs of the Company,  Blech's potential control of the
Company may deter other potential financing sources from making an investment in
the Company.

No Developed or Approved Products; Early Stage of Development

         The Company is a  development  stage  company.  The  Company's  primary
potential  products,  paclitaxel  and  its  analogs  and  bleomycin,  are in the
development   stage.   Although  the  Company  has  isolated   paclitaxel  in  a
substantially pure state, there can be no assurance that such compound will pass
the necessary regulatory requirements for approval for sale in the United States
or abroad. In addition,  Bristol-Myers  maintains a dominant market share in the
paclitaxel  business  and may choose to take legal action to impair the entry of
additional  competitors  in the  market,  such as by  alleging  infringement  on
certain patents.  Also, although the Company anticipates that it will be able to
submit an ANDA for paclitaxel  immediately upon the expiration of Bristol Myers'
exclusive  period,  as extended,  (December 29, 2001),  the Company does not yet
have all of the  data for such  ANDA  and  there  can be no  assurance  that the
Company will be able to file the ANDA at that time. Although the Company has the
capability  to, and may, sell  paclitaxel  for research  purposes,  to date, the
Company  has not  received  any  revenues  from  sales of  paclitaxel  for human
consumption  and has received only minimal  revenues from other product sales or
sales of  paclitaxel  for  research and  development.  The  Company's  principal
revenues have been  contract  research and testing and  consulting  services for
other companies,  which are not expected to continue and which have historically
been  minimal.  To achieve  profitable  operations,  the Company,  alone or with
others,  must successfully  develop,  obtain regulatory approval for, introduce,
and market its potential pharmaceutical products. No assurance can be given that
the Company's  product  research and  development  efforts will be  successfully
completed,  that required  regulatory  approvals  will be obtained,  or that any
products, if developed and introduced,  will be successfully marketed or achieve
market acceptance.

History of Operating Losses; Future Profitability Uncertain

         The Company has  experienced  significant  operating  losses  since its
inception and has generated minimal revenues from its operations. As of December
31, 1997, the Company's accumulated deficit was approximately  $27,729,000 which
included losses from operations of $3,246,700, $3,032,500 and $5,386,300 for the
years  ended  December  31,  1995,  1996 and 1997,  respectively.  Approximately
$12,963,000 of the Company's  $27,729,000  accumulated  deficit  resulted from a
non-cash accounting adjustment based upon the difference between the approximate
market value of certain debt and equity which was  exchanged for Common Stock of
the Company  simultaneously  with the  Company's  initial  public  offering (the
"IPO"),  and the  initial  public  offering  price  of the  Common  Stock in the
Company's IPO. To date, the Company has been dependent on capital  infusions for
financing.  The Company's ability to achieve a profitable level of operations is
dependent  in  large  part  on its  completing  product  development,  obtaining
regulatory  approvals  for its potential  products and making the  transition to
commercializing  such  products.  No assurance  can be given that the  Company's
product  research and  development  efforts  will be  completed,  that  required
regulatory approvals will be obtained, that any products will be manufactured or
marketed  or that  profitability  will be  achieved.  The  Company  may  require
additional funds to achieve profitable operations.  See "Management's Discussion
and Analysis."

                                       20

<PAGE>





Explanatory Going Concern Disclosure

         As a result  of its  losses  to date,  negative  working  capital,  and
accumulated  deficit,  the  independent  accountants'  report  on the  Company's
financial statements for the years ended December 31, 1993, 1994, 1995, 1996 and
1997 contain an explanatory paragraph indicating that there is substantial doubt
about the  Company's  ability to  continue  as a going  concern.  The  Company's
continuation  as a going  concern is  dependent  upon its  ability  to  generate
sufficient cash flow to meet its obligations on a timely basis and ultimately to
attain profitable  operations.  The Company anticipates that it will continue to
incur  significant  losses  until  successful  commercialization  of one or more
products generates sufficient net revenues to cover all costs of operation. As a
development stage company,  the Company has a limited relevant operating history
upon which an evaluation of the Company's  prospects can be made.  The Company's
prospects  must,  therefore,  be evaluated in light of the  problems,  expenses,
delays and  complications  associated  with a new  business.  As a result of the
development-stage nature of the Company's business,  additional operating losses
can be  expected.  There can be no  assurance  that the  Company can be operated
profitably in the future. See "Management's  Discussion and Analysis" and Note 3
to the Notes to the Company's Consolidated Financial Statements.

Limited Manufacturing Experience and Capacity

          The  Company  believes  that its  current  manufacturing  facility  is
capable of producing  approximately  four  kilograms  per year of 97% or greater
pure paclitaxel from crude bulk extract containing approximately 50% paclitaxel.
Formulation and packaging of paclitaxel in single injection dosages will have to
be performed by a contract  packager.  As of December 31, 1997,  the Company has
not  negotiated  a contract  with any  packager  to perform  such  services.  It
maintains an efficient,  ambient  warehouse center to insure proper handling and
shipping of the drugs. While the Company has been seeking additional and back-up
manufacturers,  there can be no  assurance  that it will be able to locate  such
manufacturers,  or that it will be able  to  enter  into  agreements  with  such
manufacturers.  Although  the Company  believes  that it has the  capability  to
significantly  expand  production of bulk  paclitaxel,  should demand exceed the
Company's  manufacturing  capacity,  it may have to seek  third  party  contract
manufacturing.  In such  instance,  there can be no  assurance  that the Company
could  locate  satisfactory  contract  manufacturing  services  to perform  such
functions  at all or on  acceptable  terms,  or that it would  have the funds or
ability to develop such capability internally.

         Bleomycin and  lovastatin (a second product which will go off-patent in
the year 1999 and under  development by the Company) are fermentation  products.
Certain of the other  niche  generic  anti-cancer  products  that the Company is
considering  for  production   (excluding   paclitaxel)  also  are  fermentation
products.  There is  presently a  world-wide  shortage of contract  fermentation
manufacturing  capacity  for  pharmaceutical  products.  Although the Company is
presently  considering  several  sources for the  production  of its  bleomycin,
lovastatin  and  other  fermentation  products  it may  develop,  it has not yet
located a reliable manufacturer,  to date. Although the Company may consider the
development of internal capacity for such manufacture, the Company currently has
no intention of developing such internal  capabilities,  as such an effort would
be costly, time consuming and would require FDA regulatory approval, which might
not be obtained.  Should the Company develop other fermentation products,  there
can be no  assurances  that  regular  and  reasonable  manufacture  of bulk  raw
material can be obtained.  Once pure bulk material is obtained for  manufacture,
it must be formulated,  packaged in single dosage quantities and warehoused in a
manner similar to that for  paclitaxel,  subject to all the inherent  associated
risks. See "Marketing" above.

         In order to manufacture  pharmaceutical products from its facility, the
Company must obtain FDA approval that the facility is in compliance with current
Good Manufacturing  Practices ("cGMP").  The Company anticipates  submitting the
facility for cGMP  approval in the latter half of 1998.  If such approval is not
obtained,  the  manufacture  of its product will have to be performed by current
manufacturers who meet necessary regulatory requirements.


                                       21

<PAGE>





Limited Marketing Experience and Capacity

         Although  the  Company  may market  certain of its  potential  products
through  a direct  sales  force if and when  regulatory  approval  is  obtained,
currently  it has no sales  and  marketing  employees.  To the  extent  that the
Company determines not to, or is unable to, enter into collaborative  agreements
or  to  arrange  for  third  party  distribution  of  its  potential   products,
significant  additional  resources  will be required to develop a marketing  and
sales  force.   Should  the  Company  elect  to  license  or  sell  products  to
distributors,  a  significant  portion of the profits from such  products may be
realized by such  licensees or  distributors,  rather than by the  Company.  See
"Marketing" above.

Dependence upon Dr. Pandey and Other Key Personnel

         The  Company's  ability  to  develop  its  business  depends  upon  its
attracting  and  retaining  qualified   management  and  scientific   personnel,
including  consultants  and  members  of its SAB.  As the  number  of  qualified
scientists is limited and competition  for such personnel is intense,  there can
be no assurance  that the Company is able to attract or retain such persons.  In
particular,  the Company will be dependent  upon the  continued  services of Dr.
Ramesh C.  Pandey,  the  Company's  Chairman of the Board,  President  and Chief
Executive Officer. The loss of key personnel, such as Dr. Pandey, or the failure
to recruit additional key personnel could significantly impede attainment of the
Company's  objectives  and  have a  material  adverse  affect  on the  Company's
financial  condition and results of  operations.  Dr. Pandey has entered into an
employment  agreement  with the  Company for at least a  five-year  term,  which
commenced in 1994,  providing  for,  among other  things,  an  agreement  not to
compete  with the Company  during his  employment  and for a period of up to six
months thereafter.  The Company has obtained a $4,000,000 key man life insurance
policy on Dr. Pandey. See Item 9, Directors,  Executive Officers,  Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act.

         The Company will be required to make certain  payments to Dr. Pandey in
the event of  certain  changes  in  control.  A  portion  of such  payments  may
constitute excess employment  severance payments,  which would not be deductible
by the Company for income tax  purposes.  In addition,  under  recently  adopted
legislation,  the Company  may not be  permitted  to deduct  that  portion of an
executive's compensation which exceeds $1,000,000 in any year, excluding certain
performance  based  compensation.  There can be no  assurance  that  options  or
warrants  issued  or  which  may  be  issued  to Dr.  Pandey  would  qualify  as
performance based  compensation,  or that the Company will be able to deduct the
entire amount earned by Dr. Pandey in any year.

         In  addition,  the  Company  relies on members of the SAB to assist the
Company in formulating its product discovery  strategy and therapeutic  targets.
The members of the SAB are not employed by the Company and each of these members
have commitments to other entities that limit their availability to the Company.
Some of the  members  of the SAB  are  consultants  for  companies  that  may be
competitors of the Company.  There is no assurance that the Company will be able
to retain key members of the SAB.

Management of Staff Growth

         The Company expects to increase its staffing levels in the future.  The
Company's ability to execute its strategies will depend in part upon its ability
to integrate such new employees  into its  operations  and fund such  additional
cost.  The  Company's  planned  activities  will  require  the  addition  of new
personnel,  including management, and the development of additional expertise by
existing  management  personnel in areas such as preclinical  testing,  clinical
trial  management,   regulatory  affairs,  manufacturing,   and  marketing.  The
inability to acquire such  services or to develop  such  expertise  could have a
material adverse impact on the Company's operations.


                                       22

<PAGE>





Reliance on Collaborative Relationships

         The  Company  believes  that it will need to enter  into  collaborative
arrangements  with  other  companies,  similar  to  the  arrangement  originally
negotiated  between  the  Company and  Apotex.  There is no  assurance  that any
collaborations will be completed, or if completed, that they will be successful.
Should any  collaborative  partner fail in its  contribution  to the  discovery,
development,  manufacture or distribution of a marketable product, the Company's
business may be adversely  affected.  In addition,  although the NIH has awarded
three master  agreements  to the Company,  the Company has not yet been assigned
any  specific  projects or received  any funding from the NIH under these master
agreements which will expire in 1998.

Uncertainty Regarding Drug Development

         The Company's  principal strategy is to develop generic  equivalents of
niche  off-patent  drugs  which  enjoy  limited  competition.  There  can  be no
assurance that such strategy will prove successful or that any proposed products
will be  commercially  viable.  Even if the Company  successfully  develops  and
markets  such  products,  with time,  other  competitors  will likely  enter the
markets for these products, which could adversely affect the Company's business.
There can be no assurance  that the Company  will be able to replicate  products
that come  off-patent,  or that the  Company  will be able to obtain  regulatory
approval for the sale of such compounds.

Patents

         The Company's  success  depends in part on its ability to obtain patent
protection for its proprietary  products and to preserve its trade secrets.  The
Company has obtained  three patents and has submitted  seven  additional  patent
applications in the United States. Any present or future patents may not prevent
others from developing  competitive products. No assurance can be given that the
Company's  patent  applications  will be  approved,  that any  current or future
patents will provide the Company with  competitive  advantages for its products,
or  that  they  will  not be  successfully  challenged  or  circumvented  by the
Company's competitors. The Company has not conducted an exhaustive patent search
and no  assurance  can be given that  patents do not exist or could not be filed
which  would  have an  adverse  effect on the  Company's  ability  to market its
products.  If other companies were to  successfully  bring legal actions against
the Company claiming patent or other intellectual  property right infringements,
in  addition to any  potential  liability  for  damages,  the  Company  could be
required  to obtain a license  to  continue  to use the  affected  process or to
manufacture  or use the affected  product or may be required to cease using such
products or process. There can be no assurance that the Company would prevail in
any such action or that any license required under any such patent would be made
available on acceptable terms, or at all. There could be significant  litigation
in the industry regarding patent and other intellectual  property rights. If the
Company  becomes  involved in such  litigation,  it could  consume a substantial
portion  of the  Company's  financial  and human  resources,  regardless  of the
outcome of such litigation.

         The Company's  licensing  agreement with the MD Anderson  Cancer Center
requires  the Company to expend  significant  sums to maintain  its  exclusivity
under  such  agreement,  as well as to  prosecute  infringers  at its  cost  and
expense.  There  can be no  assurance  that the  Company  will  have  the  funds
sufficient to continue its rights under this agreement or to  commercialize  the
licensed technology.

         The Company also relies on trade secrets and proprietary know-how which
it seeks to protect, in part, by confidentiality  agreements with its employees,
consultants and others. There can be no assurance that these agreements will not
be breached,  that the Company  would have  adequate  remedies for any breach or
that  the  Company's   trade   secrets  will  not  otherwise   become  known  or
independently developed by competitors.


                                       23

<PAGE>





Product and Professional Liability Exposure

         The  Company  faces an  inherent  business  risk of exposure to product
liability  claims if the use of products  manufactured by the Company results in
adverse effects. The Company may also face professional liability as a result of
its contract  research and other  services.  While the Company will  continue to
attempt to take appropriate precautions,  there can be no assurance that it will
avoid significant exposure to such liabilities.  Because the Company has not yet
sold any products  except for research  purposes,  and because of the expense of
insurance, it does not carry product or professional liability insurance.  While
management  intends to obtain  product  liability  insurance at such time as the
Company's  operations  require it,  subject to the Company's  ability to pay for
such  insurance,  the Company does not currently  intend to obtain  professional
liability  insurance.  There can be no  assurance  that any  coverage  which the
Company may obtain will be adequate or that adequate  insurance coverage will be
available  at  acceptable  cost,  if at all,  or that a product or  professional
liability claim would not materially  adversely affect the business or financial
condition of the Company.  The Company may lack the resources to defend  itself,
its  employees,   officers  or  directors   against  any  product  liability  or
professional liability claims.

Uncertainty of Healthcare Reimbursement; Government Healthcare Reform Proposal

         The Company's ability to successfully  commercialize paclitaxel and its
other potential products may depend in part on the extent to which reimbursement
for the cost of such  products  and related  treatment  will be  available  from
government health administration  authorities,  private health coverage insurers
and other organizations.  Significant uncertainty exists as to the reimbursement
status  of  healthcare  products  and there can be no  assurance  that  adequate
third-party  coverage will be available for the Company to maintain price levels
sufficient for realization of an appropriate return on its investment in product
development.  During the past several years,  the  healthcare  industry has been
subject  to an  increase  in  government  regulation  of,  among  other  things,
reimbursement rates. In addition, major third-party payors, insurance companies,
Medicare,  and Medicaid have significantly revised payment procedures in efforts
to contain healthcare costs.

         The  Clinton  Administration  and  various  members  of  Congress  have
proposed various programs to reform the U.S.  healthcare  system.  Such programs
may increase governmental  involvement in healthcare,  lower reimbursement rates
and otherwise change the operating environment for the Company and its potential
products.  The Company cannot  predict with any certainty  what impact,  if any,
proposals or healthcare reforms might have on the Company's business.

Anti-Takeover Provisions

         The  Board of  Directors  has the  authority  to issue up to  2,996,350
shares of Class C Preferred  Stock in one or more series,  and to fix the number
of  shares  constituting  any  such  series,  the  voting  powers,  designation,
preferences,  and relative participating,  optional, or other special rights and
qualifications,  limitations,  or restrictions  thereof,  including the dividend
rights,  terms of redemption  (including  sinking fund  provisions),  conversion
rights,  and  liquidation  preferences  of the shares  constituting  any series,
without any further vote or action by stockholders.  The Board of Directors may,
therefore,  in the  future  issue  Class  C  Preferred  Stock  with  voting  and
conversion  rights which could adversely  affect the voting power of the holders
of Common Stock. In addition, the issuance of Class C Preferred Stock as well as
certain  statutory  provisions  of  Delaware  law could  potentially  be used to
discourage  attempts by others to obtain control of the Company  through merger,
tender offer, proxy contest, or otherwise by making such attempts more difficult
to achieve or more costly.


                                       24

<PAGE>






Absence of Dividends; Dividend Policy

         The Company has not paid any dividends  upon its Common Stock since its
formation.  The Company does not currently  intend to pay any dividends upon the
Common Stock in the foreseeable  future and anticipates  that earnings,  if any,
will be used to finance the  development  and  expansion  of its  business.  The
Company's  ability to pay  dividends  on its Common Stock will be limited by the
preferences of any Class C Preferred Stock which may be outstanding from time to
time and may be limited by future indebtedness.  Any payment of future dividends
and the amounts thereof will be dependent upon the Company's earnings, financial
requirements  and  other  factors  deemed  relevant  by the  Company's  Board of
Directors, including the Company's contractual obligations.



                                       25

<PAGE>





Item 2.  Description of Property.

         The Company  conducts its operations in a  state-of-the-art  laboratory
facility in New Brunswick,  New Jersey.  Organizations such as the Company which
develop  or  produce   pharmaceuticals  must  meet  certain  Federal  and  state
standards.  For each  facility  subject to such  standards,  specific  operating
procedures  are developed to meet these  standards,  and  compliance  with those
procedures is monitored on a regular basis by both the FDA and state regulators.
Compliance  with  these  standards  and  procedures  is  known as  current  Good
Laboratory  Practices,  or cGLP,  for  research  operations,  and  current  Good
Manufacturing  Practices,  or cGMP, for  manufacturing  operations.  The Company
currently  operates its facility in accordance with cGLP and cGMP;  however,  to
date, the Company has not received the FDA certification for cGMP.

         The  Company  leases  its  office  and  laboratory  space at 100 Jersey
Avenue,  Building B, Suite 310, New  Brunswick,  New Jersey 08901.  The facility
consists of  approximately  25,000 square feet and at original  execution of the
lease the  lessor was  unaffiliated.  Ownership  of the lessor was  subsequently
transferred to a new investment group and Dr. Pandey invested  personal funds to
acquire an  approximately  25%  interest  in the  lessor.  The lease  expires on
September  30, 2000,  subject to three  five-year  extensions  at the  Company's
option and an option by the Company to lease an  additional  10,000 square feet.
The Company's base rent is approximately  $8,718 per month,  which is subject to
annual  increases  which  commenced  October 1, 1996 based upon increases in the
consumer price index.  In addition to base rent, the Company is responsible  for
its proportionate share of taxes and all other expenses of the building.

         The Company believes that the Company's facilities are adequate for the
Company's  current  needs.  If the Company's  operations  are successful and its
research  and  development  activities  continue  to expand,  or if the  Company
determines  to produce  paclitaxel or other  products in large scale  commercial
quantities,   the  Company  may  require  additional  equipment,   manufacturing
facilities,  or both.  The Company  cannot  predict the nature and extent of the
equipment or facilities which might be needed at such time.

Item 3.  Legal Proceedings.

         The Company is not involved in any legal proceedings. However, see Item
12, Certain Relationships and Related Transactions,  for information  concerning
certain recently concluded litigation involving Dr. Pandey.

Item 4.  Submission of Matters to a Vote of Stockholders.

         The  Company  did not submit  any matter to a vote of its  stockholders
during the fourth quarter of 1997.



                                       26

<PAGE>




                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         On April 26,  1994,  the  Company's  Common  Stock,  Warrants and units
comprised  of one share of Common  Stock and one  Warrant  (the  "Units")  began
trading on the Nasdaq SmallCap Market  ("Nasdaq")  under the symbols ZKEM, ZKEMW
and ZKEMU, respectively.  The Units ceased to separately trade on June 10, 1994;
however,  the Common Stock and Warrants continued to trade separately after such
date. On February 4, 1997, the Company's Common Stock and Warrants were delisted
from trading on the Nasdaq  SmallCap  Market.  Since  delisting,  the  Company's
Common Stock and Warrants have traded on the OTC Bulleting  Board. The following
table shows the high and low quotations,  on a quarterly basis, of the Company's
Common Stock and Warrants from January 1, 1996 through December 31, 1997:

                                     Common Stock


              1996   1996     1996    1996   1997     1997     1997    1997
             First  Second   Third   Fourth  First   Second   Third   Fourth
            Quarter Quarter Quarter Quarter Quarter Quarter  Quarter  Quarter
            ------- ------- ------- ------- ------- -------  -------  -------
 High Bid    8-1/8   4-3/8   1-9/32  29/32   1-1/8     1      15/16    11/16
 Low Bid     3-5/8   1-1/4    5/16    5/32     0      3/16     9/32    9/32

                                       Warrants


             1996     1996   1996     1996   1997     1997     1997      1997
            First    Second  Third   Fourth  First   Second    Third    Fourth
            Quarter Quarter Quarter Quarter Quarter  Quarter  Quarter   Quarter
            ------- ------- ------- ------- -------  -------  -------   -------

 High Bid   4-3/8    1-3/4     1      1/8    3/32       0        0         0
 Low Bid    1-1/4      1      1/8     1/32     0        0        0         0

         The Company has not declared or paid any dividends on its Common Stock.

         As of March  31,  1998,  there  were 175 and 15 record  holders  of the
Company's Common Stock and Warrants, respectively. Dividends on the Common Stock
are subordinated to the payment of dividends on the Company's  outstanding Class
A Voting Preferred Stock (the "Class A Preferred Stock").  The Class A Preferred
Stock  has a  dividend  preference  of  $.00001  per  annum  per  share  on  the
liquidation  preference of $100 per share on a cumulative basis. As of March 31,
1998, there were 2,500 outstanding shares of Class A Preferred Stock.

         From  November  1996 through  January  1997,  the Company  entered into
agreements with holders of $330,000 in principal  amount of notes and a supplier
to whom the  Company was  indebted in the amount of $7,041,  whereby the Company
agreed to issue a total of 1,477,745  shares of Common Stock in exchange for the
cancellation  of all  indebtedness  owed by the Company to such  persons.  These
shares were offered and sold pursuant to an exemption  from  registration  under
the federal  securities  laws provided by Section 4(2) of the  Securities Act of
1933, as amended (the "1933 Act"), and Regulation D promulgated  thereunder as a
non public offering to a limited number of persons.  The Company did not use any
securities broker-dealers in connection with these transactions.


                                       27

<PAGE>





         Between  November 18, 1996 and February 7, 1997,  pursuant to the Blech
Purchase  Agreement,  the  Company  issued a total of 22,500  Series 2 Preferred
Shares  and  13,180  Series  3  Preferred  Shares,  which  were  converted  into
45,000,000 and  21,088,000  shares of Common Stock,  respectively.  The purchase
price of the Series 2 Preferred  Shares was $100 per share and was paid in cash.
The Blech  Purchase  Agreement  provided  for the sale by the  Company  of up to
55,000 shares of Series 2 Preferred  Stock,  or the Common Stock into which such
shares are convertible.  The Company will issue a total of 110,000,000 shares of
Common Stock to Blech pursuant to the Blech Purchase Agreement when Blech or his
designees  make the entire  investment  of  $5,500,000.  The Series 3  Preferred
Shares  were issued in  exchange  for  $1,188,062  of  indebtedness  owed by the
Company to the  purchaser  (Dr.  Pandey) and all of the Class B Preferred  Stock
owned by him. Subsequently, the Blech Purchase Agreement was amended whereby Dr.
Pandey returned  1,657,600  shares of Common Stock to the Company.  The Series 2
Preferred  Shares  convert into Common  Stock at a conversion  price of $.05 per
share;  Series 3 Preferred  Shares are  convertible  into  21,088,000  shares of
Common  Stock.  For the period  March 28, 1997 through  December  31, 1997,  The
Edward A. Blech Trust  purchased  2,300,000  shares of Common Stock and 15 other
assignees  purchased  48,320,000  shares of Common  Stock,  which  included  two
affiliated  individuals who purchased 1,960,000 shares of Common Stock. To date,
cash payments of $5,500,000  have been made under the Blech  Purchase  Agreement
and 110,000,000 shares have been or will be issued thereunder.

         The  Company  agreed to pay a fee of  $50,000  and  issued an option to
purchase 200,000 shares of Common Stock to Kensington Wells Incorporated,  a now
defunct securities broker-dealer,  for introducing Mr. Blech to the Company. The
Company has  determined not to pay the balance of $40,000 of such fee due to its
belief  that  Kensington   Wells   Incorporated  has  breached  certain  of  its
obligations to the Company.  See Item 1,  Description of Business - Other Recent
Developments  - Blech  Purchase  Agreement.  These  shares were offered and sold
pursuant to an exemption from  registration  under the federal  securities  laws
provided by Section 4(2) of the 1933 Act as a  non-public  offering to a limited
number of persons.




                                       28

<PAGE>





Item 6.  Management's Discussion and Analysis.1

General

         The Company is the holder of all of the capital stock of Xechem,  Inc.,
a  development  stage  bio-pharmaceutical   company  engaged  in  the  research,
development,  and production of niche generic and proprietary drugs from natural
sources.  Xechem, Inc., was formed in March 1990 to acquire substantially all of
the assets of a subsidiary of LyphoMed,  Inc. (later known as Fujisawa/LyphoMed,
Inc.),  a publicly  traded  company,  Xechem  Laboratories  (formed in 1993) and
XetaPharm, Inc. (formed in 1996) are subsidiaries of the Company.

Results of Operations

The Year Ended December 31, 1997 vs. The Year Ended December 31, 1996

         The following table sets forth certain  statement of operations data of
the  Company  for the  cumulative  period  from  inception  (March 15,  1990) to
December 31, 1997 and for each of the years ended December 31, 1997 and December
31, 1996.

                                                                Cumulative
                                                 Years Ended   Inception to
                                                December 31,   December 31,
                                              1997      1996       1997
                                                (in thousands)

Revenue                                    $   114.2  $   208.9  $   690.0
Research and development expense           $ 2,418.3  $ 1,596.6  $ 7,055.4
Rent, general and administrative expenses  $ 1,431.0  $ 1,644.8  $ 6,596.1
Writedown of inventory and intangibles     $ 1,537.0  $      --  $ 1,537.0
(Loss) from operations                     $(5,272.1) $(3,032.5) $(14,498.5)


--------
      1 Some of the  statements  included in Item 7,  Management  Discussion and
Analysis,  may be  considered  to be  "forward  looking  statements"  since such
statements relate to matters which have not yet occurred.  For example,  phrases
such as "the Company  anticipates,"  "believes" or "expects" indicate that it is
possible that the event anticipated,  believed or expected may not occur. Should
such event not occur,  then the result which the Company  expected  also may not
occur or occur in a different manner, which may be more or less favorable to the
Company.  The Company does not undertake any obligation to publicly  release the
result of any revisions to the forward  looking  statements  that may be made to
reflect any future events or circumstances.

            Readers  should  carefully  review  the  items  included  in Item 1,
Description of Business - Risks Affecting  Forward Looking  Statements and Stock
Prices,  as they relate to any forward  looking  statements,  as actual  results
could differ materially from those projected in the forward looking statement.

                                       29

<PAGE>





Revenue

         The $94,700  decrease in revenue from the year ended  December 31, 1996
to the year ended December 31, 1997 was  attributable  to a decrease in sales of
services and  products.  Service  sales  decreased by $121,600 in the year ended
December  31, 1997 as compared to the year ended  December  31,  1996.  Sales of
products, including paclitaxel and nutraceuticals, increased $26,900 in the year
ended December 31, 1997 as compared to the year ended  December 31, 1996.  Sales
of  paclitaxel  for  research  purposes  for the year ended  December  31,  1997
decreased  $74,500 as compared  with the period ended  December  31,  1996.  The
balance of product  sales,  $101,400,  were sales by the  Company's  subsidiary,
XetaPharm,   which  introduced  its  line  of  over-the-counter  natural  health
products,  commonly known as  nutraceuticals,  in June 1996.  This represents an
830.3% increase over the year 1996.

Research and Development

         The  Company's  research  and  development   expenditures  continue  to
emphasize  compounds for niche  generic  anticancer,  antiviral  and  antibiotic
products  which enjoy  significant  market  demand but are no longer  subject to
patent protection.  Research and development  expenditures increased by $821,700
to $2,418,300, or 51.5%, for the year ended December 31, 1997 as compared to the
year ended December 31, 1996.

         Expenditures on the development of the Company's  process for producing
paclitaxel  of  $911,600  represents  an  increase of  $595,800,  or 188.7%,  as
compared to the year ended December 31, 1996.  This included the  revaluation of
paclitaxel  inventory to lower of cost or market and a charge to  operations  of
$431,000.  Research and  development  costs for bleomycin were $20,900,  for the
year ended  December 31, 1997, an increase of $4,200,  or 25.9%,  as compared to
the year ended December 31, 1996.

         XetaPharm had research and development expenses of $186,700, for market
readiness on alternative medicines and nutraceuticals in the year ended December
31,  1997.  Included  in the  $186,700  is the cost for  writing off the expired
Melatonin inventory of $34,200. After this adjustment,  there was a net decrease
of $5,400 of expenses for the period ended  December 31, 1997 as compared to the
period ended December 31, 1996.

         Two new cholesterol  lowering projects for 1997 represented $163,200 of
increased  costs with no comparison in 1996.  The Company's  other  research and
development  projects,  both  for  customers  and  in-house  research,   totaled
$1,299,100,  for the year ended  December 31, 1997, an increase of $192,900,  or
17.4%, from the same period in 1996.

         Excluding non-cash expenses of stock options and depreciation,  general
research and development  costs decreased  $37,000,  or 4.1%, for the year ended
December 31, 1997 over the same period in 1996.  The Company  anticipates  that,
subject to the  availability of funding,  research and development  expenditures
will continue to increase for  paclitaxel,  as well as the  development of other
anticancer, antiviral and memory enhancing drugs.

Rent, General and Administrative

         Rent, general and administrative  expenses decreased $213,800,  or 13%,
for the year ended  December 31, 1997 as compared to the year ended December 31,
1996.  Significant  expense  increases  totaled  $175,400  for the period  ended
December 31, 1997,  include:  officers salary  $55,600;  repairs and maintenance
$45,000;  NASDAQ fees $41,100; and consulting fees $33,700. These increases were
offset by decreases of $377,500 which included a settlement of $147,800 in April
1996 of the Ocean Marine  Service claim against Dr. Pandey.  Additional  expense
decreases for the period ended December 31, 1997, included: trade shows $82,300;
salaries and wages $62,500; travel $46,000; and advertising $38,900.


                                       30

<PAGE>





         Legal and  accounting  expenses  totaled  $345,900  for the year  ended
December 31, 1997 and were comparable to the same period in 1996.  Other general
and administrative costs decreased $1,200 or .2%, to $527,000,  in 1997 compared
to the same period in 1996.

         The Company anticipates that, provided adequate funding is available to
the Company,  general and  administrative  expenses will increase as a result of
the expansion of its operations  and marketing  efforts.  The Company's  planned
activities will require the addition of new personnel, including management, and
the  development of additional  expertise in areas such as preclinical  testing,
clinical trial management,  regulatory affairs, manufacturing and marketing. The
exact number and nature of persons  hired,  and the Company's  expenses for such
persons,  will  depend on many  factors,  including  the  capabilities  of those
persons who seek employment with the Company and the  availability of funding to
finance these efforts.

         The writedown in inventory and intangibles in 1997 was due to the write
off of paclitaxel  inventory  with an original cost of $1,020,000  and the write
off of capitalized patents of $517,000.

         The Company's loss from operations totaled  $5,272,100,  an increase of
$2,239,600,  or 73.9%,  for the year ended  December 31, 1997 as compared to the
same period in 1996, and is primarily a result of the foregoing.

         Interest  expense  decreased   approximately  $137,000,  or  90.7%,  to
$14,100,  in the year ended  December  31,  1997 as  compared  to the year ended
December 31, 1996.  In the 1996 period,  these  expenses  were the result of gap
financing  loans to the  Company,  all of which was  converted  to equity in the
second half of 1996 and first quarter 1997.

Liquidity and Capital Resources; Plan of Operations

         On December  31,  1997,  the Company had cash and cash  equivalents  of
$50,800,  negative  working  capital of  $638,700  and  stockholder's  equity of
$1,017,200.

         As a result of its net  losses to  December  31,  1997 and  accumulated
deficit  since  inception,  the  Company's  accountants,  in their report on the
Company's financial statements for the year ended December 31, 1997, included an
explanatory  paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern.  The Company's  research and development
activities  are at an early stage and the time and money  required to  determine
the commercial value and marketability of the Company's proposed products cannot
be estimated  with  precision.  The Company  expects  research  and  development
activities  to  continue  to  require   significant  cost  expenditures  for  an
indefinite period in the future.


                                       31

<PAGE>




         In May 1995 the Company  filed a Drug Master File ("DMF") with the Food
and Drug Administration  ("FDA") for the Company's  facilities.  The Company has
completed its technology validation and filed a DMF for paclitaxel in June 1997;
however,  the  Company's  facilities  have  yet to be  inspected  by the FDA for
current Good manufacturing  Practices ("cGMPs").  The Company has sufficient raw
materials  to produce  commercial  bulk  paclitaxel  which has a market value of
approximately  $2,000,000 at current prices and anticipates,  but can provide no
assurances,  that it will  commence  sales of  paclitaxel  in the  international
market in 1999.  Although  the  Company  has the  capability  to, and may,  sell
paclitaxel  for  research  purposes,  to date,  the Company has not received any
revenues from sales of paclitaxel  for human  consumption  and has received only
minimal  revenues from other  product sales or sales of paclitaxel  for research
and development.  As a result,  during 1997, the Company determined to write off
its crude paclitaxel,  work-in-process paclitaxel and finished (pure) paclitaxel
inventory  in the amount of  $1,020,000.  Prior to  commencing  such sales,  the
Company must file for and obtain approvals from appropriate  regulatory agencies
in foreign  jurisdictions.  Additionally,  to the extent the  Company  elects to
manufacture bulk paclitaxel domestically and ship it overseas for packaging, the
Company's  facilities  must be approved  for cGMP and the product must either be
approved for an investigational  new drug exemption (not currently so approved),
or deemed in compliance with the laws of 24 industrialized  "tier one" countries
(not yet so approved).  Otherwise,  the Company can produce the product entirely
overseas;  however,  it most likely would subcontract  production to others from
raw material or partially  processed raw material  provided by the Company,  and
might also enter into joint venture or other marketing  arrangements for sale of
the product  overseas.  There can be no such assurance that necessary  approvals
will not be delayed or subject to conditions or that the Company will be able to
meet such conditions.  In addition,  the Company has not experience in marketing
pharmaceutical products for human consumption and there can be no assurance that
the Company will be able to successfully  market its paclitaxel product in bulk,
or indirectly through others, or be able to obtain satisfactory packaging of the
product in single dosage vials from an independent manufacturer.

         The Company is negotiating  "Strategic  Alliance  Agreements"  with two
European  companies  to license  production,  marketing  and selling of bulk and
injectable paclitaxel. The companies will be responsible for the registration of
injectable  paclitaxel in their respective  countries.  Xechem will also grant a
license  to  the  companies  to  manufacture  and  sell  Xechem's  patented  new
paclitaxel analogs as well as a new paclitaxel formulation without Cremophor(TM)
or  ethanol.  In return,  Xechem  will be  cross-licensed  by the  companies  to
produce,  market and sell  certain  key  pharmaceutical  products  in the United
States and India.  Xechem  will be  responsible  for the  registration  of these
products with the FDA. The aggregate market for these products currently exceeds
$1,000,000,000.

         Xechem has expended and will  continue to expend  substantial  funds in
connection  with the research and  development  of its products.  As a result of
these  expenditures,  and even with revenues  anticipated  from  commencement of
sales of paclitaxel,  the Company  anticipates that losses will continue for the
foreseeable future.

         Xechem's planned activities will require the addition of new personnel,
including  management,  and the continued development of expertise in areas such
as  preclinical   testing,   clinical  trial  management,   regulatory  affairs,
manufacturing and marketing. Further, if Xechem receives regulatory approval for
any of  its  products,  in  the  United  States  or  elsewhere,  it  will  incur
substantial  expenditures  to develop  its  manufacturing,  sales and  marketing
capabilities  and/or  subcontract or joint venture these activities with others.
There can be no assurance that Xechem will ever recognize revenue or profit from
any such products.  In addition,  Xechem may encounter  unanticipated  problems,
including  developmental,  regulatory,  manufacturing or marketing difficulties,
some of which may be beyond  Xechem's  ability to  resolve.  Xechem may lack the
capacity to produce its products in-house and there can be no assurances that it
will be able to locate suitable  contract  manufacturers or be able to have them
produce products at satisfactory prices.

                                       32

<PAGE>





         On November 18, 1996,  the Company  entered into and closed the initial
stage of a Stock Purchase Agreement (the "Blech Purchase  Agreement") with David
Blech or his designees  ("Blech")  providing for the sale of up to 55,000 shares
of Class C Series 2 Voting  Cumulative  Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying shares of Common Stock, over approximately nine months. At the
initial closing,  The Edward A. Blech Trust (the "Trust") purchased 5,000 Series
2 Preferred Shares for $500,000.  The Trust purchased an additional 5,000 Series
2 Preferred  Shares on December  30, 1996;  5,000  Series 2 Preferred  Shares on
January 8, 1997;  and 7,500 Series 2 Preferred  Shares on February 7, 1997.  The
Blech Purchase  Agreement was amended,  effective  March 27, 1997, to modify the
dates  for  closing  of other  purchases  of  portions  of the  shares  issuable
thereunder.  Pursuant to the Blech Purchase Agreement,  on February 7, 1997, Dr.
Ramesh C. Pandey, the Company's Chairman and Chief Executive Officer,  exchanged
certain  indebtedness owed by the Company to him and the 1,070 shares of Class B
Preferred  Stock  of the  Company  held by him for  12,144  shares  of  Series 3
Preferred Shares.  Pursuant to their terms, effective February 8, 1997, the then
outstanding  22,500  Series 2  Preferred  Shares and 12,144  Series 3  Preferred
Shares were  converted into  45,000,000  and 19,430,400  shares of Common Stock,
respectively.  For the period  march 28, 1997 through  December  31,  1997,  The
Edward  Blech  Trust  purchased  2,300,000  shares of Common  Stock and 15 other
assignees  purchased  48,320,000  shares of Common  Stock,  which  included  two
affiliated  individuals  who purchased  1,960,000  shares of common  Stock,  two
trusts, not otherwise  affiliated with Blech, each purchased 5,000,000 shares of
Common  Stock on March 27,  1997 and a Blech  purchase  of  5,000,000  shares of
Common  Stock on April 14,  1997.  On May 1, 1997,  Blech sold (at his cost) his
5,000,000  shares  to  the  two  referenced  unaffiliated  trusts  and  a  third
unaffiliated  trust.  To date,  cash payments of $5,500,000 have been made under
the Blech Purchase Agreement and 110,000,000 shares of Common Stock have been or
will be issued thereunder.

         The Company continues to apply to various governmental agencies to fund
its research on specific  projects and those projects which are in the Company's
expertise.

         The  Company   intends  to  conduct  a  rights  offering  (the  "Rights
Offering"),  pursuant  to which it will offer to those  holders  ("Holders")  of
Xechem's Common Stock, who purchased Common Stock pursuant to the Blech Purchase
Agreement,  the right to subscribe  for an aggregate of  275,000,000  additional
shares of Common Stock at a price of $.01 per share, subject to the proviso that
until sufficient Common Stock is authorized for issuance, the Company will issue
a new series of Class C Preferred Shares which will be converted to Common Stock
when  sufficient  Common  Stock is  authorized.  If the  offering  is not  fully
subscribed,  the Company may be unable to obtain substitute financing and may be
unable to meet its  obligations or continue its  operations.  The Company cannot
offer any assurances  that all or any shares of Common Stock will be sold in the
Rights Offering and it is expected that additional  funds will have to be raised
by the  Company to support  ongoing  operations  even if the Rights  Offering is
fully subscribed.

Year 2000

         The Company has reviewed its critical information systems for Year 2000
compliance  and has  initiated  plans to  remedy  any  deficiencies  in a timely
manner. As a result of the review and action plan, the Company believes the cost
of such remedial  corrective actions is not material to the Company's  financial
position, results of operations or cash flows.



                                       33

<PAGE>





Item 7.  Financial Statements.

         The following financial  statements of Xechem  International,  Inc. and
subsidiaries  are separately  prepared and numbered  independently  of the other
narrative portions of this Form 10-KSB.


                                       34

<PAGE>




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
  Xechem International, Inc.
  New Brunswick, New Jersey


            We have  audited  the  accompanying  consolidated  balance  sheet of
Xechem International, Inc. and its subsidiaries (a development stage enterprise)
as of December 31, 1997, and the related consolidated  statements of operations,
stockholders'  equity,  and cash  flows for each of the two years in the  period
ended  December 31,  1997,  and for the  cumulative  period from March 15, 1990,
(date  of  inception)  to  December  31,  1997.  These  consolidated   financial
statements are the  responsibility of Xechem  International,  Inc.'s management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements based on our audits.

            We  conducted  our  audits in  accordance  with  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to  obtain  reasonable  assurance  about  whether  the  consolidated   financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall  consolidated  financial  statement  presentation.  We believe  that our
audits provide a reasonable basis for our opinion.

            In our opinion,  the consolidated  financial  statements referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Xechem  International,  Inc. and its subsidiaries as of December 31,
1997, and the consolidated  results of their operations and their cash flows for
each of the two  years  in the  period  ended  December  31,  1997,  and for the
cumulative period from March 15, 1990, (date of inception) to December 31, 1997,
in conformity with generally accepted accounting principles.

            The  accompanying   consolidated   financial  statements  have  been
prepared  assuming  Xechem   International,   Inc.  and  its  subsidiaries  (the
"Company")  will  continue as a going  concern.  As  discussed  in Note 3 to the
consolidated   financial   statements,   the  Company's  recurring  losses  from
operations,  accumulated deficit, cumulative negative cash flows from operations
and other  factors  raise  substantial  doubt  about the  Company's  ability  to
continue as a going concern.  Management's  plans in regard to these matters are
also described in Note 3. These consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.







                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford, New Jersey
March 20, 1998


                                       F-1

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
------------------------------------------------------------------------------



Current Assets:
  Cash                                                              $    50,826
  Accounts Receivable - Net                                              66,229
  Loans Receivable - Related Parties                                    110,000
  Inventory                                                             211,507
  Prepaid Expenses                                                      117,741
  Other Current Assets                                                    5,000
                                                                    -----------

  Total Current Assets                                                  561,303

Equipment - Net of Accumulated
  Depreciation of $483,371                                              918,543
Leasehold Improvements - Net of Accumulated
  Amortization of $298,288                                              716,888
Deposits                                                                 20,517
                                                                    -----------

  Total Assets                                                      $ 2,217,251
                                                                    ===========




See Accompanying Notes to Consolidated Financial Statements.


                                        F-2

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
------------------------------------------------------------------------------



Current Liabilities:
  Accounts Payable                                                  $   503,532
  Accrued Liabilities                                                   162,274
  Loans Payable                                                         280,000
  Notes Payable                                                         128,300
  Other Current Liabilities                                               4,635
  Due to Related Parties                                                121,293
                                                                    -----------

  Total Current Liabilities                                           1,200,034

Commitments and Contingencies                                                --

Stockholders' Equity:
  Class A Voting Preferred Stock, $.00001 Par Value, 2,500
   Shares Authorized; 2,500 Shares Issued and Outstanding                    --

  Additional Paid-in Capital [Class A Voting Preferred]                   2,500

  Class B 8% Preferred Stock, $.00001 Par Value, 1,150 Shares
   Authorized; None Issued or Outstanding                                    --

  Class C Preferred Stock, $.00001 Par Value, 2,996,350
   Shares Authorized; None Issued or Outstanding                             --

  Common Stock, $.00001 Par Value, 247,000,000
   Shares Authorized; 119,870,839 Shares Issued and Outstanding           1,197

  Additional Paid-in Capital [Common]                                28,742,596

  (Deficit) Accumulated During the Development Stage                (27,729,076)
                                                                    -----------

  Total Stockholders' Equity                                          1,017,217

  Total Liabilities and Stockholders' Equity                        $ 2,217,251
                                                                    ===========


See Accompanying Notes to Consolidated Financial Statements.


                                        F-3

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------



                                                                   March 15,
                                                                 1990 (Date of
                                             Years  ended        Inception) to
                                             December 31,        December 31,
                                         1 9 9 7      1 9 9 6       1 9 9 7
                                         -------      -------       -------

Revenues                              $   114,187  $   208,857   $    689,917
                                      -----------  -----------   ------------

Expenses:
  Research and Development              2,418,291    1,596,636      7,055,357
  Rent                                         --       86,500        410,065
  Rent - Related Party                     96,856       21,705        118,561
  General and Administrative            1,334,130    1,536,559      6,067,485
  Writedown of Inventory                1,020,000           --      1,020,000
  Writedown of Intangibles                517,000           --        517,000
                                      -----------  -----------   ------------

  Total Expenses                        5,386,277    3,241,400     15,188,468
                                      -----------  -----------   ------------

  (Loss) from Operations               (5,272,090)  (3,032,543)   (14,498,551)

Other Income - Net                            459        9,461        273,578

Interest Income - Related Party             4,211           --          4,211

Interest (Expense) - Related Party             --      (86,926)    (8,589,081)

Interest (Expense)                        (14,132)     (64,197)    (4,919,233)
                                      -----------  -----------   ------------

  (Loss) Before Income Taxes           (5,281,552)  (3,174,205)   (27,729,076)

Income Taxes                                   --           --             --
                                      -----------  -----------   ------------

  Net (Loss)                          $(5,281,552) $(3,174,205)  $(27,729,076)

Preferred Stock Dividends             $        --  $    87,208   $    101,594

  Net (Loss) Available to Common
   Stockholders                       $(5,281,552) $(3,261,413)  $(27,830,670)
                                      ===========  ===========   ============

Net (Loss) per Share, Basic and
  Diluted                             $     (0.06) $     (0.45)
                                      ===========  ===========

Average Number of Common Shares
 Outstanding, Basic and Diluted        93,162,589    7,321,966
                                      ===========  ===========




See Accompanying Notes to Consolidated Financial Statements.


                                        F-4

<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

<TABLE>

                                                      Class A     Additional       Class B    Additional         Class C
                                                 Voting Preferred   Paid-in     8% Preferred    Paid-in         Series 1
                                                                    Capital                     Capital    8% Conv. Preferred

                                                 # of       Par                # of      Par                # of       Par
                                                Shares     Value    Class A   Shares    Value   Class B    Shares     Value

Common Stock issued in exchange for
 equipment in March 1990 at no
<S>                                             <C>      <C>       <C>       <C>       <C>      <C>       <C>       <C>    
  par value                                          --  $     --  $     --       --   $   --   $     --        --  $    --

Capital contributions April 1990                     --        --        --       --       --         --        --       --
Net (loss) for the period from
 March 15, 1990 (date of
 inception) to December 31, 1990                     --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 19900                         --        --        --       --       --         --        --       --

Capital contributions July 1991                      --        --        --       --       --         --        --       --
Capital contributions September
 1991                                                --        --        --       --       --         --        --       --
Capital contributions October 1991                   --        --        --       --       --         --        --       --
Net (loss) for the year ended
 December 31, 1991                                   --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1991                          --        --        --       --       --         --        --       --
Capital contributions                                --        --        --       --       --         --        --       --
Net (loss) for the year ended
 December 31, 1992                                   --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1992                          --        --        --       --       --         --        --       --

Net (loss) for the year ended
 December 31, 1993                                   --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1993                          --        --        --       --       --         --        --       --

Reorganization                                    2,500        --     2,500    1,070       --    107,000        --       --
Net Proceeds from Initial Public
 Offering - First Quarter 1994, at
 $5.00 Per Unit, Less Issuance Cost                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1994                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1994                 --        --        --       --       --         --        --       --
Net (loss) for the year ended
  December 31, 1994                                  --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31,  1994                      2,500        --     2,500    1,070       --    107,000        --       --

Private Placement - Common  Stock at
 $3.00 Per Share, Less Issuance Costs                --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - First Quarter 1995                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options and issuance of
 Apotex stock - Second Quarter 1995                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1995                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1995                 --        --        --       --       --         --        --       --
Net (loss) for the year ended
 December 31, 1995                                   --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1995 -
 Forward                                          2,500  $     --     2,500    1,070   $   --   $107,000        --  $    --


See Accompanying Notes to Consolidated Financial Statements.
</TABLE>



<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

<TABLE>

                                                      Class A     Additional       Class B    Additional         Class C
                                                 Voting Preferred   Paid-in     8% Preferred    Paid-in         Series 1
                                                                    Capital                     Capital    8% Conv. Preferred

                                                 # of       Par                # of      Par                # of       Par
                                                Shares     Value    Class A   Shares    Value   Class B    Shares     Value

Balance - December 31, 1995 -
<S>                                             <C>      <C>       <C>       <C>       <C>      <C>       <C>       <C>    
 Forwarded                                        2,500  $     --     2,500    1,070   $   --   $107,000        --  $    --


Private Placement - Common Stock at
 $3.00 Per Share, Less Issuance Costs                --        --        --       --       --         --        --       --
Private Placement - Petron at $.38
 per Share                                           --        --        --       --       --         --        --       --
Private Placement - Series 1 Preferred
 Stock at $100 per Share, Less
 Issuance Cost                                       --        --        --       --       --         --    22,500       --
Private Placement - Series 2 Preferred
 Stock at $100 per Share, Less
 Issuance Cost                                       --        --        --       --       --         --        --       --
Conversion of Preferred Stock                        --        --        --       --       --         --   (21,000)      --
Conversion of Debt to Equity at $.25
 Per Share                                           --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified Stock
 Options  - Second Quarter 1996                      --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1996                  --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1996                 --        --        --       --       --         --        --       --
Cancellation of Apotex Stock                         --        --        --       --       --         --        --       --
Ocean Marine Settlement at $1.31
 per Share                                           --        --        --       --       --         --        --       --
Net (loss) for the year                              --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1996                       2,500        --     2,500    1,070       --    107,000     1,500       --

Private Placement - Series 2
 Preferred at $100 per Share -
 First Quarter 1997                                  --        --        --       --       --         --        --       --
Conversion of Series 1
 Preferred Stock at $1.25 per
 Share - First Quarter 1997                          --        --        --       --       --         --    (1,500)      --
Conversion of Series 2
 Preferred Stock at $.05 per
 Share - First Quarter                               --        --        --       --       --         --        --       --
Conversion of Dr. Pandey's
 Preferred Stock & Debt to
 Equity at $.0625 per Share -
 First Quarter                                       --        --        --   (1,070)      --   (107,000)       --       --
Private Placement - Common Stock
 At $.05 per Share                                   --        --        --       --       --         --        --       --
Excess of Fair Market Value
 Over Option Price of
 Non-Qualified Stock Options
 Exercised First Quarter 1997                        --        --        --       --       --         --        --       --
Excess of Fair Market Value
 Over Option Price of
 Non-Qualified Stock Options
 Exercised Third Quarter 1997                        --        --        --       --       --         --        --       --
Stock Option Grants                                  --        --        --       --       --         --        --       --
Net (loss) for the Year                              --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1997                       2,500  $     --  $  2,500       --   $   --   $     --        --  $    --
                                                =======  ========  ========  =======   ======   ========  ========  =======




See Accompanying Notes to Consolidated Financial Statements
</TABLE>



<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

<TABLE>

                                         Class C      Additional  Xechem, Inc.    Xechem International  Additional (Deficit)
                                        Series 2       Paid-in    Common Stock        Common Stock       Paid-in  Accumulated
                                Voting Conv.Preferred  Capital                                            Capital  During the
                                     # of      Par                # of       Par      # of       Par               Development
                                    Shares    Value   Class C    Shares     Value    Shares     Value      Common     Stage
Common Stock issued in exchange for
 equipment in March 1990 at no
<S>                              <C>        <C>      <C>       <C>       <C>       <C>       <C>        <C>         <C>         
  par value                             --  $    --  $     --       100  $125,000        --  $      --  $       --  $        --
Capital contributions April 1990        --       --        --        --        --        --         --     170,000           --
Net (loss) for the period from
 March 15, 1990 (date of
 inception) to December 31, 1990        --       --        --        --        --        --         --          --     (159,271)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------    ---------

Balance - December 31, 19900            --       --        --       100   125,000        --         --     170,000     (159,271)

Capital contributions July 1991         --       --        --        --        --        --         --      95,971           --
Capital contributions September
 1991                                   --       --        --        --        --        --         --      50,172           --
Capital contributions October 1991      --       --        --        --        --        --         --      25,000           --
Net (loss) for the year ended
 December 31, 1991                      --       --        --        --        --        --         --          --     (357,390)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------    ---------

Balance - December 31, 1991             --       --        --       100   125,000        --         --     341,143     (516,661)
Capital contributions                   --       --        --        --        --        --         --      95,000           --
Net (loss) for the year ended
 December 31, 1992                      --       --        --        --        --        --         --          --     (487,301)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------    ---------

Balance - December 31, 1992             --       --        --       100   125,000        --         --     436,143   (1,003,962)

Net (loss) for the year ended
 December 31, 1993                      --       --        --        --        --        --         --          --     (819,816)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------    ---------

Balance - December 31, 1993             --       --        --       100   125,000        --         --     436,143   (1,823,778)
                                                                                                                              

Reorganization                          --       --        --      (100) (125,000) 4,370,500        43  13,840,487           --
Net Proceeds from Initial Public
 Offering - First Quarter 1994, at
 $5.00 Per Unit, Less Issuance Cost     --       --        --        --        --  1,150,000        12   4,542,670           --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1994     --       --        --        --        --   105,000          1       1,049           --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1994    --       --        --        --        --   105,000          1      50,060           --
Net (loss) for the year ended
  December 31, 1994                     --       --        --        --        --        --         --          --  (14,316,193)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------  -----------

Balance - December 31,  1994            --       --        --        --        --  5,730,500        57  18,870,409  (16,139,971)

Private Placement - Common  Stock at
 $3.00 Per Share, Less Issuance Costs   --       --        --        --        --   118,778          2     388,887           --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - First Quarter 1995     --       --        --        --        --    30,000         --     328,125           --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options and issuance of
 Apotex stock - Second Quarter 1995     --       --        --        --        --   674,700          7     980,806           --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1995     --       --        --        --        --    24,500         --    (260,612)          --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1995    --       --        --        --        --     5,000         --      40,624           --
Net (loss) for the year ended
 December 31, 1995                      --       --        --        --        --        --         --          --   (3,133,348)
                                 ---------  -------  --------  --------  --------  --------  ---------  ----------   ----------

Balance - December 31, 1995 -
 Forward                                --  $    --  $     --        --  $     --  6,583,478 $      66 $20,348,239 $(19,273,319)


See Accompanying Notes to Consolidated Financial Statements.
</TABLE>



<PAGE>


XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

<TABLE>


                                         Class C       Additional  Xechem, Inc.    Xechem International  Additional (Deficit)
                                        Series 2         Paid-in   Common Stock        Common Stock        Paid-in Accumulated
                                  Voting Conv. Preferred Capital                                          Capital  During the
                                     # of      Par                # of       Par      # of       Par               Development
                                    Shares    Value   Class C    Shares     Value    Shares     Value      Common     Stage

Balance - December 31, 1995 -
 <S>                             <C>        <C>      <C>         <C>      <C>      <C>         <C>      <C>          <C>          
 Forwarded                              --  $    --  $       --       --  $     --   6,583,478 $     66 $20,348,239  $(19,273,319)

Private Placement - Common Stock at
 $3.00 Per Share, Less Issuance Costs   --       --          --       --        --     163,333        1      52,784            --
Private Placement - Petron at $.38
 per Share                              --       --          --       --        --     260,000        1     100,000            --
Private Placement - Series 1 Preferred
 Stock at $100 per Share, Less
 Issuance Cost                          --       --   2,137,500       --        --      12,500       --      28,125            --
Private Placement - Series 2 Preferred
 Stock at $100 per Share, Less
 Issuance Cost                      10,000       --     882,440       --        --          --       --          --            --
Conversion of Preferred Stock           --       --  (1,995,000)      --        --   1,673,583       16   1,966,840            --
Conversion of Debt to Equity at $.25
 Per Share                              --       --          --       --        --   1,477,745       15     369,422            --
Excess of Fair Market Value over
 Option Price of Non-Qualified Stock
 Options  - Second Quarter 1996         --       --          --       --        --       2,000       --       4,625            --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Third Quarter 1996     --       --          --       --        --         600       --         564            --
Excess of Fair Market Value over
 Option Price of Non-Qualified
 Stock Options - Fourth Quarter 1996    --       --          --       --        --      51,600        1      13,205            --
Cancellation of Apotex Stock            --       --          --       --        --     (75,000)      --          --            --
Ocean Marine Settlement at $1.31
 per Share                              --       --          --       --        --      25,000       --      32,812            --
Net (loss) for the year                 --       --          --       --        --          --       --          --    (3,174,205)
                                 ---------  -------  ----------  -------  -------- ----------- -------- -----------  ------------

Balance - December 31, 1996         10,000  $    --  $1,024,940       --  $     --  10,174,839      100 $22,916,616  $(22,447,524)

Private Placement - Series 2
 Preferred at $100 per Share -
 First Quarter 1997                 12,500       --   1,250,000       --        --          --       --          --            --
Conversion of Series 1
 Preferred Stock at $1.25 per
 Share - First Quarter 1997             --       --    (142,500)      --        --     120,000        1     142,499            --
Conversion of Series 2
 Preferred Stock at $.05 per
 Share - First Quarter             (22,500)      --  (2,132,440)      --        --  45,000,000      450   2,131,180            --
Conversion of Dr. Pandey's
 Preferred Stock & Debt to
 Equity at $.0625 per Share -
 First Quarter                          --       --          --       --        --  19,430,400      194   1,214,257            --
Private Placement - Common Stock
 At $.05 per Share                      --       --          --       --        --  45,020,000      451   2,290,549            --
Excess of Fair Market Value
 Over Option Price of
 Non-Qualified Stock Options
 Exercised First Quarter 1997           --       --          --       --        --     125,000        1      31,249            --
Excess of Fair Market Value
 Over Option Price of
 Non-Qualified Stock Options
 Exercised Third Quarter 1997           --       --          --       --        --         600       --         246            --
Stock Option Grants                     --       --          --       --        --          --       --      16,000            --
Net (loss) for the Year                 --       --          --       --        --          --       --          --    (5,281,552)
                                 ---------  -------  ----------  -------  -------- ----------- -------- -----------  ------------

Balance - December 31, 1997             --  $    --  $       --       --  $     -- 119,870,839    1,197 $28,742,596  $(27,729,076)
                                 =========  =======  ==========  =======  ======== =========== ======== ===========  =============




See Accompanying Notes to Consolidated Financial Statements
</TABLE>



<PAGE>






XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------


<TABLE>
                                                                         March 15,
                                                                      1990 (Date of
                                                   Years  ended        Inception) to
                                                   December 31,        December 31,
                                               1 9 9 7      1 9 9 6       1 9 9 7
                                               -------      -------       -------

Operating Activities:
<S>                                         <C>          <C>           <C>          
  Net (Loss)                                $(5,281,552) $(3,174,205)  $(27,729,076)
                                            -----------  -----------   ------------
  Adjustments to Reconcile Net (Loss) to Net Cash
   Provided (Used) by Operating Activities:
   Depreciation                                 150,026      124,882        372,077
   Amortization                                  80,445       77,470        469,164
   (Gain)/Loss on Sale of Assets                  6,000       (1,089)         5,609
   Interest and Compensation Expense in
     Connection with Issuance of Equities        46,240      118,227     14,259,740
   Write Down of Inventory                    1,020,000           --      1,020,000
   Write Down of Intangibles                    517,000           --        517,000

  Changes in Assets and Liabilities
   (Increase) Decrease in:
     Accounts Receivable                        (61,108)       6,895        (66,229)
     Inventory                                  165,398     (541,304)    (1,231,507)
     Prepaid Expenses                            18,410       91,582       (117,741)
     Other Current Assets                      (115,000)      60,909       (106,022)
     Deposits                                     1,650       (1,650)       (20,517)
     Organizational Costs                            --           --        (13,828)
     Other Assets                                    --        2,250         (1,592)

   Increase (Decrease) in:
     Accounts Payable                           (59,745)     131,937        503,532
     Accrued Interest Payable, Other Current
      Liabilities and Due to Related Parties        807       65,201        125,925
     Accrued Expenses                           (39,720)      99,451        162,274
                                            -----------  -----------   ------------

   Total Adjustments                          1,730,403      234,761     15,877,885
                                            -----------  -----------   ------------

  Net Cash (Used) by Operating
   Activities - Forward                      (3,551,149)  (2,939,444)   (11,851,191)
                                            -----------  -----------   ------------

Investing Activities:
  Patent Issuance Costs                        (294,875)    (168,122)      (548,174)
  Purchases of Equipment and
   Leasehold Improvements                      (275,808)    (264,212)    (1,911,219)
  Proceeds from Sale of Assets                    2,000       17,500         28,700
  Purchase of Marketable Securities                               --     (1,476,449)
  Proceeds from Sale of Marketable Securities        --           --      1,476,449
                                             ----------  -----------   ------------

  Net Cash (Used) by Investing
   Activities - Forward                     $  (568,683) $  (414,834)  $ (2,430,693)

See Accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                          F-7

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

<TABLE>

                                                                         March 15,
                                                                      1990 (Date of
                                                   Years  ended        Inception) to
                                                   December 31,        December 31,
                                               1 9 9 7      1 9 9 6       1 9 9 7
                                               -------      -------       -------

  Net Cash (Used) by Operating
<S>                                         <C>          <C>           <C>          
   Activities - Forwarded                   $(3,551,149) $(2,939,444)  $(11,851,191)
                                            -----------  -----------   ------------

  Net Cash (Used) by Investing
   Activities - Forwarded                      (568,683)    (414,834)    (2,430,693)
                                            -----------  -----------   ------------

Financing Activities:
  Proceeds from Note Payable - Bank                  --           --       (390,000)
  Proceeds from Related Party Loans                  --      155,000      1,294,582
  Proceeds from Borrowings Under
   Line of Credit                                    --           --      1,365,000
  Proceeds from Notes Payable                    13,300           --        458,300
  Proceeds from Interim Loans                   280,000       55,000      1,250,295
  Proceeds from Bridge Financing                     --      265,000        640,000
  Capital Contribution                               --           --         95,000
  Payments on Interim Loans                          --      (55,000)      (305,000)
  Payments on Notes Payable                          --           --       (520,000)
  Payment on Stockholder Loans                       --           --       (207,037)
  Payment of Line of Credit                          --           --       (975,000)
  Proceeds from Issuance of Common Stock      2,291,000      152,784      7,375,343
  Proceeds from Issuance of Class C
   Series 1 Preferred Stock                          --    2,109,347      2,109,347
  Proceeds from Issuance of Class C
   Series 2 Preferred Stock                   1,249,190      882,440      2,131,630
  Proceeds from Exercise of Options               1,256          552         10,250
                                            -----------  -----------   ------------

  Net Cash - Financing Activities             3,834,746    3,565,123     14,332,710
                                            -----------  -----------   ------------

  Net Increase (Decrease) in Cash
   And Cash Equivalents                        (285,086)     210,845         50,826

Cash and Cash Equivalents -
  Beginning of Periods                          335,912      125,067             --
                                            -----------  -----------   ------------

  Cash and Cash Equivalents -
   End of Periods                           $    50,826  $   335,912   $     50,826
                                            ===========  ===========   ============

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the periods for:
   Interest - Related Party                 $        --  $    20,641   $    104,992
   Interest - Other                         $        --  $     2,347   $    133,818
   Income Taxes                             $        --  $        --   $         --

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
  See Note 5.

See Accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                          F-8

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------



(1) Description of Business and Summary of Significant Accounting Policies

Xechem  International,  Inc. and its wholly-owned  subsidiaries,  Xechem,  Inc.,
Xechem Laboratories,  Inc. and XetaPharm,  Inc.  (collectively the "Company") is
engaged in research and technology development with respect to the production of
generic and  proprietary  drugs from natural  sources.  Research and development
efforts focus  principally on anti-fungal,  anti-cancer,  anti-viral  (including
anti-AIDS)  and  anti-inflammatory  compounds,  as well as anti-aging and memory
enhancing compounds.  The Company is particularly  committed to developing drugs
from  sources  derived  from  Chinese  and  Indian  folklore  and niche  generic
anti-cancer  drugs developed by  fermentation  or from other natural  processes.
Additionally,  the Company provides technical and analytical laboratory services
including  the  testing  of  chemicals,   cosmetics,   food  and  household  and
pharmaceutical   products  on  a  contract  basis.  The  Company  also  provides
consulting   services   for   development   and   pilot-plant    production   of
pharmaceuticals for companies on a contract basis. The Company also develops and
markets a natural food and dietary supplement line of products.

Principles of Consolidation - The accompanying consolidated financial statements
include  the  accounts  of  Xechem  International,  Inc.  and  its  wholly-owned
subsidiaries,  Xechem,  Inc.,  Xechem  Laboratories,  Inc., and XetaPharm,  Inc.
Intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents - The Company considers all highly liquid  investments
with an original  maturity of three  months or less when  purchased,  to be cash
equivalents. At December 31, 1997, the Company had no cash equivalents.

Inventory  -  Inventory  is  stated  at the  lower  of cost or  market.  Cost is
determined  on a first-in,  first-out  basis.  Inventory at December 31, 1997 is
principally comprised of raw materials and finished goods of XetaPharm's dietary
supplement products.

At December 31, 1996,  inventory was  principally  comprised of  work-in-process
paclitaxel,  an anti-cancer compound used for the treatment of refactory ovarian
and  breast  cancer.   Although  the  Company  has  isolated   paclitaxel  in  a
substantially pure state, there can be no assurance that such compound will pass
the necessary regulatory requirements for approval for sale in the United States
or abroad. In addition, Bristol-Myers Squibb Company maintains a dominant market
share in the  paclitaxel  business and may choose to take legal action to impair
the  entry  of  additional  competitors  in  the  market,  such  as by  alleging
infringement on certain patents.  Also, although the Company anticipates that it
will be able  to  submit  an  Abbreviated  New  Drug  Application  ("ANDA")  for
paclitaxel  immediately upon the expiration of Bristol-Myers'  exclusive period,
as extended,  (December 29, 2001), the Company does not yet have all of the data
for such ANDA and there can be no  assurance  that the  Company  will be able to
file the ANDA at that time. Although the Company has the capability to, and may,
sell paclitaxel for research purposes, to date, the Company has not received any
revenues from sales of paclitaxel  for human  consumption  and has received only
minimal  revenues from other  product sales or sales of paclitaxel  for research
and development.  As a result,  during 1997, the Company determined to write off
its crude paclitaxel,  work-in-process paclitaxel and finished (pure) paclitaxel
inventory in the amount of $1,020,000.

Impairment - Long-lived  assets of the Company are reviewed at least annually as
to whether their  carrying  value has become  impaired  pursuant to Statement of
Financial  Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires  long-lived  assets,  if  impaired,  to be  remeasured  at fair  value,
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be  recoverable.  Management  also  reevaluates the periods of
amortization of long-lived  assets to determine whether events and circumstances
warrant revised estimates of useful lives.  During 1997, in conjunction with its
determination to write off paclitaxel inventory,  the Company charged a total of
$517,000 for prior years' patent and trademark costs to operations.



                                       F-9

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(1)  Description of Business and Summary of Significant Accounting Policies 
(Continued)

Equipment and Leasehold Improvements - All material expenditures for betterments
and additions  are  capitalized  at cost.  Expenditures  for normal  repairs and
maintenance are charged to operations as incurred. Depreciation and amortization
are  provided  for  financial  reporting  purposes  on the basis of the  various
estimated  useful  lives of the  assets,  using the  straight-line  method  over
periods ranging from 3 to 15 years.  Depreciation and  amortization  expense for
equipment and leasehold  improvements  for the years ended December 31, 1997 and
1996 was $230,471 and $202,352, respectively.

Revenue  Recognition - The Company records revenue when all contracted  services
have been performed and product has been shipped to the customer.

Research and  Development  Costs -  Expenditures  for  research and  development
activities are charged to operations as incurred.

Stock  Issued  to  Employees  -  The  Company  adopted  Statement  of  Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
on January 1, 1996 for financial note  disclosure  purposes and will continue to
apply the intrinsic value method of Accounting  Principles Board ("APB") Opinion
No. 25,  "Accounting  for Stock Issued to  Employees"  for  financial  reporting
purposes.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect certain  reported  amounts and  disclosures.  Actual
results could differ from those  estimates.  Also, as more fully described under
the equipment and leasehold improvements,  the Company's policy is to depreciate
and  amortize  the  net  book  value  of such  assets  ($1,635,431)  over  their
respective  remaining useful lives. It is reasonably possible that the Company's
estimate that the carrying amount of such assets will be recoverable from future
operations  will  change  in the near  term  given  the  uncertainty  about  the
Company's ability to continue as a going concern as more fully discussed in Note
3.

Advertising - The Company's policy is to expense  advertising costs as incurred.
Advertising  costs for 1997 were  approximately  $101,000 and  insignificant  in
1996.

Loss Per Share - The Financial  Accounting  Standards  Board ("FASB") has issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share." SFAS No. 128  simplifies  the earnings  per share  ("EPS")  calculations
previously  required by Accounting  Principles Board ("APB") Opinion No. 15, and
related  interpretations,  by replacing the  presentation  of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual  presentation of basic and
diluted EPS by entities with complex capital  structures.  Basic EPS includes no
dilution  and  is  computed  by  dividing  income  (loss)  available  to  common
stockholders by the weighted-average number of common shares outstanding for the
period.  Diluted EPS reflects the potential  dilution of  securities  that could
share in the  earnings  of an entity,  similar to the fully  diluted  EPS of APB
Opinion No. 15. SFAS No. 128 is effective  for financial  statements  issued for
periods  ending after  December 15, 1997,  including  interim  periods;  earlier
application  is not  permitted.  The Company  has adopted  SFAS No. 128 in these
financial  statements.  Basic EPS is based on average common shares  outstanding
and diluted EPS includes the effects of potential common stock, such as, options
and warrants, if dilutive.  The Company has potentially dilutive securities that
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the periods  presented.  Such securities may
dilute EPS in future years.

Patent  Issuance  Costs - The cost of patents is  amortized  on a  straight-line
basis over the estimated economic life of 15 years.


                                      F-10

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(1)  Description of Business and Summary of Significant Accounting Policies 
(Continued)

Risk Concentrations - Financial instruments that potentially subject the Company
to concentrations of credit risk are cash and accounts  receivable  arising from
its normal  business  activities.  The Company  maintains cash balances at three
different financial institutions in New Jersey. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1997, the Company had no uninsured cash balances.

The Company performs certain credit  evaluation  procedures and does not require
collateral on accounts receivable and other financial  instruments.  The Company
believes that credit risk is limited because the Company routinely  assesses the
financial  strength of its  customers,  and based upon factors  surrounding  the
credit  risk  of its  customers,  establishes  an  allowance  for  uncollectible
accounts  and, as a  consequence,  believes  that it has no accounts  receivable
credit risk exposure.

(2) Development Stage Activities and Operations

For the period from the  incorporation  of Xechem Inc. to date,  the Company has
been a "development  stage enterprise."  Operations have consisted  primarily of
financial planning,  raising capital,  and research and development  activities.
The Company has produced  minimal  revenues since its inception,  incurred a net
loss of  $5,281,552  and  $3,174,205  for the years ended  December 31, 1997 and
1996,  respectively,  and has accumulated a deficit since  inception  (March 15,
1990)  of  $27,729,076.  The  Company  has  financed  research  and  development
activities  principally  through  capital  contributions  and loans  made by its
stockholders and other investors,  banks, and through an initial public offering
and private placement of its securities (See Notes 4, 5, 6, 7, 9, 10 and 11).

(3) Going Concern

The accompanying consolidated financial statements have been prepared on a going
concern basis which  contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As shown in the
consolidated  financial  statements,  the  Company  has  incurred  net losses of
$5,281,552  and  $3,174,205  for the years  ended  December  31,  1997 and 1996,
respectively;  has  accumulated  a deficit since  inception  (March 15, 1990) of
$27,729,076;  and has a  cumulative  negative  cash flow from  operations  since
inception  amounting to  $11,851,191.  As discussed in Note 2, the Company is in
the development stage and has realized minimal revenues since its inception. The
Company's research and development activities are at an early stage and the time
and money  required to develop the  commercial  value and  marketability  of the
Company's  proposed  products cannot be estimated.  The Company expects research
and development  activities to continue to require significant cash expenditures
for an indefinite  period in the future.  The Company is in arrears with respect
to rental  payments on its facilities  (See Note 12B).  The Company's  principal
revenues have been  contract  research and testing and  consulting  services for
other companies,  which are not expected to continue and which have historically
been minimal.  All of these factors raise substantial doubt about the ability of
the Company to continue as a going concern.

To achieve  profitable  operations,  the  Company,  alone or with  others,  must
successfully develop, obtain regulatory approval for, introduce,  and market its
potential  pharmaceutical products. No assurance can be given that the Company's
product research and development  efforts will be successfully  completed,  that
required  regulatory  approvals  will be  obtained,  or that  any  products,  if
developed  and  introduced,  will be  successfully  marketed  or achieve  market
acceptance.

The Company has been  substantially  dependent on funds received under the Blech
Purchase  Agreement (See Note 4). Subsequent to December 31, 1997, Mr. Blech and
his  designees  have  purchased the  remaining  securities  subject to the Blech
Purchase Agreement (See Note 19).


                                      F-11

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(3) Going Concern (Continued)

The Company continues to make strides in attaining self-sufficiency.  During the
year, the Company has cut  administrative  expenses and reduced its monthly cash
requirements.  At the same  time,  the  Company  is  exploring  a joint  venture
agreement  with  two  European  companies  for the sale of bulk  paclitaxel.  In
addition,  the Company is actively  moving  forward  toward the  completion of a
private placement  memorandum for the sale of $2,750,000 of common stock at $.01
per share.  As of March 20,  1998,  a total of $75,545 has been raised (See Note
19).

There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful.  The financial  statements do not include
any adjustments  relating to the  recoverability  and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event that the Company cannot continue in existence.

(4) Blech Purchase Agreement

On November 18, 1996, the Company entered into and closed the initial stage of a
stock  purchase  agreement  (the "Blech  Purchase  Agreement")  with David Blech
and/or his designees  ("Blech") providing for the sale of up to 55,000 shares of
Class C Series 2 Voting  Cumulative  Preferred  Stock (the  "Series 2  Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying  shares of Common Stock.  Subsequent to December 31, 1996, the
Blech  Purchase  Agreement  was amended to extend the purchase  period.  Through
December 31, 1997, Blech purchased 95,620,000 shares of Common Stock for a total
of  $4,781,000.  Subsequent  to December 31, 1997,  Blech  purchased  14,380,000
shares of Common Stock for a total of $719,000.  This completed the  obligations
under the Blech Purchase Agreement. (See Note 18).

Pursuant to the Purchase Agreement,  the Company, Dr. Pandey and Blech have also
entered into a stockholder's agreement, which, among other things: (i) generally
prohibits the sale of any of Dr. Pandey's shares of capital stock of the Company
for a period of five  years,  except with the  consent of Blech;  (ii)  provides
Blech with the right to sell his pro rata  portion  (relative to the holdings of
Dr.  Pandey) of any  proposed  sales of shares by Dr.  Pandey,  and a reciprocal
right in favor of Dr.  Pandey to sell his pro rata portion of any shares sold by
Blech; (iii) requires Blech to vote for Dr. Pandey as a director of the Company,
and to use his efforts to cause Dr.  Pandey to remain  Chairman,  President  and
chief  executive  officer of the  Company;  (iv)  requires  the  Company and its
directors (subject to their fiduciary duties to the Company and the shareholders
of the  Company) to take such actions as Blech may request to elect his nominees
to constitute a majority of the  directors of the Company;  and (v) provides for
certain demand and piggyback registration rights in favor of Blech.

(5) Capital Transactions

(A) In March 1990, Xechem issued 100 shares of its Common Stock to Dr. Pandey in
exchange  for  equipment,  the cost of which to him  amounted  to  $125,000.  At
various dates  throughout 1991 and 1990, Dr. Pandey donated  certain  laboratory
and  research  equipment  the cost of  which to him  amounted  to  $171,143  and
$170,000,  respectively.  The  latter  amounts  have been  credited  to  paid-in
capital.

(B) On May 15, 1992, Xechem and Dr. Pandey signed a letter agreement to exchange
one hundred percent of the capital stock of Xechem for a certain sum in cash and
15,000,000  shares of the common stock of the purchaser,  Regal One  Corporation
("Regal  One").  If the  transaction  was  completed,  Xechem  was to  become  a
wholly-owned  subsidiary  of  Regal  One.  The  transaction  was not  completed.
Although the letter agreement was superseded,  Regal One had made non-refundable
cash contributions to Xechem amounting to $95,000. This amount has been credited
to paid-in  capital  rather than income  because a new  agreement  was signed in
January 1993.



                                      F-12

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(5) Capital Transactions (Continued)

(C) In April 1995,  the Company  issued  100,000  shares of its Common  Stock to
Apotex  U.S.A.,  Inc.  pursuant to a series of agreements  for the  development,
manufacture  and marketing of paclitaxel and bleomycin.  In September  1995, the
agreements were  restructured,  all prior  agreements  between Apotex and Xechem
were terminated,  and in May 1996,  Apotex returned to the Company 75,000 of the
100,000 shares of Common Stock.

(D) In connection  with the Company's  initial public  offering in May 1994, the
underwriter  received  options to purchase  550,000 shares of Common Stock at an
exercise  price  of $.01  per  share.  These  options  were  exercised,  and the
resulting Common Stock was registered in June 1995.

(E) In the fourth quarter 1995 and the first quarter 1996,  under the terms of a
Private Placement Memorandum (see Note 7), 178,166 and 20,000 common shares were
issued  which  were  offset by the  return of 59,388  and 6,667  common  shares,
respectively,  by the major stockholder (Dr. Pandey). In a subsequent  agreement
with one of the investors (who purchased 150,000 of the 198,166 shares issued in
the private  offering),  an additional  150,000 common shares were issued for no
additional cash in December, 1996.

(F) On  March  26,  1996,  the  Company  entered  into an  agreement  with a new
placement  agent for a  non-public  offering to issue Class C Series 1 Preferred
Stock at $100 per share  convertible into Common Stock, at any time following 60
days from  issuance,  together  with demand  registration  rights for the Common
Stock.  The Class C Series 1 Preferred  Stock is  entitled  to an 8%  cumulative
dividend,  and must  convert to Common  Stock at  maturity  (one year  following
issuance).  The  conversion  price of the  Class C Series 1  Preferred  Stock is
subject  to a floor of $1.25 per share and  ceiling,  as  amended,  of $2.75 per
share.  In March  1996,  the  Company  received a gap loan of  $400,000  from an
entity,  which  converted the  principal  amount of the loan to Class C Series 1
Preferred Stock, with interest on the loan payable totaling 12,500 shares of the
Company's Common Stock. In April 1996, the Company received  $1,850,000,  before
commissions,  from this  offering.  In the year 1996,  21,000  shares of Class C
Series 1 Stock  were  converted  into  1,673,583  shares  of  Common  Stock at a
conversion  price  ranging from $1.25 - $1.70 per share In January  1997,  1,500
shares of Class C Series 1 Stock were  converted  into 120,000  shares of Common
Stock at a conversion price of $1.25 per share.  This transaction  completed the
conversion of all 22,500 shares of Class C Series 1 Stock into 1,793,583  shares
of Common Stock at a conversion price ranging from $1.25 - $1.70 per share.

(G) In May 1996,  the Company  entered  into a settlement  agreement  with Ocean
Marine Services ("Ocean  Marine").  The lawsuit was settled by an agreement with
the  Company  to make a cash  payment of  $115,000  and issue  25,000  shares of
unregistered  Common Stock to Ocean Marine. Such shares are subject to piggyback
registration rights in favor of Ocean Marine (see Note 12).

(H) On August 29, 1996, the Company and XetaPharm,  entered into a Memorandum of
Understanding (the "MOU") with Petron  International,  Inc. ("Petron"),  whereby
Petron agreed to purchase 96 shares of common stock of XetaPharm  (48.98% of the
shares to be outstanding) for a total of $500,000.  The MOU provided that Petron
would pay for the XetaPharm shares as follows: $50,000 on or before September 5,
1996; $100,000 on September 30, 1996; $150,000 on October 30, 1996; and $200,000
on November 30, 1996.  The Company had agreed to make its existing  facility and
personnel  available  to  XetaPharm  at a cost of  $25,000  per month for twelve
months ending August 31, 1996.

In the MOU,  Petron also agreed to purchase  1,250,000  shares of the  Company's
Common Stock for a total of $500,000. The MOU provided that Petron would pay for
the  Company's  shares as follows:  $50,000 on or before  September  5, 1996 and
$50,000  on the first  day of each of the  following  nine  months.  After  each
payment,  Petron would  receive that number of shares for which full payment had
been made.  Petron  granted the Company an option to repurchase up to 250,000 of
such shares any time before August 29, 1999 at a price of $0.75 per share.


                                      F-13

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(5) Capital Transactions (Continued)

(H)  (Continued)  On September 5, 1996,  XetaPharm and the Company each received
the  initial  payment  of  $50,000  and Petron  acquired  125,000  shares of the
Company's  Common  Stock and an 8.3%  minority  interest  in  XetaPharm.  Petron
defaulted on its payments of $100,000 to XetaPharm  due  September  30, 1996 and
$50,000 to the  Company due October 1, 1996.  On October 14,  1996,  the Company
notified  Petron that,  due to non-payment of amounts due under the MOU, the MOU
was terminated.

On December 19, 1996,  the Company  entered  into a  Settlement  Agreement  with
Petron  whereby  Petron  returned  its 8.3%  minority  interest in  XetaPharm in
exchange for 135,000  shares of the  Company's  Common  Stock and all  remaining
rights and obligations of the parties, under the MOU, were terminated.

(I)  Individuals had made loans to the Company during 1996 and 1995 amounting to
$150,000 and $180,000,  respectively. Each of these loans was evidenced by a ten
percent (at simple  interest)  promissory note due one year from the date of the
loan.  Interest  expense  amounted  to $27,483  and  $4,913 for the years  ended
December 31, 1996 and 1995,  respectively.  Accrued  interest totaled $32,396 at
November  30, 1996.  In November  1996,  the Company  offered to the lenders the
option of converting their outstanding loans and accrued interest into shares of
Common  Stock at $.25 per share.  All  lenders  and one vendor  with an accounts
receivable of $7,041  exercised  this option and converted at November 30, 1996.
The Company issued  1,477,745  shares of restricted  Common Stock,  with certain
registration rights to such persons.

(J) On January 15,  1997,  at a Special  Meeting of  Shareholders,  approval was
received to amend the Company's  Certificate  of  Incorporation  to increase the
number of authorized  shares of Common Stock from  15,000,000 to 247,000,000 and
the Company subsequently amended its Certificate of Incorporation to reflect the
cancellation  of all the Series 1, Series 2 and Series 3 Class C Preferred Stock
which had been converted into Common Stock.

(K) Blech Purchase Agreement - See Note 4.

On November 18, 1996, the Company entered into and closed the initial stage of a
stock  purchase  agreement  (the "Blech  Purchase  Agreement")  with David Blech
and/or his designees  ("Blech") providing for the sale of up to 55,000 shares of
Class C Series  2 Voting  Cumulative  Preferred  Stock  shares  (the  "Series  2
Preferred  Shares") for a purchase  price of $100 per share  ($5,500,000  in the
aggregate),  or the underlying shares of Common Stock, over  approximately  nine
months.  Subsequent  to December  31, 1996,  the Blech  Purchase  Agreement  was
amended to modify the closing schedule. Through December 31, 1996, the Edward A.
Blech Trust (the "Trust")  purchased 10,000 Series 2 Preferred Shares at a price
of $100 per share.  In January and February  1997,  the Trust  purchased  12,500
Series 2 Preferred Shares for a price of $100 per share.

In February 1997,  the 22,500 Series 2 Preferred  shares owned by the Trust were
converted into 45,000,000  shares of Common Stock at a conversion  price of $.05
per common share.

In February 1997, in accordance with the terms of the Blech Purchase  Agreement,
Dr. Pandey  converted his Class B 8% Preferred  Stock and notes  receivable into
12,144  shares  of  Class C Series 3  Preferred  Shares  for a price of $100 per
share.  Subsequently,  these shares were  converted  into  19,430,400  shares of
Common Stock at a conversion price of $.0625 per common share.

In March 1997, in accordance with the terms of the Blech Purchase Agreement, two
other trusts,  not otherwise  affiliated  with Blech,  each purchased  5,000,000
shares of Common Stock at a price of $.05 per common share.

In April  1997,  under the terms of the Blech  Purchase  Agreement,  David Blech
purchased 5,000,000 shares of Common Stock at a price of $.05 per common share.


                                      F-14

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(5) Capital Transactions (Continued)

(K) Blech Purchase Agreement  (Continued) - In August,  1997, under the terms of
the Blech  Purchase  Agreement,  the Trust and five  individuals,  not otherwise
affiliated  with Blech,  purchased  1,500,000  and  25,320,000  shares of Common
Stock, respectively, at a price of $.05 per common share.

In  November  1997,  under  the  terms  of  the  Blech  Purchase  Agreement,  an
individual,  not otherwise  affiliated with Blech,  purchased  500,000 shares of
Common Stock at a price of $.05 per common share.

In  December  1997,  under  the  terms of the  Blech  Purchase  Agreement,  four
individuals,  not otherwise affiliated with Blech, purchased 2,700,000 shares of
Common Stock at a price of $.05 per common share.

(6)  Initial Public Offering

In May,  1994,  the  Company  successfully  completed  a public  offering of its
securities which resulted in net proceeds of $5,002,500  before giving effect to
offering expenses of $459,830.

(7) Private Placement Memorandum

On March 29, 1995, Kensington Wells, Inc. ("broker/dealer"),  the underwriter of
the Company's  initial  public  offering,  signed a letter of intent in which it
agreed to act as a placement  agent in a best  efforts  private  offering of the
Company's  Common Stock. A total of $594,500 was raised,  before offering costs,
and the Company  closed the  offering on February  15,  1996. A total of 348,166
shares  of  Common  Stock  were  issued in this  offering.  Concurrent  with the
offering, Dr. Pandey's agreed to return a certain number of Common Stock held by
him. As a result of such agreement,  66,055 shares of Common Stock were returned
to the Company and canceled.

(8) Income Taxes

Income taxes are provided based on the asset and liability  method of accounting
pursuant to  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 109,
"Accounting for Income Taxes." Prior to the  consummation of the Public Offering
(See Note 6), the Company was an "S" corporation  and, as such,  losses incurred
from date of  inception  to April 26, 1994 were not  available to the Company as
tax loss carryforwards.

Since  April  26,  1994,  the  Company  has   approximate   net  operating  loss
carryforwards as follows:

           Amount                              Expiration Date

         $3,175,000                                 2009
         3,150,000                                  2010
         3,250,000                                  2011
         3,750,000                                  2012

SFAS No. 109 requires the establishment of a deferred tax asset  attributable to
operating loss  carryforwards.  The deferred tax asset attributable to operating
loss carryforwards amounted to approximately $4,665,000 at December 31, 1997, an
increase of $1,315,000  over December 31, 1996.  However,  because the Company's
cumulative   losses   since   inception   raise   questions   about  the  future
recoverability  of any deferred tax asset established for the Company's tax loss
carryforwards,  a corresponding  valuation allowance of the same amount has been
established,  pursuant to SFAS No. 109.  Accordingly,  no deferred  tax asset is
reflected in these financial statements.  In addition, if a change in control is
deemed to have occurred,  there may be a possible diminution of any deferred tax
asset.



                                      F-15

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(9) Related Parties

(A) Loans  Receivable  -  Related  Parties - In 1997,  the  Company  made a loan
totaling $90,000 to Consumers Choice Systems, Inc. ("CCS"), a company engaged in
the   marketing   and   distribution   of  products   in  the   over-the-counter
pharmaceutical  market. The loan is collateralized by CCS inventory and accounts
receivable.  The Company has entered into  negotiations  with CCS in  connection
with  possible  distribution  of XetaPharm  nutraceuticals.  CCS is engaged in a
private  offering of its securities,  and upon completion of this offering,  The
Edward A. Blech Trust would own  approximately  30.8% of CCS's common stock. The
outstanding balance of the loan at December 31, 1997 was $40,000.

In 1997,  the  Company  made an  unsecured  loan  totaling  $70,000 to  Margaret
Chassman.  Ms.  Chassman is the wife of David Blech, a principal  shareholder of
the Company. This balance was outstanding at December 31, 1997.

Demand  promissory  notes  which bear  interest at 10% per annum were issued for
each of these loans.  Accrued interest and interest income amounted to $4,211 at
December 31, 1997.

(B) Notes  Payable - Related Party - Dr. Pandey had made advances to the Company
prior to the Public Offering.  The principal amounts advanced (including accrued
salary of $110,000)  totaled $517,451 at December 31, 1996 and were evidenced by
an eight  percent (at simple  interest)  note payable  originally  due April 25,
1999,  to be paid in equal  monthly  installments,  commencing  April 25,  1996.
However,  due to the  financial  condition of the Company,  Dr. Pandey agreed to
defer the monthly  installments until April 25, 1997 and subsequently  converted
this debt to equity under the Blech Purchase Agreement.  Interest expense on the
note amounted to $41,508 for the year ended December 31, 1996.

Additionally,  Dr. Pandey had made advances to the Company aggregating  $590,000
at December 31, 1996.  Such advances were  evidenced by eight percent (at simple
interest)  promissory note due December 31, 1996.  Interest  expense amounted to
$45,419 for the year ended December 31, 1996 (See Notes 4 and 5).

Pursuant to the Blech  Agreement  (See Note 4), on February 7, 1997,  Dr. Pandey
exchanged the principal portion of the above described  indebtedness  along with
the  1,070  shares of Class B  Preferred  Stock  for  12,144  shares of Series 3
Preferred  Shares.  These shares were then converted into  19,430,400  shares of
Common Stock at $.0625 per share. At December 31, 1997, the Company was indebted
to Dr. Pandey for the accrued interest on the notes totaling $80,611.

(C) Xechem India - The Company currently receives its supplies of plant extracts
from India  through  informal  collaborative  relationships.  Dr. Pandey and his
brothers have  incorporated a corporation  in India ("Xechem  India") which will
seek to formalize  such  relationships  by obtaining  contracts  for  dependable
supplies of plants and other raw materials. Based on its discussions with Indian
sources for such materials, the Company believes that an Indian corporation will
be able to obtain such  contracts  on  significantly  better  terms than would a
United States-based corporation.  During 1997, the Company purchased certain raw
materials  from Xechem  India for  $47,000.  Xechem  India may  conduct  certain
research, manufacturing, and marketing activities in India. Subject to obtaining
regulatory  approvals in India,  Dr. Pandey  intends to transfer his interest in
Xechem India to the Company for no  consideration  other than  reimbursement  of
amounts Dr. Pandey advanced for organizational expenses (approximately $5,000 to
date).  Dr. Pandey's  brothers will initially own the remaining equity in Xechem
India,  some or all of which the Company  anticipates  will be made available to
other,  unrelated,  persons in India.  Both of Dr.  Pandey's  brothers  and Anil
Sharma,  a  chartered  accountant,  serve  as  directors  of  Xechem  India.  No
compensation  is paid to Dr. Pandey,  his relatives or Mr. Sharma for service as
directors of Xechem India.

(D) Consulting - During the year, the Company  expensed  $68,000 to a consultant
as a condition of the Blech Purchase Agreement.


                                      F-16

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(10) Loans Payable

During  1997, a total of $280,000  had been  received  from David Blech and five
assignees  under the terms of the Blech Purchase  Agreement.  Upon completion of
all documentation, these funds will be converted into 5,600,000 shares of Common
Stock.  At December 31, 1997,  outstanding  loans amounted to $280,000 (See Note
19B).

(11) Notes Payable

An individual  made two loans to the Company during 1996  aggregating  $115,000.
Each of these loans was  evidenced by ten percent and twelve  percent (at simple
interest) promissory notes due March 1997. Each promissory note was subject to a
six month extension,  which the Company exercised.  In September 1997, these two
loans were  extended  for an  additional  one year  evidenced  by 12% (at simple
interest)  promissory  notes.  The  accumulated  interest  of  $13,300  was also
converted into a one year 12% promissory note and accrued  interest and interest
expense related to these notes amounted to $4,634 at December 31, 1997.

The weighted average  interest rate on short-term  borrowings as of December 31,
1997 was approximately 12%.

(12) Commitments and Contingencies

(A) Employment  Contract - Dr. Pandey is employed pursuant to an Agreement dated
July 1, 1992, for a period of ten years, which primarily provides for:

(i)  a salary of  $140,000 a year  commencing  July 1,  1992,  subject to annual
     increases in proportion to the increase in the consumer price index.

(ii) a royalty payment to Dr. Pandey or his estate or designees in the amount of
     2-1/2% of the Company's  net profits  before  taxes,  as  determined  under
     generally  accepted  accounting  principles,  with  respect to any products
     developed  by the  Company  during Dr.  Pandey's  tenure  with the  Company
     whether  prior to or  after  the term of the  Employment  Agreement,  which
     royalty will  continue to be paid to Dr.  Pandey  and/or his  successors so
     long as any such  products are sold by the Company  (regardless  of whether
     Dr. Pandey is actually employed by the Company at the time of such sale).

(B) Leases - Related Party - The Company leases its operating  facilities  under
an operating  lease which began in April 1991 and expires on September 30, 2000.
In 1996,  Dr.  Pandey  purchased a 25%  beneficial  ownership in the lessor as a
limited  partner in such  entity,  which may be deemed to be an affiliate of Dr.
Pandey. The lease provides the Company with renewal options for three additional
five year periods.  Management  has stated its intention to renew.  Rent expense
under the operating  lease amounted to $96,856 and $108,205 (of which $21,705 is
related party) and utility charges  relating to common areas amounted to $22,452
and $24,252 for the years ended  December 31, 1997 and 1996,  respectively.  The
future minimum payments under  non-cancelable  operating leases consisted of the
following at December 31, 1997:

1998                                            $   117,136
1999                                                117,136
2000                                                 87,853
                                                -----------

  Total Minimum Lease Payments                  $   322,125
  ----------------------------                  ===========

The operating lease also provides for cost escalation payments.

As of  December  31,  1997,  the  Company is in arrears  with  respect to rental
payments in the amount of $40,682.

                                      F-17

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(12) Commitments and Contingencies (Continued)

(C) Registration  Rights - The holders of 111,108,000 shares of Common Stock and
options to  purchase  1,032,000  shares of Common  Stock  (including  options to
purchase 707,000 shares held by Dr. Pandey) are entitled to certain  "piggyback"
registration  rights.  Such rights  require the  Company,  if  requested by such
holders,  to  register  such  shares  for sale under the  Securities  Act if the
Company files certain other registration statements.

(D) Purchase  Commitments  - In  September,  1994,  the Company  entered into an
agreement with Guizhou Fanya  Pharmaceutical  Co., Ltd.  ("Guizhou"),  a Chinese
company,  for Guizhou to supply to the Company partially  processed raw material
for paclitaxel.  This purchase of the raw material by the Company was contingent
upon Guizhou meeting  specific  contractual  criteria which were met in 1995 and
the purchases were consummated in 1997 and 1996.

The Company  currently buys all of its crude  paclitaxel from Guizhou.  Although
there are a limited number of suppliers of these materials, the Company has come
to an agreement with a second supplier and is negotiating  with a third supplier
on comparable terms to assure there is no delay in manufacturing.

(E)  License  Agreement  - In  collaboration  with  the  University  of Texas MD
Anderson  Cancer  Center ("MD  Anderson"),  the  Company  has  developed a novel
formulation  of paclitaxel.  In August 1997, the Company  entered into a license
agreement with MD Anderson and was granted  exclusive  worldwide  rights to this
formulation of paclitaxel.  Milestone payments are required under this agreement
in the amounts of $25,000 upon each US FDA approval for each  licensed  product,
$50,000  upon  regulatory  approval  for sale of a  licensed  product in a first
non-U.S.  country and $25,000  upon the first to issue a U.S. or foreign  patent
within  patent  rights.  In  addition,  the Company  will pay  royalties to M.D.
Anderson based on net sales and future minimum annual royalties are as follows:

First Year                                      $    25,000
Second Year                                          35,000
Third Year                                           45,000
Each year for 17 years thereafter                    50,000

(13) Product Development Agreement

In June and August  1993,  the  Company  signed  contracts  with two  scientific
institutions  in China  for the  purchase  of plant  extracts  and/or  synthetic
compounds  which are  expected to be used in the  development  of the  Company's
proposed  products.  The Company also acquired the exclusive right and ownership
(outside  of China) of  scientific  research  and  development  with  respect to
certain plant  extracts and  synthetic  compounds  isolated by the  institutions
during the term of the  contracts.  The Company has committed to spend  $145,000
($95,000 has been paid as of December  31, 1997) for the extracts and  compounds
as long as the institutions are not in default of any of their obligations under
the  contracts.  The contracts  also call for royalty  payments to be negotiated
among the parties if and when products are developed and marketed.

(14) Stock Plan

Effective  December  1993,  Xechem's  then sole  stockholder  approved the Share
Option Plan (the "Plan"), providing for the issuance to employees,  consultants,
and directors of options to purchase up to 200,000  shares of Common Stock.  The
Company  assumed  Xechem's  obligations  under  the  Plan  at  the  time  of the
reorganization  into Xechem  International,  Inc.. At the May 26, 1995, June 25,
1996 and June 11, 1997 annual meetings of stockholders,  an amended and restated
Stock Option Plan was adopted  whereby the number of shares of Common Stock that
could be issued  under the Plan was  increased  to  2,600,000  shares.  The Plan
provides  for the grant to employees of  incentive  stock  options  ("ISOs") and
non-qualified stock options.

                                      F-18

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(14) Stock Plan (Continued)

The Plan is  administered by the Board of Directors or a committee which has the
power to determine  eligibility to receive  options and the terms of any options
granted,  including the exercise or purchase price, the number of shares subject
to the options,  the vesting  schedule,  and the exercise  period.  The exercise
price of all ISOs  granted  under  the Plan  must be at least  equal to the fair
market  value of the  shares  of  Common  Stock on the date of the  grant.  With
respect to any participant who owns stock possessing more than 10% of the voting
power of the Company's  outstanding capital stock, the exercise price of any ISO
granted  must equal at least 110% of the fair market value on the grant date and
the maximum  exercise period of the ISO must not exceed five years. The exercise
period of any other  options  granted under the Plan may not exceed 11 years (10
years in the case of ISOs).  Options begin vesting after one year from the grant
date at a rate of 20% per year. In December  1997, an exception was made so that
780,000  options  granted on December 2, 1997 will begin  vesting after one year
from the grant date at a rate of 33 1/3% per year.

The Plan will  terminate in December 2003, ten years after the date it was first
approved,  though awards made prior to  termination  may expire after that date,
depending on when granted.

For options whose exercise price equaled the market price,  the weighted average
exercise price is $0.25 and $0 and the weighted average fair value of options is
$0.27 and $0 for the years ended December 31, 1997 and 1996, respectively.

For options whose exercise price exceeded the market price, the weighted average
exercise price is $0.55 and $1.60 and the weighted average fair value of options
is $0.52 and $1.20 for the years ended December 31, 1997 and 1996, respectively.

A summary of stock  option  activity  under all plans is as  follows  (shares in
thousands):

                                      1 9 9 7                  1 9 9 6
                              ----------------------     -------------
                                          Weighted-                 Weighted-
                                           Average                   Average
                               Shares  Exercise Price    Shares  Exercise Price

Outstanding on January 1,        369      $ 2.16            194     $ 3.59

Granted                        1,421        0.50            272       1.88
Exercised                          1        0.01              4       0.01
Forfeited/Expired                106        2.92             93       4.38
                              ------      ------         ------     ------

  Outstanding on December 31,  1,683      $ 0.44            369     $ 2.16
  --------------------------- ======      ======         ======     ======

  Exercisable on December 31,    113      $ 0.17
  --------------------------- ======      ======



                                      F-19

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(14) Stock Plan (Continued)

The  following  table  summarizes  information  about stock  options at December
31,1997 (shares in thousands):
                       Outstanding Stock Options      Exercisable Stock Options
                             Weighted-
                              Average       Weighted
  Range of                   Remaining       Average          Weighted-Average
Exercise Prices   Shares Contractual Life Exercise Price Shares Exercise Price

$0.01 to 0.26        481         8.2         $  0.21        113    $  0.17
$0.27 to 0.50        422         9.5         $  0.34         --    $    --
$0.56 to 1.00        780         9.5         $  0.66         --    $    --
                  ------     -------         -------     ------    -------

  Totals           1,683         9.1         $  0.44        113    $  0.17
  ------          ======     =======         =======     ======    =======

Compensation  cost recognized in income was $16,000 and $-0- for the years ended
December 31, 1997 and 1996, related to the stock option plan.

Had  compensation  cost for the stock option plans been determined  based on the
fair value at the grant dates for awards  under the plans,  consistent  with the
alternative method set forth under Statement of Financial  Accounting  Standards
("SFAS") No. 123,  "Accounting for Stock-Based  Compensation," the Company's net
loss and net loss per share would have been increased. The pro forma amounts are
indicated below (in thousands, except per share amounts):

Year Ended December 31                        1 9 9 7       1 9 9 6
----------------------                        -------       -------
Net Loss:
  As Reported                               $   (5,282)  $    (3,174)
  Pro Forma                                 $   (5,931)  $    (3,799)
Net Loss Per Share:
  As Reported                               $    (0.06)  $     (0.45)
  Pro Forma                                 $    (0.06)  $     (0.51)

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1997 and 1996,  respectively;  dividend yields of
$-0- for each year,  expected  volatility of approximately 272% and 80% for 1997
and 1996,  respectively,  risk-free  interest rates of 6.1 and 6.5 percent;  and
expected  lives  of 5  and  10  years  for  1997  and  1996,  respectively.  The
weighted-average fair value of options granted was $0.49 and $2.30 for the years
ended December 31, 1997 and 1996, respectively.

(15) Description of Securities

The  authorized  capital stock of the Company at December 31, 1997  consisted of
247,000,000 shares of Common Stock, par value $.00001 per share, 2,500 shares of
Class A  Preferred  Stock,  par value  $.00001  per  share,  1,150  shares of 8%
Preferred  Stock,  par value $.00001 per share,  and 2,996,350 shares of Class C
Preferred Stock, par value $.00001 per share.

(A) Common  Stock - Holders  of Common  Stock are  entitled  to one vote on each
matter submitted to a vote at a meeting of  stockholders.  The Common Stock does
not have cumulative voting rights, which means that the holders of a majority of
voting  shares voting for the election of directors can elect all of the members
of the Board of  Directors.  The Common  Stock has no  preemptive  rights and no
redemption  or  conversion  privileges.   Subject  to  any  preferences  of  any
outstanding  Preferred  Stock,  the holders of the outstanding  shares of Common
Stock are entitled to receive  dividends out of assets legally available at such
times and in such  amounts  as the Board of  Directors  may,  from time to time,
determine,  and upon  liquidation  and  dissolution  are entitled to receive all
assets available for distribution to the stockholders. A majority vote of shares
represented  at a meeting  at which a quorum is present  is  sufficient  for all
actions that require the vote of stockholders.

                                      F-20

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(15) Description of Securities (Continued)

(B) Class A Voting  Preferred  Stock - There  are  currently  outstanding  2,500
shares of Class A Preferred  Stock. The holder of the Class A Preferred Stock is
entitled to receive  dividends  of $.00001  per share,  and $.00001 per share in
liquidation, before any dividends or distributions on liquidation, respectively,
may be paid to the holders of Common Stock.  The holder of the Class A Preferred
Stock is  entitled to cast 1,000  votes per share on each  matter  presented  to
stockholders of the Company,  voting together as a single class with the holders
of the  Common  Stock,  except  as  may be  required  by  the  Delaware  General
Corporation  Law, and except that the affirmative  vote or consent of the holder
of a majority of the outstanding  Class A Preferred Stock is required to approve
any action to  increase  the number of  authorized  shares of Class A  Preferred
Stock,  to  amend,  alter,  or  repeal  any of the  preferences  of the  Class A
Preferred Stock, or to authorize any  reclassification  of the Class A Preferred
Stock.  Dr.  Pandey owns all of the  outstanding  Class A Preferred  Stock.  The
Company may redeem the Class A Preferred Stock for $.00001 per share at any time
after May 3, 2009,  however,  pursuant to the private  offering of the Company's
Common Stock in 1995 and 1996, Dr. Pandey agreed with the  underwriter to redeem
the Class A Preferred Stock in 1999.

(C) Class B 8% Preferred Stock - At December 31, 1997, there were no outstanding
shares of 8% Preferred Stock with a liquidation preference of $100 per share. In
February  1997,  in  accordance  with the Blech  Agreement,  1,070  shares of 8%
Preferred  Stock  owned  by  Dr.  Pandey  was  redeemed  by the  Company  at the
liquidation  preference price of $107,000. A total of 1,712,000 shares of Common
Stock  were  issued at a price of $.0625 per share.  The 8%  Preferred  Stock is
entitled to cumulative dividends on the liquidation preference at the rate of 8%
per annum,  payable  quarterly.  The 8%  Preferred  Stock may be redeemed at any
time, in whole or in part,  at the option of the Company for a redemption  price
equal to the liquidation preference plus accrued and unpaid dividends. After the
fifth  anniversary of issuance,  the holders of 8% Preferred  Stock may, at each
holder's  option,  convert  such 8%  Preferred  Stock  into  Common  Stock  at a
conversion price equal to $5.00 per share;  provided that if a change in control
has occurred such shares may be converted, regardless of whether five years have
elapsed at a conversion  price equal to the least of (i) $5.00,  (ii) 25% of the
then-current  market price of the Common Stock or (iii) the lowest price paid by
the hostile acquiror within the one year preceding the change in control. The 8%
Preferred Stock has no voting rights except for extraordinary  corporate actions
such as mergers,  consolidation, or sales of substantially all the assets of the
Company,  which will require the  affirmative  vote or consent of the holders or
majority of such shares, and except as may be required by law.

(D) Class C Preferred  Stock - The  Company's  Board of Directors  may,  without
further action by the Company's stockholders, from time to time, issue shares of
the  Class C  Preferred  Stock  in  series  and may,  at the  time of  issuance,
determine the rights, preferences,  and limitations of each series. Any dividend
preference  of any Class C Preferred  Stock which may be issued would reduce the
amount of funds  available  for the payment  dividends  on Common  Stock.  Also,
holders of the Class C Preferred  Stock would  normally be entitled to receive a
preference payment in the event of any liquidation,  dissolution,  or winding-up
of the Company  before any payment is made to the holders of Common  Stock.  The
Board of Directors of the Company,  without stockholder approval,  may issue the
Class C Preferred Stock with voting and conversion  rights which could adversely
affect the holders of Common Stock. As described in Note 6, in 1996, the Company
had authorized the issuance of up to 40,000 shares of Class C Series 1 Preferred
Stock,  up to  55,000  shares of Class C Series 2 Voting  Convertible  Preferred
Stock and 13,180 shares of Class C Series 3 Voting Convertible  Preferred Stock.
In March 1997,  the Board of Directors  approved the  retirement  of these three
series of Class C Preferred  Stock.  At December 31, 1997,  there were no issued
and outstanding Class C Preferred Stock.



                                      F-21

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(15) Description of Securities (Continued)

(E)  Redeemable  Warrants - In connection  with the Public  Offering,  1,150,000
warrants  were issued  pursuant to an  agreement,  dated  April 26,  1994,  (the
"Warrant  Agreement"),  between  Xechem and  Continental  Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent").

The Warrants were immediately separable from the shares of Common Stock included
in the Units in the Public Offering. Each Warrant originally entitled the holder
to purchase,  at any time until April 26, 1999,  one share of Common Stock at an
exercise price of $6.00 per share, subject to certain  adjustments.  As a result
of various  issuances of Common Stock since April 1994,  the exercise  price per
share has been substantially reduced to a price below $.50 per share and will be
subject to further adjustments as additional  issuances are made under the Blech
Purchase Agreement. The number of shares deliverable on exercise of each warrant
increases in proportion to each decrease in the per share  exercise  price.  The
Warrants may be exercised in whole or in part.  Unless  exercised,  the Warrants
will automatically expire on April 26, 1999, unless extended by the Company.

The  Company may at any time redeem the  Warrants,  in whole or in part,  at the
option of the Company,  upon not less than 30 days'  notice,  at a price of $.10
per Warrant, provided that (a) the then-current market price of the Common Stock
is at least  175% of the  then-current  exercise  price of the  Warrants  for 20
consecutive  business  days  ending  within 30 days of the date of the notice of
redemption and (b) the Company is in compliance with its obligations to register
under the  Securities Act the shares of Common Stock issuable on exercise of the
Warrants.  If the  Company  exercises  its right to redeem  the  Warrants,  such
Warrants will be  exercisable  until the close of business on the date fixed for
redemption in such notice. If any Warrant called for redemption is not exercised
by such time,  it will cease to be  exercisable  and the holder  thereof will be
entitled only to the redemption price.

Pursuant to the Warrant Agreement,  the Company, by notice to the Warrant Agent,
may  reduce  the  exercise  price,  permanently  or for  such  period  as it may
determine,  or extend the expiration date of the Warrants.  The Warrant Agent is
required  to send a notice  of any such  change  to each  registered  holder  of
Warrants. At December 31, 1997, there were 1,150,000 Warrants outstanding.

(16) New Authoritative Accounting Pronouncements

In June 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting  Comprehensive  Income." SFAS No. 130 establishes  standards for
reporting  and  display  of  comprehensive  income  and  its  components  in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.  Reclassification of financial statements for earlier periods
provided for comparative purposes is required.  The Company is in the process of
determining  its  preferred  format.  The  adoption of SFAS No. 130 will have no
impact on the Company's  consolidated results of operations,  financial position
or cash flows.



                                      F-22

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------


(16) New Authoritative Pronouncements (Continued)

In June 1997, the FASB has issued SFAS No. 131,  "Disclosures  About Segments of
an Enterprise and Related  Information." SFAS No. 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued  to  shareholders.  SFAS  No.  131 is  effective  for  financial
statements  for fiscal  years  beginning  after  December  15,  1997.  Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating  the  disclosure  requirements.  The adoption of
SFAS No.  131 will have no  impact  on the  Company's  consolidated  results  of
operations; financial position or cash flows.

In February  1998,  the FASB issued SFAS No. 132,  "Employers  Disclosure  about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure  requirements are not
expected  to have a material  impact on the  Company's  results  of  operations,
financial position or cash flows.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  which is  effective  for  fiscal  years
beginning  after June 15, 1999.  The Company  will  evaluate the new standard to
determine any required new disclosures or accounting.

(17) Fair Value of Financial Instruments

Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosure About
Fair Value of Financial  Instruments,"  which requires  disclosing fair value to
the  extent  practicable  for  financial  instruments  which are  recognized  or
unrecognized in the balance sheet.  The fair value of the financial  instruments
disclosed herein is not necessarily  representative  of the amount that could be
realized  or  settled,   nor  does  the  fair  value  amount  consider  the  tax
consequences of realization or settlement.

In  assessing  the fair value of these  financial  instruments,  the Company was
required to make assumptions, which were based on estimates of market conditions
and risks  existing  at that time.  For  certain  instruments,  including  cash,
accounts receivable,  related party loan receivable,  accounts payable,  accrued
liabilities and short-term  debt (including  related party debt), it was assumed
that the  carrying  amount  approximated  fair value for the  majority  of these
instruments because of their short maturities.

(18) Subsequent Events

Blech Purchase Agreement. In accordance with the Blech Purchase Agreement, David
Blech or his assignees  invested an additional  $719,000 into the Company in the
three months ended March 20, 1998.  For this  investment,  14,380,000  shares of
Common Stock were or will be issued.  This  completed  the funding  requirements
under the Blech Purchase Agreement (See Note 4).

(19) Subsequent Events  (Unaudited)  Subsequent to the Date of the Report of the
Independent Auditors

(A) In the four month period  ended July 17,  1998,  the Company has received an
additional   $795,545  in  funding  from  David  Blech  and  six  non-affiliated
individuals.  These funds will be  converted  into equity upon  completion  of a
proposed private offering of the Company's Common Stock.




                                      F-23

<PAGE>



XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------



(19) Subsequent Events  (Unaudited)  Subsequent to the Date of the Report of the
Independent Auditors (Continued)

(B) Pro Forma - When the (i)  Loans  Payable  of  $280,000  (See Note 10),  (ii)
subsequent  funds of $719,000  received under the Blech Purchase  Agreement (See
Note 19) and (iii)  additional  funding of  $795,545  received in the four month
period ended July 17, 1998 (See Note 19A) are converted into equity, a pro forma
balance sheet would be as follows:

                                              Actual                  Pro Forma
                                           December 31,   Effect of   July 17,
                                              1 9 9 7   Transactions   1 9 9 8
                                              -------   ------------   -------

Current Liabilities                         $1,200,034  $ (280,000) $  920,034
Stockholders Equity                          1,017,217   1,794,545   2,811,762
                                            ----------  ----------  ----------

  Totals                                    $2,217,251  $1,514,545  $3,731,796
  ------                                    ==========  ==========  ==========

The effect of the above transactions would be antidilutive and accordingly basic
and diluted earnings per share are not shown.





                    .  .  .  .  .  .  .  .  .  .  .  .  .  .


                                      F-24

<PAGE>





Item 8.  Changes In and Disagreements With Accountants on Accounting and 
         Financial Disclosure.

         There have been no changes  in, or  reported  disagreements  with,  the
Company's  accountants  on any matter of  accounting  principles,  practices  or
financial statement disclosure.


                                       35

<PAGE>



                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act.

         The names of the directors  and  executive  officers of the Company and
their respective ages and positions with the Company are as follows:

Name                        Age     Position with the Company

Dr. Ramesh C. Pandey (1).... 59   Chief Executive Officer, President, Chairman
                                  of the Board of Directors and Chief Accounting
                                  Officer

Stephen Burg (1)(2)(3)...... 59   Director

(1)      Member of Stock Option Committee.
(2)      Member of Compensation Committee.
(3)      Member of Audit Committee.

         All directors hold office until their  successors have been elected and
qualified or until their earlier  resignation or removal.  Directors are elected
annually and serve without remuneration for service as directors. Officers serve
at the discretion of the Board of Directors.  There are no family  relationships
among any of the directors or executive officers of the Company.

         Ramesh C. Pandey,  Ph.D.,  is the founder of the  Company.  He has been
Chief Executive Officer and President and a director of the Subsidiary since its
formation in 1990 and the Chief Executive  Officer,  President,  and Chairman of
the Board of Directors of the Company since its formation in February 1994. From
1984 to March  1990,  Dr.  Pandey was the  President  and Chief  Scientist  of a
predecessor  of the Company,  which was a subsidiary  of  LyphoMed.  Dr.  Pandey
served as a visiting  Professor  at the Waksman  Institute  of  Microbiology  at
Rutgers  University  from 1984 to 1986. Dr. Pandey has also served as scientist,
consultant,   and  research  associate  for  several  universities  and  private
laboratories.  Dr.  Pandey  has  published  numerous  articles  in  professional
publications  such as the Journal of  Antibiotics,  the Journal of the  American
Chemical  Society,  the Journal of  Industrial  Microbiology  and the Journal of
Natural  Products.  Dr. Pandey is a member of the editorial board of the Journal
of Antibiotics and of several professional societies.

         Stephen F. Burg,  since 1986,  has been chief  executive  officer of El
Dorado  Investments,  which offers  corporate  growth  strategies for public and
private companies,  nationally and internationally.  From 1978 to 1986, Mr. Burg
was Vice  President-Corporate  Acquisitions  for Evans Products Company and from
1973 to 1978 was  Corporate  Director-Acquisitions  and Human  Services for Jack
August  Enterprises.  Mr.  Burg,  through  El  Dorado  Investments,  serves as a
consultant to various businesses.

Section 16(a) Beneficial Reporting Compliance

         The  Company's   executive   officers,   directors   and   shareholders
beneficially  owning more than 10% of the  Company's  Common  Stock are required
under the  Exchange  Act to file  reports of  ownership  of Common  Stock of the
Company with the Securities and Exchange Commission and the NASDAQ Stock Market.
Copies of those reports must also be furnished to the Company. Based solely upon
a  review  of the  copies  of  reports  furnished  to the  Company  and  written
representations  that no other reports were required,  the Company believes that
during  the  preceding  year all filing  requirements  applicable  to  executive
officers,  directors and shareholders  beneficially  owning more than 10% of the
Company's Common Stock have been complied with.


                                       36

<PAGE>





Committees

         The  Company's  Stock  Option  Committee,   established  in  May  1995,
presently  consists  of Messrs.  Pandey  and Burg.  The Stock  Option  Committee
administers  the 1995 Stock Option Plan and reviews and  recommends to the Board
of Directors stock options to be granted.

         The  Company's  Compensation   Committee,   established  in  May  1995,
presently  consists  of  Mr.  Burg.  The  Compensation   Committee  reviews  and
recommends  to the Board of  Directors  the  compensation  and  benefits  of all
officers  of  the  Company  and  reviews  general  policy  matters  relating  to
compensation and benefits of employees of the Company.

         The  Company's  Audit  Committee,  established  in May 1995,  presently
consists of Mr. Burg. The Audit Committee  reviews with the Company  independent
public  accountants  the scope and timing of their audit  services and any other
services  they are asked to  perform,  the  accountants  report  on the  Company
financial  statements  following  completion  of their  audit and the  Company's
policies  and  procedures  with  respect to internal  accounting  and  financial
controls. In addition,  the Audit Committee makes annual  recommendations to the
Board of  Directors  for the  appointment  of  independent  accountants  for the
ensuing year.

Item 10. Executive Compensation

Compensation of Directors.

         Directors do not receive any standard compensation for services.

Executive Compensation.

         Set forth below is information  concerning the  compensation  for 1995,
1996 and 1997 for the Company's  President and Chief Executive  Officer,  who is
the only executive officer of the Company whose compensation exceeded $100,000:

                                            Long Term Compensation
                    ANNUAL COMPENSATION         Awards      Payouts
                                                   Securities
                                          Restricted Under-
                               Other Annual  Stock   lying   LTIP     All Other
            Year  Salary Bonus Compensation  Awards Options Payouts Compensation

Dr. Ramesh
  Pandey    1995 $139,525   0     $7,072       0        0      0        0
            1996 $118,365   0     $13,375      0        0      0        0
            1997 $130,273   0     $7,991       0        0      0        0

Employment Agreements

         Ramesh C. Pandey is employed  pursuant to an agreement  which  provides
for a base  salary of  $140,000  per year,  subject  to an  annual  increase  in
proportion  to the  increase in the  consumer  price  index,  such  bonuses as a
majority of the disinterested members of the board of the Company may determine,
and a royalty of 2 1/2% of the Company's  net profits  before taxes with respect
to any products  developed by the Company or its  affiliates  during the term of
the  agreement.  The royalty will be payable to Dr. Pandey or his estate so long
as the Company continues to sell such products,  notwithstanding any termination
of the agreement. The agreement provides for a ten year term, but permits either
party to terminate the agreement after five years; if the Company terminates the
agreement,  Dr.  Pandey  will be  entitled  to  receive  severance  equal to his
compensation for the two years prior to termination. Dr. Pandey has

                                       37

<PAGE>






agreed not to engage in certain business activities  (generally similar to those
currently  engaged in by the Company) for six months  (four  months,  in certain
cases) after the termination of his employment  with the Company.  If there is a
change  in the  beneficial  ownership  of 20% or more of the  Company's  capital
stock,  Dr. Pandey may, at any time within one year after such event,  terminate
the  agreement,  in which event his  noncompete  and  confidentiality  agreement
terminate and any  indebtedness  of the Company to Dr. Pandey shall  accelerate.
Dr. Pandey has agreed and approved the  transactions  contemplated  by the Blech
Purchase Agreement and that, accordingly,  such transactions do not and will not
result in a "Change  of  Control"  as defined in the  Employment  Agreement.  In
August 1996,  due to the  financial  constraints  of the Company,  Dr.  Pandey's
salary was reduced by 54%. In November  1996,  50% of the reduction was restored
and in February 1997,  Dr. Pandey was returned to full salary.  The reduction in
salary was not accrued and will not be paid to Dr. Pandey.

Stock Plan

         Effective December 1993,  Xechem's sole stockholder  approved the Share
Option  Plan (the  "Plan"),  which the Company has  assumed,  providing  for the
issuance to employees,  consultants,  and directors of options to purchase up to
2,600,000  shares of Common Stock.  The Plan provides for the grant to employees
of incentive stock options ("ISOs") and non-qualified stock options.

         The Plan is administered by a Stock Option Committee established in May
1995  comprised of two members of the Board of Directors  which has the power to
determine  eligibility to receive options and the terms of any options  granted,
including the exercise or purchase  price,  the number of shares  subject to the
options,  the vesting schedule,  and the exercise period.  The exercise price of
all ISOs granted  under the Plan must be at least equal to the fair market value
of the  shares  of  Common  Stock  on the date of  grant.  With  respect  to any
participant  who owns stock  possessing more than 10% of the voting power of the
Company's  outstanding capital stock, the exercise price of any ISO granted must
equal at least 110% of the fair  market  value on the grant date and the maximum
exercise  period of the ISO must not exceed five years.  The exercise  period of
any other  options  granted  under the Plan may not exceed 11 years (10 years in
the case of ISOs).

         The Plan will  terminate in December  2003, ten years after the date it
was  first  approved  by  Xechem's  stockholder,  though  awards  made  prior to
termination may expire after that date,  depending on when granted.  As of March
31, 1998, the Company has granted  options under the Plan to purchase  1,967,000
shares of Common Stock.

Option Tables

         The  following  table sets forth  certain  information  with respect to
options  granted to the directors and executive  officers of the Company  during
the year ended  December 31, 1997 under the  Company's  Stock  Option Plan.  The
Company did not grant any stock appreciation rights during the year.

                                       Individual Grants
                                       -----------------
            Number of Securities  % of Total Options
             Underlying Options  Granted to Employees Exercise Price Expiration
  Name             Granted          In Fiscal Year      (per Share)     Date
  ----             -------          --------------      -----------     ----

Stephen Burg       10,000                                  $0.34      06/10/07
Stephen Burg       50,000                                  0.66       12/01/08

  TOTAL            60,000                4.3%


                                       38

<PAGE>





Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Values

         The following table provides information on option exercises during the
year ended  December 31, 1997 by the  directors  and  executive  officers of the
Company and the value of such parties'  unexercised stock options as of December
31, 1997.

                                  Number of Securities  Value of Unexercised
                                 Underlying Unexercised In-the-Money Options
                                   Options at 12/31/96     at 12/31/96 (1)
                                   -------------------     ---------------
               Shares
               ------
              Acquired
                 on      Value                  Un-                    Un-
              Exercise Realized Exercisable exercisable Exercisable exercisable
              -------- -------- ----------- ----------- ----------- -----------
                 (#)      ($)

Dr. Ramesh C.
 Pandey           0        0             0    707,000 (2)       0    $331,336
Stephen Burg      0        0         1,000     64,000        $220           0(3)

(1)  Represents the excess,  if any, of the closing price of the Common Stock as
     quoted on the OTC  Bulletin  Board on  December  31,  1997  ($.47) over the
     exercise price of the options,  multiplied by the  corresponding  number of
     underlying shares.

(2)  These  options  were  issued  in  exchange  for the  capital  stock  of the
     Subsidiary in the reorganization of the Company. See Board Item 1, Business
     - Reorganization.  These options are exercisable upon the Company attaining
     specific financial goals.

(3)  The net  exercise  price of the options  exceeds  the closing  price of the
     Common Stock on the OTC Bulletin Board on December 31, 1997.



                                       39

<PAGE>




Item 11. Security Ownership of Certain Beneficial Owners and Management

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the Common Stock and total voting stock  (including the
Class A Preferred Stock) as of March 31, 1998 by: (i) each stockholder  known by
Xechem to beneficially  own in excess of 5% of the outstanding  shares of Common
Stock or Class A Preferred  Stock;  (ii) each  director or nominee for director;
and  (iii)  all  directors  and  executive  officers  as a  group.  All  of  the
outstanding  Class A  Preferred  Stock is owned by Ramesh C.  Pandey.  Except as
otherwise  indicated in the footnotes to the table, the persons named below have
sole voting and investment power with respect to the shares  beneficially  owned
by such persons.

                                                         Class A
                                 Common Stock        Preferred Stock Percent of
                              Number       Percent   Number  Percent   Voting
Name and Address             of Shares    of Class  of Sharesof Class Stock (1)
----------------             ---------    --------  ----------------- -----

The Edward A. Blech
 Trust (2)                36,500,000  (3)     30.4%     0        -       29.8%

David Blech (4)           41,500,000  (3)(5)  34.6%     0        -       33.9%

Michael G. Jesselson
 12/18/80 Trust (6)        6,250,000  (7)     5.2%      0        -       5.1%

Benjamin J. Jesselson
 12/18/80 Trust (6)        6,250,000  (7)     5.2%      0        -       5.1%

Michael G. Jesselson (6)  15,050,000  (7)(8)  12.6%     0        -       12.3%

EER Systems (9)           20,000,000          16.7%     0        -       16.3%

Dr. Ramesh C. Pandey (10) 22,164,345  (11)    18.5% 2,500     100%       20.2%

All directors and
 executive officers as a
 group .... (2 persons)   22,166,345  (12)    18.5% 2,500     100%       20.2%

(1)  Gives  effect  to the  voting  rights  of  2,500  shares  of Class A Voting
     Preferred Stock, all of which are owned by Dr. Pandey and which entitle him
     to cast 1,000 votes per share on all matters as to which  shareholders  are
     entitled to vote.

(2)  The  address of The Edward A. Blech  Trust is 418 Avenue I,  Brooklyn,  New
     York 11230.

(3)  As reported in a Schedule 13D filed jointly by Mr. Blech and the Trust.

(4)  The address of Mr. Blech is 225 Lafayette Street, New York, New York 10012.

(5)  Includes shares owned by the Trust and shares owned by Mr. Blech's spouse.

(6)  The  address  of each of The  Michael  G.  Jesselson  12/18/80  Trust,  the
     Benjamin J. Jesselson 12/18/80 Trust, the Jesselson  Grandchildren 12/18/80
     Trust and Michael G. Jesselson is 1301 Avenue of the Americas,  Suite 4101,
     New York, New York 10019.

(7)  As reported in a Form 3.

(8)  Includes  shares  owned by the Michael G.  Jesselson  12/18/80  Trust,  the
     Benjamin  J.  Jesselson  12/18/80  Trust  and the  Jesselson  Grandchildren
     12/18/80 Trust .

(9)  As reported in a Schedule 13D and whose  address is 10289  Aerospace  Road,
     Seabrook, MD 20706

(10) The address of Dr.  Pandey is c/o Xechem  International,  Inc.,  100 Jersey
     Avenue, Building B, Suite 310, New Brunswick, New Jersey 08901.

(11) Does not  include  707,000  shares  subject  to the Pandey  Options,  which
     presently are not exercisable, and will not be exercisable,  within 60 days
     from March 31, 1998.

(12) Includes  2,000 shares subject to options which are  exercisable  within 60
     days from March 31, 1998.

*     Less than one percent.

                                       40

<PAGE>





Item 12. Certain Relationships and Related Transactions

         On April 25, 1994, Dr. Ramesh C. Pandey,  the Company's Chairman of the
Board and Chief Executive Officer, exchanged the capital stock of the Subsidiary
for  2,800,000  shares of the Company's  Common  Stock,  2,500 shares of Class A
Preferred Stock, and the Pandey Options.  On the same date, Dr. Pandey exchanged
$107,000  of  indebtedness  of the  Subsidiary  for  1,070  shares  of  Class B.
Preferred  Stock and  $517,451  of  indebtedness  of the  Subsidiary  (including
accrued interest) for a note of the Company in the same amount.  Pursuant to the
Blech  Purchase  Agreement,  Dr.  Pandey  subsequently  exchanged  such  Class B
Preferred Stock and note for other equity securities of the Company. See Item 1,
Description of Business - Recent  Developments - Blech Stock Purchase  Agreement
and The Reorganization.

         From  December  1989  to  October  1990,  Dr.  Pandey  was  a  minority
stockholder   and  director  of  Advanced   Molecular   Technologies,   Inc.,  a
Washington-based  corporation  ("AMT") formed to gather  paclitaxel  bark in the
Pacific  Northwest for sale. Dr. Pandey had no  involvement in AMT's  day-to-day
activities,  and believes he was asked to serve on its board of directors to add
academic  credibility to its efforts.  Ocean Marine  Services  ("Ocean  Marine")
claimed to have made an investment of $200,000 in AMT in 1990. AMT  subsequently
ceased  operations.  In January 1991,  Ocean Marine filed a lawsuit  against Dr.
Pandey  and others in  Federal  District  Court in  Washington  State,  alleging
breaches of state and federal  securities laws in connection with Ocean Marine's
investment and seeking rescission and damages.  Dr. Pandey denied any wrongdoing
in  connection  with  the  litigation.  However,  given  the  time  and  expense
associated with a Washington-based  lawsuit and the uncertainties of litigation,
an  out-of-court  settlement  was  reached in late 1992 by Dr.  Pandey,  with no
finding of  wrongdoing  by Dr.  Pandey.  Although the Company was not a party to
such  proceedings,  and Dr. Pandey received a general release from Ocean Marine,
the Company has agreed to  indemnify  Dr.  Pandey  against any future  claims by
Ocean Marine.

         On October 12, 1994, counsel for Ocean Marine Services ("Ocean Marine")
requested  additional  information  from Dr. Pandey,  alleging that it would not
have entered into a settlement  agreement in 1992 had it known that  discussions
were  ongoing  with  Regal  One  Corporation   regarding  a  possible   business
transaction.  In April 1995 Ocean Marine instituted an action against Dr. Pandey
seeking to set aside the settlement agreement based upon its assertion that such
discussions  were not  disclosed to it, and seeking  remedies  under  applicable
state and federal securities laws, including interest, attorneys fees and costs,
which were alleged to have  cumulated over $525,000 by April 20, 1996, and which
could  include  additional  attorneys  fees,  interest  and  costs  through  the
determination  of such  action.  Dr.  Pandey  denied  that  any  wrongdoing  had
occurred.  However,  the Company  determined  that it was in the Company's  best
interest  to settle  such  action,  given  the cost of  defending  such  action,
together with the  possibility,  however  remote,  that an adverse outcome could
have a  material  adverse  effect  on the  Company.  In  addition,  the  Company
determined  that the time and  effort  necessary  to defend  such  action  would
detract from Dr.  Pandey's  ability to exert full time efforts in executing  the
Company's business plan. Accordingly, the lawsuit was settled in May 1996 by the
payments of $115,000 and issuance of 25,000 shares of unregistered  Common Stock
to the plaintiffs (subject to piggyback  registration  rights),  pursuant to its
indemnification obligation to Dr. Pandey.

         Subject to  obtaining  necessary  regulatory  approvals  in India,  Dr.
Pandey has  transferred  his  interest  in Xechem  India to the  Company  for no
consideration  other  than  reimbursement  of  amounts  (equal to  approximately
$5,000) Dr. Pandey advanced for organizational  expenses.  Dr. Pandey's brothers
own the  remaining  equity in  Xechem  India,  some or all of which the  Company
anticipates will be made available to other,  unrelated,  persons in India. Both
of Dr. Pandey's brothers and Mr. Anil Sharma, a chartered  accountant,  serve as
directors of Xechem India. No compensation is paid to Dr. Pandey,  his relatives
or Mr. Anil Sharma for service as directors. See Item 1, Description of Business
- Raw Material Supply.


                                       41

<PAGE>





         In connection with the Company's private offering completed in February
1996,  for every three shares of Common  Stock sold by the Company,  the Company
purchased for nominal  consideration  one share of Common Stock from Dr. Pandey.
The maximum  number of shares subject to purchase by the Company from Dr. Pandey
was  400,000  shares  for an  aggregate  purchase  price of $4.00.  The  Company
purchased 66,055 of such shares from Dr. Pandey.

         Effective  June 25, 1996,  an entity  wholly-owned  by Dr.  Pandey (the
"Holding Company") became a member of Vineyard Productions, L.L.C. ("Vineyard"),
which in June 1994  acquired  the  building  in which  the  Company  leases  its
offices.  Prior to making such  investment,  Dr.  Pandey  informed  the Board of
Directors of the opportunity for such investment,  and the Board determined that
the Company was not  interested  in such  opportunity  and approved  Dr.  Pandey
making the  investment.  The Company's lease was entered into prior to that date
(with a prior  owner  of the  building)  and has not  been  modified  subsequent
thereto.   The  Company  paid  Vineyard  $110,491  in  1996,  including  $21,705
subsequent to June 25, 1996, and $130,258 in 1997.

         On November 18, 1996,  the Company  entered into and closed the initial
stage of Blech Purchase Agreement. Additional issuances under the Blech Purchase
Agreement  were closed at various dates through  February 21, 1998.  See Item 1,
Description of Business - Recent Developments - Blech Stock Purchase Agreement.

         During  1997 and  1998,  the  Company  made  unsecured  loans  totaling
$100,000 to Consumers  Choice Systems,  Inc.  ("CCS"),  a company engaged in the
marketing and  distribution of products in the  over-the-counter  pharmaceutical
market.  The Company has entered into  negotiations  with CCS in connection with
possible distribution of XetaPharm  nutraceuticals.  CCS is engaged in a private
offering of its securities  and, upon  completion of this  offering,  The Edward
Blech Trust would own approximately 30.8% of CCS's common stock.

         During  1998,  the Company  made six  unsecured  loans in the amount of
$72,000  to  Pacific  Sensuals,  Inc.  ("Pacific"),  a  company  engaged  in the
marketing and  distribution of products sold through health stores.  The Company
has  entered  into   negotiations  with  Pacific  in  connection  with  possible
distribution of XetaPharm  nutraceuticals.  David Blech, a principal shareholder
of the Company, has an indirect 38% ownership interest in Pacific.

         During  1997 and 1998,  the  Company  made six  unsecured  loans in the
amount of  $144,000  to  Margaret  Chassman.  Ms.  Chassman is the wife of David
Blech, a principal shareholder of the Company.


                                       42

<PAGE>





Item 13. Exhibits and Reports on Form 8-K.

         (a) (1)The  following  exhibits are  incorporated by reference from the
Company's  Registration  Statement  on Form SB-2 (SEC  File  Number  33-75300NY)
referencing the exhibit numbers used in such Registration Statement:

Number   Exhibit

3(i)(a)       Certificate of Incorporation.

3(i)(b)       Certificate of Correction to Certificate of Incorporation.

3(ii)         By-Laws.

4.3           Form of Warrant Agreement (including form of Warrant).

4.4           Form of Representative's Warrant.

10.2          Form of Pandey Option.

10.3          Form of Employment Agreement between the Company and Dr. Pandey.

10.6          Leases   between  Urban   Brunswick   Associates,   L.P.  and  the
              Subsidiary.

10.7          Agreement,  dated June 22, 1993,  between the  Subsidiary  and the
              School of Pharmaceutical Sciences of Beijing Medical University.

10.8          Agreement, dated June 22, 1993, between the Subsidiary and Kunming
              Institute of Botany.

10.9          Form of Note issued to Dr. Pandey.

10.16         Acquisition agreement among LyphoMed,  Inc., Old Xechem and Ramesh
              C. Pandey.

10.17         Patents.

10.18         Indemnity agreement between the Company and Ramesh C. Pandey.

      (a) (2) The following  exhibits are incorporated by reference from the
              Company's  Quarterly  Report on Form 10-QSB for the quarter  ended
              September 30, 1994 (File No. 0-23788).

Number        Exhibit

10.20         Agreement  dated September 6, 1994 between the Company and Guizhou
              Fanya Pharmaceutical Co. Ltd.

      (a) (3) The following  exhibits are incorporated by reference from the
              Company's Annual Report on Form 10-KSB for the year ended December
              31, 1995:

3(i)(c)       Certificate of Amendment to Certificate of Incorporation.

10.27         Xechem/Apotex Restructuring Agreement.


                                       43

<PAGE>





10.28         Xechem International, Inc. Amended and Restated Stock Option Plan.

      (a) (4) The following  exhibits are incorporated by reference from the
              Company's Form 8-K Current Report dated November 18, 1996:

10.29         Stockholders  Agreement  dated  November  18,  1996  among  Xechem
              International, Inc., David Blech and Ramesh C. Pandey

10.30         Stock  Purchase  Agreement  dated  November  18, 1996 among Xechem
              International, Inc., David Blech and Ramesh C. Pandey dated

      (a)(5)  The  following  exhibits are  incorporated  by reference  from the
              Company's Annual Report on Form 10-KSB for the year ended December
              31, 1996 (File No. 0-23788).

3(i)(c)       Certificate of Amendment to Certificate of Incorporation

3(i)(d)       Certificate  of  Designations,  Preferences  and Rights of Class C
              Shares (Class C Series 1 Preferred Stock)

3(i)(e)       Certificate  of  Designations,  Preferences  and  Rights  (Class C
              Series 2 and Series 3 Preferred Stock)

3(i)(f)       Certificate of Elimination  (Class C Series 1, Series 2 and Series
              3 Preferred Stock)

      The following exhibits are filed with the Form 10-KSB:

Number        Exhibit

11            Statement of Earnings (Loss) Per Share

21            Subsidiaries of the Company

   (b)        The Company filed no Reports on Form 8-K during the fourth quarter
              of 1997.






                                       44

<PAGE>




                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
as amended,  the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                     XECHEM INTERNATIONAL, INC.


Date: July 24, 1998                  By: /s/ Ramesh C. Pandey
                                         --------------------
                                         Ramesh C. Pandey, Ph.D.
                                         Chief Executive Officer, President and
                                         Chairman of the Board of Directors


     In accordance  with the Securities  Exchange Act of 1934, as amended,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.



By:  /s/ Ramesh C. Pandey                                   Date: July 24, 1998
     ----------------------------
     Ramesh C. Pandey, Ph.D.,
     Chief Executive Officer, President and
     Chairman of the Board of Directors and
     Chief Accounting Officer

By:  /s/ Stephen Burg                                       Date:  July 24, 1998
     ----------------------------
     Stephen Burg
     Director




                                       45

<PAGE>




                                  EXHIBIT INDEX


Number      Exhibit

11          Statement of Earnings (Loss) Per Share

21          Subsidiaries of the Company



                                       46