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, 1996

[    ]         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 Jersey08901
(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number:                                 (908) 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.  $208,857

    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. $3,183,100 as of March 31, 1997.

    The  number  of  shares  outstanding  of  the  Company's  Common  Stock  was
86,507,839 as of March 31, 1997.


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                                      INDEX

                                                                         Page
PART I
      Item 1.  Description of Business....................................  1
      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.......................................  36
      Item 8.  Changes In and Disagreements With Accountants on Accounting
               and Financial Disclosure...................................  37

PART III
      Item 9.  Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act..........  38
      Item 10. Executive Compensation.....................................  40
      Item 11. Security Ownership of Certain Beneficial Owners and Managemen43
      Item 12. Certain Relationships and Related Transactions.............  44
      Item 13. Exhibits and Reports on Form 8-K...........................  46


SIGNATURES

                                       (i)

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                                    PART I

Item 1.     Description of Business.1

General

      Xechem  International,  Inc.  ("Xechem" or the "Company")  owns all of the
capital  stock  of  Xechem,  Inc.  (the   "Subsidiary"),   a  development  stage
bio-pharmaceutical company currently engaged in research,  development,  and the
limited  production of 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. The Company has successfully  isolated greater than 97% pure paclitaxel
(less than one  kilogram),  and is  preparing  dosage  forms of  paclitaxel  for
stability testing submission of an Abbreviated New Drug Application  (ANDA"), as
well as for its  facility  for  approval  by the Food  and  Drug  Administration
("FDA") as a bulk material manufacturing facility.

      Consistent  with the Company's  focus on the development and production of
paclitaxel,  the Company  will  continue to apply its  expertise to research and
develop other compounds, such as bleomycin and mitomycin,  which no longer enjoy
patent protection, but experience limited competition due to their difficulty to
replicate.  In  addition,  the Company has focused  certain of its  research and
development  efforts on the  development  of drugs  from  sources  derived  from
Chinese  and  Indian  folklore  in  the  anti-cancer,   anti-fungal,  anti-viral
(including anti-AIDS), anti-inflammatory, anti-aging and memory enhancing areas.

      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),  Melatonin and DHEA. To date,
XetaPharm has commenced only limited operations. See "XetaPharm" below.

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")
--------
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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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  13,180  shares  of  Series 3
Preferred Shares.  Pursuant to their terms, effective February 8, 1997, the then
outstanding  22,500  Series 2  Preferred  Shares and 13,180  Series 3  Preferred
Shares were  converted into  45,000,000  and 21,088,000  shares of Common Stock,
respectively.  Under the Blech  Purchase  Agreement,  as amended,  Blech has the
right to purchase an additional  25,000,000  shares of Common Stock on or before
April 30, 1997, 20,000,000 shares of Common Stock on or before June 2, 1997, and
a final 10,000,000 shares on or before July 15, 1997.

      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 is  obligated  to pay a  commission  of $50,000 and issued an
option  to  purchase   200,000  shares  of  Common  Stock  to  Kensington  Wells
Incorporated ("KWI") for introducing Mr. Blech to the Company.

      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.

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.

                                        2

<PAGE>



      The Company has filed an appeal of the delisting  with the Nasdaq  Listing
and Hearing  Review  Committee  and has been  notified  that the Hearing  Review
Committee will issue its opinion in early June 1997.

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(R)")  has been  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.  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  $800,000,000 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 expires on December 29, 1997,  although  that period may be extended.  The
Company intends to submit an ANDA for paclitaxel immediately upon the expiration
of Bristol-Myers' period of marketing  exclusivity.  The Company estimates,  but
can provide no assurances, that FDA approval of an ANDA for paclitaxel will take
six to  twenty-four  months.  Although  the  Company  cannot  submit an ANDA for
paclitaxel  in the  United  States  prior to  December  29,  1997,  the  Company
anticipates  that it will have the  necessary  data to complete an ANDA sometime
during the fourth quarter of 1997. 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  February  1996,  the Company  entered  into an  agreement  (the "Sabex
Agreement") with Sabex Inc., a Canadian corporation ("Sabex"), for the marketing
of the  Company's  formulation  of paclitaxel in Canada and for the packaging of
bulk  quantities  of  paclitaxel  supplied  by  the  Company  into  single  dose
quantities  for sale by the  Company to the rest of the  world.  Under the Sabex
Agreement,  Sabex is  required  to, but has not yet  applied  for the  necessary
regulatory  approvals to market paclitaxel in Canada.  Following receipt of such
approval,  the Company will furnish bulk  paclitaxel  to Sabex at the  Company's
cost. Sabex will utilize the

                                        3

<PAGE>



Company's processes to produce and package paclitaxel injectables, which will be
marketed in Canada. Sabex will pay the Company a royalty of 50% of Sabex's gross
profits on its Canadian sales.  In addition,  the Company has agreed to purchase
from  Sabex  all  of the  Company's  requirements  for  paclitaxel  packaged  in
commercial  form for sale in the United States,  provided Sabex meets all United
States  regulatory  requirements,  and the rest of the world.  The Company  will
supply bulk  paclitaxel to Sabex for such purposes,  at no charge to Sabex,  and
Sabex will  package  the  material  for a fixed fee.  The Sabex  Agreement  will
terminate  on the  tenth  anniversary  of the  receipt  of  Canadian  regulatory
approval.

      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 and ethanol.  Xechem believes it may
ultimately have significant commercial potential. In the second quarter of 1997,
Xechem  will obtain 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,  to be negotiated,  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 compound.  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 A 2 and B
2 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 the capital  provided under the Blech Purchase  Agreement will
enable the  Company to restart  this  project in the second or third  quarter of
1997.

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



<PAGE>



subsequently publicly registered by the Company. However, Apotex did not provide
any funding to the Company and the Company  does not  anticipate  receiving  any
such funding.

      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.

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.




<PAGE>



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.

      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



<PAGE>



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.

      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



<PAGE>



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.

XetaPharm

      XetaPharm   was   established   in  1996  to   bridge   the  gap   between
pharmaceuticals and nutraceuticals.  XetaPharm's principal business objective is
to develop "quality" products for the consumer market. Based on meetings between
the Office of Alternative  Medicine, 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  health food outlets and
physicians  specializing in natural medicines.  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 five products to date.  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



<PAGE>



performance liquid chromatography 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.

      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.

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. From various proposals made in 1996, the Company has 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)).

Hexoid Plate

      The Company has  developed 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.

      Dr.  Pandey has filed the 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.  In addition,  although
the Company believes certain  governmental  approvals will be required to market
the Hexoid(R) plate,  the Company has not yet determined the regulatory  process
which will be applicable to the Hexoid(R) plate. There can be no assurance as to
whether  or  when  the  Company  will be able  to  obtain  necessary  regulatory
approvals or 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 1997,  although there can
be no assurance that any such sales will occur.



<PAGE>



The Company has entered into the Sabex  Agreement to provide for the  processing
of bulk  paclitaxel  produced by the Company into finished dosage packaged form.
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 two
contract  manufacturers.  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.

Marketing

      The Company's initial potential  products are targeted at the anti-cancer,
anti-viral,  and anti-fungal markets.  Although there can be no assurances,  the
Company  anticipates  selling  paclitaxel,  as well as  possibly  certain  other
compounds,  in Canada  through  Sabex and on a  nonexclusive  basis  through its
restructured  agreements with Apotex. 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  anticipates  selling its  nutraceutical  product  line  through
health food stores and  pharmacies.  The  marketing  of these  products  will be
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 distributors, as well as marketing firms, to promote
its product line.

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.  Dr.  Pandey has filed the United States
patent  applications  (which patents will be assigned to the Company, if issued)
for the development of 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.




<PAGE>



      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.

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), although Sabex and Apotex may
use other trademarks.  However, registration of Paxetol(TM) in United States and
Canada has been opposed by  Smithkline  Beechan  P.L.C.  ("SKB")  based on SKB's
registered  Paxil(R)  mark for use with a  dissimilar  product.  The  Company is
reviewing  this claim with counsel and has not  determined a course of action as
of this  date.  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.

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 Fanyu  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.  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 not purchase sufficient quantities of paclitaxel pursuant to the Guizhou
agreement  to meet its  current  needs,  or the  Company  determine  to  produce
paclitaxel  in  larger  quantities  than  presently  planned,   the  Company  is
negotiating with two suppliers in China and two suppliers 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



<PAGE>



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.

      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.

      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.



<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 cancer and refractory breast cancer.  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.

      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



<PAGE>



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.

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,



<PAGE>



which  expires on December  29,  1997,  although  that  period may be  extended.
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  immediately upon the expiration of Bristol-Myers' period of
marketing  exclusivity.  The Company  estimates,  but can provide no assurances,
that FDA approval of an ANDA for paclitaxel will take six to twenty-four months.
Although the Company  cannot submit an ANDA for  paclitaxel in the United States
prior to December 29, 1997, the Company  anticipates  that it will have the data
necessary to complete an ANDA  sometime  during the fourth  quarter of 1997.  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.

      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
microorganisms.  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, 1997, the Company had 30 employees. Of these employees, 25
are dedicated to research, development, manufacturing and regulatory compliance.
Eleven 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.




<PAGE>



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.

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

      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 for more than 40 years studied the organic chemistry of
natural  products  and  Ayurvedic   medicinal   plants.  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.

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

      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.




<PAGE>



      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.

The Reorganization

      Between  December  21,  1992 and  August 4,  1993,  Regal One  Corporation
("Regal One"), the Subsidiary, Dr. Pandey, and Regal One's Chairman of the Board
entered into a series of agreements and  instruments  (collectively,  the "Prior
Agreement")  providing for or contemplating,  among other things:  (i) a private
placement of securities of Regal One (the "Regal One Private  Placement");  (ii)
the acquisition by Regal One of the  Subsidiary;  and (iii) a public offering of
securities of Regal One to be consummated  contemporaneously with the completion
of such acquisition.  As contemplated by the Prior Agreement, during 1993, Regal
One sold  1,249,000  shares of its common  stock (the  "Regal One  Shares")  and
loaned a portion of the funds raised to the Subsidiary.

      In January 1994,  KWI, which had acted as placement agent in the Regal One
Private Placement,  informed Regal One and the Subsidiary that KWI was unable to
continue efforts toward such public offering.  Therefore,  pursuant to the Prior
Agreement,   the  Subsidiary   terminated  the  Prior  Agreement  and  commenced
discussions  with KWI concerning a possible public offering by the Subsidiary or
a holding  company.  This led to the transfer of the  Subsidiary's  stock to the
Company and a subsequent public offering (the "Public  Offering") by the Company
in April 1994.

      Following  termination  of  the  Prior  Agreement,  the  Company  and  the
Subsidiary entered into a settlement agreement (the "Settlement Agreement") with
Regal One.  Pursuant to the Settlement  Agreement,  at the closing of the Public
Offering,  the Company paid  $250,000 in cash and issued 60,000 shares of Common
Stock to Regal One. The Company also  entered into certain  agreements  with the
purchasers  of the Regal One Shares  pursuant  to which,  at the  closing of the
Public Offering,  the Company exchanged one share of Common Stock for each Regal
One Share.  The Company also placed into escrow an additional  136,500 shares of
Common Stock (the  "Escrow  Shares"),  which were  offered to certain  Regal One
stockholders  who had  acquired  shares of Regal  One  common  stock in  private
placements in 1992 in exchange for their Regal One Shares. All the Escrow Shares
have been so  exchanged.  Pursuant  to the  Settlement  Agreement,  the  Company
returned to Regal One all Regal One Shares acquired in the exchanges.

      On April 25,1994, Dr. Pandey exchanged the capital stock of the Subsidiary
for  2,800,000  shares  of the  Company's  Common  Stock,  2,500  shares  of the
Company's  Class A Preferred  Stock (with  supermajority  voting rights of 1,000
votes per share),  and options (the "Pandey Options") to purchase 707,000 shares
of Common



<PAGE>



Stock at a price of $0.01 per share.  The Pandey  Options  will expire ten years
from issuance and will become exercisable: (i) as to 130,000 shares, if, for any
fiscal  year,  the  Company's  income  from  operations   before  taxes  exceeds
$2,000,000;  (ii) as to an additional  205,000 shares,  if, for any fiscal year,
the Company's income from operations before taxes exceeds $5,000,000;  and (iii)
as to the final 372,000  shares,  if, for any fiscal year, the Company's  income
from  operations  before  taxes  exceeds  $7,500,000.  The  Pandey  Options  are
non-qualified  options under the Internal Revenue Code of 1986, as amended.  The
Pandey Options also have certain piggyback registration rights.

      In  addition,  on  April  25,  1994,  Dr.  Pandey  exchanged  $107,000  of
indebtedness  of the  Subsidiary  for  1,070  shares  of the  Company's  Class B
Preferred  Stock and  $517,451  of  indebtedness  of the  Subsidiary  (including
interest  accrued  through April 26, 1994) for a note of the Company in the same
principal  amount  which bears  interest at the rate of 8% per annum and matures
five years after issuance. As of the date hereof, such note and all of the Class
B Preferred  Stock have been  converted  into  Common  Stock.  See "Blech  Stock
Purchase Agreement" above.

      In connection with its acquisition of the Subsidiary,  the Company assumed
the  Subsidiary's  obligations  under a Stock Plan,  as a result of which it has
issued  options to  employees,  directors,  and  members of the SAB to  purchase
158,000  shares of Common  Stock at an  exercise  price of $.01 per  share.  KWI
received options to purchase 550,000 shares of Common Stock at an exercise price
of $.01 per share, and demand  registration  rights with respect to such shares.
Such options have been  exercised and the  underlying  shares have been publicly
registered and sold.

      In addition,  the Company entered into agreements  pursuant to which:  (i)
indebtedness  of the  Subsidiary  in the amount of $120,000 was  converted  into
125,000  shares of Common  Stock;  (ii)  indebtedness  of the  Subsidiary in the
amount of $125,000 was  converted  into a note of the  Company,  which has since
been paid,  and issuance to the lender of options to purchase  100,000 shares of
Common Stock for $.01 per share;  and (iii) the Company  assumed  obligations of
the Subsidiary with respect to $395,000 of other  indebtedness and issued to the
lenders  thereof  options to purchase an aggregate  of 155,000  shares of Common
Stock at an exercise price of $.01 per share.

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.  See "Recent  Developments--Nasdaq  Delisting."  Although  the
Company has filed an appeal of the delisting with the Nasdaq Listing and Hearing
Review  Committee,  the  Company  cannot  predict  whether  such  appeal will be
successful.

      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



<PAGE>



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 bio-technology  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 a  substantial  number  of shares of
Common Stock by existing  security  holders could also have an adverse effect on
the market price of the Company's  securities.  In the past twelve  months,  the
Company's  Common  Stock  has  declined  from  approximately  $8.00 per share to
present values ($.125 to $.50 per share).

Control by Blech

      As of March 31, 1997, Blech  beneficially owns 45,000,000 shares of Common
Stock, or approximately  52% of the 86,507,839  shares of issued and outstanding
Common Stock  (entitling  Blech to cast 50.6% of the aggregate votes entitled to
be cast by all stockholders in election of directors).  As a result,  Blech owns
or  controls  a  sufficient  number of shares of  Common  Stock to  control  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
research and 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  stability  testing  or other  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.  To date, the Company has
not  received  any  such  infringement   claims.   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 (December 29, 1997), the
Company does not yet have all of the data for such ANDA and there can be no



<PAGE>



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 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, 1996, the Company's accumulated deficit was approximately $22,447,500, which
included losses from operations of $1,341,200, $3,246,700 and $3,032,500 for the
years  ended  December  31,  1994,  1995 and 1996,  respectively.  Approximately
$12,963,000 of the Company's  $22,447,500  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 substantially  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."

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 and 1996
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 4
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 two to four kilograms per year of 97% or greater pure
paclitaxel from crude bulk extract containing approximately



<PAGE>



50%  paclitaxel.  Formulation  and packaging of  paclitaxel in single  injection
dosages will have to be performed by a contract  packager.  It is critical  that
single dosage packages,  once produced,  be maintained in an efficient,  ambient
warehouse  center to insure  proper  handling  and  shipping  of the drugs.  The
Company has  contracted  with Sabex to provide the  formulation,  packaging  and
warehousing services necessary for paclitaxel, but there can be no assurances it
will be able to perform under such contract.  While the Company has been seeking
additional and back-up producers, there can be no assurance that it will be able
to locate such producers,  or that it will be able to enter into agreements with
such  producers  in  light  of the  Company's  commitments  to  Sabex.  Sabex is
required,  but has not yet applied for the  necessary  regulatory  approvals  to
market  paclitaxel  in Canada.  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 is a  fermentation  product.  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 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  from  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.

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



<PAGE>



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.  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.

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.

Uncertainty Regarding Drug Development

      The Company's  principal  strategy is to develop  generic  equivalents  of
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.




<PAGE>



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  four  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 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.

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.

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



<PAGE>



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.

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.





<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.

      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 is leased from an unaffiliated entity. 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 1996.




<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.  The following table shows the high
and low  quotations,  on a quarterly  basis,  of the Company's  Common Stock and
Warrants from January 1, 1995 through December 31, 1996:
<TABLE>


                                     Common Stock


              1995      1995       1995       1995      1996       1996       1996      1996
             First     Second     Third      Fourth     First     Second     Third     Fourth
            Quarter    Quarter   Quarter    Quarter    Quarter   Quarter    Quarter    Quarter
            -------    -------   -------    -------    -------   -------    -------    -------
<S>          <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>

 High Bid    115/8      113/8     111/8       81/8      81/8       43/8      1 9/32     29/32
 Low Bid     101/8      107/8       8 1/4     75/8      35/8        1 1/4     5/16      5/32



</TABLE>
<TABLE>


                                       Warrants


            1995      1995     1995       1995      1996      1996    1996     1996
            First    Second    Third     Fourth     First    Second  Third    Fourth
           Quarter  Quarter   Quarter   Quarter    Quarter  Quarter Quarter   Quarter
<S>       <C>        <C>      <C>       <C>       <C>        <C>       <C>       <C>        

 High Bid   67/8      65/8     63/8       51/8      43/8       1 3/4      1        1/8
 Low Bid   5 3/16     63/8     45/8        4 1/4        1 1/4        1      1/8      1/32
</TABLE>


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

      As of  March  31,  1997,  there  were  168 and 12  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,
1997, 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



<PAGE>



$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.

      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  provides  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 if Blech makes
his 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. 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.

      The Company is  obligated  to pay a fee of $50,000 and issued an option to
purchase  200,000  shares of Common Stock to Kensington  Wells  Incorporated,  a
securities broker-dealer,  for introducing Mr. Blech 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.




<PAGE>



Item 6.     Management's Discussion and Analysis.2

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 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, 1996 vs. The Year Ended December 31, 1995

      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, 1996 and for each of the years ended  December  31,  1996 and  December  31,
1995.

                                                                Cumulative
                                                 Years Ended   Inception to
                                                December 31,   December 31,
                                              1996      1995       1996
                                                (in thousands)
Revenue                                    $  208.9   $  30.7    $ 575.8
Research and development expense           $1,596.6   $1,504.5   $4,637.0
Rent, general and administrative expenses  $1,644.8   $1,772.9   $5,165.2
(Loss) from operations                     $(3,032.5) $(3,246.7) $(9,226.4)

      The $178,200  increase in revenue from the year ended December 31, 1995 to
the year ended  December  31, 1996 was  attributable  to an increase in sales of
services and  products.  Service  sales  increased by $121,200 in the year ended
December 31, 1996 as compared to the year ended  December 31, 1995.  Included in
this amount is $86,700 from the National  Cancer  Institute for a Small Business
Innovative  Research  Phase I grant,  and a net  increase of $34,500  from other
service  work.  Sales of  paclitaxel  for  research  purposes for the year ended
December 31, 1996  increased  $46,100 as compared with the period ended December
31, 1995.  The balance of product  sales,  $10,900,  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.

--------
2
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.




<PAGE>



      The Company's research and development  expenditures continue to emphasize
compounds for generic anticancer,  antiviral and antibiotic products which enjoy
significant  market demand but are no longer  subject to patent  protection.  In
1996, the Company's  manufacturing  and regulatory  activities  were expanded in
order to finalize the paclitaxel production process and prepare the facility for
production  activities  to  meet  FDA  requirements.  Research  and  development
expenditures  increased by $92,100 to  $1,596,600,  or 6.1%,  for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. This included
expenditures  on  the  development  of  the  Company's   process  for  producing
paclitaxel of $489,500,  an increase of $375,900,  or 76.8%,  as compared to the
year ended December 31, 1995.

      This was partially  offset by a decline in research and development  costs
for  bleomycin to $16,600,  for the year ended  December 31, 1996, a decrease of
$100,100,  or 85.8%, as compared to the year ended December 31, 1995.  XetaPharm
had  research and  development  expenses of  $157,800,  for market  readiness on
alternative medicines and nutraceuticals in the year ended December 31, 1996.

      The Company's other research and development projects,  both for customers
and in-house research, totaled $932,700, for the year ended December 31, 1996, a
decrease of $341,500, or 26.8%, from the same period in 1995. The single largest
cause for the decrease in expenses from the year ended December 31, 1996 was the
reduction of $541,900 in non-cash  charges  resulting from the exercise of stock
options by employees and  non-employees.  Excluding  this  non-cash  expense and
depreciation,  general  research and development  costs increased  $152,600,  or
26.2%, as a result of additional  staffing,  payroll taxes,  group insurance and
other  overhead  for the year ended  December  31,  1996 over the same period in
1995. The Company  anticipates that 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 expenses decreased $128,100, or 7.2%, for
the year ended  December  31, 1996 as compared  to the year ended  December  31,
1995, due primarily to a 1996 decrease of $522,900 in non-cash  expenses related
to the exercise of stock options by employees and  consultants.  This was offset
by an expense of $147,800 for the  settlement  in April 1996 of the Ocean Marine
Service  claim  against  Dr.  Pandey  (described  below).  Legal and  accounting
expenses totaled $346,000 for the year ended December 31, 1996 and were $12,000,
or 3.4%, lower than the $358,000,  for the comparable 1995 period. Other general
and administrative  costs increased $259,000,  or 29.0%, to $1,150,800,  in 1996
compared to the same period in 1995.

      The most  significant  item in the  increase of  $259,000,  was trade show
expenses ($83,200).  This expense was related to increased marketing  activities
for XetaPharm and the Company There was no comparative  cost for the same period
ended December 31, 1995.  Salaries and wages  increased  $35,200,  or 11.2%,  to
$348,700. Consulting, travel, office expense and utilities increased by $48,200,
$34,600, $24,800 and $45,900, respectively, and contributed to the overall rent,
general and administrative  expense increase in the year ended December 31, 1996
compared to the same period in 1995.

      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.




<PAGE>



      The  Company's  loss from  operations  totaled  $3,032,500,  a decrease of
$214,200,  or 6.6%, for the year ended December 31, 1996 as compared to the same
period in 1995, and is primarily a result of the foregoing.

      Interest expense increased  approximately  $74,200, or 96.2%, to $151,100,
in the year ended  December 31, 1996 as compared to the year ended  December 31,
1995. In the 1996 period, these expenses were the result of gap financing loaned
to the Company, all of which was converted to equity in the second half of 1996.

Liquidity and Capital Resources; Plan of Operations

      On  December  31,  1996,  the  Company  had cash and cash  equivalents  of
$335,912, working capital of $84,657 and stockholder's equity of $1,603,632.

      As a result of its net losses to December 31, 1996 and accumulated deficit
since  inception,  the Company's  accountants,  in their report on the Company's
financial  statements  for  the  year  ended  December  31,  1996,  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.

      In May 1995 the  Company  filed a Drug  Master File with the Food and Drug
Administration  for the Company's  facilities.  The Company is in the process of
completing  its  technology  validation  and  anticipates,  but can  provide  no
assurances,  that a Drug Master File for paclitaxel  will be filed in the fourth
quarter of 1997.  The Company  has  sufficient  inventory  of 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 the
fourth quarter of 1997.  Prior to commencing  such sales,  the Company must file
for and  obtain  approvals  from  appropriate  regulatory  agencies  in  foreign
jurisdictions. There can be no assurance that such approvals will not be delayed
or  subject  to  conditions  or that the  Company  will be able to meet any such
conditions. In addition, the Company has no experience in marketing 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 be able to  obtain
satisfactory packaging of the product in single dosage vials from an independent
manufacturer.

      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.  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.




<PAGE>



      The  Company is  developing  a limited  line of  over-the-counter  natural
products (not requiring FDA approval) for sale through health food outlets, drug
stores  and  physicians  specializing  in natural  medicines.  The  Company  has
selected  several  natural,   over-the-counter   products,   commonly  known  as
nutraceuticals,  manufactured  by  contract  manufacturers  under the  Company's
trademark.  The emphasis of the products will be the  combination of the natural
health  benefits of these  products with the quality of a  pharmaceutical  firm.
Initial marketing efforts commenced in the third quarter of 1996; however, there
can be no assurances  as to the level of success for this  program,  or that the
Company will have adequate financial resources to support such program.

      The Company is presently  substantially  dependent  on funds  received and
anticipated to be received under the Blech Purchase Agreement. Through March 31,
1997,  Mr. Blech and his designees  have purchased an aggregate of $2,750,000 of
the total of $5,500,000 of securities  subject to the Blech Purchase  Agreement.
If Mr.  Blech does not meet or cause others to meet his  continuing  obligations
under the Blech  Purchase  Agreement,  the Company's only remedy is to terminate
Mr.  Blech's  future  rights.  In such case, the Company may be unable to obtain
substitute financing,  and may be unable to meet its obligations or continue its
operations.

      During 1996, the Company undertook a number of transactions which affected
its capital resources, summarized as follows:

      Blech Purchase  Agreement On November 18, 1996,  the Company  entered into
and closed the initial stage of the Blech Purchase  Agreement  providing for the
sale of up to 55,000 shares of 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. 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.  At the initial closing,  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. Two other trusts,  not otherwise  affiliated with Blech,  each
purchased  5,000,000  shares of Common Stock on March 27, 1997.  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 13,180  shares of Series 3 Preferred  Shares.  Pursuant to their
terms,  effective  February  8,  1997,  the  then  outstanding  22,500  Series 2
Preferred  Shares and 13,180  Series 3  Preferred  Shares  were  converted  into
45,000,000 and 21,088,000 shares of Common Stock, respectively.  Under the Blech
Purchase  Agreement,  as amended,  Blech has the right to purchase an additional
25,000,000 shares of Common Stock on or before April 30, 1997, 20,000,000 shares
of Common Stock on or before June 2, 1997, and a final  10,000,000  shares on or
before July 15, 1997.

      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  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.




<PAGE>



      The  Company is  obligated  to pay a  commission  of $50,000 and issued an
option to purchase  200,000  shares of Common Stock to KWI for  introducing  Mr.
Blech to the Company.

      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.

      Other  Offerings and Loans On March 29, 1995,  KWI, 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 private offering of the Company's Common Stock.
The offering was on a best efforts, with a minimum of $360,000, and called for a
closing no later than  February 15, 1996. A total of $594,500 was raised,  after
offering  costs,  and the Company  closed the offering on February 15, 1996.  Of
this total,  $60,000,  before offering costs, was raised in the first quarter of
1996.

      Due to the continuing need for operating funds, the Company obtained loans
totaling  $120,000  during the first  quarter  of 1996 and  $30,000 in the third
quarter of 1996 from four individuals not affiliated with the Company. The loans
are evidenced by 10% promissory  notes due one year from the dates of the loans.
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 account  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.

      In  September  1996,  a  non-affiliated  individual  made two loans to the
Company in the amounts of $50,000 and $65,000.  Each of these loans is evidenced
by a 10% and 12% (at simple  interest)  promissory  note due six months from the
dates of the loans.

      During 1995 and 1996, Dr. Pandey made advances to the Company  aggregating
$590,000.  Interest  expense  amounted to $45,419 and $7,407 for the years ended
December  1996 and 1995,  respectively.  Accrued  interest  totaled  $52,826  at
December 31, 1996. The two notes and accumulated accrued interest were converted
into equity in February 1997 in accordance with the Blech Purchase Agreement.

      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 was  entitled to an 8%  cumulative
dividend,  and was  required to convert to Common  Stock at  maturity  (one year
following  issuance).  The  conversion  price of the Class C Series 1  Preferred
Stock was  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. As of December 31, 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 to $1.70 per share. As of January 31, 1997,
all 22,500 shares of Class C Series 1 Stock have been  converted  into 1,793,583
shares of Common  Stock at a  conversion  price  ranging from $1.25 to $1.70 per
share.

      The Company  continues to apply to various  governmental  agencies to fund
its research on specific  projects  and in prior years had been awarded  certain
grants. In March 1996 the Company was awarded a National



<PAGE>



Cancer  Institute  Small  Business  Innovative  Research  grant in the amount of
$86,700 for "Enhanced  Xechem  Integrated  Screening  Techniques " ("EXIST") for
paclitaxel.


      Ocean Marine From December 1989 to October 1990, Dr. Ramesh C. Pandey, the
Company's  President/CEO  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 $225,000
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 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. The Company was not a party to such
proceedings,  Dr. Pandey received a general  release from Ocean Marine,  and the
Company agreed to indemnify Dr. Pandey against any future claims by Ocean Marine
in his employment agreement.

      On  October  12,  1994,  counsel  for 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 any  wrongdoing  has  occurred.  However the
Company, which had previously agreed to indemnify Dr. Pandey against liabilities
to Ocean Marine, 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 payment 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.

      Petron On August 29,  1996,  the  Company  and  XetaPharm  entered  into a
Memorandum  of  Understanding  (the  "MOU")  with  Petron  International,   Inc.
("Petron"),  wherein  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, 1997.

      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.



<PAGE>



      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-payments 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.




<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.




<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, 1996, and the related consolidated  statements of operations,
stockholders'  equity,  and cash  flows for each of the two years in the  period
ended  December 31,  1996,  and for the  cumulative  period from March 15, 1990,
(date  of  inception)  to  December  31,  1996.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company'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,
1996, and the consolidated  results of their operations and their cash flows for
each of the two  years  in the  period  ended  December  31,  1996,  and for the
cumulative period from March 15, 1990, (date of inception) to December 31, 1996,
in conformity with generally accepted accounting principles.

            The  accompanying   consolidated   financial  statements  have  been
prepared assuming Xechem  International,  Inc. will continue as a going concern.
As discussed in Note 4 to the consolidated  financial statements,  the Company's
recurring losses from operations,  accumulated  deficit, and cumulative negative
cash flows from operations raise substantial  doubt about Xechem  International,
Inc.'s ability to continue as a going concern.  Management's  plans in regard to
these  matters  are  also  described  in Note 4.  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 15, 1997

                                       F-1

<PAGE>

<TABLE>


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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
------------------------------------------------------------------------------

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

<S>                                                                   <C> 

Current Assets:
  Cash and Cash Equivalents                                             $   335,912
  Inventory                                                               1,396,905
  Prepaid Expenses                                                          136,151
  Other Current Assets                                                        5,121
                                                                        -----------

  Total Current Assets                                                    1,874,089

Equipment - Net of Accumulated
  Depreciation of $335,345                                                  825,300
Leasehold Improvements - Net of Accumulated
  Amortization of $233,268                                                  757,369
Deposits                                                                     22,167
Patent Issuance Costs-Net of Accumulated
  Amortization of $16,490                                                   237,550
                                                                        -----------

Total Assets                                                            $ 3,716,475
                                                                        -----------




See Accompanying Notes to Consolidated Financial Statements.

                                        F-2
</TABLE>

<PAGE>

<TABLE>


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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
------------------------------------------------------------------------------


<S>                                                                    <C>  

Current Liabilities:
  Accounts Payable                                                      $   603,960
  Accrued Expenses                                                          201,994
  Notes Payable - Related Party                                             784,040
  Notes Payable - Others                                                    115,000
  Other Current Liabilities                                                  84,438
                                                                        -----------

  Total Current Liabilities                                               1,789,432

Note Payable - Related Party                                                323,411
                                                                        -----------

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; 1,070 Shares Issued and Outstanding,
   $107,000 Liquidation Value                                                    --

  Additional Paid-in Capital [Class B 8% Preferred]                         107,000

  Class C Preferred Stock, $.00001 Par Value, 2,996,350 Shares Authorized
   Class C Series 1, $.00001, Par Value, 8% Convertible
       40,000 Authorized; 1,500 Issued and Outstanding                           --
   Class C Series 2, $.00001, Par Value, Voting Convertible
       55,000 Authorized; 10,000 Issued and Outstanding                          --
   Class C Series 3, $.00001, Par Value, Voting Convertible
       13,180 Authorized; None Issued or Outstanding                             --

  Additional Paid-in Capital [Class C Preferred]                          1,024,940

  Common Stock, $.00001 Par Value, 15,000,000
   Shares Authorized; 10,174,839 Shares Issued and Outstanding                  100

  Additional Paid-in Capital [Common]                                    22,916,616

  (Deficit) Accumulated During the Development Stage                    (22,447,524)
                                                                        -----------

Total Stockholders' Equity                                                1,603,632

Total Liabilities and Stockholders' Equity                              $ 3,716,475
                                                                        -----------


See Accompanying Notes to Consolidated Financial Statements.

                                        F-3
</TABLE>

<PAGE>


<TABLE>

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 6      1 9 9 5        1 9 9 6
                                              -------      -------        -------

<S>                                         <C>         <C>           <C>   

Revenues                                    $   208,857  $    30,720   $    575,730
                                            -----------  -----------   ------------

Expenses:
  Research and Development                    1,596,636    1,504,549      4,637,066
  Rent                                          108,205      100,060        431,770
  General and Administrative                  1,536,559    1,672,815      4,733,355
                                            -----------  -----------   ------------

  Total Expenses                              3,241,400    3,277,424      9,802,191
                                            -----------  -----------   ------------

  (Loss) from Operations                     (3,032,543)  (3,246,704)    (9,226,461)

Other Income                                      9,461      190,327        273,119

Interest (Expense) - Related Party              (86,926)     (48,802)    (8,589,081)

Interest (Expense)                              (64,197)     (28,169)    (4,905,101)
                                            -----------  -----------   ------------

  (Loss) Before Income Taxes                 (3,174,205)  (3,133,348)   (22,447,524)

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

  Net (Loss)                                $(3,174,205) $(3,133,348)  $(22,447,524)
                                            ============ ============  =============

Preferred Stock Dividends                   $    87,208  $     8,560   $    101,594
                                            ===========  ===========   ============

Net (Loss) Available to Common
  Stockholders                              $(3,261,413) $(3,141,908)  $(22,549,118)
                                            ===========  ===========   ============

Net (Loss) per Share                        $     (0.45) $     (0.51)
                                            ===========  ===========

Average Number of Common Shares Outstanding   7,321,966    6,206,237
                                            ===========  ===========





See Accompanying Notes to Consolidated Financial Statements.

                                        F-4
</TABLE>

<PAGE>


<TABLE>

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


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



                Class A   Additional Class B   Additional Class C     Class C  Additiol Xechem, Inc. Xechem Int.  Add   (Deficit)   
        
          Voting Prefer Paid in 8% Preferred Paid in     series 1   Series 2   Paid  Common Stock  Common Stock Paid in  Accumulated
                          Capital              Capital 8% Conv.Prf.  Voting Conv prf.                  Capital               During
              # of   Par           # of   Par          # of    Par   # of    Par         # of   Par   # of      Par            Devp.
             Shares Value Class A Shares Value Class b Shares  Value Shares Value Class C Shares Value Shares  Value Common    Stage
-----------------------------------------------------------------------------------------------------------------------------------
<S>             <C>   <C>   <C>    <C>    <C>    <C>       <C>   <C>   <C>    <C>       <C>   <C>    <C>    <C>    <C>      <C>


Common Stock issued 
in exchange for
 equipment in March
 1990 at no
  par value       -- $  -- $   --     --  $  -- $  --     -- $  --    --  $ --  $  --    100 $125,000  --  $  --  $ --  $  --
Capital contributions April 1990--------     --    --     --    --    --    --     --     --    --     --     --  170,000  --
Net (loss) for the
 period from
 March 15, 1990 
(date of
 inception) to December31,1990   --     --    --    --     --     --    --    --     --    --    --      --     --    --   (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(1,821,778)
                                                                                                                                   -

Reorganization 2,500    --  2,500  1,070     -- 107,000   --    --    --    --     --   (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 2,500 2,500 1,070  107,000   --    --    --    -- --     --    -- 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       2,500 $  --  2,500  1,070  $  -- $107,000  -- $  --    --  $ --  $    -- $  -- 6,583,478  66  $20,34$,239(19,273,319)


See Accompanying Notes to Consolidated Financial Statements.

                                              F-5
</TABLE>

<PAGE>


<TABLE>

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


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





                  Class A   Additional Class B   Additional Class C      Class C  Add.   Xechem, Inc. Xechem Int.   Add.  (Deficit)
              Voting Pref. Paid in 8% Preferred Paid in  Series 1    Series 2  Paid in Common Stock  Common Stock Paid in     Accum.
                            Capital              Capital 8% Conv. Pref. Voting Conv pref. Capital                 Capital    During
                 # of   Par           # of   Par         # of    Par   # of  Par         # of   Par   # of    Par           Develop
               Shares Value Class A Shares Value Class Shares  Value Shares ValueClass C Shares Value Shares  Value Common     Stage
-----------------------------------------------------------------------------------------------------------------------------------
<S>        <C>  


Balance - December
 31, 1995 -
 Forwarded     2,500 $  --  2,500  1,070  $  -- $107,000  -- $  --  --  $ --  $  --   -- $  -- 6,583,47$ 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    --    --     --     --     --    -- 22,500    --    --    --  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------   --     --    -- (21,000)  --    --    --  (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 - Dece.31 1996 2,500 -- 2,500 1,070 -- $107,000 1,500$  10,000$  $1,024,940-- $  -- 10,174,839100 $22,916$616  (22,447,524)
                     ============---=-=== ==================  ==========  ==========-- ===== ============= ============ ===========



See Accompanying Notes to Consolidated Financial Statements

                                              F-6
</TABLE>

<PAGE>

<TABLE>


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


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


                                    March 15,
                                  1990 [Date of
                                                 Years  ended          Inception) to
                                                 December 31,          December 31,
                                              1 9 9 6      1 9 9 5        1 9 9 6
                                              -------      -------        -------
<S>                                        <C>           <C>          <C>  

Operating Activities:
  Net (Loss)                                $(3,174,205) $(3,133,348)  $(22,447,524)
                                            -----------  -----------   -------------
  Adjustments to Reconcile Net (Loss) to Net Cash
   Provided (Used) by Operating Activities:
   Depreciation                                 124,882       67,583        222,051
   Amortization                                  77,470       67,580        388,719
   (Gain)/Loss on Sale of Assets                 (1,089)          --           (391)
   Interest and Compensation Expense
   in Connection with Issuance of Equities      118,227    1,082,608     14,213,500

  Changes in Assets and Liabilities
   (Increase) Decrease in:
     Accounts Receivable                          6,895       (3,121)         1,259
     Inventory                                 (541,304)    (828,366)    (1,369,670)
     Prepaid Expenses                            91,582       (1,699)      (136,151)
     Other Current Assets                        60,909      (17,013)       (32,720)
     Deposits                                    (1,650)          --        (22,167)
     Organizational Costs                                         --        (13,828)
     Other Assets                                 2,250       (2,250)        (1,592)

   Increase (Decrease) in:
     Accounts Payable                           131,937      251,469        604,824
     Accrued Interest Payable                    65,201        5,432         84,438
     Accrued Expenses                            99,451       49,667        209,210
     Other Current Liabilities                       --       (1,117)            --
                                            -----------  -----------   ------------

   Total Adjustments                            234,761      670,773     14,147,482
                                            -----------  -----------   ------------

  Net Cash (Used) by Operating
   Activities - Forward                      (2,939,444)  (2,462,575)    (8,300,042)
                                            -----------  -----------   ------------

Investing Activities:
  Patent Issuance Costs                        (168,122)     (73,196)      (253,299)
  Purchases of Equipment and
   Leasehold Improvements                      (264,212)    (250,915)    (1,635,411)
  Proceeds from Sale of Asset                    17,500           --         26,700
  Purchase of Marketable Securities                               --     (1,476,449)
  Proceeds from Sale of Marketable Securities        --    1,476,449      1,476,449
                                             ----------  -----------   ------------

  Net Cash (Used) by Investing
   Activities - Forward                     $  (414,834) $ 1,152,338   $ (1,862,010)

See Accompanying Notes to Consolidated Financial Statements.


                                        F-7
</TABLE>

<PAGE>

<TABLE>


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


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


                                    March 15,
                                  1990 [Date of
                                                 Years  ended          Inception) to
                                                 December 31,          December 31,
                                              1 9 9 6      1 9 9 5        1 9 9 6
                                              -------      -------        -------
<S>                                        <C>           <C>           <C>  

  Net Cash (Used) by Operating
   Activities - Forwarded                   $(2,939,444) $(2,462,575)  $ (8,300,042)
                                            -----------  -----------   ------------

  Net Cash (Used) by Investing
   Activities - Forwarded                      (414,834)   1,152,338     (1.862,010)
                                            -----------  -----------   ------------

Financing Activities:
  Proceeds from Note Payable - Bank                  --           --       (390,000)
   Proceeds from Related Party Loans            155,000      435,000      1,294,582
  Proceeds from Borrowings Under
   Line of Credit                                    --      450,000      1,365,000
  Proceeds from Notes Payable - Others               --           --        445,000
  Proceeds from Interim Loans                    55,000           --        970,295
  Proceeds from Bridge Financing                265,000      180,000        640,000
  Capital Contribution                               --           --         95,000
  Payments on Interim Loans                     (55,000)          --       (305,000)
  Payments on Notes Payable -Others                  --     (125,000)      (520,000)
  Payment on Stockholder Loans                       --           --       (207,037)
  Payment of Line of Credit                          --     (975,000)      (975,000)
  Proceeds from Issuance of
   Common Stock                                 152,784      388,889      5,084,343
  Proceeds from Issuance of Class C
   Series 1 Preferred Stock                   2,109,347           --      2,109,357
  Proceeds from Issuance of Class C
   Series 2 Preferred Stock                     882,440           --        882,440
  Proceeds from Exercise of Options                 542        6,342          8,984
                                            -----------  -----------   ------------

  Net Cash - Financing Activities             3,565,123      360,231     10,497,964
                                            -----------  -----------   ------------

  Net Increase (Decrease) in Cash
   And Cash Equivalents                         210,845     (950,006)       335,912

Cash and Cash Equivalents -
  Beginning of Periods                          125,067    1,075,073             --
                                            -----------  -----------   ------------

  Cash and Cash Equivalents -
   End of Periods                           $   335,912  $   125,067   $    335,912
                                            ===========  ===========   ============

Supplemental Disclosures of Cash Flow 
 Information:
  Cash paid during the periods for:
   Interest - Related Party                 $    20,641  $    34,477   $    104,992
   Interest - Other                         $     2,347  $    27,251   $    133,818
   Income Taxes                             $        --  $        --   $         --

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
  See Notes 5, 6 and 14.

See Accompanying Notes to Consolidated Financial Statements.


                                        F-8
</TABLE>

<PAGE>



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


(1) Organization and Basis of Presentation

The consolidated financial statements present the results of operations and cash
  flows of Xechem International, Inc. and its wholly-owned subsidiaries, Xechem,
 Inc., Xechem Laboratories, Inc. and XetaPharm, Inc. (collectively the
 "Company") for the cumulative period from the date of inception 
(March 15, 1990) to December 31, 1996, and the financial position of the 
Company at that date.

The Company was incorporated by Ramesh C. Pandey, Ph.D. ("Dr. Pandey") on
 February 10, 1994, under the laws of the State of Delaware for the ultimate
 purpose of acting as the common parent in a reorganization of entities he
 owned. On April 25, 1994, Dr. Pandey exchanged all of the capital stock of
Xechem, Inc. ("Xechem") for certain equity ownership in Xechem International,
 Inc. (see Note 6). Xechem was formed by Dr. Pandey and began operations on 
March 15, 1990 (date of inception) upon his contribution of certain equipment. 
  Additionally, during 1994, Dr. Pandey transferred the stock of
Xechem Laboratories, Inc. to Xechem in exchange for approximately $5,000.
   XetaPharm, Inc. was
formed in January 1996 to develop and market over-the-counter natural products.

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,
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  develops and
markets a natural food and dietary supplement line of products.

(2) Summary of Significant Accounting Policies

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.
(collectively the "Company").  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, 1996, 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, 1996 is
principally comprised of work-in-process paclitaxel (Paclitaxel is more commonly
known as "taxol," a registered  trademark of Bristol-Myers  Squibb Company),  an
anti-  cancer  compound  used for  treatment  of  refractory  ovarian and breast
cancer.

Equipment and Leasehold Improvements - All material expenditures for betterments
and additions  are  capitalized  at cost.  Expenditures  for normal  repairs and
maintenance   are  charged   against  income  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 5 to 15 years.  Depreciation and amortization  expense
for equipment and leasehold  improvements  for the years ended December 31, 1996
and 1995 was $189,750 and $131,991, respectively.

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


                                       F-9

<PAGE>



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


(2) Summary of Significant Accounting Policies (Continued)

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-Based  Compensation  - The Company  follows  Accounting  Principles  Board
Opinion  ("APB") No. 25,  "Accounting for Stock Issued to Employees" with regard
to the  accounting  for its employee  stock  options.  Under APB Opinion No. 25,
compensation  expense is recognized  only when the exercise  price of options is
below the market price of the underlying stock on the date of grant.

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 in the near term.

Significant  Estimates - While the  Company  has various  programs in process to
market  its  inventory  during  1997 based on its  patents  and  trademarks,  no
estimate can be made of the range of loss of amounts that is reasonably possible
should the programs to market  paclitaxel be unsuccessful (See Note 4). Also, as
more fully described under the equipment and leasehold improvements,  and patent
issuance costs accounting  policies  described above, the Company's policy is to
depreciate  and  amortize  the net book value of such assets  ($1,820,219)  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 4.

Advertising - The Company's policy is to expense  advertising costs as incurred.
Advertising costs have been insignificant since the inception of the Company.

Concentration  of Credit Risk - 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, 1996, the Company's uninsured cash balance totaled $285,412.

(3) Development Stage Activities and Operations

For the  period  from the  incorporation  of Xechem  (see  Note 1) 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 $3,174,205  and  $3,133,348  for the years ended December
31, 1996 and 1995,  respectively,  and has accumulated a deficit since inception
(March  15,  1990)  of  $22,447,524.  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 5, 6, 7, 8, 10 and
11).




                                      F-10

<PAGE>



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


(4) 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
$3,174,205  and  $3,133,348  for the years  ended  December  31,  1996 and 1995,
respectively;  has  accumulated  a deficit since  inception  (March 15, 1990) of
$22,447,524;  and has a  cumulative  negative  cash flow from  operations  since
inception amounting to $8,300,042. As discussed in Note 3, 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.  All of these factors raise substantial
doubt about the ability of the Company to continue as a going concern.

The  Company  is  presently   substantially  dependent  on  funds  received  and
anticipated  to be received  under the Blech  Purchase  Agreement  (See Note 5).
Subsequent  to December 31, 1996,  Mr. Blech and his  designees  have  purchased
securities subject to the Blech Purchase Agreement (See Notes 19 and 20). If Mr.
Blech does not meet or cause others to meet his continuing obligations under the
Blech Purchase Agreement,  the Company's only remedy is to terminate Mr. Blech's
future  rights.  In such case,  the Company  may be unable to obtain  substitute
financing, and may be unable to meet its obligations or continue its operations.

There can be 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.

(5) 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,  over  approximately  nine  months.
Subsequent  to December  31, 1996,  the Blech  Purchase  Agreement  was amended.
Through  December 31, 1996,  the Edward A. Blech Trust (the  "Trust")  purchased
10,000 Series 2 Preferred  Shares for at a price of $100 per share (See Notes 19
and 20).

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.



                                      F-11

<PAGE>



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



(6) 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.

(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  Xechem  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 8), 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. As of December 31, 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 (See Notes 19 and 20).

(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).




                                      F-12

<PAGE>



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


(6) Capital Transactions (Continued)

(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.

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) Blech Purchase Agreement - See Note 5.

(7)  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.

(8) 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.


                                      F-13

<PAGE>



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



(9) 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 7), 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 net operating loss
carryforwards of approximately $3,175,000 which expire in 2009, $3,150,000 which
expire in 2010 and  $3,250,000  which expire in 2011.  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  $3,350,000  at December 31, 1996,  an
increase of $820,000  over December 31, 1995.  Because the Company's  cumulative
losses since inception, however, 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.

(10) Related Parties

(A) 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, the majority stockholder
agreed to defer the monthly  installments until April 25, 1997. Accrued interest
totaled $27,785 at December 31, 1996.  Interest  expense on the note amounted to
$41,508 and $41,395 for the years ended December 31, 1996 and 1995, respectively
(See Note 20).

Additionally,  Dr. Pandey has 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 and $7,407 for the years ended December 31, 1996 and 1995, respectively.
Accrued interest totaled $52,826 at December 31, 1996 (see Notes 5, 6 and 19).

(B) 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.  Xechem India may conduct  certain  research,
manufacturing,   and  marketing   activities  in  India.  Subject  to  obtaining
regulatory approvals in India, Dr. Pandey has transferred 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.


                                      F-14

<PAGE>



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


(11) Notes Payable - Other

An  individual  has made two loans to the  Company  during 1996  aggregating  to
$115,000. Each of these loans is evidenced by ten percent and twelve percent (at
simple  interest)  promissory  notes due six  months  from the date of the loan.
Accrued interest and interest expense amounted to $3,827 at December 31, 1996.

The weighted average  interest rate on short-term  borrowings as of December 31,
1996 was approximately 10%.

(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 - 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.  Rent  expense  under the  operating  lease  amounted to  $108,205  and
$100,060 for the years ended December 31, 1996 and 1995, respectively The future
minimum  payments  under  non-cancelable   operating  leases  consisted  of  the
following at December 31, 1996:

      1997                             136,936
      1998                             137,536
      1999                             138,136
      2000                             109,453
                                     ---------

      Total Minimum Lease Payments   $ 522,061

The operating lease also provides for cost escalation payments.

(C) Registration  Rights - The holders of 11,502,745  shares of Common Stock and
options to  purchase  1,157,000  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.


                                      F-15

<PAGE>



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


(12) Commitments and Contingencies (Continued)

(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 1996 and 1995,  resulting in a substantial
outlay of cash.

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  and a possible
loss of sales, which could affect operating results adversely.

(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  $150,000
($75,000 has been paid as of December  31, 1996) 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 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.  At the May 26,  1995 and  June  25,  1996  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 600,000  shares.  The Plan  provides for the grant to employees of
incentive stock options ("ISOs") and non-qualified stock options.

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.

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 exceeded the market price, the weighted average
exercise  price is $1.60 and  $11.60  and the  weighted  average  fair  value of
options  is $1.20  and $8.93 for the years  ended  December  31,  1996 and 1995,
respectively.

For options whose  exercise  price is less than the market  price,  the weighted
average exercise price is $1.99 and $4.38 and the weighted average fair value of
options  is $2.72  and $9.21 for the years  ended  December  31,  1996 and 1995,
respectively.

                                      F-16

<PAGE>



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


(14) Stock Plan (Continued)

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

                                         1996                              1995
                      ----------------------------------------------------------
                                          Weighted-                Weighted-
                                           Average                  Average
                             Shares        Exercise Price    Shares    Exercise
                                                                       Price

Outstanding on January 1,        194      $ 3.59            168     $ 0.30

Granted                          272        1.88            114       5.90
Exercised                          4        0.01             84       0.01
Forfeited/Expired                 93        4.38              4       7.46
                              ------      ------         ------     ------

  Outstanding on December 31,    369      $ 2.16            194     $ 3.59
  --------------------------- ======      ======         ======     ======

  Exercisable on December 31,     40      $ 3.21             24     $ 4.10
  --------------------------- ======      ======         ======     ======

The  following  table  summarizes  information  about stock  options at December
31,1996 (shares in thousands):

                          Outstanding Stock Options    Exercisable Stock Options
                           Weighted-
                            Average     Weighted
  Range of                 Remaining     Average             Weighted-Average
Exercise Prices   SharesContractual LifeExercise PriceShares  Exercise Price

$0.00 to $  1.00    160     9.53         $  .33           8      $  .33
$0.01 to $  5.00    190    10.56           2.94          30        2.94
$5.01 to $10.00       7     8.96           7.71           2        7.71
$10.01 to $15.00     12     8.46          11.14           2       11.14
                  -----    -----         ------        ----      ------

     Totals         369     9.72         $ 2.16          40      $ 3.21
     ------       =====    =====         ======        ====      ======

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                        1996              1995
----------------------                        ----              ----
Net Loss:
   As Reported                            $     (3,174)     $     (3,133)
   Pro Forma                              $     (3,799)     $     (4,176)
Net Loss Per Share:
   As Reported                            $      (0.45)     $      (0.51)
   Pro Forma                              $      (0.51)     $      (0.67)

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 1996 and 1995,  respectively,  dividend yields of
$-0- for each year,  expected  volatility  of  approximately  80% for each year;
risk-free interest rates of 6.5 and 6.7 percent;  and expected lives of 10 years
for both years. The weighted-average fair value of options granted was $2.30 and
$9.15 for the years ended December 31, 1996 and 1995, respectively.

                                      F-17

<PAGE>



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



(15) Description of Securities

The  authorized  capital stock of the Company at December 31, 1996  consisted of
15,000,000 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.

(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 1995-6,  Dr.  Pandey agreed with the  underwriter  to redeem the
Class A Preferred Stock in 1999.

(C) Class B 8% Preferred  Stock - At December 31, 1996,  there were  outstanding
1,070 shares of 8% Preferred  Stock with a  liquidation  preference  of $100 per
share, all of which were held by Dr. Pandey.  The 8% Preferred Stock is entitled
to  cumulative  dividends on the  liquidation  preference  at the rate of 8% per
annum,  payable  quarterly.  At December  31,  1996,  the  cumulative  dividends
amounted to $22,946 or $21.44 per each  outstanding  Class B 8% Preferred Share.
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.

                                      F-18

<PAGE>



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


(15) Description of Securities (Continued)

(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, 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.

(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 $1.00 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, 1996, there were 1,150,000 Warrants outstanding.

(16) Loss Per Share

Loss per  share  amounts  are  based on the  weighted  average  number of shares
outstanding.  Shares issuable upon the exercise of common stock  equivalents are
excluded from the computation  since the effect on the net loss per common share
would be  anti-dilutive.  The holders of Class B 8% Preferred  Stock and Class C
Series 1 Preferred  Stock were entitled to accumulate  dividends on the $100 per
share liquidation preference at the rate of 8% per annum payable quarterly. This
dividend has been reflected in the  computation  of loss per share  available to
common stockholders.

                                      F-19

<PAGE>



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


(17) New Authoritative Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has issued Statement of
 Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers 
and Servicing of Financial Assets and
Extinguishment of Liabilities."  SFAS No. 125 is effective for transfers and
 servicing of financial assets and extinguishment of liabilities occurring 
after December 31, 1996.  Earlier application is not allowed.
The provisions of SFAS No. 125 must be applied prospectively; retroactive
 application is prohibited.Adoption on January 1, 1997 is not expected 
to have a material impact on the  Company.  The FASB
deferred some provisions of SFAS No. 125, which are not expected to be 
relevant to the Company. 

 The FASB has also issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
 "Disclosure of Information about Capital Structure," in February 1997.

SFAS No. 128 simplifies the earnings per share ("EPS") calculations  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  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.  When
adopted,  SFAS No. 128 will require  restatement  of all  prior-period  EPS data
presented;  however,  the Company has not sufficiently  analyzed SFAS No. 128 to
determine  what effect SFAS No. 128 will have on its  historically  reported EPS
amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

(18) 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, cash
equivalents,  accounts  payable and  short-term  debt,  it was assumed  that the
carrying amount  approximated  fair value for the majority of these  instruments
because of their short maturities. Management estimates that the carrying amount
of long-term related party indebtedness approximates fair value.


                                      F-20

<PAGE>



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



(19) Subsequent Events

(A) Blech  Purchase  Agreement - Pursuant to the Blech  Purchase  Agreement (See
Note 5), the Trust purchased for $100 per share, 5,000 Series 2 Preferred Shares
on January 8, 1997 and 7,500 Series 2 Preferred  Shares on February 7, 1997.  On
February 7, 1997, Dr. Ramesh Pandey,  the Company's Chairman and Chief Executive
Officer,  agreed to exchange 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
13,180  shares  of Series 3  Preferred  Shares.  Pursuant  to their  terms,  the
outstanding  22,500  Series 2  Preferred  Shares and 13,180  Series 3  Preferred
Shares are to be converted into 45,000,000 and 21,088,00 shares of Common Stock,
respectively.  Under the Blech  Purchase  Agreement,  as amended,  Blech has the
right to purchase an additional  25,000,000  shares of Common Stock on or before
April 30, 1997, 20,000,000 shares of Common Stock on or before June 2, 1997, and
a final 10,000,000 shares on or before July 15, 1997.

(B) Class C Series 1 Preferred Stock - As of January 31, 1997, all 22,500 shares
of Class C Series 1 Stock have been converted  into  1,793,583  shares of Common
Stock at a conversion price ranging from $1.25 - $1.70 per share.

(C) Capital Stock - 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  share 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 of the Series 1, Series 2 and
Series 3 of the Class C  Preferred  Stock which had been  converted  into Common
Stock.

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

(A) Debt to Equity Conversions - Subsequent to December 31, 1996, certain of the
Company's  debt is to be  converted  to  equity  in  accordance  with the  Blech
Purchase  Agreement.  The  following  does  not  give  effect  to  other  events
subsequent to year end but gives pro forma effect to:

(1)Conversion of long term notes payable
      to Dr. Pandey to equity (See Note 10).              $ 517,451

(2)Conversion of notes payable to Dr. Pandey
      to equity (See Note 10).                              590,000

(3)Conversion of accrued interest due
      Dr. Pandey to equity (See Note 10).                    80,611
                                                          ---------
      Total                                               $1,188,062
                                                          ==========



                                      F-21

<PAGE>



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



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

(B) Blech Purchase Agreement - In accordance with the Blech Purchase  Agreement,
as amended,  David Blech or his assignees invested an additional $1,750,000 into
the Company in the three  months  ended  March 31,  1997.  For this  investment,
35,000,000 shares of Common Stock were issued.

(C) Pro Forma
                                   Actual                        Pro forma
                                 December 31      Effect of      March 31
                                    1996        Transactions        1997
Current liabilities              $1,789,432     $  (864,651)    $  924,781
Notes payable - related party      323,411         (323,411)            --
Stockholders' equity             1,603,632        2,938,062      4,541,694
                                 ---------      -----------     ----------
        Totals                   $3,716,475     $ 1,750,000     $5,466,475
                                 ==========     ===========     ==========



                        .   .   .   .   .   .   .   .   .

                                      F-22

<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.


                                      37

<PAGE>



                                   PART III

Item 9Directors, 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).........    58  Chief Executive Officer, President, and
                                         Chairman of the Board of Directors
Dr. Brian Arenare (1) (2) (3)....    38  Director
Dr. Lester A. Mitscher (2) (3)...    65  Director
Leonard A. Mudry.................    59  VP - Finance and Operations,
                                            Secretary, Treasurer

  (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 and the Journal of  Industrial  Microbiology.  Dr. Pandey is a
member of the  editorial  board of the  Journal  of  Antibiotics  and of several
professional societies.

   Brian Arenare,  M.D., has been a director of the Company since March 1994 and
has served as a consultant to the Company since May 1992. He is also a member of
the  SAB.  Currently,  Dr.  Arenare  is  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

                                      38

<PAGE>



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.
   Lester A. Mitscher, Ph.D., has been a director of the Company since August 
1994.  He is also a member of the SAB.  Dr. Mitscher 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.

   Leonard A. Mudry has been the Vice  President - Finance and Operations of the
Company since May 1994.  From February 1991 to April 1994, he was Vice President
- Operations of MediGene,  Inc., a pre-natal  testing company.  Prior to joining
MediGene,  Mr.  Mudry was Vice  President  -  Operations/Finance  for  Princeton
Diagnostic Labs from March 1990 to January 1991; Senior Vice President and Chief
Financial  Officer of American Medical  Laboratories  from January 1987 to March
1990;  and  held  various  positions  with  Hoffman-   LaRoche,   Inc.  and  its
subsidiaries, a major pharmaceutical company, from 1969 to 1987.

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,  except that David Blech and the Trust,
which  became  reporting  persons on November  18,  1996,  did not file a Form 3
reporting their ownership of the Company's securities (a Form 5 was later filed)
and Brian Arenare, a director of the Company,  filed late a Form 4 reporting the
grant of an option from the Company to purchase Common Stock.

Committees

   The Company's Stock Option  Committee,  established in May 1995,  consists of
Messrs.  Pandey and Arenare.  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, consists of
Messrs.  Arenare and Mitscher. 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,  consists of Messrs.
Arenare and Mitscher.  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

                                      39

<PAGE>



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 1994, 1995 and
1996 for the Company's  President and Chief Executive  Officer,  who is the only
executive officer of the Company whose compensation exceeded $100,000:
<TABLE>



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

Dr. Ramesh 
Pandey        1997  $137,846     0      $7,978        0         0        0           0
              1995  $139,525     0      $7,072        0         0        0           0
              1996  $118,365     0      $13,375       0         0        0           0
==================  ========= ======= =========== ========  ======== ========= ============

</TABLE>

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 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

                                      40

<PAGE>



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 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 February 20, 1997,
the Company has granted  options  under the Plan to purchase  599,500  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, 1996 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 Option Exercise
               Underlying Option Granted to Employee Price (per
     Name          Granted      In Fiscal Year   Share)   Expiration Date
Leonard A. Mudry   15,000            4.7%         3.00      2/29/07
Leonard A. Mudry    7,000            3.1%         1.38      6/25/06
Leonard A. Mudry   40,000           14.3%         0.47      11/15/06
   TOTAL           62,000           22.1%
============== =============== ================ ========= ============


Aggregated Option Exercises in Fiscal 1996 and Fiscal Year-End Option Values

   The following table provides  information on option exercises during the year
ended  December 31, 1996 by the directors and executive  officers of the Company
and the value of such  parties'  unexercised  stock  options as of December  31,
1996.

                                      41

<PAGE>

<TABLE>




                                         Number of Securities   Value of Unexercised
                                        Underlying Unexercised  In-the-Money Options
                                         Options at 12/31/96      at 12/31/96 (1)
                     Shares
                    Acquired    Value
       Name         on ExercisRealized  ExercisableUnexercisablExercisableUnexercisable
<S>                    <C>      <C>       <C>      <C>         <C>        <C>

                       (#)       ($)
Dr. Ramesh C. Pandey    0         0         0      707,000 (2)     0       $633,649
Dr. Brian Arenare       0         0       2,000       6,000      $1,793     $5,378
Dr. Lester A. Mitscher  0         0       2,300       8,200       $896      $2,688
Leonard A. Mudry        0         0       6,000      71,000        0        $17,450
==================  ========= ========= ========== =========== ========== ===========
</TABLE>

(1)Represents  the excess,  if any, of the closing  price of the Common Stock as
   quoted on the Nasdaq  SmallCap on December  31, 1996 ($.91) 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 Item 1, Business - Reorganization.
   These options are exercisable upon the Company attaining  specific  financial
   goals.



                                      42

<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, 1997 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 Preferred
                         Common Stock               Stock
                      Number of  Percent     Number of  Percent       Percent of
Name and Address     Shares   of Class     Shares   of  Class   Voting Stock (1)
The Edward A. Blech Tr45,000,000 (52.0%              0        -         50.6%
David Blech (4)       45,000,000  52.0%              0        -         50.6%
                          (3)(5)
Michael G. Jesselson 125,000,000   5.8%              0        -          5.6%
Trust (3)
Benjamin J. Jesselson 15,000,000   5.8%              0        -          5.6%
Trust (3)
Michael G. Jesselson (10,050,000  11.6%              0        -         11.3%
                          (7)(8)
Dr. Ramesh C. Pandey (23,821,945(127.5%          2,500     100%         29.6%
Dr. Brian Arenare (9)  6,000 (11)   *                0        -           *
Dr. Lester A. Mitscher 4,600 (11)    *                0        -           *
All dir.and exec     23,844,545  27.6%                                 29.6%
officers as a group ....  (4(12)sons)            2,500     100%

(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.

(6)The address of each of The Michael G. Jesselson 12/18/80 Trust, the
 Benjamin J. Jesselson 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 filed by Michael G. Jesselson.

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

(9)The address of each of Messrs.  Pandey,  Arenare  and  Mitscher is c/o Xechem
   International, Inc., 100 Jersey Avenue, Building B, Suite 310, New Brunswick,
   New Jersey 08901.

(10Does  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, 1997.

(11All shares subject to options which are exercisable within 60 days from March
31, 1997.

                                      43

<PAGE>



(12Includes  20,600 shares  subject to options which are  exercisable  within 60
days from March 31, 1997.

*     Less than one percent.

   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 though  March 28, 1997.  As a result of
such  issuances,  Blech has the ability to control the  election of the Board of
Directors,  as well a  contractual  right to have his  nominees  elected  to the
Board.  Accordingly,  Blech has obtained the power to control the affairs of the
Company. See Item 1, Description of Business - Recent Developments - Blech Stock
Purchase  Agreement and Risks  Affecting  Forward  Looking  Statements and Stock
Prices - Control by Blech.

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

                                      44

<PAGE>



Stock to the plaintiffs (subject to piggyback registration rights), pursuant
to its indemnification obligation to Dr.
Pandey.

   During 1994, Dr. Pandey transferred the stock of Xechem Laboratories to the 
Company, in exchange for reimbursement of the amount Dr. Pandey contributed 
to Xechem Laboratories to pay  its organizational and
related expenses (approximately $5,000).  Xechem Laboratories is presently
 inactive.  See Item 2, Properties.

   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.

   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.

   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  March 28,  1997.  See Item 1,
Description of Business - Recent Developments - Blech Stock Purchase Agreement.


                                      45

<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.


                                      46

<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 filed with this report:

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)

11    Statement of Earnings (Loss) Per Share

21    Subsidiaries of the Company

23    Consent of Moore Stephens, P.C.

   (b)The  Company  filed the  following  Reports  on Form 8-K during the fourth
quarter of 1996.

   (i)Form 8-K dated November 29, 1996 wherein the Company reported  information
      under Item 1-Changes in Control of Registrant and Item 5 - Other Events.

   (iiForm 8-K dated December 16, 1996 wherein the Company reported  information
      under Item 5 - Other Events.

                                      47

<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: April 10, 1997                        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: April 10, 1997
     ----------------------------
     Ramesh C. Pandey, Ph.D.,
     Chief Executive Officer, President and
     Chairman of the Board of Directors


By:  /s/ Brian Arenare                                     Date:  April 10, 1997
     ----------------------------
     Brian Arenare, M.D.,
     Director


By:  /s/ Lester A. Mitscher                                Date:  April 10, 1997
     ----------------------------
     Lester A. Mitscher, Ph.D.
     Director


By:  /s/ Leonard A. Mudry                                  Date:  April 10, 1997
     ----------------------------    Leonard A. Mudry,
     Vice President - Finance and Operations



<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: April 10, 1997                        By:
                                          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:                                                         Date: April 10, 1997
     ----------------------------
     Ramesh C. Pandey, Ph.D.,
     Chief Executive Officer, President and
     Chairman of the Board of Directors


By:                                                        Date:  April 10, 1997
     ----------------------------
     Brian Arenare, M.D.,
     Director


By:                                                        Date:  April 10, 1997
     ----------------------------
     Lester A. Mitscher, Ph.D.
     Director


By:                                                        Date:  April 10, 1997
     ----------------------------
     Leonard A. Mudry,
     Vice President - Finance and Operations



<PAGE>





                                 EXHIBIT INDEX


Number      Exhibit

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

3(i)(d)     Certificate of Designations, Preferences and Rights of Class C
            Share (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)

11          Statement of Earnings (Loss) Per Share

21          Subsidiaries of the Company

23          Consent of Moore Stephens, P.C.