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, 2000

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

                         Commission File Number 0-23788

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

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

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

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

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

       Title of each class             Name of each exchange on which registered

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

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

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

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

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                                (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.

YES        NO  X
    ---       ---

     State issuer's revenues for its most recent fiscal year. $ 38,000

     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. $ 6,346,000 as of February 28, 2001.

     The  number  of  shares  outstanding  of the  Company's  Common  Stock  was
344,537,279 as of February 28, 2001.

<PAGE>

                                      INDEX
                                      -----

                                                                            Page
                                                                            ----
PART I
     Item 1.  Description of Business ......................................  03
     Item 2.  Description of Property ......................................  25
     Item 3.  Legal Proceedings ............................................  25
     Item 4.  Submission of Matters to a Vote of Stockholders ..............  25

PART II
     Item 5.  Market for Common Equity and Related Stockholder Matters .....  26
     Item 6.  Management's Discussion and Analysis .........................  28
     Item 7.  Financial Statements .........................................  32
     Item 8.  Changes In and Disagreements With Accountants on Accounting
              and Financial Disclosure .....................................  33

PART III
     Item 9.  Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act ............  34
     Item 10. Executive Compensation .......................................  35
     Item 11. Security Ownership of Certain Beneficial Owners and Management  38
     Item 12. Certain Relationships and Related Transactions ...............  39
     Item 13. Exhibits and Reports on Form 8-K .............................  40

<PAGE>

                                     PART I
                                     ------

ITEM 1.   DESCRIPTION OF BUSINESS(1)
          --------------------------
GENERAL

     Xechem International, Inc. ("Xechem" or the "Company") is a holding company
which  owns all of the  capital  stock  of  Xechem,  Inc,  a  development  stage
biopharmaceutical  company currently engaged in the research,  development,  and
limited  production of niche generic and proprietary drugs from natural sources.
The  Company  is engaged  primarily  in  applying  its  proprietary  extraction,
isolation and  purification  technology to the  production  and  manufacture  of
paclitaxel  (commonly referred to in the scientific  literature as "TAXOL(R)," a
registered   trademark  of  Bristol-Myers  Squibb  Company  ("Bristol  Myers")).
Paclitaxel is an anticancer compound used for the treatment of ovarian,  breast,
small cell lung  cancers  and AIDS  related  Kaposi  sarcomas.  The  Company has
successfully  isolated  greater than 97% pure  paclitaxel and has received seven
(7) U.S. and six (6)  international  patents on this  technology  and its second
generation  analogs from the U.S.  Patent and Trademark  Office and  thirty-four
international  patents  are  pending.  The Company  has also  prepared,  through
contract, dosage forms of paclitaxel and has performed limited stability testing
for submission of an Abbreviated New Drug  Application  ("ANDA") to the Food and
Drug Administration  ("FDA"). The Company has submitted to the FDA a Drug Master
File ("DMF") for the facility and the bulk  paclitaxel  product.  The Company is
working to submit an ANDA for generic paclitaxel.

     The Company has  continued  and will  continue  to apply its  expertise  to
research and develop other niche  compounds.  The Company has focused certain of
its research and  development  efforts on the  development of drugs from sources
derived  from  Chinese,  Indian and other  traditional  medicinal  plants in the
anticancer,  antifungal,  antiviral  (including  anti-AIDS),  anti-inflammatory,
antiaging  and memory  enhancing  areas.  Some of these efforts are performed in
collaboration  with the  National  Cancer  Institute  ("NCI")  and the  National
Institutes of Mental  Health  ("NIMH").  The Company has  discovered a number of
medicinal plant extracts showing excellent in vitro biological  activity against
Helicobacter pylori (H. pylori),  Vancomycin  resistant bacteria and Methicillin
resistant bacteria.

     The Company has a  subsidiary,  Xechem  (India)  Pvt.,  Ltd., in New Delhi,
India.

     The Company has a subsidiary, XetaPharm, Inc. ("XetaPharm"), to develop and
market   over-the-counter   natural   product   health   supplements   such   as
GinkgoOnce(R),  GarlicOnce(R),  GinsengOnce(R), Gugulon(TM), Melatonin, DHEA and
CoEnzyme Q-10. To date, XetaPharm has had only limited operations and sales. See
"XetaPharm" below.

     The Company has signed a joint venture  agreement  with J & M  Consultants,
Ltd. a Hong Kong company,  to establish  Xechem  Pharmaceutical  China Ltd. with
offices in Hong Kong and Beijing,  Peoples  Republic of China.  See Xechem China
below.

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

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

                                       3
<PAGE>

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 six major
phases: (i) folklore screening;  (ii) ethnobotanical  research; (iii) biological
screening,  fingerprinting  and  standardization of the actives 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  anticancer,
antiviral,   antifungal  and  memory  enhancing  activities.  The  field-derived
information is also  cross-checked  through  literature  searches as to chemical
constituents,  previously  discovered  biological  activity  and other  reported
medicinal   uses.   In  the   Company's   multidisciplinary   environment,   the
ethnobotanists continue to work with other scientists after the expedition phase
in the later stages of drug discovery to assist in directing activity screens.

     Biological Screening, Fingerprinting and Standardization,  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 fingerprinting  and  standardization by high performance liquid
chromatograph   (HPLC)   and  thin   layer   chromatograph   (TLC)  for  use  as
"PHYTOPHARMACEUTICALS"  and also subjected to bioassay guided  fractionation  to
isolate pure  compounds.  The  isolated  compounds  are then further  tested for
biological  activities to develop  pharmaceuticals  in studies  meeting  Western
standards. The Company is currently screening extracts and pure compounds in the
antifungal, anticancer, antiviral, anti-inflammatory and memory enhancing areas.
The Company conducts certain of its screening in collaboration  with the NIH and
industrial laboratories.

     Product  Development.  Once an extract or a pure compound has  demonstrated
promising activity, it is subjected 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.

                                       4
<PAGE>

RECENT DEVELOPMENTS

New Patents
-----------

     The Company  announced at its annual meeting held July 11, 2000 that it had
received  seven new U.S.  and two  international  patents  during the past year,
seven of which are related to the field of the  anticancer  drug  Paclitaxel and
its second generation Paclitaxel analogs and two for diagnostic  microbiological
HEXOID(TM)  plates.  In addition,  there are currently 30 international  patents
pending, with more possible during the coming year.

     The Company received an Australian  Patent # 724929 on January 25, 2001 for
several dihalo  analogs of  paclitaxel,  the well know antitumor drug sold under
the name TAXOL(R) by Bristol-Myers Squibb.

     The U.S.  Patent & Trademark  Office  issued U.S.  Patent No.  6,177,456 on
January 23, 2001 containing broad claims to novel  second-generation  paclitaxel
analog  developed  by  the  Company.  Preliminary  studies  show  antineoplastic
efficacy of the new,  novel analogs  against a wide array of cancer tumor cells.
The claims cover the new  paclitaxel  analog,  its  pharmaceutical  formulations
comprising the compound,  a method for administering  such compound for treating
both animal and human tumors,  and a method for production of the compound.  The
new analog is produced by  semisyntheses  involving  selective  halogenation  of
paclitaxel's   close   analog   cephalomannine,   to  produce   haloisomers   of
cephalomannine.

Xechem China
------------

     On April 4, 2000, the Company  signed a joint venture  agreement with J & M
Consultants,  Ltd.  ("J & M") to  establish  Xechem  Pharmaceutical  China  Ltd.
(Xechem  China)  with  offices in Hong Kong and  Beijing,  People's  Republic of
China.  Xechem  China is owned 45% by the Company and 55% by J & M  Consultants,
Ltd.  The purpose of  establishing  Xechem  China is to carry on the business of
manufacturing,  marketing  and  distributing  pharmaceutical  and  nutraceutical
products  in China.  Xechem  China  will also carry out  research,  development,
clinical  studies and production of new drugs based on the Company's  technology
related  to  traditional   Chinese  medicine  and  other  disciplines,   provide
consulting  services for drug development and set up a certified  laboratory in,
the  People's  Republic of China to screen,  to  establish  Quality  Control and
Quality  Assurance  laboratories  and certify  pharmaceutical  products  for the
public.

     In an exclusive License Agreement with Xechem China, the Company will allow
the use of its patents,  trademarks and technical  information  to  manufacture,
market and sell the  products in the  Territories  of the  People's  Republic of
China,  Hong Kong,  Macao,  Taiwan  (The  Republic of China),  Mongolia,  Korea,
Singapore, Malaysia, Indonesia, the Republic of Philippines,  Thailand, Vietnam,
Brunei,  Cambodia,  Myanmar,  and such other  countries or regions  which may be
agreed between the parties.  A non-exclusive  license is granted in Japan. J & M
have  committed a sum of  $1,218,000  and  management  services to Xechem China.
Xechem  China has agreed to fund the Company up to $240,000 as an interest  free
loan in monthly  installments of $20,000 over 24 months. As of December 31, 2000
the Company has received  $140,000 pursuant to this Xechem China is currently in
the development  stage, and accordingly is hiring employees and other to conduct
it's business.

In the first phase, Xechem China will commence the (i) pre-clinical and clinical
studies of a new paclitaxel  formulation  for ovarian and breast  cancers,  (ii)
toxicological  studies on two of Xechem's second generation  patented paclitaxel
analogs  and  (iii)  registration  of  Xechem/XetaPharm's  nutritional  products
(GinkgoOnce(R),  GarlicOnce(R),  GinsengOnce(R), Gugulon(TM), Co-Enzyme Q-10 and
Vida  Pras(TM)).  Xechem  China is in the  process of  establishing  development
agreements  with various  research and  marketing  specialty  firms in Shanghai,
Beijing and other locations. Further capital commitments will be required of J&M
or other partners in the development agreements, in order to meet their business
plans.  Xetapharm  has received two purchase  orders from Xechem China  totaling
$125,000 for nutraceutical products of which, $25,000 of Gugulon(TM) was shipped
in 2000, and the second scheduled to ship in 2001.

                                       5
<PAGE>

Sale of Net Operating Loses (NOLs)
----------------------------------

     In the year 2000 the  Company has  received  Certificates  of Approval  for
$299,782 from the New Jersey Economic Development Authority (NJEDA) for the sale
of Xechem,  Inc.  and  XetaPharm,  Inc.  unused New  Jersey net  operating  loss
carryovers.  This represents the Company's  allocation under a State tax benefit
transfer program for emerging technology and biotechnology  companies,  which is
administered by the NJEDA. The tax credits are based on the net operating losses
for the  Company  and each  subsidiary  filing in New  Jersey.  The  credits are
calculated  at a tax  rate of 9% and the  Company  is then  allowed  to sell the
credits for a minimum of 75% of the Tax Benefits  Authorized.  The Company's tax
benefits were  purchased by a Fortune 500 Company for $248,819.  The Company has
$409,606 of approved  NJEDA tax  benefits,  which can be sold in 2001 along with
over $450,000 of tax credits pending approval in 2001. All tax credits available
for sale are subject to approval and allocation restrictions from the New Jersey
Economic Development Authority (NJEDA). .

PACLITAXEL AND OTHER ANTICANCER 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 anticancer
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 anticancer action which blocks the replication of cancer
cells.  Bristol-Myers'  formulation of paclitaxel (marketed under the trade name
"TAXOL(R)") was first approved in the United States, Canada, and other countries
for use against refractory ovarian and breast cancers in patients who had failed
to respond to initial chemotherapy.  Subsequently it has been approved for small
cell lung cancer and AIDS related Kaposi sarcoma. Paclitaxel has also been shown
to be effective against skin cancer and colon cancer.

     An  established  market  exists for  paclitaxel  that the Company  believes
currently exceeds $1.5 billion per year.  Additionally,  as clinical  experience
grows,  paclitaxel is expected to be approved for use in several other  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 future as a number of competitors  produce
or are developing processes to produce paclitaxel.

     The Company has developed its own process and isolated  limited  quantities
(less than one kilogram) of greater than 97% pure  paclitaxel that it intends to
utilize in its efforts to obtain  regulatory  approval in the United  States and
foreign  jurisdictions  for the sale of the  compound.  Under  the  Waxman-Hatch
Amendment to the Food,  Drug and  Cosmetic  Act of 1984,  a five-year  period of
marketing  exclusivity  is granted to any firm which  develops  and  obtains FDA
approval of a non-patentable  new molecular  entity,  to compensate the firm for
development  efforts on such non-patentable  molecular  entities.  In connection
with its development of paclitaxel,  Bristol-Myers  was granted such a period of
marketing  exclusivity,  which was to expire on December 29, 1997,  but has been
extended for an additional  four-year  period.  The Company intends to submit an
ANDA in both India and the United States for  paclitaxel  before the end of year
2001. The Company estimates, but can provide no assurances, that FDA approval of
an ANDA for paclitaxel will take six to twenty-four  months. At such time as the
Company  has such data,  it intends to apply for  regulatory  approval to market
paclitaxel in certain foreign countries.  In addition,  although there can be no
assurances,  the Company is considering the possibility of selling paclitaxel as
"bulk raw material,"  processed to 97% or greater purity, but not formulated and
packaged into single dosage sizes. Such sales,  however,  are not expected to be
significant.  Management  believes that obtaining  regulatory approval to market
and distribute  paclitaxel in such foreign  markets will require a significantly
shorter  period of time than would be  required  in the United  States,  but can
offer no assurance thereof. See "Government Regulation."

In cooperation  with  researchers at the University of Texas MD Anderson  Cancer
Center ("MD  Anderson"),  Xechem has developed a new  formulation  of paclitaxel
which  does not  contain  Cremophor(TM)  and  ethanol.  Xechem  believes  it may
ultimately have significant commercial potential. In the second quarter of 1997,
Xechem  obtained  a license  from MD  Anderson  and the Board of  Regents of the
University of Texas (the "UT Board") for the rights to such  formulation.  Under
the license, Xechem has the exclusive, worldwide rights to MD Anderson's and the
UT

                                       6
<PAGE>

Board's patent and other rights,  except for certain rights of the US government
and  the  rights  of MD  Anderson  and  the UT  Board  to use  such  rights  for
educational purposes. Xechem may lose the rights to such technology in countries
in which it does not commence  activities within five years from the date of the
license.  Under the license  agreement,  Xechem  would pay MD  Anderson  certain
milestone and similar payments,  as well as a royalty of 4% of Xechem's sales of
the new  formulation  use of paclitaxel.  Xechem would also pay to MD Anderson a
percentage of amounts received by Xechem from  sublicenses,  if any. Xechem Inc.
is presently  engaged in  litigation  with MD Anderson in  connection  with this
agreement. See Item 3 Legal Proceedings

     In  August  1998 the  Company  announced  that it had  signed  a  strategic
agreement with Nordic Drugs AB for the marketing and  distribution of paclitaxel
in Denmark, Sweden, Finland, Norway and Iceland. Nordic Drugs AB is a well-known
marketer of  pharmaceuticals  with a strong  position in the oncology  area. The
headquarters of Nordic Drug AB is located in Malm, Sweden.

     The marketing and  distribution  agreement calls for Nordic Drugs to submit
the  necessary   application  for  obtaining  regulatory  approval  of  Xechem's
paclitaxel  product,  as well as its new patented paclitaxel analogs and its new
patented stable  non-toxic  formulation for paclitaxel  developed in conjunction
with the M. D. Anderson Cancer Center.

     Nordic Drugs will have exclusive  marketing and distribution  rights in its
territory for a term of ten years.  As of filing date no new  developments  have
occurred.

MANUFACTURING

     The Company conducts  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  has
temporarily stopped its in-house manufacturing of bulk paclitaxel because of the
extension of Bristol-Myers exclusivity.  The Company has submitted a Drug Master
File (DMF) for the facility and for the  manufacture of bulk paclitaxel with the
FDA. Such certification is a necessary  precondition to production of paclitaxel
and other  pharmaceutical  products for sale in the United  States  market.  See
"Paclitaxel and Other Anticancer 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.

PATENTS AND PROPRIETARY TECHNOLOGY

     The Company's policy is to seek patent protection  aggressively and enforce
all of its intellectual  property rights. Dr. Pandey was issued a patent in 1992
for purifying Dermostatin A and B, the rights to which have been assigned to the
Company.  A second  patent,  related to the method for  separating and purifying
antifungal polyene macrolide antibiotics,  was granted to Dr. Pandey in 1993 and
assigned by Dr. Pandey to the Company. The Company has received two patents from
the U.S. Patent and Trademark  Office for the HEXOID(TM)  plate. The Company has
also  received  six U.S.  patents on  paclitaxel  and its analogs  from the U.S.
Patent and  Trademark  Office from 1997 till January 2001 and six  international
patents  from July 1999 till  January  2001.  Patent  applications  for numerous
counterparts are pending 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

                                       7
<PAGE>

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.

                              UNITED STATES PATENTS
                              ---------------------

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
      U.S. PATENT                          TITLE OF PATENT                         DATE OF
         NUMBER                                                                     ISSUE
------------------------------------------------------------------------------------------
<S>   <C>             <C>                                                          <C>
1.    5,159,002       "Method for Purifying Dermostatin A and B"                    1992
------------------------------------------------------------------------------------------
2.    5,210,226       "Method for Separating Purifying Polyene Macrolide            1993
                      Antibiotics"
------------------------------------------------------------------------------------------
3.    5,654,448       "Isolation and Purification of Paclitaxel from Organic        1997
                      Matter containing Paclitaxel, Cephalomannine and Other
                      Related Taxanes"
------------------------------------------------------------------------------------------
4.    5,840,748       "Dihalocephalomannine and Methods of Use Therefor"            1998
------------------------------------------------------------------------------------------
5.    5,854,278       "Preparation of Chlorinated Paclitaxel Analogues and          1998
                      Their Use Thereof as Antitumor Agents"
------------------------------------------------------------------------------------------
6.    5,807,888       "Preparation of Brominated Paclitaxel Analogues and Their     1998
                      Use as Effective Antitumor Agents"
------------------------------------------------------------------------------------------
7.    5,840,930       "Method for Production of 2",3" Dihalocephalomannine"         1998
------------------------------------------------------------------------------------------
8.    5,817,510       "Device and Method for Evaluating Microorganisms"             1998
------------------------------------------------------------------------------------------
9.    Des. 411,308    "Covered, Multi-Well Assay Plate"                             1999
------------------------------------------------------------------------------------------
10.   6,177,456       "Monohalocephalomannines having Anticancer and                2001
                      Antileukemic Activity and Method Preparation Therefor"
------------------------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>

--------------------------------------------------------------------------------
                              INTERNATIONAL PATENTS
                              ---------------------

1.   Pandey, R.C. and L. Yankov,  "Isolation and Purification of Paclitaxel from
     Organic  Matter  Containing  Paclitaxel,  Cephalomannine  and Other Related
     Taxanes" South African Letters Patent # 97/6834, July 28, 1999.

2.   Pandey,  R.C., L.K.  Yankov,  R. Nair and A. Poulev,  "Paclitaxel  Analogs,
     Preparation  and Use as Antitumor  Agents"  South  African  Letter Patent #
     97/6833, July 28, 1999.

3.   Pandey,  R.C., L.K.  Yankov,  "Isolation and Purification of Paclitaxel and
     Cephalomannine" New Zealand Letter Patent # 321499, August 13, 1999.

4.   Pandey,  R.C., L.K.  Yankov,  R. Nair and A. Poulev,  "Paclitaxel  Analogs,
     Preparation  and Use as  Antitumor  Agents"  New  Zealand  Letter  Patent #
     326527, June 8, 2000.

5.   Pandey,  R.C., L.K. Yankov,  "Isolation and Purification of Paclitaxel from
     organic  Matter  Containing  Paclitaxel,  Cephalomannine  and other Related
     Taxanes", Australian Letter Patent # 720719, September 21, 2000.

6.   Pandey,  R.C., L.K.  Yankov,  R. Nair and A. Poulev,  "Paclitaxel  Analogs,
     Preparation and Use as Antitumor Agents", Australian Letter Patent #724929,
     January 25, 2001
--------------------------------------------------------------------------------

     No assurance  can be given 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  thinks it has conducted an exhaustive  patent  search,  there can be no
assurance  that  patents do not exist or could not be filed  which would have an
adverse  effect on the  Company's  ability  to  market  its  products.  If other
companies were to successfully  bring legal actions against the Company claiming
patent or other intellectual  property right  infringements,  in addition to any
potential  liability  for  damages,  the  Company  could be required to obtain a
license to continue to use the  affected  process or to  manufacture  or use the
affected  product or may be required  to cease  using such  products or process.
There can be no assurance  that the Company  would prevail in any such action or
that any license  required  under any such  patent  would be made  available  on
acceptable  terms,  or at all.  There  could be  significant  litigation  in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation,  it could consume a substantial  portion of
the Company's  financial and human resources,  regardless of the outcome of such
litigation.

     The  Company's  licensing  agreement  with the MD  Anderson  Cancer  Center
requires  the Company to expend  significant  sums to maintain  its  exclusivity
under such agreement,  as well as to prosecute patent infringers at its cost and
expense.  There  can be no  assurance  that the  Company  will  have  the  funds
sufficient to continue its rights under this agreement or to  commercialize  the
licensed  technology.  MD Anderson  Cancer Center issued a letter to the Company
claiming a breach of contract.  The Company opposes this claim and  subsequently
filed for a declaratory judgement against MD Anderson Cancer Center.

     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.

                                       9
<PAGE>

RESEARCH FOR PROPRIETARY DRUGS AND TECHNOLOGY DEVELOPMENT

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 the NCI.  Preliminary animal studies have
shown that  these  analogs  may have  significant  advantage  over  TAXOL(R)  or
TAXOTERE(R)  in the treatment of certain  cancers.  The Company has been awarded
six  United  States  patents  and  six   international   patents  with  numerous
international patents pending.

Niche Anticancer Drugs
----------------------

     In  addition to  paclitaxel,  the Company is  developing  technologies  for
production and formulation of other niche generic anticancer drugs whose patents
have either expired or will expire. In some instances, the bulk raw material for
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
niche  generic  drugs  through  submission  of an  ANDA  in the  United  States.
Opportunities  may exist to market such drugs abroad,  subject to less stringent
requirements in certain instances.

Products from Traditional Medicinal Plants and Marine Sources:
--------------------------------------------------------------

     In addition to its efforts to develop  generic  equivalents  to  compounds,
which no longer enjoy patent protection,  the Company has developed an efficient
drug discovery program for the discovery,  development and  commercialization of
new classes of  pharmaceuticals.  Towards  this goal,  the Company is seeking to
develop  proprietary drugs from extracts of 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  through  combinatorial  chemistry,
synthetic   compounds  and  the  modification  of  existing  compounds  for  the
generation of analogs and the utilization of biotechnology tools and techniques,
the Company  believes its approach of screening folk lore  medicinal  plants and
modification through  semisyntheses have better chances of success in developing
new drugs.

     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,  paclitaxel and camptothecin 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.

                                       10
<PAGE>

     The Company's  particular  focus is the  development of therapeutic  agents
based on traditional  plant  medicines,  especially  the folklore of India,  the
People's Republic of China and Indonesia. 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.

     Through a detailed  investigation  of  traditional  Chinese and  Indonesian
medicinal   plants  and  herbs,   Indian   Ayurvedic   medicines   and   Western
pharmacological   literature,  the  Company  has  selected  over  2,000  natural
products, extracts,  semi-synthetic and synthetic compounds for further research
and  development  in the areas of  anticancer,  antiviral  (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 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.

NCI Grant: Products from Deep Sea Marine Organisms
--------------------------------------------------

     The  Company  has  entered  into  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  antiviral,  antimicrobial,
anti-HIV and immunomodulatory  activities.  Antimicrobial  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.

     In August 1999 the Company was awarded a Small Business Innovative Research
(SBIR) Phase I grant of $87,084 from the National  Cancer  Institute  (NCI) with
Dr.  Ramesh  Pandey,  the principle  investigator,  to study  Bioactive  Natural
Products from Marine  Extremophiles.  This research was done in conjunction with
Rutgers  University.  The grant was later increased by $10,834 and, was extended
to August 2001.

     The Company is actively  pursuing other government grants and will continue
to do so in the near and distant future.

OTHER NICHE GENERIC DRUGS

     In  addition  to  anticancer  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.

HEXOID(TM) Plate
----------------

     The Company developed, under a SBIR Phase I grant in 1992 from the National
Aeronautics and Space Administration ("NASA"), a microbial diagnostic HEXOID(TM)
plate assay useful for 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, and sputum),  in water samples,  in cosmetics and
for pesticide detection and biocide evaluation.

                                       11
<PAGE>

     The  Company  has  received  two U.S.  Patents  from the  U.S.  Patent  and
Trademark Office relating to the HEXOID(TM)  plate. See "Patents and Proprietary
Technology"  below.  Further  development will be required before the HEXOID(TM)
plate can be  marketed.  There can be no  assurance  as to  whether  or when the
Company will be able to market the HEXOID(TM) plate successfully.

--------------------------------------------------------------------------------
     U.S. PATENT                    TITLE OF PATENT                     DATE OF
        NUMBER                                                           ISSUE
--------------------------------------------------------------------------------
     5,817,510     "Device and Method for Evaluating Microorganisms"     1998
--------------------------------------------------------------------------------
     Des. 411,308  "Covered, Multi-Well Assay Plate"                     1999
--------------------------------------------------------------------------------

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 ("IR"),  ultraviolet  ("UV-VIS") and gas chromatography ("GC") analysis
of pharmaceuticals,  chemical analysis of vitamins,  and high performance liquid
chromatography ("HPLC") analysis of pharmaceuticals and cosmetics. Many of these
tests are  standardized  tests required to obtain approval of products by FDA or
the U.S. Environmental Protection Agency ("EPA").

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

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

XETAPHARM(TM)

     The  Company  established  XetaPharm(TM)  in 1996 to bridge the gap between
pharmaceuticals and nutraceuticals.  XetaPharm's principal business objective is
to develop "quality controlled"  nutraceutical products for the consumer market.
Based on meetings between the National Center for  Complimentary and Alternative
Medicine ("NCCAM"),  National  Institutes of Health ("NIH"),  and the 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  controlled  nutraceutical  products.  The
Company has obtained "Gold Leaf(R)" as its Trademark for these products.

     XetaPharm is has  developed a limited  number of  over-the-counter  natural
products (not  requiring FDA approval) for sale through direct  consumer  sales,
health food outlets and distribution companies. The Company has selected several
products  to  be   manufactured  by  contract   manufacturers   under  XetaPharm
trademarks.  The emphasis of the products has been the natural health  benefits.
Initial marketing efforts commenced in the second quarter of 1996. XetaPharm has
introduced   seven   products,    to   date:    GarlicOnce(R);    GinkgoOnce(R);
GinsengOnce(R);  Gugulon(TM); Melatonin; DHEA; Co-Enzyme-Q10 and will release an
eighth,  VIDA  PRAS(TM),  in the spring of 2001. The Company has designed a time
release component for the first three of these products,  reducing the number of
pills that must be taken. In 2000, the Company  introduced its newest product in
XetaPharm's nutraceutical line, Co Enzyme Q-10. There can be no assurances as to
the level of success for this program. XetaPharm's marketing

                                       12
<PAGE>

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.

     XetaPharm's  interactive  E-commerce  based  web  site  (xetapharm.com)  is
available for purchases and information for all of XetaPharm's product line.


MANUFACTURING OF NUTRACEUTICALS

     XetaPharm  products are currently  produced to Company  specifications by a
contract  manufacturer  until the Company's  marketing  efforts through brokers,
Internet  and  foreign  sales  show  sufficient   demand  to  warrant   in-house
manufacturing. The Company will analyze possible alternatives.

MARKETING

     The Company's initial potential pharmaceutical products are targeted at the
anticancer,  antiviral,  and  antifungal  markets.  Although  there  can  be  no
assurances,  the Company  anticipates  selling  paclitaxel,  as well as possibly
certain other compounds,  primarily in Europe initially due to the possibly fast
timetable in which to obtain regulatory  approval for sale of such products.  To
date,  no  regulatory  submissions  have been made;  however,  a submission  for
paclitaxel is  anticipated  to be made in select  European  markets in 2001. The
Company is seeking corporate alliances with large  pharmaceutical  companies for
some of its programs in order to take advantage of such companies'  abilities to
reach  broad-based  markets.  There can be no assurance that the Company will be
able to enter into such  collaborative  agreements.  If the  Company  decides to
conduct  any  direct  marketing  of  its  potential  products,  there  can be no
assurance  that the Company  will be  successful  in  establishing  a successful
in-house  marketing  and  sales  force  or  that  sufficient  financing  will be
available to develop its marketing and sales capabilities.

     XetaPharm sells its nutraceutical  product line through health food stores,
pharmacies  and  through  the  internet.  The  marketing  of these  products  is
anticipated to occur through print,  radio and television  advertising and trade
publications.  XetaPharm has limited in-house  marketing and sales force at this
time and is seeking to establish  alliances with more  distributors,  as well as
marketing  firms,  to promote  its product  line.  The Company may in the future
co-market these products with established marketing organizations and/or provide
some  of  these  products  on a  private  label  basis.  The  Company  has  also
established sales through the world-wide web and E-commerce through the web site
www.xetapharm.com.

TRADEMARKS

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

     XetaPharm  maintains  trademark  rights to  GarlicOnce(R),  GinsengOnce(R),
GinkgoOnce(R) and Gold Leaf(R), for which federal registration has been granted.
The  trademarks  for  Gugulon(TM)  and VIDA  PRAS(TM)  are pending at this time.
XetaPharm may adopt other trademarks for use with its potential products.

                                       13
<PAGE>

RAW MATERIAL SUPPLY

     Initially,  the Company  obtained  the raw  material  for  paclitaxel  from
domestic  sources.  In  September  1994,  the Company  entered into a three-year
agreement with Guizhou Fanya  Pharmaceutical Co. Ltd. ("Guizhou") for Guizhou to
supply to the Company partially processed raw material for paclitaxel.  Pursuant
to that  Agreement,  the Company  purchased  2.5 kilograms of at least 50% crude
paclitaxel  (i.e.,  paclitaxel  already  extracted  from the bark) from  Guizhou
during 1995 and 2.5 kilograms in 1996. The Company's  obligation was to purchase
a minimum  of four  kilograms  in the year 1996 and four  kilograms  in the year
1997.  Due to its  financial  condition,  and  the  extension  of  Bristol-Myers
Squibb's  exclusivity of the sale of TAXOL(R) in the US market,  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.

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

     As  paclitaxel  is derived  from the  extraction  and  purification  of raw
materials (bark, needles etc.), the manufacture of paclitaxel is contingent upon
the  availability  of the raw material.  There are limited sources of paclitaxel
raw  material  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 has spent
$150,000  for  extracts  and  compounds  under  these  agreements  over the past
five-years.  Some  of  the  compounds  from  these  investigations  are  in  the
pre-clinical  development.  In  addition,  the  Company  will likely have to pay
royalties to these institutions if the markets develop for any products based on
these materials.

     Dr. Pandey and his brothers  incorporated  a corporation  in India ("Xechem
India") which seeks 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).
Currently the Company owns  substantially  all of Xechem India.  The Company has
not invested  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. Dr. Pandey's
family has invested  additional  funds 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
                                       14
<PAGE>

materials available to competitors of the Company.  In addition,  if the Company
does not control  Xechem India,  there can be no assurance  that Xechem  India's
research,  development,  manufacturing,  and other activities will be of benefit
to, or would not be competitive  with,  the Company.  Xechem India has signed an
agreement  with Fujisawa (USA) to market their  vancomycin and other  injectable
drugs in India.  Xechem  India  commenced  marketing  vancomycin  in 1997  after
registration  of the drug with the Drug  Controller  of India.  Xechem  India is
working closely with the Company in the  registration  of generic  paclitaxel in
India in the second  quarter of 2001.  The results of operations of Xechem India
have not been significant to date.

     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.

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 ovarian,  breast,
small cell lung  cancers and AIDS related  Kaposi  Sarcoma.  In addition,  other
companies have competitive products that are in more advanced stages of clinical
testing than the Company's paclitaxel or its second-generation  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(TM)," which has similar
but different  properties to paclitaxel,  which has been sold in Europe,  and in
1996  received  approval  to sell  TAXOTERE(TM)  in the  United  States.  To the
Company's  knowledge,  a number  of other  pharmaceutical  firms  are  poised to
introduce  paclitaxel  for sale in the United States once Bristol Myers Squibb's
exclusivity for TAXOL(R) lapses.

     As reported in THE  STAR-LEDGER on March 3, 2000 a federal court  supported
most of the patent  challenges  filed by a generic drug maker that wants to sell
generic TAXOL(R). The ruling invalidated key provisions of the

                                       15
<PAGE>

exclusivity  held by  Bristol-Myers  and allowed the  competitor  IVAX to launch
generic versions,  with six months exclusivity from October 31, 2000. Because of
this  ruling the  Company is putting its efforts to bring its version of generic
paclitaxel to the public.

     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.  The Company has  established  some  collaboration  to
investigate  its  second-generation  paclitaxel  analogs,  which  are  at a very
preliminary stage.

Nutraceuticals
--------------

     The  health  supplements  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 be determined.  XetaPharm will
primarily  compete  with  health-aid   companies,   specialty  retailers,   mass
merchandisers,  chain drug stores, health food stores and supermarkets.  Many of
such companies have trademarked  products known  worldwide.  XetaPharm will also
compete with companies,  which manufacture and distribute  non-branded (generic)
products.  Many competitors have substantially greater financial,  distribution,
marketing and other resources than XetaPharm and have achieved  significant name
recognition  and goodwill for their brand names.  There can be no assurance that
XetaPharm  will  be able to  successfully  compete  with  these  companies  when
marketing its products.

GOVERNMENT REGULATION

     The  research,  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  product  for other than  research
purposes,  the Company  must  prepare and submit a Drug Master File (DMF) to the
FDA  to  obtain  overall   approval  of  the  facility  as  a  manufacturer   of
pharmaceuticals  and a DMF for  the  process  of  manufacturing  such  products.
Thereafter,  before any of the Company's  potential new pharmaceutical  products
may be marketed in the United States the following is involved:  (i) preclinical
testing  including  stability  studies 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
application;  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 that 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

                                       16
<PAGE>

dispersed  clinical  study  sites.  The FDA or the sponsor may suspend  clinical
trials at any point in this process if either  entity  concludes  that  clinical
subjects are being exposed to an unacceptable health risk, or for other reasons.

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

     Under the  Waxman-Hatch  Amendment  to the Food,  Drug and  Cosmetic Act of
1984, a five-year  period of marketing  exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable  new molecular  entity, to
compensate the firm for  development  efforts on such  non-patentable  molecular
entities.  In connection with its development of paclitaxel,  Bristol-Myers  was
granted a period of marketing  exclusivity,  which was to expire on December 29,
1997,  but was extended for four years.  Management  believes some, but not all;
foreign  countries  have  given  Bristol  Myers  exclusive  rights to market the
compound. The Company intends to submit an ANDA for paclitaxel before the end of
year 2001.  The  Company  estimates,  but can  provide no  assurances,  that FDA
approval of an ANDA for paclitaxel will take six to twenty-four  months. At such
time as the Company has such data, it intends to apply for  regulatory  approval
to market  paclitaxel in certain  foreign  countries.  Management  believes that
obtaining  regulatory  approval to market and  distribute  paclitaxel in certain
foreign markets will require a  significantly  shorter period of time than would
be required in the United States, but can offer no assurance thereof.

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

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

ENVIRONMENTAL REGULATION

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

                                       17
<PAGE>

EMPLOYEES

     As of December 31, 2000, the Company had eleven  employees,  three of which
are part-time. Of these employees, seven are dedicated to research, development,
manufacturing and regulatory  compliance.  Five of the Company's  employees hold
doctorate degrees.  None of the Company's  employees are covered by a collective
bargaining agreement.  The Company believes all relations with its employees are
satisfactory.

SCIENTIFIC ADVISORY BOARD

     The Company has  established  the  Scientific  Advisory Board ("SAB") which
consists of scientists, researchers, and clinicians with recognized expertise in
the Company's areas of research.  Certain members of the SAB are asked from time
to time to review  the  Company's  research  programs,  advise  with  respect to
technical or clinical matters,  and recommend  personnel.  The Company initially
granted  options in May 1994 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,  and
shares of Common  Stock were  granted to certain  advisors in  compensation  for
their help and  contribution  to the company.  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,  Director of Clinical
Affairs of the Myeloma and Transplantation Research Center and the University of
Arkansas School of Medical Sciences,  Little Rock, Arkansas.  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, Houston, Texas.

     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.  He was  responsible  for the  discovery of many new drugs,  which
include   Centchroman,   a   contraceptive,    Centbutindole,   a   neuroleptic,
Centbucridine,  a local anaesthetic and Gugulipid,  a lipid-lowering  agent. Dr.
Anand  received  his Ph.D.  from Bombay  University  in 1948 and from  Cambridge
University in 1980.

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

     PROF. JOAN W. BENNETT,  PH.D., is a specialist in the generic and secondary
metabolism of filamentous  fungi.  A graduate of the University of Chicago,  Dr.
Bennett is currently a Professor in the Department of Cell and Molecular Biology
at  Tulane  University  in  New  Orleans,  Louisiana.  Active  in  a  number  of
professional  societies,  she has been Vice President of the British Mycological
Society,  a Board member of the Society for  Industrial  Microbiology,  and is a
Past  President  of the  American  Society for  Microbiology.  She is  currently
co-editor  of The Mycota and  Advances  in Applied  Microbiology,  an  Associate
Editor of  Mycologia,  and Mycology  Series  Editor for Marcel  Dekker.  She has
co-edited six books, and published well over 100 research  papers,  chapters and
reviews.

     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  Squibb.  Dr. Bradner  received his Ph.D. from Lehigh
University in 1952.

                                       19
<PAGE>

     PROF. GEOFFREY A. CORDELL, PH.D., is a Professor and Department Head of the
Medicinal  Chemistry  and  Pharmacognosy  Department at The College of Pharmacy,
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 460 scientific papers and reviews.
He received his Ph.D. in organic  chemistry from the University of Manchester in
1970.

     PROF.  SUKH DEV,  PH.D.,  D.SC.,  F.N.A.,  is a visiting  Professor at the.
Centre for Biomedical  Research,  University of Delhi, India and has studied the
organic  chemistry of natural  products and Ayurvedic  medicinal plants for more
than 40 years.  He has held Research  Professorship  at the Indian  Institute of
Technology in Delhi (1988 - 1992), Director of the Malti-Chem Research Center in
Nandesari,  Varodara,  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 is a recipient of several awards including the Ernest
Guenther  Award (1980) of the  American  Chemical  Society,  and the Third World
Academy  of  Sciences  Award in  Chemistry  (1988).  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.

     PROF.  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 300 papers and received  nineteen awards in the People's Republic
of China for his research achievements,  including the Second and Third Award of
Science and Technology from the Academy of Sciences of China and 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 the  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.

     PROF.  ZHANG  LI-HE,  PH.D.,  is  Professor  and  Dean  of  the  School  of
Pharmaceutical Sciences at Beijing 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 130 scientific papers
in these  areas.  He has been a recipient of the  National  Scientific  Research
Excellence Award from the Science and Technology  Commission and The Ministry of
Education 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.  He
was  awarded  the  12th  Edgar  Snow   Professorship   by  the   University   of
Missouri-Kansas City, USA in 1993.

     RENUKA MISRA,  PH.D., is currently the Director of Natural  Products at the
Company and she is a guest 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, Pune, India in 1965.

     PROF. LESTER A. MITSCHER,  PH.D., is currently the University Distinguished
Professor and former  Chairman of the  Department of Medicinal  Chemistry at the
University  of Kansas,  one of the nations  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,

                                       19
<PAGE>

as well as Chairman of the  American  Society for  Pharmacognosy.  Dr.  Mitscher
received  his Ph.D.  from Wayne State  University  in 1968.  Dr.  Mitscher was a
director of the Company from 1994 to 1997.

     PROF. 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  President  and CEO of the  Texas  Biotechnology
Foundation.  Previously she was Founder and Executive Director of the Center for
Biotechnology,  and  Director  of the  Graduate  Program  in  Biotechnology,  at
Northwestern University.  She has also served as President and CEO of Affiliated
Scientific,  Inc.,  as  Corporate  Vice  President,   Research  and  Development
Worldwide for Flow General,  Inc., as Divisional  Vice  President,  Research and
Development  for Ayerst  Laboratories,  American Home  Products,  and as Head of
Microbial and Molecular Biology for Abbott Laboratories. Dr. Propst received her
Ph.D. from Yale University in 1973.

     PROF. FEDERICO ARCAMONE, PH.D., received a "Diplome d'etudes superieures de
sciences  physiques de  l'Universite  de Paris (1952) and a "Libera  Docenza" in
biological  chemistry in Rome (1962). He has been active in the field of natural
products  and  antibiotic  research,  drug  metabolism  and  organic  synthesis,
becoming Head of Chemical R&D at Farmitalia, Milan in 1973. In 1987 was Chairman
of the Research Division of the Menarini Company (Florence, Italy). From 1997 he
is  associated  with the National  Research  Council,  Italy.  His  achievements
include  the  discovery  and   development   of  the  antitumor   anthracyclines
doxorubicin, epirubicin, idarubicin and their analogs, the structure elucidation
and synthesis of new antibiotics,  the development of new ergoline drugs and the
synthesis of glycopeptides, penem derivatives and DNA conjugates.

     Prof.  Arcamone is author and  co-author  of over 200  research  papers and
reviews,  over  100  patents  and  has  been an  active  lecturer  in  different
countries,   and  has  been  associated  as  a  "contract  professor"  with  the
Universities  of Bologna,  Parma and Milan.  He has received  the  Bristol-Myers
award for Cancer  Chemotherapy,  (1981),  the Gold Medal of the "Academia  delle
Scienze  detta dei XL"  (1982),  the Bruce Cain award of the  American  Ass.  of
Cancer Res.  (1985),  the Medal of the University of Florence  (1992),  the Gold
Medal of the Italian Federation of Chemical  Industries (1994), the Medal of the
Italian Chemical  Society,  Carbohydrate  Division (2000),  and other scientific
recognition.  Prof.  Arcamone is a member  "emeritus"  of the American  Chemical
Society,  member Italian Chemical Soc. of the Am. Ass. of Cancer  Research,  Am.
Soc. of Pharmacognosy,  Am. Soc. of Microbiology, and Int. Society for the Study
of Xenobiotics.

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.

Volatility of Stock Price
-------------------------

     The securities of biotechnology  companies have  experienced  extreme price
and volume  fluctuations,  which have often  been  unrelated  to the  companies'
operating  performance.  Announcements  of  technological  innovations  for  new
commercial products by the Company or its competitors,  developments  concerning
proprietary  rights or  general  conditions  in the  bio-technology  and  health
industries  may have a significant  effect on the Company's  business and on the
market  price of its  securities.  Sales of shares of Common  Stock by  existing
security holders

                                       20
<PAGE>

could  also  have  an  adverse  effect  on the  market  price  of the  Company's
securities given the limited trading and low price of the Company's  securities.
During  2000 stock  prices  have  changed  dramatically  with a high of $1.00 in
February  2000 and a low of $.03 in December  2000.  As of February 28, 2001 the
closing  price of the  Company's  common stock on the OTC  Bulletin  Board was $
0.04.

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

History of Operating Losses; Future Profitability Uncertain
-----------------------------------------------------------

     The  Company  has  experienced   significant  operating  losses  since  its
inception and has generated minimal revenues from its operations. As of December
31, 2000, the Company's accumulated deficit was approximately  $34,464,000 which
included losses from operations of $1,868,000,  $3,035,000,  and $2,314,000, for
the years ended December 31, 2000,  1999, and 1998  respectively.  Approximately
$12,963,000  of the  Company's  accumulated  deficit  resulted  from a  non-cash
accounting  adjustment based upon the difference  between the approximate market
value of certain  debt and equity  which was  exchanged  for Common Stock of the
Company  simultaneously  with the Company's initial public offering (the "IPO"),
and the initial public  offering price of the Common Stock in the Company's IPO.
To date, the Company has been dependent on capital infusions for financing.  The
Company's  ability to achieve a profitable  level of  operations is dependent in
large part on its completing product development, obtaining regulatory approvals
for its potential  products and making the  transition to  commercializing  such
products.  No assurance  can be given that the  Company's  product  research and
development efforts will be completed,  that required regulatory  approvals will
be  obtained,  that  any  products  will be  manufactured  or  marketed  or that
profitability  will be  achieved.  The Company may require  additional  funds to
achieve profitable operations. See "Management's Discussion and Analysis."

Explanatory Going Concern Disclosure
------------------------------------

     As a  result  of its  losses  to  date,  working  capital  deficiency,  and
accumulated  deficit,  the  independent  accountants'  report  on the  Company's
financial statements for each of the years ended December 31, 1993 through 2000,
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  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

                                       21
<PAGE>

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 2 to the Notes to the Company's
Consolidated Financial Statements.

Limited Manufacturing Experience and Capacity
---------------------------------------------

     The Company believes that its current manufacturing  facility is capable of
producing  approximately  four to six  kilograms per year of 97% or greater pure
paclitaxel  from crude bulk extract  containing  approximately  50%  paclitaxel.
Formulation  and  packaging of paclitaxel  in single  injection  dosages will be
performed by a contract  packager.  As of December 31, 2000, the Company has not
negotiated a contract  with any packager to perform such  services.  The Company
maintains an efficient,  ambient  warehouse center to insure proper handling and
shipping of the drugs. While the Company has been seeking additional and back-up
manufacturers,  there can be no  assurance  that it will be able to locate  such
manufacturers,  or that it will be able  to  enter  into  agreements  with  such
manufacturers.  Although  the Company  believes  that it has the  capability  to
significantly  expand  production of bulk  paclitaxel,  should demand exceed the
Company's  manufacturing  capacity,  it may have to seek  third  party  contract
manufacturing.  In such  instance,  there can be no  assurance  that the Company
could  locate  satisfactory  contract  manufacturing  services  to perform  such
functions  at all or on  acceptable  terms,  or that it would  have the funds or
ability  to  develop  such  capability  internally.   In  order  to  manufacture
pharmaceutical  products from its facility, the Company must obtain FDA approval
that the facility is in compliance  with cGMP. The Company has submitted the DMF
of the facility to the FDA. If such approval is not obtained, the manufacture of
its  product  will  have to be  performed  by  current  manufacturers  who  meet
necessary regulatory requirements.

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
minimal 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  originally  entered  into  an  employment
agreement  with the Company for at least a five-year  term,  which  commenced in
1994 and has been extended to February 2005,  providing for, among other things,
an agreement  not to compete with the Company  during his  employment  and for a
period of up to six  months  thereafter.  As of date of filing 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.  The Company may have to record significant
charges to the results of operations  if this occurs.  Further a portion of such
payments may constitute excess employment severance payments, which would not be
deductible

                                       22
<PAGE>

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

     As a result of a reduced  amount of capital the number of persons which the
Company employs has decreased. The Company has reduced its staff from a one time
high of  thirty-five  to eleven  people.  The Company  expects to  increase  its
staffing levels in the future.  The Company's  ability to execute its strategies
will depend in part upon its ability to integrate  such new  employees  into its
operations and fund such additional cost. The Company's planned  activities will
require the addition of new personnel, including management, and the development
of  additional  expertise  by  existing  management  personnel  in areas such as
preclinical   testing,   clinical   trial   management,    regulatory   affairs,
manufacturing,  and  marketing.  The  inability to acquire  such  services or to
develop such  expertise  could have a material  adverse  impact on the Company's
operations.

Reliance on Collaborative Relationships
---------------------------------------

     The  Company  believes  that  it  will  need to  enter  into  collaborative
arrangements with other companies. 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.

Uncertainty Regarding Drug Development
--------------------------------------

     The Company's principal strategy is to develop generic equivalents of niche
off-patent drugs that 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.

Product and Professional Liability Exposure
-------------------------------------------

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

                                       23
<PAGE>

Anti-Takeover Provisions
------------------------

     The Board of Directors has the  authority to issue up to 49,996,350  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.

                                       24
<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 that
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  believes it operates its facility in  accordance  with cGLP and cGMP;
however, to date, the Company has not received the FDA certification for cGMP.

     The Company  leases its office and  laboratory  space at 100 Jersey Avenue,
Building B, Suite 310, New Brunswick, New Jersey 08901. The facility consists of
approximately  25,000  square  feet and at original  execution  of the lease the
lessor was unaffiliated. Ownership of the lessor was subsequently transferred to
a new  investment  group and Dr. Pandey  invested  personal  funds to acquire an
approximately 25% interest in the lessor.  The Company has accepted the first of
three five-year  extensions therefore the current extension to the lease expires
on September 30, 2005,  subject to two  additional  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 $7,768 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 that might be needed at such time.

ITEM 3.   LEGAL PROCEEDINGS
          -----------------

     On March 2, 2000,  the  Company  filed a  complaint  in the  United  States
District  Court for the District of New Jersey  against the  University of Texas
M.D. Anderson Cancer Center and the Board of Regents of the University of Texas,
as defendants. This complaint is for declaratory judgment against the defendants
in connection  with a certain  Patent and  Technology  License  Agreement  dated
August  18,  1997  (the  "License  Agreement"),  which  was the  outgrowth  of a
Sponsored  Laboratory  Study  Agreement  dated  December 12,  1995.  The License
Agreement granted to Xechem certain  exclusive  worldwide rights to use, license
and sublicense patented technology related to a new formulation for the delivery
of paclitaxel. The M.D. Anderson Cancer Center sent a letter to Xechem's counsel
seeking to  terminate  the  License  Agreement.  This  letter  also  contained a
counterproposal to Xechem,  which Xechem rejected,  and Xechem also rejected the
claim that the License Agreement should be terminated.  The defendants delivered
a termination  letter to Xechem purporting to terminate the License Agreement on
the basis of the claim that Xechem was "insolvent." This alleged  insolvency was
based upon 1998  financial  records.  Xechem states in its complaint  that it is
currently solvent and denies the claim that it was insolvent in 1998. Xechem has
made all required  payments to the M.D.  Anderson  Cancer Center pursuant to the
License Agreement.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
          -----------------------------------------------

     No matters were submitted to stockholders  for a vote in the Fourth Quarter
of 2000.

                                       25
<PAGE>

                                     PART II
                                     -------

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
          --------------------------------------------------------

     The  Company's  Common  Stock is  traded  on the OTC  Bulletin  Board.  The
following table shows the high and low quotations,  on a quarterly basis, of the
Company's Common Stock from January 1, 1999 through December 31, 2000:

                                  Common Stock
                                  ------------

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                       1999         1999         1999         1999         2000         2000         2000         2000
                      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               3/32         1/16         5/64         1/16         1           13/32         7/32         1/8
------------------------------------------------------------------------------------------------------------------------
Low Bid                3/64         1/32         1/32         1/32         1/16         3/32         1/32         1/32
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

     As of February 28, 2001,  there were 227 record  holders and  approximately
4,200 beneficial  owners of the Company's Common Stock.  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  $.00001  per  share on a  cumulative  basis.  As of
February  28,  2001  there were 2,500  outstanding  shares of Class A  Preferred
Stock.

     During the year ended  December  31,  2000,  the Company sold shares of its
Common Stock (the "Shares") in transactions  not registered under the Securities
Act of 1933, as amended (the "Securities Act") as set forth below:

     During August 2000,  the Company sold a total of 1,000,000  Shares to three
persons  located  outside of the United States who were not U.S.  citizens.  The
purchasers of these Shares paid a total of $80,000 for their Shares. The Company
did not  use  the  services  of any  finders  or  securities  broker-dealers  in
connection  with the offer and sale of these Shares.  The Company  believes that
all Shares sold in the above mentioned transactions are exempt from registration
under the Securities Act by virtue of Regulation S promulgated thereunder.

     During August 2000, the Company issued a total of 1,110,000  Shares to four
persons as payment for certain services provided to the Company.  The purchasers
of these Shares had provided  services to the Company,  which the Company valued
at approximately  $107,000.  The Company did not use the services of any finders
or  securities  broker-dealers  in  connection  with the offer and sale of these
Shares.  The Company  believes that all Shares issued in the above  transactions
are exempt from registration  under the Securities Act by virtue of Section 4(2)
of the Securities Act and/or Regulation D promulgated thereunder.

     During August 2000, the Company also issued a total of 16,426,400 Shares to
three persons in connection with the conversion of certain  indebtedness owed by
the Company to such persons. The amount of indebtedness converted as a result of
such  transactions  was  $164,264.  The Company did not use the  services of any
finders or securities  broker-dealers  in connection  with the offer and sale of
these  Shares.  The  Company  believes  that  all  Shares  issued  in the  above
transactions are exempt from registration  under the Securities Act by virtue of
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.

                                       26
<PAGE>

     During August 2000, the Company issued a total of 42,259,318  Shares to Dr.
Ramesh C. Pandey,  the President,  Chief  Executive  Officer and Chairman of the
Company in connection  with the conversion of certain shares of Preferred  Stock
which he held. The Company did not receive cash or any other  consideration from
Dr. Pandey in connection with this  transaction.  The Company  believes that all
Shares issued in the above  transaction are exempt from  registration  under the
Securities Act by virtue of Section 3(a)(9) of the Securities Act.

     During October 2000, the Company issued a total of 40,000,000 Shares to one
person in connection  with conversion of certain shares of Preferred Stock which
he held.  The  Company  did not receive  cash or other  consideration  from this
person in connection with this transaction. The Company believes that all Shares
in the above transact are exempt from  registration  under the Securities Act by
virtue of Section 3(a)(9) of the Securities Act.

     During November 2000, the Company issued a total of 2,154,800 Shares to one
person in connection  with the  conversion of certain  indebtedness  owed by the
Company to such person. The amount of indebtedness converted as a result of such
transaction  was $21,548.  The Company did not use the services of any finder or
securities broker-dealers in connection with the offer and sale of these Shares.
The  Company  believes  that  all  Shares  issued  in  connection  in the  above
transaction are exempt from  registration  under the Securities Act by virtue of
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.

                                       27
<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 niche generic and proprietary drugs from natural
sources.  Xechem, Inc., was formed in March 1990 to acquire substantially all of
the assets of a subsidiary of LyphoMed,  Inc. (later known as Fujisawa/LyphoMed,
Inc.),  a  publicly  traded  company.  Xechem  Laboratories  (formed  in  1993),
XetaPharm,  Inc.  (formed in 1996) and Xechem (India) Pvt. Ltd. are subsidiaries
of the  Company.  Xechem  Pharmaceutical  China  Ltd.,  (formed  in  2000) is an
affiliate of the Company in the early stages of development.

Results of Operations
---------------------

The Year Ended December 31, 2000 vs. The Year Ended December 31, 1999

     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, 2000 and for each of the years ended  December  31,  2000 and  December  31,
1999.

                                                                     Cumulative
                                            Years Ended             Inception to
                                            December 31              December 31
                                            -----------              -----------
                                             2000          1999          2000
                                                      (in thousands)

Revenue                                    $     38      $    358      $  1,173

Research and development expense           $    538      $    574      $  9,425

General and administrative expenses        $  1,368      $  2,633      $ 11,741

Writedown of inventory and intangibles     $     --      $    186      $  1,723

(Loss) from operations                     $ (1,868)     $ (3,035)     $(21,716)

Revenue
-------

     Revenue decreased $320,000 or 89% from $358,000 for the year ended December
31, 1999 to $38,000 for the year ended December 31, 2000. The $320,000  decrease
in revenue from the year ended  December 31, 1999 to the year ended December 31,
2000 was the result of the  elimination  of  consulting  fees from the Company's
joint  venture  partner  in Xechem  China  which  occurred  in 1999 prior to the
formation of the joint venture agreement.  XetaPharm's revenues from the sale of
over-the-counter  natural health  products,  commonly  known as  nutraceuticals,
increased $18,000 or 58% from the year ended December 31, 1999 to the year ended
December 31, 2000, due to the first shipment of  nutraceuticals  to Xechem-China
for distribution in the Asian market.

------------------------
     (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" indicates that it is
possible that the event anticipated,  believed or expected may not occur. Should
such event not occur,  then the result  that 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.

                                       28
<PAGE>

Research and Development
------------------------

     Research and Development decreased $36,000 or 6% from $574,000 for the year
ended  December 31, 1999 to $538,000 for the year ended  December 31, 2000.  The
Company's research and development  expenditures continue to emphasize compounds
for niche generic  anticancer,  antiviral and antibiotic  products,  which enjoy
significant market demand but are no longer subject to patent protection

     Research  and  development  operations  decreased  slightly in 2000,  which
resulted in the 6%  reduction.  This decrease was mainly due to no new increases
in  personnel  until the 4th  quarter  of 2000 and  reduced  spending  until the
availability  of new funding and  concentrated  effort of the Company's staff in
establishing Xechem-China.

     Expenditures  for research and development  will increase during 2001 since
the Company was able to increase its work force late in 2000 and plans on adding
additional  personnel in 2001. The Company believes that increased  research and
development  expenditures  could  significantly  hasten the  development  of new
products as well as the marketability of paclitaxel.

General and Administrative
--------------------------

     General and administrative  expenses decreased $1,265,000,  or 48%, for the
year ended  December  31, 2000 as compared to the year ended  December 31, 1999.
The significant  changes for the period ending December 31, 2000 were a decrease
of $1,643,000 in non-cash  compensation  to  employees,  directors,  lawyers and
consultants  due to issuance of options and common stock, a $25,000  increase in
accounting  fees  due to new SEC  regulation  requiring  the  timely  review  of
quarterly reports by the Company's  auditors.  A $320,000 increase in legal fees
primarily  relating  to the M.D.  Anderson  case and to  patent  maintenance,  a
$47,000 increase in advertising costs due to the design and maintenance of three
web sites  and the  production  of a video for  "American  Medical  Review",  an
increase in the costs for the Company's Annual Meeting of $27,000, and a $17,000
increase in rent due to the lease renewal.

     The  Company  does not  anticipate  that  the  general  and  administrative
expenses  will  increase  significantly  until  the  hiring  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  occurs.  The exact  number  and nature of persons
hired, and the Company's  expenses for such persons will depend on many factors,
including the capabilities of those persons who seek employment with the Company
and the availability of funding to finance these efforts.

     The  Company  recorded  a  charge  to  operations  in 1999 of  $186,000  to
write-down  certain  inventories  which in the  opinion  of the  Company  had no
realizable value.

     The  Company's  loss from  operations  totaled  $1,868,000,  a decrease  of
$1,167,000, or 38%, for the year ended December 31, 2000 as compared to the year
ended December 31, 1999.

     Interest  expense  increased  approximately  $298,000  in  the  year  ended
December  31, 2000 as compared to the year ended  December  31,  1999.  This was
primarily due to increased borrowings under short-term convertible notes.

     The Company has received  $249,000  from the sales of it's New Jersey NOL's
in 2000.  The  Company  still has over  $400,000  in  approved  tax  credits and
anticipates  on applying for  approximately  an additional  $450,000 of credits,
from its  losses  in 1999 and  2000.  There  is no  guarantee  that all of these
proposed  credits will be approved by "NJEDA" or of the total amount the Company
will be allowed to sell in 2001.

Liquidity and Capital Resources; Plan of Operations
---------------------------------------------------

     On  December  31,  2000,  the  Company  had cash and  cash  equivalents  of
$229,000,  negative  working  capital of $1,423,000  and negative  stockholder's
equity (deficit) of $767,000.

                                       29
<PAGE>

     The  Company  received  $140,000  during the year ended  December  31, 2000
pursuant  to the loan  arrangement  with  Xechem  China.  The  Company  has also
received  approximately  $400,000 in the form of proceeds from convertible loans
and equity  securities.  Cash used in operating  activities was $796,000  during
2000.

     As a result of its net losses to December 31, 2000 and accumulated  deficit
since  inception,  the Company's  accountants,  in their report on the Company's
financial  statements  for  the  year  ended  December  31,  2000,  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 ("DMF") with the Food and
Drug  Administration  ("FDA")  for the  Company's  facilities.  The  Company has
completed its technology  validation and filed a DMF for bulk paclitaxel in June
1997; however,  the Company's facilities have yet to be inspected by the FDA for
current Good Manufacturing  Practices  ("cGMP").  The Company has sufficient raw
materials  to produce  commercial  bulk  paclitaxel  that has a market  value of
approximately  $2,000,000  at  current  prices,  however  the book value of such
inventory  was  written  off in  1997,  and  anticipates,  but  can  provide  no
assurances,  that it will  commence  sales of  paclitaxel  in the  international
market in 2001.  Prior to commencing  such sales,  the Company must file for and
obtain approvals from appropriate  regulatory agencies in foreign jurisdictions.
The  Company has made use of a grant from the State of New Jersey for ISO - 9000
training to gain ISO - 9001  certification,  however the project is currently on
hold due to lack of  personnel  and  funding.  Additionally,  to the  extent the
Company elects to manufacture bulk paclitaxel  domestically and ship it overseas
for  packaging,  the  Company's  facilities  must be  approved  for cGMP and the
product must either be approved for an  investigational  new drug exemption (not
currently  so  approved),   or  deemed  in  compliance   with  the  laws  of  24
industrialized  "tier  one"  countries  (not yet so  approved).  Otherwise,  the
Company can produce the product entirely overseas; however, it most likely would
subcontract  production  to others from raw material or partially  processed raw
material  provided by the  Company,  and might also enter into joint  venture or
other marketing  arrangements for sale of the product overseas.  There can be no
such  assurance  that  necessary  approvals  will not be  delayed  or subject to
conditions  or that  the  Company  will be able  to  meet  such  conditions.  In
addition, the Company has no experience in marketing pharmaceutical products for
human consumption and there can be no assurance that the Company will be able to
successfully  market its  paclitaxel  product  in bulk,  or  indirectly  through
others,  or be able to obtain  satisfactory  packaging  of the product in single
dosage vials from an independent manufacturer.

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

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

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

                                       30
<PAGE>

     On April 4, 2000, the Company  signed a joint venture  agreement with J & M
Consultants, Ltd. ("J&M") to establish Xechem Pharmaceutical China Ltd. ("Xechem
China")  with offices in Hong Kong and  Beijing,  Peoples  Republic of China.The
purpose  of  establishing   Xechem  China  is  to  carry  on  the  business  of,
manufacturing,  marketing  and  distributing  pharmaceutical  and  nutraceutical
products.  Xechem  China will also  carry out  research,  development,  clinical
studies and production of new drugs based on the Company's technology related to
traditional Chinese medicine and other disciplines,  provide consulting services
for drug  development  and set up a  certified  laboratory  in China to  screen,
verify and certify pharmaceutical products for the public.

     In an exclusive License Agreement with Xechem China, the Company will allow
the use of its patents,  trademarks and technical  information  to  manufacture,
market and sell the products in the Territory of the People's Republic of China,
Hong Kong, Macao, Taiwan (The Republic of China),  Mongolia,  Korea,  Singapore,
Malaysia,  Indonesia,  the Republic of Philippines,  Thailand,  Vietnam, Brunei,
Cambodia,  Myanmar,  and such other  countries  or  regions  which may be agreed
between the  parties.  A  non-exclusive  license is granted in Japan.  J & M has
committed a sum of US $1,218,000 and management support to the joint venture and
up to $240,000 as an interest  free loan to Xechem over 24 months,  to be repaid
from the Company's share of profits from the joint venture. Profits of the joint
venture are to be split 55% to J & M and 45% to the Company.

     In the first phase,  Xechem China will  commence the (i)  pre-clinical  and
clinical studies of a new paclitaxel formulation for ovarian and breast cancers,
(ii)  toxicological  studies  on  two of  Xechem's  second  generation  patented
paclitaxel  analogs and (iii)  registration  of  Xechem/XetaPharm's  nutritional
products (GinkgoOnce(R),  GarlicOnce(R),  GinsengOnce(R), Gugulon(TM), Co-Enzyme
Q-10 and Vida Pras(TM)).

                                       31
<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.

                                       32
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Xechem International, Inc.

We  have  audited  the  accompanying   consolidated   balance  sheet  of  XECHEM
International,   Inc.  (the   "Company")  (a  development   stage  company)  and
subsidiaries as of December 31, 2000, and the related  statements of operations,
stockholders'  equity (deficit),  and cash flows for the year ended December 31,
2000 and the 2000  amounts  included in the  cumulative  period  from  inception
(March 15, 1990) through December 31, 2000.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion,  the 2000 consolidated  financial  statements  referred to above
present fairly, in all material respects the consolidated  financial position of
XECHEM International,  Inc. (a development stage company) and subsidiaries as of
December 31, 2000, and the  consolidated  results of their  operations and their
cash flows for the year ended December 31, 2000 and the 2000 amounts included in
the  cumulative  period from (March 15, 1990)  through  December  31,  2000,  in
conformity with accounting principles generally accepted in the United States of
America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  The Company is a  development  stage
enterprise  engaged in the research and  development of generic and  proprietary
drugs from natural  sources.  To date, the Company has primarily been engaged in
the research and development  activities and needs to secure additional  capital
and obtain proper regulatory  approval to continue  operations.  As discussed in
Note 2 to the financial  statements,  the Company's  existence is dependent upon
its  ability to  generate  sufficient  cash flows to meet its  obligations  on a
timely  basis and  ultimately  to attain  profitable  operations,  which  raises
substantial doubt about its ability to continue as a going concern. Management's
plans  concerning  these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.

GRANT THORNTON LLP
March 2, 2001
New York, NY

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Xechem International, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheet of Xechem
International,  Inc. and its subsidiaries (a development stage enterprise) as of
December  31,  1999,  and the related  consolidated  statements  of  operations,
stockholders'  equity  and cash flows for the year then ended and for the period
from  January 1, 1998 to December  31, 1999 (not  presented  separately  herein)
which are included in the cumulative period from inception to December 31, 2000.
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,  based on our audit the consolidated  financial  statements
referred to above  present  fairly,  in all  material  respects,  the  financial
position of Xechem  International,  Inc. and its subsidiaries as of December 31,
1999, and the consolidated  results of their operations and their cash flows for
the year then ended and for the period from January 1, 1998 to December 31, 1999
in conformity with generally accepted accounting principles.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  Xechem  International,  Inc. and its  subsidiaries  will continue as a
going concern. As discussed in Note 2 to the consolidated  financial statements,
the Company has suffered  recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 2. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.

                                                   Wiss & Company, LLP

Livingston, New Jersey
February 18, 2000

                                      F-2
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                    2000             1999
                                                                                ------------     ------------
Current Assets:
<S>                                                                             <C>              <C>
   Cash                                                                         $    229,000     $    632,000
   Accounts receivable less allowance for doubtful accounts
       of $4,000 in 1999                                                              15,000           13,000
   Inventory:
       Raw materials                                                                   6,000               --
       Finished goods                                                                125,000          133,000
   Prepaid expenses and other current assets                                           6,000            1,000
                                                                                -----------------------------

   Total Current Assets                                                              381,000          779,000

 Equipment, less accumulated depreciation of $923,000(2000)
     and $789,000(1999)                                                              507,000          621,000
 Leasehold improvements, less accumulated amortization of
     $502,000(2000) and $434,000(1999)                                               513,000          581,000
 Cash surrender value of officer's life insurance                                     25,000           35,000
 Deposits                                                                             20,000           20,000
                                                                                -----------------------------

                                                                                $  1,446,000     $  2,036,000
                                                                                =============================

CURRENT LIABILITIES
   Accounts payable                                                             $    750,000     $    678,000
   Accrued expenses to related parties                                               346,000          253,000
   Accrued expenses to others                                                        124,000          149,000
   Loans payable                                                                     130,000           61,000
   Loans payable to related parties                                                  298,000          298,000
   Other current liabilities                                                         156,000           36,000
                                                                                -----------------------------

     Total Current Liabilities                                                     1,804,000        1,475,000
                                                                                -----------------------------

NOTES PAYABLE-RELATED PARTIES                                                        409,000          312,000
                                                                                -----------------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS EQUITY (DEFICIT)
   Class A voting preferred stock,$ .00001 par value, 2,500 shares
     authorized; 2,500 shares issued and outstanding                                      --               --
   Class B 8% preferred stock,$ .00001 par value, 1,150 shares
     authorized; none outstanding                                                         --               --
   Class C preferred stock,$ .00001 par value, 49,996,350 shares authorized;
     none outstanding in 2000, 200,000 outstanding in 1999                                --
   Common stock,$.00001 par value, 700,000,000 shares authorized;
     344,537,000 and 240,460,000 respectively issued and outstanding                   3,000            2,000
   Unearned compensation expense                                                    (406,000)              --
   Additional paid in capital                                                     34,100,000       32,740,000
   Deficit accumulated during development stage                                  (34,464,000)     (32,493,000)
                                                                                -----------------------------

   Total Stockholders Equity (Deficit)                                              (767,000)         249,000
                                                                                -----------------------------

                                                                                $  1,446,000     $  2,036,000
                                                                                =============================
</TABLE>

See notes to consolidated financial statements.

                                       F-3
<PAGE>

          XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
      (A DEVELOPMENT STAGE ENTERPRISE)
             CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             MARCH 15, 1990
                                                                               (DATE OF
                                                                             INCEPTION) TO
                                              YEAR ENDED DECEMBER 31,         DECEMBER 31,
                                              2000              1999              2000
                                         -------------     -------------     -------------
REVENUES:
<S>                                      <C>               <C>               <C>
   Consulting fees from Asian company    $          --     $     300,000     $     300,000
   Other                                        38,000            58,000           873,000
                                         -------------------------------------------------
                                                38,000           358,000         1,173,000
                                         -------------------------------------------------

EXPENSES:
   Research and development                    538,000           574,000         9,425,000
   General and administrative                1,368,000         2,633,000        11,741,000
   Writedown of inventory
      and intangibles                               --           186,000         1,723,000
                                         -------------------------------------------------
                                             1,906,000         3,393,000        22,889,000
                                         -------------------------------------------------

   LOSS FROM OPERATIONS                     (1,868,000)       (3,035,000)      (21,716,000)
                                         -------------------------------------------------

OTHER INCOME (EXPENSE) - NET:

   Interest Expense - Related Party            (66,000)          (58,000)       (8,736,000)

   Interest Expense                           (290,000)               --        (5,215,000)

   Sale of New Jersey net operating
    loss carryforwards                         249,000           651,000           900,000

   Other                                         4,000            15,000           303,000
                                         -------------------------------------------------
                                              (103,000)          608,000       (12,748,000)
                                         -------------------------------------------------

   NET LOSS                              $  (1,971,000)    $  (2,427,000)    $ (34,464,000)
                                         =================================================

BASIC AND DILUTED LOSS PER SHARE         $       (0.01)    $       (0.01)
                                         ===============================

WEIGHTED AVERAGE NUMBER OF COMMON
     SHARES OUTSTANDING                    285,145,000       279,197,000
                                         ===============================
</TABLE>

                                       F-4
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
        CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                                        Deficit
                                                                                           Unearned     Additional    Accumulated
                                                                   Number of             Compensation    Paid-in-        During
                                                                 shares issued   Par value  Expense      Capital      Development
                                                                 -------------   --------  ---------   ------------  -------------
<S>                                                               <C>            <C>       <C>         <C>           <C>
    Common stock issued to Dr. Pandey in 1990 in exchange
      for equipment  recorded at transferror's cost                         --   $     --  $      --   $    125,000

    Laboratory and research equipment contributed to capital
      by Dr. Pandey in 1990 and 1991                                        --         --         --        341,000

    Contribution to capital relating to unconsummated acquisition
      in 1992                                                               --         --         --         95,000

    Exchange of securities of newly formed parent for outstanding
      securities of entities owned by Dr. Pandey                     4,371,000         --         --     13,840,000

    Initial public offering in 1995 at $ 5 per share,
      less related expenses                                          1,150,000         --         --      4,543,000

    Stock options granted at exercise prices below market:
      1994                                                             210,000         --         --         51,000
      1995                                                             659,000         --         --      1,110,000
      1996                                                              54,000         --         --         18,000
      1997                                                             126,000         --         --         31,000

    Private placements, less related expenses:
      In 1995 at $ 3.00 per share                                      119,000         --         --        389,000
      In 1996 at $ 3.00 per share, net of a related 66,000 shares
        returned by Dr. Pandey                                         163,000         --         --         53,000
      In 1997 at $ 0.05 per share                                   45,020,000         --         --      2,291,000

    Shares issued in 1996 at $ 0.38 per share upon termination of
      agreement to sell a minority interest in a subsidiary            260,000         --         --        100,000

    Conversion of preferred stock into common stock at $ 1.25 to
      $ 1.75 per share less related costs:
         In 1996                                                     1,686,000         --         --      1,995,000
         In 1997                                                    45,120,000      1,000         --      2,131,000

    Conversion of debt into common stock in 1996 at $ 0.25 per
      share                                                          1,478,000         --         --        369,000

    Shares issued in settlement of a lawsuit in 1996 valued at
      $ 1.31 per share                                                  25,000         --         --         33,000

    Conversion of Dr. Pandey's preferred stock and debt into
      common stock in 1997 at $ 0.0625 per share                    19,430,000         --         --      1,214,000

    Other                                                                   --         --         --         16,000

See notes to consolidated financial statements.

                                      F-5
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
        CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)

                                  (Continued)

<CAPTION>
                                                                                                                        Deficit
                                                                                           Unearned     Additional    Accumulated
                                                                   Number of             Compensation    Paid-in-        During
                                                                 shares issued   Par value  Expense      Capital      Development
                                                                 -------------   --------  ---------   ------------  -------------
<S>                                                               <C>            <C>       <C>         <C>           <C>
    Private placement at $ 0.05 per share                           11,180,000         --         --        559,000

    Contribution to capital by stockholders of equity interest
      in Xechem India                                                       --         --         --         79,000

    Conversion of debt into common stock  at $ 0.05 per share        8,800,000         --         --        440,000

    Stock issued to Fortress Financial at $ 0.0001 per share           800,000         --         --             --

    Return of capital to David Blech or his designees                       --         --         --       (261,000)

    Deficit since inception                                                                                            (30,066,000)
                                                                 -----------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998                                      140,651,000   $  1,000  $      --   $ 29,562,000   $(30,066,000)

    Sale of common stock pursuent to Blech agreement
      at $0.01 per share                                         $  44,554,000      1,000         --        444,000

    Conversion of debt due related parties at $ 0.01 per share      44,181,000         --         --        360,000

    Shares issued to directors , employees and consultants
      for services valued at $ 0.037 per share                      11,074,000         --         --        410,000
     Capital arising from issuance of Class C Stock (Note 7):
          Series 4                                                          --         --         --        400,000
          Series 5                                                          --         --         --      1,564,000

    Net loss for year ended December 31, 1999                               --         --         --             --     (2,427,000)
                                                                 -----------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999                                      240,460,000   $  2,000         --   $ 32,740,000   $(32,493,000)

 Stock options exercised at $ .01 per share                            393,000         --         --          4,000

  Issuance of 1,500,000 options at $.01 per share
     with a FMV of $ .06  per share for services rendered                   --         --         --         75,000

 Conversion of Class C preferred stock to common shares             82,259,000      1,000         --         (1,000)

 Conversion of debt to shares of Common Stock @
   $0.01 per share                                                  16,426,000         --         --        164,000

 Private placement of shares of Common Stock @ $0.08
   per share                                                         1,000,000         --         --         80,000

 Issuance of Common Stock @ $0.096 per share for services rendered   1,110,000         --         --        107,000

 Stock options exercised at $ .01 per share with a FMV
   of $0.076 per share                                                 503,000         --         --          5,000

 Conversion of debt to shares of Common Stock @ $0.01 per share      2,155,000         --         --         22,000

 Stock options exercised at $ .01 per share                            231,000         --         --          1,000

 Beneficial Conversion featue of notes payable                              --         --         --        286,000

 Charge to operations resulting from Options granted to Directors,
  Consultants and Employees                                                 --         --         --        192,000

 Unearned Stock Compensation Expense Related to
  Options granted to Directors,Consultants and Employees                    --         --   (406,000)       406,000

 Increase in Equity Interest in Xechem India                                --         --         --         19,000

    Net loss for year ended December 31, 2000                               --         --         --             --     (1,971,000)
                                                                 -----------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000                                      344,537,000   $  3,000  $(406,000)  $ 34,100,000   $(34,464,000)
                                                                 =================================================================
</TABLE>

See notes to consolidated financial statements.

                                      F-6
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                  March 15, 1990
                                                                                               (date of inception)
                                                                     Year ended December 31,      to December 31,
                                                                  ----------------------------------------------
                                                                      2000             1999             2000
                                                                      ----             ----             ----
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
<S>                                                               <C>              <C>              <C>
    Net loss                                                      $ (1,971,000)    $ (2,427,000)    $(34,464,000)
    Adjustments to reconcile net loss to net cash
      Provided by (used in) operating activities:
      Depreciation                                                     132,000          143,000          824,000
      Amortization                                                      68,000           68,000          673,000
      Interest and compensation expense incurred in connection
        with issuance of equity securities                             700,000        1,973,000       16,933,000
      Write down of inventories                                             --          186,000        1,206,000
      Write down of patents                                                 --               --          517,000
      Loss on investment in related party                                   --           54,000           89,000

    Changes in operating assets and liabilities
      (Increase) decrease in:
        Accounts receivable                                             (2,000)           1,000          (15,000)
        Inventories                                                      2,000           43,000       (1,332,000)
        Prepaid expenses and other current assets                        5,000           84,000          122,000
        Other Assets                                                    10,000               --          (20,000)
      Increase (decrease) in:
        Accounts payable                                                95,000               --          773,000
        Other current liabilities                                      120,000           (9,000)         116,000
        Accrued expenses                                                45,000           44,000          447,000
                                                                  ----------------------------------------------
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES         $   (796,000)    $    160,000     $(14,131,000)
                                                                  ----------------------------------------------
</TABLE>

                                      F-7
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (continued)
<TABLE>
<CAPTION>
                                                                                             March 15, 1990
                                                                                          (date of inception)
                                                                Year ended December 31,      to December 31,
                                                             ----------------------------------------------
                                                                 2000             1999             2000
                                                                 ----             ----             ----
<S>                                                          <C>              <C>              <C>
Net cash flows provided by (used in) operating activities    $   (796,000)    $    160,000     $(14,131,000)
                                                             ----------------------------------------------

Cash flows (used in) investing activities:
    Patent issuance costs                                              --               --         (548,000)
    Purchases of equipment and leasehold improvements             (20,000)         (24,000)      (1,995,000)
    Investment in related party                                        --           12,000          (23,000)
    Other                                                              --            7,000           (8,000)
                                                             ----------------------------------------------

Net cash flows (used in) investing activities:                    (20,000)          (5,000)      (2,574,000)
                                                             ----------------------------------------------

Cash flows provided by financing activities:
    Proceeds from related party loans                              97,000          363,000        1,755,000
    Proceeds from notes payable - others                               --               --          628,000
    Proceeds from short-term loans                                226,000               --        3,173,000
    Capital contribution                                               --               --           95,000
    Payments on interim loans                                          --               --         (498,000)
    Payments on notes payable - others                                 --           (5,000)        (525,000)
    Payments on stockholder loans                                      --         (365,000)        (572,000)
    Proceeds from issuance of capital stock                        90,000          443,000       12,878,000
                                                             ----------------------------------------------

    Net cash flows provided by financing activities:              413,000          436,000       16,934,000
                                                             ----------------------------------------------

    Net change in cash                                           (403,000)         591,000          229,000
Cash, beginning of period                                         632,000           41,000               --
                                                             ----------------------------------------------
Cash, end of period                                          $    229,000     $    632,000     $    229,000
                                                             ==============================================

Supplemental disclosures of cash flow information:
    Cash paid during the periods for:
      Interest paid - related party                          $     50,000     $     33,000     $    188,000
                                                             ==============================================
      Interest paid - other                                  $         --     $         --     $    161,818
                                                             ==============================================
      Income taxes paid                                      $         --     $         --     $         --
                                                             ==============================================

Noncash financing actiities
   Net assets of Xechem India contributed to capital and
    minority interest                                        $         --     $         --     $    118,000
                                                             ==============================================

   Liabilities exchanged for preferred and common stock      $    186,000     $    921,000     $  1,107,000
                                                             ==============================================
</TABLE>

See notes to consolidated financial statements

                                      F-8
<PAGE>

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

NOTE 1    NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF THE BUSINESS
----------------------

The Company is engaged in one business  segment,  the  research  and  technology
development of generic and proprietary drugs from natural sources.  Research and
development  efforts focus  principally  on  antifungal,  anticancer,  antiviral
(including anti-AIDS) and anti-inflammatory  compounds, as well as antiaging and
memory enhancing compounds.  The Company is particularly committed to developing
drugs from sources  derived from Chinese and Indian  folklore and niche  generic
anticancer  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 also develops and
markets a natural food and dietary supplement line of products.  Operations from
inception have consisted primarily of financial planning,  raising capital,  and
research and development activities; minimal revenues have been earned to date.

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., and
Xechem  (India)  Pvt.  Ltd.  which  is   substantially   owned  by  the  Company
(collectively  the "Company").  All intercompany  transactions and balances have
been eliminated in consolidation.

The Company  owns 45% of Xechem China  ("China"),  a newly  formed  entity.  The
Company's  investment in China is carried under the equity method of accounting.
See Note 8.

REVENUE  RECOGNITION - The Company records revenue when all contracted  services
have been performed or when products have been shipped to the customer.

FINANCIAL INSTRUMENTS - Financial instruments include cash, accounts receivable,
other  assets,  notes  and loans  payable,  The fair  value of such  instruments
approximate the carrying value. The amounts  reported for financial  instruments
are considered to be reasonable  approximations  of their fair values,  based on
market  information  available  to  management.  The  use  of  different  market
assumptions and/or estimation  methodologies could have a material effect on the
estimated fair value amounts.

CASH - The Company  considers  all highly  liquid  investments  with an original
maturity of three  months or less to be cash  equivalents.  At December 31, 2000
and 1999,  the  Company had no cash  equivalents.  The  Company  maintains  cash
balances at three different  financial  institutions in New Jersey.  The Company
has over  $189,000  in one  account,  which is  insured by the  Federal  Deposit
Insurance Corporation up to $100,000.

INVENTORIES  -  Inventories  are  stated  at the  lower  of cost on a  first-in,
first-out  basis or  market.  Inventories  at  December  31,  2000 and 1999 were
principally comprised of raw materials and finished goods of XetaPharm's dietary
supplement products.

                                      F-9
<PAGE>

LONG-LIVED  ASSETS - Long-lived  assets,  if impaired,  are written down to fair
value,  whenever events or changes in  circumstances  indicate that the carrying
amount of the asset may not be  recoverable.  Management  also  reevaluates  the
periods of  amortization  of long-lived  assets to determine  whether events and
circumstances warrant revised estimates of useful lives.

FOREIGN  CURRENCY  TRANSLATION - The  consolidated  financial  statements of the
foreign  affiliates have been  translated at current  exchange rates for balance
sheet  items and at average  rates for income and expense  items.  The effect of
foreign  currency  translation  is included in the  consolidated  statements  of
operations,  as the  effects  are  not  material.  Transaction  adjustments  are
included in income.

DEPRECIATION AND AMORTIZATION - Depreciation and amortization are provided using
the straight-line method over estimated lives of 5 to 15 years. Depreciation and
amortization  expense for  equipment and  leasehold  improvements  for the years
ended December 31, 2000 and 1999 was $202,000 and $211,000 respectively.

PATENTS - The cost of patents is charged to cost of operations when incurred, as
no value is assigned to the patents due to the  uncertainty  of  realization  of
value.

GOVERNMENT  GRANTS - The Company has obtained a grant from the  National  Cancer
Institute  for  a  project  entitled  Bioactive  Natural  Products  from  Marine
Extremophiles,  which was substantially completed in 2000. Government grants are
recognized as income as the related costs are incurred.

RESEARCH AND  DEVELOPMENT  COSTS -  Expenditures  for  research and  development
activities are charged to operations as incurred.

STOCK-BASED  COMPENSATION - The Company recognizes compensation expense when the
exercise  price of  employee  stock  options  is below the  market  price of the
underlying stock on the date of grant ("intrinsic value method").  However, with
respect to common  stock and  options  granted  to  non-employees,  the  Company
records  expense  equal to the fair value of the  common  stock or option on the
measurement date, which generally is the date of completion of service. Expenses
relating to such options or stock are estimated  based upon the fair value as of
the end of each reporting period prior to the measurement date.

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
Company's  initial  public  offering  (in  May  1994),  the  Company  was an "S"
corporation  and, as such,  losses  incurred from the date of inception to April
26, 1994 are not available to the Company as tax loss carryforwards.

ESTIMATES - In preparing  financial  statements  in  conformity  with  generally
accepted  accounting  principles  management  is required to make  estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

EARNINGS  (LOSS)  PER SHARE - Basic  earnings  (loss) per share is  computed  by
dividing income (loss) available to common stockholders by the  weighted-average
number of common shares outstanding for the period.  Diluted earnings (loss)/per
share is computed by  dividing  the loss for the period by the  weighted-average
number of common and preferred  shares  outstanding  for the period adjusted for
the diluted effect of any potential common stock issuable during the period. The
shares  issuable  upon the  exercise  of  outstanding  warrants  and options and
conversion  of  preferred  stock have been  excluded  since the effect  would be
antidilutive, due to net losses for all periods presented.  Accordingly, diluted
loss per share is the same as basic loss per share for all periods reported.

                                      F-10
<PAGE>

Recent  Accounting  pronouncements  - In June,  1998,  the Financial  Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS
133),  "Accounting  for  Derivative  Instruments."  SFAS  133,  as  amended,  is
effective for fiscal years  beginning  after June 15, 2000. SFAS 133 establishes
accounting and reporting  standards for derivative  instruments  and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair market value.  Under
certain  circumstances,  a portion of the derivative's gain or loss is initially
reported as a component of income when the transaction  affects earnings.  For a
derivative  not  designated  as a  hedging  instrument,  the  gain  or  loss  is
recognized  in the period of change.  We believe  that the  adoption of SFAS 133
will have no impact on our financial position or results of operations.

In December 1999, the staff of the  Securities  and Exchange  Commission  issued
Staff Accounting Bulletin 101, "Revenue Recognition," to provide guidance on the
recognition,  presentation,  and disclosure of revenue in financial  statements.
Our policies on revenue recognition are consistent with this bulletin.

     In March 2000, the Financial  Accounting  Standards Board issued  Financial
Interpretation No. 44 (FIN 44), "Accounting for Certain  Transactions  Involving
Stock  Compensations - and  Interpretation  of APB No. 25." FIN 44 clarifies the
application  of APB 25 for certain  issues  including:  (a) the definition of an
employee for  purposes of applying APB No. 25, (b) the criteria for  determining
whether a plan qualifies as a  non-compensatory  plan, (c) the definition of the
date of granting employee stock options, and (d) the accounting  consequences of
various  modifications to the terms of a previously fixed stock option or award.
FIN 44 became  effective July 1, 2000,  except for the provisions that relate to
modifications  that directly or indirectly reduce the exercise price of an award
and the  definition of an employee,  which became  effective  after December 15,
1998. We adopted in the accompanying financial statements the provisions for the
definition of the grant date for options whose grant was subject to  stockholder
approval.  The  adoption  of FIN 44 had no material  impact on the  accompanying
financial statements.

RECLASSIFICATIONS  -  Certain   reclassifications   to  prior  year's  financial
statements have been made to conform to the current presentation.

NOTE 2    OPERATING  AND  LIQUIDITY   DIFFICULTIES  AND  MANAGEMENT'S  PLANS  TO
          OVERCOME THEM:

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 for the
years ended  December 31, 2000 and 1999;  has a working  capital  deficiency  at
December 31, 2000; and has an accumulated  deficit and cumulative  negative cash
flows from operations since  inception.The  Company is in the development  stage
and  has  realized  minimal  revenues  to  date.  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  reasonably  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.

                                      F-11
<PAGE>

In view of the matters described in the previous paragraph,  recoverability of a
major portion of the recorded  asset amounts shown in the  accompanying  balance
sheet is dependent upon continued operations of the Company, which, in turn, are
dependent  upon the Company's  ability to meet its financing  requirements  on a
continuous  basis  and  to  succeed  in its  future  operations.  The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification of recorded asset amounts or amounts of liabilities that might be
necessary should the Company be unable to continue in existence.

MANAGEMENT'S PLANS WITH RESPECT TO THIS SITUATION INCLUDE THE FOLLOWING:

The Company has financed research and development activities principally through
capital  contributions  and loans made by its  stockholders and other investors,
banks, and through funds received from the sale of NOL's (Net Operating  Losses)
through the New Jersey State Tax Credit Transfer program.

During the two years ended December 31, 2000, the Company has cut administrative
expenses,  reduced its monthly cash  requirements and has sold a portion of it's
state net operating loss carryforwards and expects the following:

The  Company  expects  to  continue  its  development  efforts  with  respect to
antifungal,  anticancer,  antiviral (including  anti-AIDS) and anti-inflammatory
compounds, as well as antiaging and memory enhancing compounds.

The Company is  attempting to raise  outside  financing  through the issuance of
equity securities or other instruments,  although no agreements are currently in
place.

The Company has received cash advances and loans from affiliates of the Company,
and has deferred certain expenses payable to officers of the Company.

The Company has issued  equity  securities  where  possible to obtain  services,
without expending cash.

The Company expects to continue to receive an interest free loan pursuant to its
joint venture agreement with Xechem China. Xechem China, which is being financed
by the Company's joint venture partner,  is a development  stage company engaged
in the  research,  development,  manufacturing,  marketing and  distribution  of
pharmaceutical and nutraceutical products.

NOTE 3    INCOME TAXES

     The Company has not provided for income taxes since they have generated net
operating  losses.  As of December 31, 2000 the Company had net  operating  loss
carryforwards  ("NOL") for federal  income tax purposes of  approximately  $19.2
million,  which a portion of the NOL begins to expire in 2014 and fully  expires
in 2020.  As the  Company  continues  to sell  stock,  the  Company  may undergo
ownership changes within the meaning of Section 382 of the Internal Revenue Code
of 1986 as amended (the "Code") Under section 382 of the Code,  upon  undergoing
an  ownership  change,  our right to use our then  existing net  operating  loss
carryforwards  as of the date of the  ownership  change is limited  during  each
future year to the  percentage of the fair market value of our then  outstanding
capital stock  immediately  before the ownership  change and if other  ownership
changes have occurred prior to this ownership  change,  the  utilization of such
losses may be further

                                      F-12
<PAGE>

limited.  The timing and manner in which we may utilize the NOL in any year will
be limited by Section 382 of the Code.

As of December  31, 2000 and 1999 the Company  recorded a deferred  tax asset of
approximately  $7.0  million  and  $6.3  million,  respectively,  and has  fully
reserved  against it. The  Deferred  Tax Asset has  primarily  arisen out of the
Company's Net Operating Losses,  since the Company will probably not realize the
benefit of the Net  Operating  Losses;  they have  fully  reserved  against  the
deferred tax asset.

As of December  31, 2000 the Company has received  approval  from the New Jersey
Economic Development  Authority ("NJEDA") to sell approximately  $300,000 of tax
benefits  generated  from  NOL's.  Under the terms of this  NJEDA  program,  the
proceeds of the sale had to be used for the  purchase of fixed  assets,  working
capital and any other expenses  determined by the NJEDA to be in conformity with
the New Jersey Emerging Technology and Biotechnology  Financial  Assistance Act.
During  2000 and 1999,  the  Company and its  subsidiaries  transferred  the tax
benefits  of  $299,782  and  $784,236 in exchange  for  $248,819  and  $650,917,
respectively, pursuant to the New Jersey State Tax Credit Transfer program.

NOTE 4    RELATED PARTY TRANSACTIONS

NOTES PAYABLE - The Company owes Dr. Pandey,  Chairman of the Board, $615,000 as
of December 31, 2000 from advances ($269,000) at 10% per annum and the note will
be due when the  Company is no longer a  development  entity,  accrued  interest
($130,000),  accrued  salary  ($191,000)  and  accrued  expenses  ($25,000).  At
December 31, 1999, the Company owed Dr. Pandey $565,000.  The Company also has a
note payable to Dr. Renuka  Misra,  director of Natural  Products,  for $298,300
with 12% annual  interest due  September  20,  2001.  Interest  expense  totaled
$66,000  and  $58,000  for  the  years  ended   December   31,  2000  and  1999,
respectively, related to these notes.

XECHEM CHINA - The Company has received  $140,000 during the year ended December
31, 2000 from Xechem China  pursuant to an interest  free loan.  This loan which
aggregates  $480,000  is  payable  by Xechem  China to the  Company  in  $20,000
installments over a twenty-four month period.  The loan advanced by Xechem China
shall be repaid by the Company out of its share in the dividends or distribution
of Xechem China.

XECHEM INDIA - The Company  currently  receives  its supplies of plant  extracts
from India  through  informal  collaborative  relationships.  Dr. Pandey and his
brothers had  incorporated  a corporation  in India  ("Xechem  India") which was
established  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  believed  that an Indian
corporation would 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.  In 1998,  as a
contribution  to the  Company's  capital,  Dr.  Pandey  transferred  his 66-2/3%
interest  in  Xechem  India  to the  Company  for no  consideration  other  than
reimbursement  of  amounts  Dr.  Pandey  advanced  for  organizational  expenses
(approximately  $5,000).  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. The minority interest in
Xechem India is not material.

                                      F-13
<PAGE>

LEASES - Dr.  Pandey  owns 25% of the  lessor of it's  operating  facility  as a
limited partner (See Note 5).

NOTE 5    COMMITMENTS

EMPLOYMENT CONTRACTS

Dr.  Pandey is  employed  pursuant to  Agreements  through  February  2005 which
provide  for 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.  In
addition a royalty  payment is due 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.  This 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).  Further Dr.  Pandey will receive a severance
payment equal to his compensation if his services are terminated.

Dr. Pandey has agreed to defer all unpaid compensation  otherwise payable to him
under these  agreements  until such time as the Company has the available funds.
At December 31, 2000 unpaid compensation totaled $191,000.

LEASES - The Company leases its facilities  under an operating  lease that began
in April 1991 and expires on September 30, 2005. 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 two additional five-year periods.  Rent expense
under the operating lease amounted to approximately $105,000 and $90,000 for the
years ended December 31, 2000 and 1999, respectively.  At December 31, 2000, the
Company owes rental  payments to the lessor totaling  approximately  $80,000 and
$140,000 as of December 31, 1999.

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

In 2000 and 1999, no purchases of paclitaxel were made.

LICENSE AGREEMENT - In August 1997, the Company entered into a license agreement
granting it exclusive  worldwide rights to a novel  formulation  (patent pending
for the delivery of paclitaxel developed by the University of Texas MD. Anderson
Cancer Center, ("M.D.  Anderson") in collaboration with Xechem. The Company will
pay royalties to M.D.  Anderson on net sales and future minimum annual royalties
as follows, after the beginning of licensed sales, as follows:

                                    1st Year  $25,000
                                    2nd Year   35,000
                                    3rd Year   45,000
           Each year for 17 years thereafter   50,000

                                      F-14
<PAGE>

In 2000 and 1999,  the Company did not  generate  any sales with  respect to the
agreement, and no royalties were paid.

The Company is currently in litigation  with M.D.  Anderson with respect to this
agreement relating to M.D.  Anderson's desire to terminate the License Agreement
on the basis that the Company is "insolvent",  which the Company believes is not
correct due to the fact that the Company is still operating and has met all it's
financial  obligations to date concerning M.D.  Anderson.  The Company  believes
that this litigation will not have a material effect on the financial  condition
of the Company.

LOVASTATIN  AGREEMENT - In March 1997, the Company acquired a strain and related
technology to produce Lovastatin for a total purchase price of $300,000, payable
$50,000 upon delivery,  $50,000 upon initial laboratory  verification,  $100,000
upon  additional  laboratory  verification  and  $100,000  upon the  earlier  of
commercial  production  or two years  after  delivery  of the strain and related
technology.  For accounting purposes, the payments have been considered research
and  development  incurred at the  earliest  date to which they become  payable.
Through December 31, 1998, a total of $200,000 has been recorded as research and
development expense, of which $100,000 has been paid and $100,000 is included in
accounts  payable at December  31, 2000 and 1999.  There has been no activity in
1999 or 2000 but the Company intends to continue with the agreement.

NOTE 6    STOCK OPTIONS:

The  Company's  Stock  Option Plan  provides  for the grant of up to  12,600,000
shares of Common Stock to employees  with incentive  stock options  ("ISOs") and
non-qualified stock options to employees, consultants and directors. The Plan is
administered by the Board of Directors and the stock option  committee.  On July
11, 2000 the Stockholders  authorized increasing the number of options available
to 25,000,000.

The exercise  price of all ISOs granted under the Plan must be at least equal to
the fair  market  value of the shares of Common  Stock on the date of the grant.
With respect to any participant  who owns stock  possessing more than 10% of the
voting power of the Company's  outstanding  capital stock, the exercise price of
any ISO granted  must equal at least 110% of the fair market  value on the grant
date and the maximum  exercise period of the ISO must not exceed five years. The
exercise  period of any other  options  granted under the Plan may not exceed 11
years (10 years in the case of ISOs).  Options begin vesting after one year from
the grant date at a rate of 20% per year.  In December  1997,  an exception  was
made so that  780,000  options  granted on December  2, 1997 will begin  vesting
after one year from the grant date at a rate of 33 1/3% per year.  In July 2000,
an  exception  was made so that of the  13,200,000  options  granted on July 11,
2000, approximately one third (1/3) vested immediately and the balance will vest
equally one year and two years from the grant date.

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.

                                      F-15
<PAGE>

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

                                             2000                   1999
                                      ------------------------------------------
                                                Weighted-              Weighted-
                                                ---------              ---------
                                                 Average                Average
                                                 -------                -------
                                                Exercise               Exercise
                                                --------               --------
                                      Shares      Price      Shares      Price
                                      ------      -----      ------      -----

OUTSTANDING ON JANUARY 1,              1,516     $  0.14      1,626     $  0.14

Granted                               13,200     $  0.03         50     $  0.07
Exercised                             (1,326)    $  0.01         --          --
Forfeited/Expired                     (1,366)    $  0.02       (160)    $  0.04
                                     -------     -------    -------     -------
  OUTSTANDING ON DECEMBER 31,         12,024     $  0.04      1,516     $  0.14
                                     =======     =======    =======     =======

  EXERCISABLE ON DECEMBER 31,          4,682     $  0.04        885     $  0.15
                                     =======     =======    =======     =======

The following table summarizes  information  about stock options at December 31,
2000 (shares in thousands):

<TABLE>
<CAPTION>
                             Outstanding Stock Options          Exercisable Stock Options
                      ----------------------------------------  -------------------------
                                   Weighted-
                                   ---------
                                    Average       Weighted
                                    -------       --------
    Range of                       Remaining       Average              Weighted-Average
    --------                       ---------       -------              ----------------
 Exercise Prices       Shares  Contractual Life Exercise Price   Shares  Exercise Price
 ---------------       ------  ---------------- --------------   ------  --------------
<S>                    <C>         <C>              <C>         <C>          <C>
$0.01 to 0.34          11,879        10.4            $0.02       4,537        $0.02
$0.66 to 5.00             145         6.9            $0.81         145        $0.81
                       ------      ------           ------      ------       ------

     Totals            12,024        10.3            $0.04       4,682        $0.04
     ------            ======      ======           ======      ======       ======
</TABLE>

Compensation  cost for the stock option plans has been  determined  based on the
fair  value at the grant  dates for awards  under the plan,  which  resulted  in
approximately a $267,000 charge in 2000 and $203,000 in the next two years which
has  been  recorded  as  unearned  compensation  in the  accompanying  financial
statements.

The fair value of certain  option grants is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in 2000 and 1999,  respectively;  dividend yields of
0% for each year, expected volatility of approximately 210 % in 2000 and 116% in
1999,  risk-free  interest rates of 6.1 percent for each year and expected lives
of 10 years for both years. The  weighted-average  fair value of options granted
was $ 0.07 for the each of the years ended December 31, 2000 and 1999.

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
proforma net loss and proforma net loss per share would have been as follows:

                                                       Year Ended December 31,
                                                       -----------------------
                                                        2000            1999
                                                        ----            ----
Net Loss:
    As Reported                                     $   (1,971)      $   (2,427)
    Pro Forma                                       $   (2,298)      $   (2,429)
Net Loss Per Share:
    As Reported                                     $    (0.01)      $    (0.01)
    Pro Forma                                       $    (0.01)      $    (0.01)

                                      F-16
<PAGE>

In 2000,  13,200,000 options were granted to employees,  directors,  consultants
and  attorneys as  incentives  and bonuses.  The Company  recognized a charge to
operations of $267,000 relating to the issuance of these stock options.

NOTE 7    COMMON AND PREFERRED STOCK:

The two largest  shareholders  of the Company  are Dr.  Pandey,  Chairman of the
Board of the Company and David  Blech,  an outside  investor  ("Blech").  During
1999,  Blech , his wife and the trustee of the Edward A. Blech Trust  granted to
Dr. Pandey an irrevocable proxy to vote all of the shares under his control.

In 1999 Blech and Dr.  Pandey  agreed to amend those  portions of a  stockholder
agreement as to which they are parties. Specifically,  Blech and Dr. Pandey have
amended this agreement to: (i) eliminate the  prohibition  against Dr.  Pandey's
sale of any shares of Company  capital  stock for five years except with Blech's
consent;  (ii) eliminate  Blech's right to sell his prorata 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  prorata  portion  of any
shares sold by Blech;  (iii) eliminate the  requirement  that Blech vote for Dr.
Pandey as a director of the  Company,  and to use his best  efforts to cause Dr.
Pandey to remain Chairman, President and Chief Executive Officer of the Company;
and (iv) eliminate the requirement  that 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.

The Company  recognized a charge to  operations  of $107,000 and $26,000 for the
years ended December 31, 2000 and 1999, respectively, for shares of common stock
issued to consultants.

                                      F-17
<PAGE>

The  following  table  summarizes  the  number of  shares  of  common  stock and
preferred stock outstanding at December 31, 2000 and 1999:



--------------------------------------------------------------------------------
                                        DECEMBER 31, 2000   DECEMBER 31, 1999
--------------------------------------------------------------------------------
COMMON STOCK                            344,537,000         240,460,000
--------------------------------------------------------------------------------
CLASS A VOTING PREFERRED STOCK          2,500               2,500
--------------------------------------------------------------------------------
CLASS B PREFERRED STOCK                 0                   0
--------------------------------------------------------------------------------
CLASS C  - SERIES 4 PREFERRED STOCK     0                   100,000
--------------------------------------------------------------------------------
CLASS C  - SERIES 5 PREFERRED STOCK     0                   100,000
--------------------------------------------------------------------------------

CLASS A VOTING PREFERRED STOCK - There are currently outstanding 2,500 shares of
Class A Preferred  Stock.  The holder of 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 except as may be required by the Delaware
General  Corporation Law, and except that the affirmative vote or consent of the
holders of a majority of the outstanding  Class A Preferred Stock is required to
approve  any  action to  increase  the  number of  authorized  shares of Class A
Preferred Stock, to amend,  alter, or repeal any of the preferences of the Class
A Preferred Stock, or to authorize any reclassification of the Class A Preferred
Stock.  Dr.  Pandey owns all of the  outstanding  Class A Preferred  Stock.  The
Company may redeem the Class A Preferred Stock for $.00001 per share at any time
after May 3, 2009,  however,  pursuant to the private  offering of the Company's
Common Stock in 1995 and 1996,  Dr. Pandey agreed with the  underwriter  to have
the option to redeem the Class A Preferred  Stock.  As of December  31, 2000 Dr.
Pandey is still the holder of record.

CLASS B 8% PREFERRED  STOCK - The 8% Preferred  Stock is entitled to  cumulative
dividends on the  liquidation  preference  at the rate of 8% per annum,  payable
quarterly.  The 8% Preferred  Stock may be redeemed at any time,  in whole or in
part,  at  the  option  of the  Company  for a  redemption  price  equal  to the
liquidation  preference  plus  accrued  and  unpaid  dividends.  After the fifth
anniversary of issuance, the holders of 8% Preferred Stock may, at each holder's
option,  convert such 8% Preferred Stock into Common Stock at a conversion price
equal to $5.00 per share; provided that if a change in control has occurred such
shares may be  converted,  regardless  of whether  five years have  elapsed at a
conversion  price equal to the least of (I) $5.00,  (II) 25% of the then-current
market  price of the Common  Stock or (III) the lowest price paid by the hostile
acquirer  within the one year preceding the change in control.  The 8% Preferred
Stock has no  voting  rights  except  for  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.

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

                                      F-18
<PAGE>

the Class C  Preferred  Stock with  voting and  conversion  rights  which  could
adversely affect the holders of Common Stock.

In January 1999, the Company issued 100,000 shares of Class C Series 4 Preferred
Stock in exchange for $ 400,000 owed by the Company. These shares were converted
into 40,000,000 shares of common stock in September 2000.

In October  1999,  the Company  issued an option which  entitled  Dr.  Ramesh C.
Pandey to  purchase  100,000  shares of Class C Series 5  convertible  preferred
stock at par value.  The option  was  valued at the quoted  market  price of the
underlying  common  stock in  excess  of the  exercise  price  and  recorded  as
compensation  expense  with a  corresponding  credit  to paid in  capital.  Upon
exercise,  the shares became  convertible into that number of shares, on a fully
diluted  basis,  which will bring Dr.  Pandey's  ownership to  20%(approximately
42,259,000  shares).This conversion was exercised in September 2000. The Company
recorded $1,563,000 of compensation expense for the year ended December 31, 1999
related to the issuance of these securities.

NOTE 8 - XECHEM CHINA JOINT VENTURE

On April 4,  2000,  the  Company  signed a joint  venture  agreement  with J & M
Consultants,  Ltd.  ("J & M") to  establish  Xechem  Pharmaceutical  China  Ltd.
(Xechem  China)  with  offices in Hong Kong and  Beijing,  People's  Republic of
China.  Xechem  China is owned 45% by the Company and 55% by J & M  Consultants,
Ltd.  The purpose of  establishing  Xechem  China is to carry on the business of
manufacturing,  marketing  and  distributing  pharmaceutical  and  nutraceutical
products.  Xechem  China will also  carry out  research,  development,  clinical
studies and production of new drugs based on the Company's technology related to
traditional Chinese medicine and other disciplines,  provide consulting services
for drug development and set up a certified laboratory in, the People's Republic
of China to screen, verify and certify pharmaceutical products for the public.

The Company has not made an investment in cash or by transfer of recorded assets
to Xechem China,  and  accordingly,  there is no amount reflected on the balance
sheet of the Company at December 31, 2000.  The  following  unaudited  condensed
balance  sheet and income  statement of Xechem China as at December 31, 2000 and
for the period of inception to December 31, 2000 follows:

                                      F-19
<PAGE>


Balance Sheet Data                                       As of December 31, 2000
--------------------------------------------------------------------------------
Current Assets, including loans to Xechem
   International, Inc.                                           $160,000
--------------------------------------------------------------------------------
Total Assets                                                      268,000
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Current Liabilities                                                  -
--------------------------------------------------------------------------------
Total Liabilities                                                 689,000
--------------------------------------------------------------------------------
Total stockholders equity(deficit)                               (957,000)
--------------------------------------------------------------------------------
Total liabilities and stockholders equity(deficit)                268,000
--------------------------------------------------------------------------------
Income Statement Data:
--------------------------------------------------------------------------------
Revenues                                                             -
--------------------------------------------------------------------------------
Costs and expenses                                                421,000
--------------------------------------------------------------------------------
Net income(loss)                                                 (421,000)
--------------------------------------------------------------------------------

NOTE 9 - LOANS PAYABLE

Loans payable at December 31, 2000 and 1999 totaled  approximately  $130,000 and
$359,000, respectively, consisting principally of:

     o    $100,000 due an individual with an interest rate of 10% per annum with
          an option to convert  to Xechem  International  Inc.  stock $ 0.04 per
          share with a warrant for every two shares of common  stock,  which can
          be  exercised  at $ 0.10 per share  within five years from issue date.
          The Company recorded  additional interest expense of $100,000 in 2000,
          related to the beneficial conversion feature of the above note.

     o    $30,000 which represents  borrowing against a $ 50,000  line-of-credit
          at an annual rate of 11.5% for 2000 from the Bank of New York.

     o    During the year ended December 31, 2000, the Company received $182,500
          in the form of notes  payable to  affiliates  and  outside  investors.
          These notes were  converted  into  18,581,200  shares of common  stock
          during 2000, using a conversation rate of $0.01 per share. The Company
          recorded  additional  interest  expense of $185,812 in 2000 related to
          the beneficial conversion feature of these securities.

NOTE 10 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of fiscal 2000 the Company recorded significant fourth
quarter  adjustments related to the accounting for the issuance of stock options
to  directors,  consultants  and employees of the Company as well as stock given
out to  various  consultants  of the  Company  in  exchange  for their  services
rendered.  The Company also recorded fourth quarter  adjustments  related to the
beneficial  conversion  feature of  convertible  debt. The charges for the above
items approximated  $430,000,  of this amount approximately  $325,000 relates to
the third  quarter.  Accordingly  the  Company  will file an amended 10Q for the
period ended September 30, 2000.

                                      F-20
<PAGE>

ITEM 8.   CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          ----------------------------------------------------------------------
          FINANCIAL DISCLOSURE.
          ---------------------

On December 6, 2000, Xechem  International,  Inc. (the  "Registrant")  announced
that  it  had  decided  to  terminate  its  relationship  with  its  independent
accountants,  Wiss & Company,  LLP,  and had engaged  Grant  Thornton LLP as the
Registrant's  independent  accountants  to audit and report on the  Registrant's
annual  financial  statements  for the year ending  December 31, 2000. The Audit
Committee of the Registrant approved this decision. Over the last two years, the
report of Wiss & Company, LLP contained a statement that there were doubts about
the  ability of the  Registrant  to  continue  as a going  concern.  The Company
disagreed  with Wiss & Company's  requirement  to use quoted market value (where
there was no  objective  evidence  of fair  value) in  valuing  stock  issued to
employees.  Further,  it disagreed with Wiss & Company to value shares issued to
consultants  at fair  value.  The  Company  had  originally  used par  value but
ultimately accepted Wiss' position. These matters were discussed on July 7, 2000
with the Audit  Committee.  The Company has  authorized  Wiss & Company,  LLP to
respond  fully  to any  inquiries  from  Grant  Thornton  LLP to the  previously
mentioned  disagreements.  Except for these  valuations,  at no time  during the
Registrant's  two most recent years,  and any  subsequent  interim period before
retaining  Grant Thornton LLP, did Registrant have any  disagreements  with Wiss
and Company,  LLP  concerning  accounting  principles  or  practices,  financial
statement  disclosure  or  auditing  scope or  procedure.  At no time during the
Registrant's  two most recent fiscal years,  and any  subsequent  interim period
prior to engaging Grant Thornton LLP, did the Registrant  consult Grant Thornton
LLP  regarding:  (i) either:  the  application  of  accounting  principles  to a
specified  transaction,  either  completed  or  proposed,  or the  type of audit
opinion that might be rendered on the Registrant's financial statements; or (ii)
any matter that was either the subject of a disagreement as defined in paragraph
304(a)(1)(iv)  of Regulation  S-K and the related  instructions  or a reportable
event described in paragraph  304(a)(1)(v).  At no time during the  Registrant's
two most recent  fiscal years and the interim  period  through  December 6, 2000
were there any  reportable  events with Wiss and  Company,  LLP, as described in
Item 304(a)(1)(v) of Regulation S-K.

                                       33
<PAGE>

                                    PART III
                                    --------

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          ----------------------------------------------------------------------
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
          --------------------------------------------------

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

NAME                              AGE     POSITION WITH THE COMPANY
----                              ---     -------------------------

Dr. Ramesh C. Pandey (1) .....    62      Chief Executive Officer, President,
                                          Chairman of the Board of Directors and
                                          Chief Accounting Officer

Stephen Burg (1)(2)(3) .......    63      Director

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

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

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

     Stephen F. Burg,  has been a director of the Company  since 1996.  Mr. Burg
has  been  chief  executive  officer  of El  Dorado  Investments,  which  offers
corporate  growth  strategies for public and private  companies,  nationally and
internationally.  From  1978 to 1986,  Mr.  Burg  was  Vice  President-Corporate
Acquisitions  for Evans  Products  Company  and from 1973 to 1978 was  Corporate
Director-Acquisitions  and Human Services for Jack August Enterprises.  Mr. Burg
serves as a consultant to various businesses.

SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE

     The Company's executive officers,  directors and shareholders  beneficially
owning  more  than 10% of the  Company's  Common  Stock are  required  under the
Exchange  Act to file  reports of  ownership of Common Stock of the Company with
the  Securities  and Exchange  Commission.  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, the exception of Jay Gupta who was late filing Form 3 and Form 4.

                                       34
<PAGE>

COMMITTEES

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

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

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

ITEM 10.  EXECUTIVE COMPENSATION
          ----------------------

Compensation of Directors.
--------------------------

     Directors do not receive any standard compensation for services.

Executive Compensation.
-----------------------

     Set forth below is information  concerning the  compensation for 1998, 1999
and 2000 for the Company's  President and Chief  Executive  Officer,  who is the
only executive officer of the Company whose compensation exceeded $100,000:

<TABLE>
<CAPTION>
==============================================================================================================
                                                                   LONG TERM COMPENSATION
                                                             ----------------------------------
                                                                                                   ALL OTHER
                                                                                                  COMPENSATION
                                 ANNUAL COMPENSATION                  AWARDS            PAYOUTS
-----------------------------------------------------------------------------------------------
                                                                          SECURITIES
                                                 OTHER       RESTRICTED   UNDER-LYING
                                                 ANNUAL        STOCK        OPTIONS      LTIP
          YEAR              SALARY    BONUS   COMPENSATION     AWARDS                   PAYOUTS
--------------------------------------------------------------------------------------------------------------

<S>                        <C>          <C>      <C>         <C>               <C>         <C>          <C>
Dr. Ramesh Pandey   1998   $136,233     0        $7,340               0        0           0            0
                    1999   $140,000     0        $1,249      $1,563,000        0           0            0
                    2000   $140,000     0        $  688               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

                                       35
<PAGE>

engaged in by the Company) for six months (four months,  in certain cases) after
the termination of his employment with the Company.  If there is a change in the
beneficial  ownership of 20% or more of the Company's  capital stock, Dr. Pandey
may, at any time within one year after such event,  terminate the agreement,  in
which event his  noncompete  and  confidentiality  agreement  terminate  and any
indebtedness  of the Company to Dr.  Pandey  shall  accelerate.  Dr.  Pandey has
agreed  and  approved  the  transactions  contemplated  by  the  Blech  Purchase
Agreement and that, accordingly, such transactions do not and will not result in
a "Change of Control" as defined in the  Employment  Agreement.  In August 1996,
due to the financial constraints of the Company, Dr. Pandey's salary was reduced
by 54%. In November  1996,  50% of the  reduction  was  restored and in February
1997,  Dr.  Pandey was returned to full salary.  The reduction in salary was not
accrued and will not be paid to Dr.  Pandey.  On September  30, 1998 Dr.  Pandey
signed an Amended  Employment  Agreement  extending his current agreement by two
years.  He was also  granted an option to  purchase  stock of the  Company in an
amount  equal to 20% of the  total  number of shares  sold by the  Company  in a
Rights Offering to certain  shareholders and one or more subsequent offerings to
raise up to $10,000,000 of additional capital through December 31, 1999.

     In 2000 Dr.  Pandey  deferred  $70,000 of salary for a total of $191,425 of
deferred  salary  until  the  Company  has  funds to pay him as set forth in the
amendment to his Employment Agreement.

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
12,600,000  shares of Common Stock. The Plan provides for the grant to employees
of incentive stock options ("ISOs") and non-qualified stock options. On July 11,
2000,  the Board of  Directors  increased  the  number of options  available  to
25,000,000.

     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 December 31, 2000,
the Company has granted options under the Plan to purchase  13,429,500 shares of
Common Stock, with 12,024,000 still outstanding under the plan.

                                       36
<PAGE>

AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR-END OPTION VALUES

     The following  table provides  information on option  exercises  during the
year ended  December 31, 2000 by the  directors  and  executive  officers of the
Company and the value of such parties'  unexercised stock options as of December
31, 2000.

<TABLE>
<CAPTION>
==================================================================================================================
                                                       NUMBER OF SECURITIES               VALUE OF UNEXERCISED
                                                      UNDERLYING UNEXERCISED             IN-THE-MONEY OPTIONS
                                                        OPTIONS AT 12/31/00                 AT 12/31/00 (1)
------------------------------------------------------------------------------------------------------------------
                          SHARES
                         ACQUIRED      VALUE
        NAME                ON        REALIZED     EXERCISABLE     UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
                         EXERCISE       ($)
                            (#)
------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>             <C>               <C>              <C>
Dr. Ramesh C. Pandey            0            0       500,000         1,707,000         $14,000          $29,859

Stephen Burg               40,300       19,747       500,000         1,024,700         $14,000          $ 3,692
==================================================================================================================
</TABLE>

(1)  Represents the excess,  if any, of the closing price of the Common Stock as
     quoted on the OTC  Bulletin  Board on December  29, 2000  ($.038)  over the
     exercise price of the options,  multiplied by the  corresponding  number of
     underlying shares.

     The following table provides information on options granted during the year
ended December 31, 2000 to the directors and executive officers of the Company.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Name                      Number of Options       Percent of total Options granted to    Exercise Price   Expiration Date
                          Granted to Directors    Employees
-------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                     <C>                                    <C>              <C>
Dr. Ramesh C. Pandey      1,500,000               14%                                    $0.01            July 11, 2011
-------------------------------------------------------------------------------------------------------------------------
Stephen Burg              1,500,000               14%                                    $0.01            July 11, 2011
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

     The Company has not granted any Long-Term Incentive  Plan-Awards during the
year ended December 31, 2000.

                                       37
<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 and
Class C Preferred Stocks) as of February 28, 2001 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.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                 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)(11)(12)
-------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>             <C>           <C>             <C>
The Edward A. Blech Trust       69,000,000      20%                 0           --            19.9%
(2)                                    (3)
-------------------------------------------------------------------------------------------------------
David Blech (3)                 69,000,000      20%                 0           --            19.9%
                                       (4)
-------------------------------------------------------------------------------------------------------
Jay Gupta (6)                   60,000,000    17.4%                 0           --            17.3%
-------------------------------------------------------------------------------------------------------
Stephen Burg (9)                               0.4%                 0           --             1.2%
                                 1,500,000
                                      (10)
-------------------------------------------------------------------------------------------------------
Dr. Ramesh C. Pandey (7)        64,923,663    18.8%             2,500         100%            19.4%
                                       (8)                        (1)
-------------------------------------------------------------------------------------------------------
All directors and executive     66,423,663    19.2%             2,500         100%            19.8%
officers as a group (2                 (8)                        (1)
persons)
-------------------------------------------------------------------------------------------------------
</TABLE>

(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)  The address of Mr. Blech is 225 Lafayette Street, New York, New York 10012.
(4)  Includes shares owned by the Trust and shares owned by Mr. Blech's spouse.
(6)  The address of Jay Gupta is 1173 Dolly Madison Blvd. McLean Va. 22101.
(7)  The address of Dr.  Pandey is c/o Xechem  International,  Inc.,  100 Jersey
     Avenue, Building B, Suite 310, New Brunswick, New Jersey 08901.
(8)  Does not include  1,707,000  shares  subject to the Pandey  Options,  which
     presently are not exercisable, and will not be exercisable,  within 60 days
     from  February  28,  2001;  however,  includes  500,000  shares  which  are
     presently exercisable options.
(9)  The address of Stephen Burg is 3257 Winged Foot Drive, Fairfield, CA 94533
(10) Does not  include  1,024,700  shares  subject  to the Burg  Options,  which
     presently are not exercisable, and will not be exercisable,  within 60 days
     from  February  28,  2001;  however,  includes  500,000  shares  which  are
     presently exercisable options
(11) During 1999, Mr. Blech and the trustee of the Edward A. Blech Trust granted
     to Dr.  Pandey an  irrevocable  proxy to vote all of the shares under their
     control.
(12) During 2000, Mr. Gupta granted to Dr. Pandey an  irrevocable  proxy to vote
     all of the shares under his control.

                                       38
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

     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. At December 31, 2000, the Company owns substantially all
of Xechem India. The Company anticipates that some of the equity in Xechem India
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.

     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 $143,847 in 1999 and $228,366 in 2000.

     On November 18, 1996,  the Company  entered into the initial stage of Blech
Purchase Agreement. Additional issuances under the Blech Purchase Agreement were
closed at various dates through February 21, 1998.

     In  1999  Blech  and  Dr.  Pandey  agreed  to  amend  those  portions  of a
stockholder agreement as to which they are parties. Specifically,  Blech and Dr.
Pandey has amended this agreement to: (i) eliminate the prohibition  against Dr.
Pandey's sale of any shares of Company  capital stock for five years except with
Blech's  consent;  (ii)  eliminate  Blech's  right to sell his  prorata  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  prorata
portion of any shares sold by Blech;  (iii) eliminate the requirement that Blech
vote for Dr. Pandey as a director of the Company, and to use his best efforts to
cause Dr. Pandey to remain Chairman President and Chief Executive Officer of the
Company;  and (iv) eliminate the requirement  that 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.

     Also during  1999,  Mr.  Blech and the trustee of the Edward A. Blech Trust
granted to Dr. Pandey an irrevocable proxy to vote all of the shares under their
control.

     During 2000, Jay Gupta Trust granted to Dr. Pandey an irrevocable  proxy to
vote all of the shares under his control.

     During 2000, Dr. Pandey's brothers converted notes payable of approximately
$80,000 into  7,957,100  shares of common  stock of the Company,  under the same
terms as other investors.

                                       39
<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.

10.2      Form of Pandey Option.

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

     (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.

10.28     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.

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

                                       40
<PAGE>

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

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

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

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

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

Number Exhibit
--------------

3(i)(g)   Certificate of Designations,  Preferences and Rights of Class C Shares
          (Class C Series 4 Preferred Stock)

21        Subsidiaries of the Company

23        Consent of Wiss & Co. LLP
          Consent of Grant Thornton LLP

     (b)  The Company filed no Reports on Form 8-K during the fourth  quarter of
          2000.

                                       41
<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 12, 2001               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 12, 2001
    --------------------------------------
    Ramesh C. Pandey, Ph.D.,
    Chief Executive Officer, President and
    Chairman of the Board of Directors and
    Chief Accounting Officer

By: /s/ Stephen Burg                              Date: April 12, 2001
    --------------------------------------
    Stephen Burg
    Director

                                       42
<PAGE>

                                  EXHIBIT INDEX

Number    Exhibit
------    -------

21        Subsidiaries of the Company

23        Consent of Grant Thornton  LLP

23(b)     Consent of Wiss & Company, LLP

                                       43