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, 1999

[ ]             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
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                                (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 [X]   NO [ ]

     State issuer's revenues for its most recent fiscal year. $ 358,000

     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. $ 3,290,000 as of March 21, 2000.

     The  number  of  shares  outstanding  of the  Company's  Common  Stock  was
240,459,996 as of February 29, 2000.

<PAGE>

                                      INDEX
                                      -----
                                                                            Page
                                                                            ----
PART I
      Item 1.  Description of Business........................................03
      Item 2.  Description of Property........................................28
      Item 3.  Legal Proceedings..............................................28
      Item 4.  Submission of Matters to a Vote of Stockholders................29

PART II
      Item 5.  Market for Common Equity and Related Stockholder Matters.......30
      Item 6.  Management's Discussion and Analysis...........................32
      Item 7.  Financial Statements...........................................36
      Item 8.  Changes In and Disagreements With Accountants on Accounting
               and Financial Disclosure.......................................37

PART III
      Item 9.  Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act..............38
      Item 10. Executive Compensation.........................................39
      Item 11. Security Ownership of Certain Beneficial Owners and Management 42
      Item 12. Certain Relationships and Related Transactions.................43
      Item 13. Exhibits and Reports on Form 8-K...............................44

                                       2
<PAGE>

                                     PART I
                                     ------

ITEM 1.   DESCRIPTION OF BUSINESS1
          ------------------------

GENERAL

     Xechem  International,  Inc.  ("Xechem" or the  "Company")  owns all of the
capital stock of Xechem,  Inc, a  development  stage  biopharmaceutical  company
currently  engaged in 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 a process patent on this  technology.  The
Company has also prepared,  through contract, dosage forms of paclitaxel and has
preformed  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  has been  issued  five U.S.  patents on
paclitaxel and its second generation  analogs from the U.S. Patent and Trademark
Office and thirty-four international patents are pending.

     In addition to the Company's  focus on the  development  and  production of
paclitaxel,  the Company has  continued and will continue to apply its expertise
to research and develop other niche  compounds,  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 a  subsidiary,  Xechem  (India)  Pvt.,  Ltd., in New Delhi,
India.

     The  Company  has  also   established   a   subsidiary,   XetaPharm,   Inc.
("XetaPharm"),  to develop and market  over-the-counter  natural  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.

-------------------
     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 four major
phases: (i) folklore screening;  (ii) ethnobotanical  research; (iii) biological
screening and isolation of active compounds; and (iv) product development.

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

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

     The  Company  prioritizes  its  plants  by  determining  their  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 and Isolation of Active Compounds. The plants selected
after folklore  screening and  ethnobotanical  research are then extracted.  The
extracts are screened for specific  activities in vitro.  The in vitro  positive
extracts are tested again to confirm the  activities.  Those extracts which show
confirmed in vitro activities are subjected to bioassay guided  fractionation to
isolate pure  compounds.  The  isolated  compounds  are then further  tested for
biological  activity  in  studies  meeting  Western  standards.  The  Company is
currently  screening extracts and pure compounds in the 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  a pure  compound  has  demonstrated  promising
activity, it is subject to the same product regulatory requirements as potential
drugs from other sources. These requirements include

                                       4
<PAGE>

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.

RECENT DEVELOPMENTS

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

     On December 30, 1999 the Company  received the Certificates of Approval for
$784,236 from the New Jersey Economic Development Authority (NJEDA) for the sale
of Xechem, Inc., XetaPharm,  Inc. and Xechem  International's  unused New Jersey
net operating loss carryovers.  This represents the Company's maximum first year
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  have been  purchased by a Fortune 500
Company for $650,917.  The Company expects to receive an additional  $430,000 in
2000 from the sale of the remainder of its already-approved NJEDA tax benefits.

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

     Novel  Dihalocephalomannine  (Second  Generation  Paclitaxel  Analogs)  and
     ---------------------------------------------------------------------------
     Method for Production
     ---------------------

     In November 1998 the Company was issued two patents by the U.S.  Patent and
Trademark  Office.  U.S. Patent No. 5,840,748  containing broad coverage for 2",
3"-dihalocephalomannine  compounds,  formulations containing these compounds and
their methods of use in treating cancer patients, all of which are designated as
second generation to the well-known anticancer drug paclitaxel;  and U.S. Patent
No.  5,840,930  containing  broad  coverage  for methods for  production  of 2",
3"-dihalocephalomannine compounds.

     In December  1998 the Company was issued by the U.S.  Patent and  Trademark
Office U.S.  Patent No.  5,854,278  containing  broad  coverage  with respect to
several novel paclitaxel analogs developed by Xechem.

     Xechem's new compounds  (second  generation  paclitaxel  analogs) have been
shown to have significant  anticancer  activities against a wide array of tumors
in  preliminary  studies.  These  compounds may be more  effective than Taxol(R)
(Bristol-Myers  Squibb's  Trade mark for  paclitaxel) or Taxotere(R) in treating
certain tumor cell lines, and are more physiologically soluble, thus potentially
offering viable alternatives to paclitaxel without side effects.

     In addition to the novel paclitaxel analogs,  these patents contains claims
which very broadly cover  pharmaceutical  formulations  comprising the aforesaid
compounds, a method for administering the compounds for treating both animal and
human tumors, and a method for production of the novel compounds.

                                       5
<PAGE>

Second U.S. Patent for Disposable Culture Plates  (HEXIOD(TM)Plates)
--------------------------------------------------------------------

     In August  1999 the  Company  was  issued by the United  States  Patent and
Trademark  Office a second U.S. Design Patent (# DES. 411,308 issued on June 22,
1999) entitled "Covered  Multi-well Assay Plate" to Xechem  International,  Inc.
(OTC BB ZKEM). The patent covers a design of a multi-well  disposable HEXOID(TM)
plate used for  diagnosis  and  culturing a  multitude  of  microorganisms.  The
invention is also  protected by Utility Patent No.  5,817,510  issued October 6,
1998.  The disposable  self-enclosed  culture plate may be used for manned space
vehicles so astronauts  can culture  specimens and determine  susceptibility  of
microorganisms  to  antibiotics  within 24 hours.  This  invention was made with
Governmental   support  under  contract   NAS9-18701  awarded  by  the  National
Aeronautics and Space Administration (NASA).

     In the commercial  market, the culture plate will be available to hospitals
and diagnostic  laboratories  and for on site evaluation of microbial  purity of
water as required by the Environmental Protection Agency (EPA).

Recent Court Decisions
----------------------

     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 a
copy of Taxol(R).  The ruling  invalidated key provisions of the patents held by
Bristol-Myers  Squibb Co. and may allow competitors,  including the Company,  to
launch generic  versions.  This ruling may benefit the Company in its efforts to
bring its version to the public.

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 $1.2 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

                                       6
<PAGE>

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

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

     In  November  1998 the  Company  announced  that it had signed a  strategic
alliance  agreement  with  Lachema,  a.s. for the  manufacture  and marketing of
paclitaxel  in  Central  and  East  European  Countries  (CEEC).  Lachema  is  a
manufacturer and marketer of pharmaceuticals and is based in the Czech Republic.

     The strategic  alliance  agreement  grants  exclusive  rights to Lachema to
register  and sell  injectable  paclitaxel  in 19 Central and  Eastern  European
countries  and  non-exclusive  rights in the  Federal  Republic  of Germany  and
Russia. Under this agreement,  Lachema also grants to Xechem the exclusive right
to  register  and  sell   anticancer  and  antiviral   preparations   containing
methotrexate and acyclovir  respectively  developed and manufactured by Lachema,
for  territories  comprised of the United  States,  Canada,  Mexico,  five South
American  countries and the Scandinavian  area. The strategic alliance agreement
further grants Lachema the right to manufacture injectable paclitaxel vials from
paclitaxel purchased from Xechem. The agreement includes a royalty arrangement.

                                       7
<PAGE>

     The Company has been in  negotiations  with a Chinese  company for the past
nine months and has resulted in the Company receiving  $300,000  consulting fees
for 1999.

     On April 4, 2000, the Company  signed a joint venture  agreement with J & M
Consultants,  LTD ("J & M") to establish Xechem  Pharmaceutical  China Ltd. 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 P.R.  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 People's  Republic of China,
Hong Kong, Macao, Taiwan (The Republic of China),  Mongolia,  Korea,  Singapore,
Malaysia,  Indonesia,  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 HK$ 9,500,000 and management support to the joint venture and
up to US $240,000 as an interest free loan to Xechem over 24 months.  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)).

MANUFACTURING OF PACLITAXEL

     The  Company  conducts  its  pilot-scale  manufacturing  of  its  potential
products (other than nutraceuticals) under current Good Manufacturing  Practices
("cGMP").  Management  believes  that its  in-house  pilot  plant  facility  has
adequate  capacity to manufacture a limited quantity of bulk drugs for sale. The
Company 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.

                                       8
<PAGE>

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 five U.S.  patents from the U.S.  Patent and Trademark  Office and
two United States patent applications and thirty-four  foreign  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 obtain  patents which make claims similar to
those  covered by the  Company's  patent  applications,  or that the  patents of
others will not have an adverse  effect on the ability of the Company to conduct
its business.

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

     The  Company's  success  depends in part on its  ability  to obtain  patent
protection for its proprietary  products and to preserve its trade secrets.  The
Company has obtained five U.S.  patents and has submitted two additional  patent
applications   in  the  United  States  and  thirty-four   patent   applications
internationally.  Any  present or future  patents  may not  prevent  others from
developing competitive products.

--------------------------------------------------------------------------------
         U.S. PATENT                   TITLE OF PATENT              DATE OF
            NUMBER                                                   ISSUE
--------------------------------------------------------------------------------
     1.   #5,654,448     "Isolation    and     Purification    of     1997
                         Paclitaxel     from    Organic    Matter
                         containing  Paclitaxel,   Cephalomannine
                         and Other Related Taxanes"
--------------------------------------------------------------------------------
     2.   #5,840,748     "Dihalocephalomannine and Methods of Use     1998
                         Therefor"
--------------------------------------------------------------------------------
     3.   #5,854,278     "Preparation  of Chlorinated  Paclitaxel     1998
                         Analogues   and  Their  Use  Thereof  as
                         Antitumor Agents"
--------------------------------------------------------------------------------
     4.   #5,807,888     "Preparation  of  Brominated  Paclitaxel     1998
                         Analogues  and  Their  Use as  Effective
                         Antitumor Agents"
--------------------------------------------------------------------------------
     5.   #5,840,930     "Method   for    Production   of   2",3"     1998
                         Dihalocephalomannine"
--------------------------------------------------------------------------------

     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

                                       9
<PAGE>

process or to  manufacture  or use the  affected  product or may be  required to
cease using such products or process. There can be no assurance that the Company
would  prevail in any such  action or that any license  required  under any such
patent would be made  available on acceptable  terms,  or at all. There could be
significant  litigation in the industry  regarding patent and other intellectual
property rights.  If the Company becomes  involved in such litigation,  it could
consume a substantial  portion of the Company's  financial and human  resources,
regardless of the outcome of such litigation.

     The  Company's  licensing  agreement  with the MD  Anderson  Cancer  Center
requires  the Company to expend  significant  sums to maintain  its  exclusivity
under  such  agreement,  as well as to  prosecute  infringers  at its  cost  and
expense.  There  can be no  assurance  that the  Company  will  have  the  funds
sufficient to continue its rights under this agreement or to  commercialize  the
licensed technology. See Item 3 "Legal Proceedings" below.

     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.

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
five United States patents and thirty-four international patents are 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.

                                       10
<PAGE>

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 is seeking to develop an
efficient  drug  discovery  program and to apply that program to the  discovery,
development and  commercialization  of new classes of  pharmaceuticals.  Towards
this goal,  the Company is seeking to develop  proprietary  drugs from compounds
extracted from medicinal plants and marine sources,  as well as diagnostic tests
for  determination  of the  presence  of certain  biochemical  compounds  and/or
diseases.

     Though the pharmaceutical  industry's emphasis has shifted from plant-based
drug  discovery to the  increased  screening  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  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.

     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  1,000  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.

                                       11
<PAGE>

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.  The Company has
received a Small  Business  Innovative  Research  (SBIR)  Phase I grant from the
National Cancer Institute ("NCI") for this project. (See NCI Grant)

Small Business Innovative Research
----------------------------------

     To obtain  funding  from  alternative  sources,  the  Company  is  actively
submitting Small Business  Innovative  Research ("SBIR") Phase I grant proposals
to various  government  agencies  for certain of its drug  development  research
projects. A governmental agency may award a firm up to a maximum of $100,000 for
SBIR Phase I work for six  months.  From  various  proposals  made in 1996,  the
Company  received an award of $86,700 from NCI for a research project related to
screening  paclitaxel plant cell cultures  entitled  Enhanced Xechem  Integrated
Screening Techniques  (EXIST(TM)).  The Company received no awards in 1997 or in
1998. In 1999 the Company received a grant of $97,918 from NCI for research into
"Bioactive Natural Products from Marine Extremophiles".

NCI Grant
---------

     In August  of 1999 the  Company  was  awarded  an  initial  Small  Business
Innovative  Research  (SBIR) Phase I grant of $87,084  from the National  Cancer
Institute  with the principle  investigator,  Dr. Ramesh Pandey Ph.D.,  to study
Bioactive Natural Products from Marine  Extremophiles This research will be done
in  conjunction  with  Rutgers  University.  The grant was  later  increased  by
$10,834, thus totaling the grant to $ 97,918.

     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

                                       12
<PAGE>

specimens (e.g. urine,  blood, and sputum),  in water samples,  in cosmetics and
for pesticide detection and biocide evaluation.

     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                  1998
                    Microorganisms"
--------------------------------------------------------------------------------
     # 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"  nutraceutical  products for the consumer market.  Based on
meetings between the Office of Alternative  Medicine ("OAM"), a part of 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 nutraceutical products. The Company has
obtained a "Gold Leaf(R)" Trademark for these products.

     XetaPharm is developing a limited line of over-the-counter natural products
(not requiring FDA approval) for sale through direct consumer sales, health food
outlets and distribution companies. The Company has selected several products to
be  manufactured  by contract  manufacturers  under  XetaPharm  trademarks.  The
emphasis of the products will be the natural health benefits.  Initial marketing
efforts  commenced in the second  quarter of 1996.  XetaPharm has introduced six
products, to date: GarlicOnce(R);  GinkgoOnce(R);  GinsengOnce(R);  Gugulon(TM);
Melatonin; and DHEA. The Company has designed a time

                                       13
<PAGE>

release component for the first three of these products,  reducing the number of
pills that must be taken. In 2000 the Company  introduced it's 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 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.  The  Company  still plans to produce  products  through
outside  contract  manufacturers in 2000, when the Company's  marketing  efforts
through  brokers,  Internet and foreign sales show increased  demands to warrant
in-house manufacturing. The Company will analyze all possible alternatives.

MARKETING

     The Company's  initial  potential  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 2000.  The  Company  is
seeking corporate alliances with large pharmaceutical  companies for some of its
programs  in order  to take  advantage  of such  companies'  abilities  to reach
broad-based markets.  There can be no assurance that the Company will be able to
enter into such collaborative  agreements. If the Company decides to conduct any
direct marketing of its potential  products,  there can be no assurance that the
Company will be successful in establishing a successful  in-house  marketing and
sales  force or that  sufficient  financing  will be  available  to develop  its
marketing and sales capabilities.

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

XECHEM (EUROPE) U. STIFT

     The Company temporarily shut-down the Xechem (Europe) offices in the second
quarter of 1999. There are no outstanding  debts or obligations  associated with
Xechem (Europe) at this time and none are anticipated.

TRADEMARKS

     The Company has registered and maintains  trademark rights to Xechem(R) and
HEXOID(TM) and has applied for  registration  of VIDA PRAS(TM).  The Company had
planned to market  paclitaxel under the trademark  Paxetol(TM).  Registration of
Paxetol(TM)  in United States and Canada has been opposed by Smithkline  Beecham
P.L.C. ("SKB") based on SKB's registered Paxil(R) mark for use with a dissimilar

                                       14
<PAGE>

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  trademark  for  Gugulon(TM)  and VIDA  PRAS(TM)  is  pending  at this time.
XetaPharm may adopt other trademarks for use with its potential products.

RAW MATERIAL SUPPLY

     Initially,  the Company  obtained  the raw  material  for  paclitaxel  from
domestic  sources.  In  September  1994,  the Company  entered into a three-year
agreement with Guizhou 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. Guizhou provided the Company
with the  necessary  material  to  prepare  the Drug  Master  File  ("DMF")  for
submission to the United States FDA  establishing  the origin and  processing of
the raw material which the Company needed in connection  with its preparation of
an ANDA on paclitaxel and for its compliance files once it engages in production
of the drug.  Guizhou has provided  such  materials  exclusively  to the Company
during  the term of the  agreement.  The  Company is not  obligated  to make any
minimum purchases after it fulfills its initial purchase obligation; however, if
the Company  purchases at least twelve kilograms of crude paclitaxel  within the
initial  three-year  term of the  agreement,  the Company will have the right to
extend the agreement for an additional three-year period.

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

     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

                                       15
<PAGE>

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 pay royalties,  to be
negotiated, if it develops and markets any products based on these materials.

     The Company has also received a supply of plant extracts from India through
an agreement  with the  International  Institute of Ayurveda  ("IIA")  which the
Company  has decided not to renew from June 1998.  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).  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. It is anticipated that Xechem India will
make available to the Company the materials  Xechem India  obtains.  The Company
has adopted a policy that all transactions  with affiliates shall be on terms no
less favorable to the Company than could be obtained from an unaffiliated  party
and must be approved by a majority of the Company's independent directors.  Such
policy  specifically  applies to any transaction  between the Company and Xechem
India if and so long as Dr. Pandey or any of the members of his immediate family
own 10% or more of the capital  stock of Xechem India.  However,  if the Company
does not control Xechem India,  there can be no assurance that Xechem India will
make such  materials  available  to the  Company,  or that it will not make such
materials available to competitors of the Company.  In addition,  if the Company
does not control  Xechem India,  there can be no assurance  that Xechem  India's
research,  development,  manufacturing,  and other activities will be of benefit
to, or would not be competitive  with,  the Company.  Xechem India has signed an
agreement  with Fujisawa (USA) to market their  vancomycin and other  injectable
drugs in India.  Xechem  India  commenced  marketing  vancomycin  in 1997  after
registration of the drug with the Drug Controller of India.

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

                                       16
<PAGE>

COMPETITION

Pharmaceuticals
---------------

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

     Most  competitors,  one of which currently  dominates the paclitaxel market
(Bristol-Myers),  have  substantially  greater capital  resources,  research and
development capabilities,  manufacturing and marketing resources, and experience
than the Company. In addition, these companies have vastly greater resources for
the production and  distribution of  pharmaceuticals  following  development and
regulatory  approval.   These  companies  may  represent  significant  long-term
competition for the Company. The Company's competitors may succeed in developing
products  that are more  effective or less costly than any that may be developed
by the  Company,  or  that  gain  regulatory  approval  prior  to the  Company's
products.  Bristol-Myers  is already  marketing  paclitaxel  commercially in the
United States, Canada and certain other countries for treating 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.  The ruling  invalidated  key  provisions of the patents held by
Bristol-Myers  and may  allow  competitors,  including  the  Company,  to launch
generic  versions.  This  ruling may benefit the Company in its efforts to bring
its version 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.

                                       17
<PAGE>

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

     Prior to  marketing  any  pharmaceutical  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 it involves the following:  (i) preclinical
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
indication; and (iv) FDA approval of a New Drug Application ("NDA"). If the drug
or compound  utilized in the product  has been  previously  approved  for use in
another  dosage  form,  the  approval  process is similar,  except that  certain
preclinical  toxicity tests normally required for the IND may be avoided through
the use of an ANDA.

     Clinical trials are typically conducted in three sequential phases 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  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

                                       18
<PAGE>

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

     Under the  Waxman-Hatch  Amendment  to the Food,  Drug and  Cosmetic Act of
1984, a five-year  period of marketing  exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable  new molecular  entity, to
compensate the firm for  development  efforts on such  non-patentable  molecular
entities.  In connection with its development of paclitaxel,  Bristol-Myers  was
granted a period of marketing  exclusivity,  which was to expire on December 29,
1997,  but has been extended for four years.  Management  believes some, but not
all,  foreign  countries have given Bristol Myers exclusive rights to market the
compound. The Company intends to submit an ANDA for paclitaxel 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.

                                       19
<PAGE>

EMPLOYEES

      As of December 31, 1999, the Company had ten employees,  two part-time. Of
these employees, six are dedicated to research,  development,  manufacturing and
regulatory  compliance.  Four 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 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 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 an  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

                                       20
<PAGE>

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.

     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 B.R.A.
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
Baroda,  India  (1974 - 1988) and has been a Visiting  Professor  at the Stevens
Institute of  Technology,  the  University  of Georgia,  and the  University  of
Oklahoma.  He 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 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 Medical  University of the People's Republic
of China.  He has studied for over two decades  the  chemistry  of  nucleosides,
nucleotides,  and  anti-tumor  and  anti-viral  drugs and has published over 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

                                       21
<PAGE>

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, Poona, 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 nationL/F  premier  research  institutions for
chemistry. Among his past accomplishments,  he has served on the Senior Advisory
Council of G.D.  Searle & Co., and has been the Chairman of the  Biological  and
Natural  Products Study Section for the NIH, as well as Chairman of the American
Society for  Pharmacognosy.  Dr.  Mitscher  received his Ph.D.  from Wayne State
University  in 1968.  Dr.  Mitscher  was a director of the Company  from 1994 to
1997.

     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.

                                       22
<PAGE>

     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  could also have an adverse  effect on the market price of the
Company's  securities  given the limited  trading and low price of the Company's
securities.  In the past twelve months, the Company's Common Stock has reached a
low in November  1999 of $0.03 per share with light  trading.  During 2000 stock
prices have changed  dramatically  with a high of $1.00 in February  2000. As of
March  21,  2000 the  closing  price of the  Company's  common  stock on the OTC
Bulletin Board was $ 0.46.

Relationship with David Blech
-----------------------------

     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,  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
their control as of February 29, 2000. These proxies relate to 83,299,495

                                       23
<PAGE>

shares of Company Common Stock or approximately 34.6% of the Company's presently
outstanding shares of Common Stock.

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  immediately upon the expiration of Bristol Myers'
exclusive  period,  as extended,  (December 29, 2001),  the Company does not yet
have all of the  data for such  ANDA  and  there  can be no  assurance  that the
Company will be able to file the ANDA at that time. Although the Company has the
capability  to, and may, sell  paclitaxel  for research  purposes,  to date, the
Company  has not  received  any  revenues  from  sales of  paclitaxel  for human
consumption  and has received only minimal  revenues from other product sales or
sales of  paclitaxel  for  research and  development.  The  Company's  principal
revenues have been  contract  research and testing and  consulting  services for
other companies,  which are not expected to continue and which have historically
been  minimal.  To achieve  profitable  operations,  the Company,  alone or with
others,  must successfully  develop,  obtain regulatory approval for, introduce,
and market its potential pharmaceutical products. No assurance can be given that
the Company's  product  research and  development  efforts will be  successfully
completed,  that required  regulatory  approvals  will be obtained,  or that any
products, if developed and introduced,  will be successfully marketed or achieve
market acceptance.

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

     The  Company  has  experienced   significant  operating  losses  since  its
inception and has generated minimal revenues from its operations. As of December
31, 1999, the Company's accumulated deficit was approximately  $32,493,000 which
included  losses from operations of $3,035,000,  $2,314,000,  and $5,272,000 for
the years ended  December 31, 1999,  1998 and 1997  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,  negative  working  capital,  and
accumulated  deficit,  the  independent  accountants'  report  on the  Company's
financial  statements for the years ended December 31, 1993,  1994,  1995, 1996,
1997,  1998 and 1999 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

                                       24
<PAGE>

its ability to generate sufficient cash flow to meet its obligations on a timely
basis and ultimately to attain profitable  operations.  The Company  anticipates
that  it  will   continue  to  incur   significant   losses   until   successful
commercialization  of one or more products generates  sufficient net revenues to
cover all costs of operation.  As a development stage company, the Company has a
limited  relevant  operating  history upon which an  evaluation of the Company's
prospects can be made. The Company's prospects must, therefore,  be evaluated in
light of the problems,  expenses, delays and complications associated with a new
business. As a result of the development-stage nature of the Company's business,
additional operating losses can be expected.  There can be no assurance that the
Company can be operated  profitably in the future. See "Management's  Discussion
and Analysis" and Note 3 to the Notes to the  Company's  Consolidated  Financial
Statements.

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

     The Company believes that its current manufacturing  facility is capable of
producing  approximately  four 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, 1999, the Company has not
negotiated a contract with any packager to perform such  services.  It maintains
an efficient, ambient warehouse center to insure proper handling and shipping of
the  drugs.   While  the  Company  has  been  seeking   additional  and  back-up
manufacturers,  there can be no  assurance  that it will be able to locate  such
manufacturers,  or that it will be able  to  enter  into  agreements  with  such
manufacturers.  Although  the Company  believes  that it has the  capability  to
significantly  expand  production of bulk  paclitaxel,  should demand exceed the
Company's  manufacturing  capacity,  it may have to seek  third  party  contract
manufacturing.  In such  instance,  there can be no  assurance  that the Company
could  locate  satisfactory  contract  manufacturing  services  to perform  such
functions  at all or on  acceptable  terms,  or that it would  have the funds or
ability  to  develop  such  capability  internally.   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 US 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
no sales and marketing employees.  To the extent that the Company determines not
to, or is unable to, enter into collaborative agreements or to arrange for third
party distribution of its potential products,  significant  additional resources
will be  required  to develop a marketing  and sales  force.  Should the Company
elect to license or sell products to distributors,  a significant portion of the
profits from such  products may be realized by such  licensees or  distributors,
rather than by the Company. See "Marketing" above.

Dependence upon Dr. Pandey and Other Key Personnel
--------------------------------------------------

     The Company's  ability to develop its business  depends upon its attracting
and  retaining  qualified   management  and  scientific   personnel,   including
consultants  and members of its SAB. As the number of  qualified  scientists  is
limited and competition for such personnel is intense, there can be no assurance
that the Company is able to attract or retain such persons.  In particular,  the
Company will be dependent  upon the continued  services of Dr. Ramesh C. Pandey,
the Company's Chairman of the Board,  President and Chief Executive Officer. The
loss of key personnel,  such as Dr. Pandey, or the failure to recruit additional
key personnel could significantly  impede attainment of the Company's objectives
and have a material adverse

                                       25
<PAGE>

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.  The Company has obtained a $4,000,000 key man life insurance policy
on Dr. Pandey. See Item 9, Directors,  Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.

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

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

Management of Staff Growth
--------------------------

     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  approximately  ten  persons.  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.  Though  the  Company  was
successful  in such a strategy  with  Vancomycin,  it has not been able to align
with a  marketing  partner  for its new  products.  Therefore,  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

                                       26
<PAGE>

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.

Uncertainty of Healthcare Reimbursement; Government Healthcare Reform Proposal
------------------------------------------------------------------------------

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

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

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

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

                                       27
<PAGE>

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.

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

     The Company  leases its office and  laboratory  space at 100 Jersey Avenue,
Building B, Suite 310, New Brunswick, New Jersey 08901. The facility consists of
approximately  25,000  square  feet and at original  execution  of the lease the
lessor was unaffiliated. Ownership of the lessor was subsequently transferred to
a new  investment  group and Dr. Pandey  invested  personal  funds to acquire an
approximately  25% interest in the lessor.  The lease  expires on September  30,
2000,  subject to three  five-year  extensions  at the  Company's  option and an
option by the Company to lease an additional  10,000 square feet.  The Company's
base  rent is  approximately  $7,542  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

                                       28
<PAGE>

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

     There was no Annual Meeting of Stockholders of the Company held in 1999.

                                       29
<PAGE>

                                     PART II

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

     On April 26, 1994, the Company's Common Stock, Warrants and units comprised
of one share of Common Stock and one Warrant (the "Units")  began trading on the
Nasdaq  SmallCap  Market  ("Nasdaq")  under the symbols  ZKEM,  ZKEMW and ZKEMU,
respectively.  The Units ceased to separately  trade on June 10, 1994;  however,
the Common Stock and Warrants  continued to trade separately after such date. On
February 4, 1997,  the  Company's  Common Stock and Warrants  were delisted from
trading on the Nasdaq SmallCap  Market.  Since  delisting,  the Company's Common
Stock and Warrants have traded on the OTC Bulleting  Board. The Warrants expired
on April  26,  1999  and no  Warrants  were  exercised  as the bid  price of the
Company's Common Stock was less than the Warrant exercise throughout the life of
the  Warrants..  The  following  table shows the high and low  quotations,  on a
quarterly  basis,  of the  Company's  Common  Stock from January 1, 1998 through
December 31, 1999:

<TABLE>
<CAPTION>
                                  Common Stock

----------------------------------------------------------------------------------------
             1998      1998     1998      1998      1999     1999      1999      1999
             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    3/16      3/16     3/32      1/16      3/32     1/16      5/64      1/16
----------------------------------------------------------------------------------------
 Low Bid     3/16      1/8      1/16      1/32      3/64     1/32      1/32      1/32
----------------------------------------------------------------------------------------

                                    Warrants

----------------------------------------------------------------------------------------
             1998      1998     1998      1998      1999     1999
             First    Second    Third    Fourth    First    Second
            Quarter  Quarter   Quarter   Quarter  Quarter   Quarter
----------------------------------------------------------------------------------------
 High Bid     0         0        0          0         0         0
----------------------------------------------------------------------------------------
 Low Bid      0         0        0          0         0         0
----------------------------------------------------------------------------------------
</TABLE>


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

     As of February 29, 2000,  there were 219 record  holders and  approximately
1,200 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 $100 per share on a cumulative  basis. As of February
29, 2000 there were 2,500 outstanding shares of Class A Preferred Stock.

SBX Nanocap System
------------------

     The Company has been chosen as one of 3,400  SEC-reporting  companies to be
included on the SBX Nanocap System, the new and innovative  Internet-based order
matching system (http://www.nanocaps.com),  where investors can see at no charge
the open order book and matched trade

                                       30
<PAGE>

history  and can place  orders for Nanocap  securities  with  features  formerly
available only to professional traders. Xechem's symbol on the Nanocap System is
N2695. Individuals can view the open order book and place orders with their NASD
member broker-dealer.

                                       31
<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  (Europe),  an affiliate of Xechem,  Inc., was closed in
June 1999.

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

The Year Ended December 31, 1999 vs. The Year Ended December 31, 1998

     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, 1999 and for each of the years ended  December  31,  1999 and  December  31,
1998.

<TABLE>
<CAPTION>
                                                                    CUMULATIVE
                                                YEARS ENDED        INCEPTION TO
                                                DECEMBER 31         DECEMBER 31
                                                -----------         -----------
                                              1999        1998         1999
                                               (in thousands)
<S>                                          <C>         <C>         <C>
Revenue                                      $   358     $    88     $  1,135
Research and development expense             $   574     $ 1,258     $  8,887
Rent, general and administrative expenses    $ 2,633     $ 1,144     $ 10,373
Writedown of inventory and intangibles       $   186     $     0     $  1,723
(Loss) from operations                       $(3,035)    $(2,314)    $(19,848)
</TABLE>

Revenue
-------

     The $270,000  increase in revenue from the year ended  December 31, 1998 to
the year ended December 31, 1999,  which  represented a 307%  increase,  was due
primarily from the $300,000 increase in

-----------------------
     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.

                                       32
<PAGE>

consulting  fees in  connection  with the on going  negotiations  with a Chinese
company.  XetaPharm's revenues from the sale of over-the-counter  natural health
products,  commonly known as  nutraceuticals,  decreased $26,000 or 46% from the
year ended December 31, 1998 to the year ended December 31, 1999, due to limited
marketing and no internal sales force.

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

     The Company's research and development  expenditures  continue to emphasize
compounds for niche generic anticancer,  antiviral and antibiotic products which
enjoy significant  market demand but are no longer subject to patent protection.
Research and development  expenditures decreased by $684,000 or 54% to $574,000,
for the year ended  December 31, 1999 as compared to the year ended December 31,
1998.

     Research  and  development  operations  continued  to be curtailed in 1999,
which resulted in a 54% reduction. This was done mainly due to unavailability of
funding and the delay in attempting to market  paclitaxel due to the FDA's grant
of exclusivity to Bristol-Myers in the United States.

     Expenditures  for research and  development  may increase during 2000 since
the Company was able to finalize its pending  application  with the State of New
Jersey for a credit based upon net operating losses, obtain additional financing
and increase  nutraceutical  sales. 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 increased $1,489,000,  or 130%, for the
year ended  December  31, 1999 as compared to the year ended  December 31, 1998.
The significant changes for the period ending December 31, 1999 were an increase
of $1,910,000 in non-cash  compensation to employees,  directors and consultants
due to issuance of Company preferred and common stock, an increase in consulting
fees of $53,000 and a decrease of $43,000 in all other  administrative  salaries
and benefits. Bad debt expense decreased by $43,000, insurance expense increased
by $14,000.  Utilities decreased by $13,000 while other office expenses remained
comparable  to prior years.  Travel,  trade shows,  and meals and  entertainment
decreased by $38,000.  Legal fees decreased over $171,000 in 1999 as compared to
1998, accounting fees decreased over $12,000 for the same period.  Miscellaneous
expense  decreased  $100,000 for the year ended December 31, 1999 as compared to
the year ended  December 31, 1998 due to corrections to prior year balance sheet
adjustments  and over accruals.  There was also a $25,000  decrease in sales and
use tax due to a one time charge in 1998.

     The  Company  does not  anticipate  that  the  general  and  administrative
expenses  will have any major  increases  in it's  cost of  operations  till 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. 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's  loss from  operations  totaled  $3,035,000,  an increase of
$721,000,  or 31%, for the year ended  December 31, 1999 as compared to the year
ended December 31, 1998.

     Interest expense increased  approximately $29,000,  doubling to $58,000, in
the year ended  December  31, 1999 as compared  to the year ended  December  31,
1998. This was due to the Company having interim

                                       33
<PAGE>

loans from related parties of $661,000.

Writedown of Inventory
----------------------

     Inventories  were  devalued  by  $186,000  in 1999 due to slow  movement of
XetaPharm's product line. Raw gugulon extract, valued at $180,000, which is used
for the production of  Gugulon(TM)  was written off due to slowness in the sales
of the product line. The remainder was obsolete packaging materials.

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

     On  December  31,  1999,  the  Company  had cash and  cash  equivalents  of
$632,000,  negative  working  capital of $347,000  and  stockholder's  equity of
$249,000.

     As a result of its net losses to December 31, 1999 and accumulated  deficit
since  inception,  the Company's  accountants,  in their report on the Company's
financial  statements  for  the  year  ended  December  31,  1999,  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 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 was written
down to $0.00 in 1997, and anticipates,  but can provide no assurances,  that it
will commence sales of paclitaxel in the international  market in 2000. Prior to
commencing  such sales,  the  Company  must file for and obtain  approvals  from
appropriate  regulatory  agencies  in  foreign  jurisdictions.  The  Company  is
currently  making  use of a grant  from the State of New  Jersey  for ISO - 9000
training  to  gain  ISO -  9001  certification  before  the  end of  year  2000.
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.

     The  Company  has  "Strategic   Alliance   Agreements"  with  two  European
companies, and is negotiating with several other companies outside of the United
States to license  production,  market and sell bulk and injectable  paclitaxel.
These  companies  will  be  responsible  for  the   registration  of  injectable
paclitaxel in their  respective  countries.  Xechem will also grant a license to
these companies to manufacture and sell Xechem's patented new paclitaxel analogs
as well as a new paclitaxel formulation without

                                       34
<PAGE>

Cremophor(TM)  or ethanol.  In return,  Xechem will be  cross-licensed  by these
companies to produce, market and sell certain key pharmaceutical products in the
United States and India.  Xechem will be  responsible  for the  registration  of
these products with the FDA. The aggregate  market for these products  currently
exceeds $1,000,000,000.

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

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

     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.

     On April 4, 2000, the Company  signed a joint venture  agreement with J & M
Consultants,  LTD ("J&M") to establish  Xechem  Pharmaceutical  China Ltd.  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 P.R.  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 People's  Republic of China,
Hong Kong, Macao, Taiwan (The Republic of China),  Mongolia,  Korea,  Singapore,
Malaysia,  Indonesia,  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 HK$ 9,500,000 and management support to the joint venture and
up to $240,000 as an interest free loan to Xechem over 24 months. 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)).

                                       35
<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.

                                       36
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

     We have  audited the  accompanying  consolidated  balance  sheets of Xechem
International,  Inc. and its subsidiaries (a development stage enterprise) as of
December  31,  1999  and  1998,  and  the  related  consolidated  statements  of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1999 and for the period from inception to December 31,
1999 then ended. 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.  The  Company's
financial  statements from inception  through  December 31, 1997 were audited by
other  auditors  whose  report dated March 20,  1998,  expressed an  unqualified
opinion thereon with an explanatory  paragraph expressing  uncertainty about the
Company's ability to continue as a going concern. The other auditors' report has
been  furnished  to us and our  opinion,  insofar as it  relates to the  amounts
included for such prior periods, is based solely on the report of such auditors.

     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 and the report of the other  auditors,
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 1998, and the  consolidated  results of
their  operations  and their  cash  flows for the years  then  ended and for the
period from inception 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-1
<PAGE>

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           1999             1998
                                                           ----             ----
Current Assets:
<S>                                                   <C>              <C>
   Cash                                               $    632,000     $     41,000
   Accounts receivable less allowance for doubtful
       accounts of $4,000 and $15,000                       13,000           14,000
   Inventory:
       Raw materials                                            --          212,000
       Finished goods                                      133,000          150,000
   Prepaid expenses and other current assets                 1,000           85,000
                                                      -----------------------------
   TOTAL CURRENT ASSETS                                    779,000          502,000

 Equipment, less accumulated depreciation
     of $789,000 and $646,000                              621,000          794,000
 Leasehold improvements, less
     accumulated amortization                              581,000          649,000
 Loans receivable - related parties;
     less allowance for doubtful accounts
     of $118,000 for 1998                                       --           12,000
 Cash surrender value of officer's life insurance           35,000           43,000
 Deposits                                                   20,000           19,000
                                                      -----------------------------
                                                      $  2,036,000     $  2,019,000
                                                      =============================
CURRENT LIABILITIES
   Accounts payable                                   $    678,000     $    678,000
   Accrued expenses to related parties                     253,000          138,000
   Accrued liabilites to others                            149,000          220,000
   Loans payable                                           359,000        1,143,000
   Other current liabilities                                36,000           45,000
                                                      -----------------------------
     TOTAL CURRENT LIABILITIES                           1,475,000        2,224,000
                                                      -----------------------------
NOTES PAYABLE-RELATED PARTIES                              312,000          298,000
                                                      -----------------------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS EQUITY
   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, 2,996,000 shares authorized;
     200,000 shares issued and outstanding                      --               --
   Common stock,$.000001 par value,
      247,000,000 shares authorized;
      240,460,000 issued and outstanding                     2,000            1,000
   Additional paid in capital                           32,740,000       29,562,000
   Deficit accumulated during development stage        (32,493,000)     (30,066,000)
                                                      -----------------------------
   TOTAL STOCKHOLDERS EQUITY                               249,000         (503,000)
                                                      -----------------------------
                                                      $  2,036,000     $  2,019,000
                                                      =============================
</TABLE>

                                      F-2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               MARCH 15 1990
                                                                               -------------
                                                                                  (DATE OF
                                                                                  --------
                                                                               INCEPTION) TO
                                                                               -------------
                                               YEAR END DECEMBER 31,            DECEMBER 31,
                                               ---------------------            ------------
                                              1999               1998               1999
                                              ----               ----               ----
Revenues:
<S>                                      <C>                <C>                <C>
   Consulting fees from Asian company    $      300,000     $           --     $      300,000
   Other                                         58,000             88,000            835,000
                                         ----------------------------------------------------
                                                358,000             88,000          1,135,000
                                         ----------------------------------------------------
EXPENSES:
   Research and development                     574,000          1,258,000          8,887,000
   General and administrative                 2,633,000          1,144,000         10,373,000
   Writedown of inventory
      & intangibles                             186,000                 --          1,723,000
                                         ----------------------------------------------------
                                              3,393,000          2,402,000         20,983,000
                                         ====================================================

   LOSS FROM OPERATIONS                      (3,035,000)        (2,314,000)       (19,848,000)
                                         ----------------------------------------------------
OTHER INCOME(EXPENSE) - NET:

   Interest Expense - Related Party             (58,000)           (23,000)        (8,670,000)

   Interest Expense                                  --             (6,000)        (4,925,000)

   Sale of New Jersey net operating
    loss carryforwards                          651,000                 --            651,000

   Other(net)                                    16,000              6,000            299,000
                                         ----------------------------------------------------
                                                609,000            (23,000)       (12,645,000)
                                         ----------------------------------------------------

   NET LOSS                              $   (2,427,000)    $   (2,337,000)    $  (32,493,000)
                                         ====================================================

BASIC AND DILUTED LOSS PER SHARE         $        (0.01)    $        (0.02)
                                         =================================
WEIGHTED AVERAGE NUMBER OF
    COMMON SHARES OUTSTANDING               279,197,000        131,791,000
                                         =================================
</TABLE>

See notes to consolidated financial statements

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Additional   Deficit Accumulated
                                                               Number of                     Paid-In    During Development
                                                             shares issued       Par Value   Capital           Stage
                                                             ---------------------------------------------------------------

SUMMARY OF COMMON STOCK TRANSACTIONS FROM INCEPTION (March 15, 1990) TO DECEMBER 31, 1997:
<S>                                                             <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
                                                               ----------------------------------------------------------
BALANCES AT DECEMBER 31, 1997                                  119,871,000       $ 1,000   $ 28,745,000     $(27,729,000)
</TABLE>

See notes to consolidated financial statements

                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Additional   Deficit Accumulated
                                                               Number of                     Paid-In    During Development
                                                             shares issued       Par Value   Capital           Stage
                                                             ---------------------------------------------------------------
<S>                                                            <C>               <C>      <C>              <C>
    BALANCES FORWARDED AT DECEMBER 31, 1997                    119,871,000        $1,000   $ 28,745,000     $(27,729,000)

    YEAR ENDED DECEMBER 31, 1998:
        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)

        Net loss for year                                               --            --             --       (2,337,000)
                                                             -----------------------------------------------------------
    BALANCES AT DECEMBER 31, 1998                              140,651,000         1,000     29,562,000      (30,066,000)

    YEAR ENDED DECEMBER 31, 1999:
        Sale of common stock pursuent to Blech
          agreement at $0.01 per share                          44,554,000            --        444,000

        Conversion of debt due related
          parties at $ 0.01 per                                 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                                               --            --             --       (2,427,000)
                                                             -----------------------------------------------------------
BALANCES AT DECEMBER 31, 1999                                  240,460,000       $ 1,000   $ 32,740,000     $(32,493,000)
                                                             ===========================================================
</TABLE>

See notes to consolidated financial statements

                                      F-5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          March 15, 1990
                                                                                       (date of inception)
                                                             Years ended December 31,     to December 31,
                                                         ------------------------------------------------
                                                              1999             1998             1999
                                                              ----             ----             ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                      <C>              <C>              <C>
    Net loss                                             $ (2,427,000)    $ (2,337,000)    $(32,493,000)
    Adjustments to reconcile net loss to net cash
      Provided (used) by operating activities:
      Depreciation                                            143,000          177,000          692,000
      Amortization                                             68,000           68,000          605,000
      Interest and compensation expense in connection
        with issuance of equity securities                  1,973,000               --       16,233,000
      Write down of inventories                               186,000               --        1,206,000
      Write down of patents                                        --               --          517,000
      Loss on investment in related party                      54,000           35,000           89,000

    Changes in operating assets and liabilities
     (Increase) decrease in:
        Accounts receivable                                     1,000           52,000          (13,000)
        Inventories                                            43,000         (146,000)      (1,334,000)
        Prepaid expenses                                       84,000          108,000           74,000
        Other current assets                                       --          148,000           43,000
        Other                                                      --            2,000          (30,000)
      Increase (decrease) in:
        Accounts payable                                           --          174,000          678,000
        Other current liabilities                              (9,000)        (121,000)          (4,000)
        Accrued expenses                                       44,000          196,000          402,000
                                                         ----------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES                 $    160,000     $ (1,644,000)    $(13,335,000)
                                                         ----------------------------------------------
</TABLE>

                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          March 15, 1990
                                                                                       (date of inception)
                                                             Years ended December 31,     to December 31,
                                                         ------------------------------------------------
                                                             1999             1998             1999
                                                         ------------------------------------------------
<S>                                                      <C>             <C>               <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES                 $    160,000    $  (1,644,000)    $(13,335,000)
                                                         ----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Patent issuance costs                                          --               --         (548,000)
    Purchases of equipment and
      leasehold improvements                                  (24,000)         (40,000)      (1,975,000)
    Investment in related party                                12,000          (35,000)         (23,000)
    Other                                                       7,000          (43,000)          (8,000)
                                                         ----------------------------------------------

NET CASH FLOWS FROM INVESTING ACTIVITIES:                      (5,000)        (118,000)      (2,554,000)
                                                         ----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from related party loans                         363,000               --        1,658,000
    Proceeds from notes payable - others                           --          170,000          628,000
    Proceeds from interim loans                                    --        1,056,000        2,947,000
    Capital contribution                                           --               --           95,000
    Payments on interim loans                                      --         (193,000)        (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                   443,000          719,000       12,788,000
                                                         ----------------------------------------------

    NET CASH FLOWS FROM FINANCING ACTIVITIES:                 436,000        1,752,000       16,521,000
                                                         ----------------------------------------------
    NET CHANGE IN CASH                                        591,000          (10,000)         632,000
CASH, BEGINNING OF PERIOD                                      41,000           51,000                0
                                                         ----------------------------------------------
CASH, END OF PERIOD                                      $    632,000    $      41,000     $    632,000
                                                         ==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the periods for:
      Interest paid - related party                      $     33,000    $          --     $    138,000
                                                         ==============================================
      Interest paid - other                              $         --    $      28,000     $    161,818
                                                         ==============================================
      Income taxes paid                                  $         --    $          --     $         --
                                                         ==============================================
NONCASH FINANCING ACTIITIES
   Net assets of Xechem India contributed to
     capital and minority interest                       $         --    $     118,000     $    118,000
                                                         ==============================================
   Liabilities exchanged for preferred
     and common stock                                    $    921,000    $          --     $    921,000
                                                         ==============================================
</TABLE>

See notes to consolidated financial statements

                                      F-7
<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 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.,
XetaPharm,  Inc. and Xechem (India) Pvt. Ltd.  (collectively  the  "Company").
All   intercompany   transactions   and  balances  have  been   eliminated  in
consolidation.

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 and  equivalents,
accounts  receivable,  marketable  securities,  other assets, notes and accounts
payable, accrued expenses and long-term debt. 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 to be cash equivalents.  At December 31, 1999 and 1998,
the Company had no cash equivalents.

INVENTORIES  -  Inventories  are  stated  at the  lower  of cost on a  first-in,
first-out  basis or market.  Inventories  at December 31, 1998 were  principally
comprised of raw materials and finished goods of XetaPharm's  dietary supplement
products.  However,  the remaining  amount of raw materials at December 31, 1999
was written off based upon recent sales activity.


IMPAIRMENT - Long-lived assets of the Company are reviewed at least annually as
to whether their  carrying  value has become  impaired.  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.

                                      F-8
<PAGE>

Due to  substantial  underutilized  capacity  and weak  financial  resources  to
generate activities, it is reasonably possible that a loss will be recognized in
the near term.

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, 1999 and 1998 was $211,254 and $244,394 respectively.

PATENTS - The cost of patents is charged to cost of operations when incurred

GOVERNMENT  GRANTS - The Company has obtained a grant from the  National  Cancer
Institute  for  a  project  entitled  Bioactive  Natural  Products  from  Marine
Extremophiles.  At December 31, 1999 the company has a  contingent  liability to
repay,  in whole or in part,  grants  received of  approximately  $30,000 in the
event the Company  does not meet its  obligations  under the terms of the grant.
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").

ESTIMATES  AND  UNCERTAINTIES  - The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and 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,  as determined at a later date,
could differ from those estimates.  It is reasonably possible that the Company's
estimate that the carrying amount of such assets will be recoverable from future
operations  will  change  in the near  term  given  the  uncertainty  about  the
Company's ability to continue as a going concern as more fully discussed in Note
2.

CONCENTRATION  OF CREDIT RISK - The  Company  maintains  cash  balances at three
different financial institutions in New Jersey. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. The Company
has over  $600,000  in one  account  which is  insured  by the  Federal  Deposit
Insurance  Corporation  up to  $100,000  which  leaves a low  level  risk on the
balance.

LOSS PER SHARE - Basic EPS is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number of common  and  preferred  shares
outstanding for the period. The shares issuable upon the exercise of outstanding
warrants and options 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-9
<PAGE>

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,  1999 and 1998;  has an  accumulated  deficit  since
inception  and  has  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.

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 under the Blech Purchase Agreement.

PLANS

During the two years ended December 31, 1999, the Company has cut administrative
expenses,  reduced its monthly cash  requirements and has sold a portion of it's
state net operating loss carryforwards.

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

With the recent  inflow of cash from the sale of NOL's in December  1999 and the
anticipated sale of NOL's from 1998 and 1999 the Company has improved.  This has
spurred interest in the Company both domestically and overseas,  while no formal
agreements are yet in place the Company  believes its prospects will be improved
in the near future.

NOTE 3    BLECH PURCHASE AGREEMENT

On November 18, 1996, the Company entered into an agreement (the "Blech Purchase
Agreement")  with David Blech and/or his designees  ("Blech")  providing for the
sale of up to  55,000  shares  of Class C Series 2 Voting  Cumulative  Preferred
Stock (the "Series 2 Preferred  Shares") for a purchase  price of $100 per share
($5,500,000 in the  aggregate),  or the  underlying  shares of Common Stock at a
conversion price of $.05 per common share.

In February 1997, in accordance with the terms of the Blech Purchase  Agreement,
Dr. Pandey  converted his Class B 8% Preferred  Stock and notes  receivable into
12,144  shares  of  Class C Series 3  Preferred  Shares  for a price of $100 per
share.  Subsequently,  these shares were  converted  into  19,430,400  shares of
Common Stock at a  conversion  price of $.0625 per common  share.  In June 1998,
Blech completed the obligations under this agreement.

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.

                                      F-10
<PAGE>

NOTE 4    INCOME TAXES

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

Since 1994, the Company has  approximate  net operating loss  carryforwards  for
Federal income tax purposes as follows:

             Amount                Expiration Date
             ------                ---------------
           $3,175,000                   2009
            3,150,000                   2010
            3,250,000                   2011
            3,750,000                   2012
            2,250,000                   2013
            2,400,000                   2014

SFAS No. 109 requires the establishment of a deferred tax asset  attributable to
operating loss  carryforwards.  The deferred tax asset attributable to operating
loss  carryforwards  amounted to approximately $ 6,291,000 at December 31, 1999.
Because  the  Company's  cumulative  losses  since  inception,   however,  raise
questions about the future  recoverability of any deferred tax asset established
for the Company's tax loss carryforwards, a corresponding valuation allowance of
the same amount has been  established.  Accordingly,  no  deferred  tax asset is
reflected in these financial statements.

During 1999,  the Company and its  subsidiaries  transferred  the tax benefit of
their unused pre-1998 New Jersey net operating loss carryforwards of $784,000 in
exchange for $651,000 pursuant to a state program to finance emerging technology
and biotechnology companies.

NOTE 5    RELATED PARTY TRANSACTIONS

LOANS RECEIVABLE - In 1998 and 1997, the Company made loans totaling $60,000 and
$90,000,  respectively to Consumers  Choice  Systems,  Inc.  ("CCS"),  a company
engaged in the marketing and  distribution  of products in the  over-the-counter
pharmaceutical  market.  The Company has entered into  negotiations  with CCS in
connection  with  possible  distribution  of  XetaPharm  nutraceuticals.  CCS is
engaged in a private  offering of its  securities,  and upon  completion of this
offering, The Edward A. Blech Trust would own approximately 30.8% of CCS' common
stock.

In September  1998,  the Company agreed to accept 46,000 shares of stock with an
agreed upon value of $34,500 as partial repayment of the loan.  However,  a 100%
valuation  allowance was recorded due to the financial  condition of CCS.  Thus,
the  investment in CCS was reduced to zero. At December 31, 1998,  CCS had a net
loan balance of $11,000  after a reserve of $44,000.  In December 1999 this loan
was deemed totally uncollectable and was written off .

NOTES  PAYABLE - The Company  owes Dr.  Pandey  $565,000 as of December 31, 1999
from advances ($312,000), accrued interest ($101,000), accrued salary ($121,000)
and accrued expenses ($31,000).

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

                                      F-11
<PAGE>

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..

LEASES - Dr.  Pandey  owns 25% of the  lessor of it's  operating  facility  as a
limited partner (See Note 6).

LOANS  PAYABLE - Loans  payable  at  December  31,  1999  totaled  approximately
$328,000,  consisting  principally  of two  loans  to the  Company  during  1996
aggregating  to $115,000 and four  additional  loans to the Company  aggregating
$170,000 in 1999.  The  individual  has agreed to extend the term of the loans ,
which aggregate  $298,000,  to expire in September 2000 and simple interest will
be at 12% per annum.  In December of 1999, the individual also made a short-term
loan in the amount of $20,000.

NOTE 6    COMMITMENTS

EMPLOYMENT CONTRACTS

Dr. Pandey is employed  pursuant to  Agreements  through July 2004 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,  which royalty will continue to be paid to
Dr.  Pandey  and/or his  successors so long as any such products are sold by the
Company (regardless of whether Dr. Pandey is actually employed by the Company at
the time of such sale).

Dr. Pandey has agreed to defer all unpaid compensation  otherwise payable to him
under these  agreements  until such time as the Company has the funds to pay the
same to him. At December 31, 1999 unpaid compensation totaled $121,000.

In May 1997 the Company  entered into an  agreement to pay an employee,  $43,000
per year until May 31, 2000.  The agreement  was  terminated in June 1999 and no
further payments are due.

LEASES - The Company leases its facilities  under an operating  lease that began
in April 1991 and expires on September 30, 2000. In 1996, Dr. Pandey purchased a
25%  beneficial  ownership  in the lessor as a limited  partner in such  entity,
which may be deemed to be an affiliate  of Dr.  Pandey.  The lease  provides the
Company  with  renewal  options for three  additional  five-year  periods.  Rent
expense  under the operating  lease  amounted to  approximately  $90,000 for the
years ended December 31, 1999 and 1998, respectively.  At December 31, 1999, the
Company owes rent totaling approximately $140,000. Future minimum payments under
non-cancelable at December 31, 1999 were $88,000 all due in 2000.

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

                                      F-12
<PAGE>

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 1999 and 1998, no purchases 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 set  forth  in the
agreement:

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

In 1999 and 1998,  the Company did not  generate  any sales with  respect to the
agreement, and no royalties were paid.

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.  At
December 31, 1998, a total of $200,000 has been  recorded of which  $100,000 has
been  paid.  There  has been no  activity  in 1999 but the  Company  intends  to
continue with the agreement.

NOTE 7    STOCK OPTIONS AND WARRANTS:

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 or a committee.

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

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

                                      F-13
<PAGE>

On January 15, 2000, the Company, in consideration for future services,  granted
five year options to 2 law firms entitling them to purchase a total of 1,500,000
shares of common stock at $ .01 per share.

At December 31, 1999, options outstanding are summarized as follows:

Range of Exercise Prices      Options Outstanding         Weighted Average Price
------------------------      -------------------         ----------------------
    $ .01 to $  .34                 1,356,000                     $ .07
    $ .66 to $ 5.00                   160,000                     $ .80

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

                                          1999                    1998
                                 ----------------------   ----------------------
                                            Weighted-               Weighted-
                                            ---------               ---------
                                             Average                 Average
                                             -------                 -------
                                 Shares  Exercise Price   Shares  Exercise Price
                                 ------  --------------   ------  --------------

OUTSTANDING ON JANUARY 1,         1,626     $   0.14       1,683     $   0.14

Granted                              50     $   0.07         330         0.21
Exercised                            --           --           0         0.00
Forfeited/Expired                   160     $   0.04         387         0.40
                               --------     --------    --------     --------

  OUTSTANDING ON DECEMBER 31,     1,516     $   0.14       1,626     $   0.14
                               ========     ========    ========     ========


  EXERCISABLE ON DECEMBER 31,       885     $   0.15         515     $   0.14
                               ========     ========    ========     ========

The  following  table  summarizes  information  about stock  options at December
31,1999 (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 0.26      1,239         7.3             $0.04        885        $0.15
$0.27 to 0.50        117         7.8             $0.32         --        $  --
$0.56 to 1.00        160         7.9             $0.80         --        $  --
                   -----       -----             -----       ----        -----
     Totals        1,516         7.4             $0.14        885        $0.15
     ------        =====       =====             =====       ====        =====
</TABLE>

                                      F-14
<PAGE>

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,

                                              1999            1998
                                              ----            ----
Net Loss:
   As Reported                            $  ( 2,427)     $   (2,337)
   Pro Forma                              $  ( 2,429)     $   (2,345)
Net Loss Per Share:
   As Reported                            $    (0.01)     $    (0.02)
   Pro Forma                              $    (0.01)     $    (0.02)

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1999 and 1998,  respectively;  dividend yields of
$-0- for each year,  expected volatility of approximately 116 % in 1999 and 182%
in 1998,  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 and $0.21 for the years  ended  December  31, 1999 and 1998,
respectively.

The Company has granted  Dr.  Pandey an option to purchase  common  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.  At December  31,  1998,  a rights  offering  has not occurred nor has the
Company raised  additional  capital.  Therefore,  no options were granted to Dr.
Pandey in 1998.

In 1999,  50,000  options were granted to a new employee as an incentive to join
the Company.

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

The Warrants were immediately separable from the shares of Common Stock included
in the Units in the Public Offering. Each Warrant originally entitled the holder
to purchase,  at any time until April 26, 1999,  one share of Common Stock at an
exercise price of $6.00 per share, subject to certain  adjustments.  As a result
of various  issuances of Common Stock since April 1994,  the exercise  price per
share has been  substantially  reduced to a price below $0.50 per share and will
be subject to further  adjustments  as  additional  issuances are made under the
Blech Purchase  Agreement.  The number of shares deliverable on exercise of each
warrant  increases  in  proportion  to each  decrease in the per share  exercise
price. The Warrants may be exercised in whole or in part. Unless exercised,  the
Warrants will  automatically  expire on April 26, 1999,  unless  extended by the
Company.

The  Company may at any time redeem the  Warrants,  in whole or in part,  at the
option of the Company,  upon not less than 30 days' notice,  at a price of $0.10
per Warrant, provided that (a) the then-current market price of the Common Stock
is at least  175% of the  then-current  exercise  price of the  Warrants  for 20
consecutive  business  days  ending  within 30 days of the date of the notice of
redemption and (b) the Company is in compliance with its obligations to register
under the  Securities Act the shares of Common Stock issuable on exercise of the
Warrants. If the Company exercises its

                                      F-15
<PAGE>

right to redeem the Warrants,  such Warrants will be exercisable until the close
of  business on the date fixed for  redemption  in such  notice.  If any Warrant
called  for  redemption  is not  exercised  by such  time,  it will  cease to be
exercisable  and the holder  thereof  will be  entitled  only to the  redemption
price.

Pursuant to the Warrant Agreement,  the Company, by notice to the Warrant Agent,
may  reduce  the  exercise  price,  permanently  or for  such  period  as it may
determine,  or extend the expiration date of the Warrants.  The Warrant Agent is
required  to send a notice  of any such  change  to each  registered  holder  of
Warrants. At December 31, 1998, there were 1,150,000 Warrants  outstanding.  The
Warrants  expired on April 26, 1999 and no Warrants were  exercised,  as the bid
price of the  Company's  Common Stock was less than the Warrant  exercise  price
throughout the life of the Warrants

NOTE 8    RIGHTS OF HOLDERS OF PREFERRED STOCK:

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 1995-6,  Dr.  Pandey agreed with the  underwriter  to redeem the
Class A Preferred Stock in 1999. As of December 31, 1999 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

                                      F-16
<PAGE>

issue 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  are
convertible into 40,000,000 shares of common stock.

In October  1999,  the Company  issued an option which  entitled  Dr.  Ramesh C.
Pandey to purchase 100,000 shares of Class 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).

NOTE 9   SUBSEQUENT EVENTS:

The Company has filed a complaint  against the University of Texas M.D. Anderson
Cancer  Center  and the  Board of  Regents  of the  University  of  Texas.  This
complaint  is  for  declaratory  judgement  in  connection  with  a  Patent  and
Technology  License  agreement dated August 18, 1997 (the "License  Agreement").
The License Agreement granted 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 counter
proposal 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  and the M.D.  Anderson  Cancer  Center  has  cashed all such
checks.

The  Company  has also  entered  into  preliminary  discussions  with a proposed
investor  seeking  up to  $500,000  in new  capital  in the form of  convertible
preferred  stock,  which would  convert  into common stock at $0.01 per share of
common stock.  Xechem is only in the preliminary  stages of such discussions and
does not offer any assurances  that it will be able to obtain such $500,000,  or
any other amounts.

                                      F-17
<PAGE>

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

     On April 12, 1999,  the Company  announced that it had decided to terminate
its relationship with its independent accountants,  Moore Stephens P.C., and had
engaged Wiss and Company, LLP as the Company's independent  accountants to audit
and report on the  Company's  annual  financial  statements  for the year ending
December 31, 1998.  The Audit  Committee of the Company  approved this decision.
Over the last two years, the report of Moore Stephens P.C. contained a statement
that there were  doubts  about the ability of the Company to continue as a going
concern.  At no time  during  the  Company's  two  most  recent  years,  and any
subsequent  interim  period  before  retaining  Wiss and  Company,  LLP, did the
Company have any disagreements  with Moore Stephens P.C.  concerning  accounting
principles or practices,  financial  statement  disclosure or auditing  scope or
procedure. At no time during the Company's two most recent fiscal years, and any
subsequent  interim  period  prior to engaging  Wiss and  Company,  LLP, did the
Company consult Wiss and Company, 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  Company'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 Company's  two most recent  fiscal years and the interim  period
through  April 12, 1999 were there any  reportable  events  with Moore  Stephens
P.C., as described in Item 304(a)(1)(v) of Regulation S-K.

                                       37
<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).......     61    Chief Executive Officer, President,
                                          Chairman of the Board of Directors and
                                          Chief Accounting Officer

Stephen Burg (1)(2)(3).........     62    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.

                                       38
<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 1997, 1998
and 1999 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>
=======================================================================================================
                                                                                            ALL OTHER
                                                               LONG TERM COMPENSATION      COMPENSATION
                                                         ---------------------------------
                                ANNUAL COMPENSATION              AWARDS            PAYOUTS
                           ----------------------------- -----------------------  --------
                                               OTHER     RESTRICTED   SECURITIES
                                               ANNUAL      STOCK     UNDER-LYING    LTIP
       YEAR                 SALARY  BONUS   COMPENSATION   AWARDS      OPTIONS     PAYOUTS
-------------------------------------------------------------------------------------------------------
<S>                <C>    <C>         <C>      <C>       <C>             <C>         <C>        <C>
Dr. Ramesh Pandey  1997   $130,273    0        $7,991         0           0           0          0
                   1998   $136,233    0        $7,340         0           0           0          0
                   1999   $140,000    0        $1,249    $1,563,000       0           0          0
=======================================================================================================
</TABLE>

EMPLOYMENT AGREEMENTS

     Ramesh C. Pandey is employed  pursuant to an agreement which provides for a
base salary of $140,000 per year, subject to an annual increase in proportion to
the  increase in the  consumer  price  index,  such bonuses as a majority of the
disinterested  members of the board of the Company may determine,  and a royalty
of 2 1/2% of the Company's net profits before taxes with respect to any products
developed by the Company or its affiliates during the term of the agreement. The
royalty  will be  payable  to Dr.  Pandey or his  estate so long as the  Company
continues  to  sell  such  products,  notwithstanding  any  termination  of  the
agreement.  The agreement provides for a ten year term, but permits either party
to terminate  the  agreement  after five years;  if the Company  terminates  the
agreement,  Dr.  Pandey  will be  entitled  to  receive  severance  equal to his
compensation  for the two years prior to termination.  Dr. Pandey has agreed not
to engage in certain business  activities  (generally similar to those currently
engaged in by the Company) for six months (four months,  in certain cases) after
the termination of his

                                       39
<PAGE>

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 1999 Dr. Pandey deferred $70,000.00 of salary for a total of $121,425 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.

     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, 1999,
the Company has granted options under the Plan to purchase  1,609,000  shares of
Common Stock.

                                       40
<PAGE>

AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES

     The following  table provides  information on option  exercises  during the
year ended  December 31, 1999 by the  directors  and  executive  officers of the
Company and the value of such parties'  unexercised stock options as of December
31, 1999.

<TABLE>
<CAPTION>
==================================================================================================
                                                Number of Securities        Value of Unexercised
                                               Underlying Unexercised       In-the-Money Options
                                                Options at 12/31/99           at 12/31/99 (1)
                                            --------------------------  --------------------------
                          Shares
                         Acquired
       Name                 on      Value
                         Exercise Realized  Exercisable  Unexercisable  Exercisable  Unexercisable
                            (#)      ($)
--------------------------------------------------------------------------------------------------
<S>                          <C>      <C>           <C>     <C>                <C>      <C>
Dr. Ramesh C. Pandey         0        0             0       707,000(2)         0        $35,343

Stephen Burg                 0        0        40,000        25,000        $1600        $ 1,000
==================================================================================================
</TABLE>

(1)  Represents the excess,  if any, of the closing price of the Common Stock as
     quoted on the OTC  Bulletin  Board on  December  31,  1999  ($.05) over the
     exercise price of the options,  multiplied by the  corresponding  number of
     underlying shares.

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

                                       41
<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 29, 2000 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    CLASS C PREFERRED
                                     COMMON STOCK              STOCK                STOCK
                                 --------------------  --------------------  --------------------
                                 NUMBER OF   PERCENT   NUMBER OF   PERCENT   NUMBER OF   PERCENT    PERCENT OF
NAME AND ADDRESS                   SHARES    OF CLASS    SHARES    OF CLASS    SHARES    OF CLASS  VOTING STOCK
                                                                                                   (1)(12)(15)
---------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>        <C>        <C>      <C>           <C>        <C>
THE EDWARD A. BLECH TRUST (2)   72,300,000     30.1%          0         -           0         -        22.2%
                                       (3)
---------------------------------------------------------------------------------------------------------------
DAVID BLECH (4)                 83,299,495     34.6%          0         -           0         -        25.6%
                                    (3)(5)
---------------------------------------------------------------------------------------------------------------
MICHAEL G. JESSELSON (6)        15,050,000      6.3%          0         -           0         -         4.6%
                                    (7)(8)
---------------------------------------------------------------------------------------------------------------
JAY GUPTA (9)                   20,000,000      8.3%          0         -     100,000       50%        18.4%
                                                                                 (12)
---------------------------------------------------------------------------------------------------------------
STEPHEN BURG (13)                1,500,000       .6%          0         -           0         -          .5%
---------------------------------------------------------------------------------------------------------------
DR. RAMESH C. PANDEY (10)       22,164,345      9.2%      2,500      100%     100,000       50%        20.6%
                                      (11)                  (1)                  (14)
---------------------------------------------------------------------------------------------------------------
ALL DIRECTORS AND EXECUTIVE     23,664,345      9.8%      2,500      100%     100,000       50%        21.0%
OFFICERS AS A GROUP (2                (11)                  (1)                  (14)
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)  AS REPORTED IN A SCHEDULE 13D FILED JOINTLY BY MR. BLECH AND THE TRUST.
(4)  THE ADDRESS OF MR. BLECH IS 225 LAFAYETTE STREET, NEW YORK, NEW YORK 10012.
(5)  INCLUDES SHARES OWNED BY THE TRUST AND SHARES OWNED BY MR. BLECH'S SPOUSE.
(6)  THE  ADDRESS  OF EACH OF THE  MICHAEL  G.  JESSELSON  12/18/80  TRUST,  THE
     BENJAMIN J. JESSELSON 12/18/80 TRUST, THE JESSELSON  GRANDCHILDREN 12/18/80
     TRUST AND MICHAEL G. JESSELSON IS 1301 AVENUE OF THE AMERICAS,  SUITE 4101,
     NEW YORK, N. Y. 10019.
(7)  AS REPORTED IN A FORM 3.
(8)  INCLUDES  SHARES  OWNED BY THE MICHAEL G.  JESSELSON  12/18/80  TRUST,  THE
     BENJAMIN  J.  JESSELSON  12/18/80  TRUST  AND THE  JESSELSON  GRANDCHILDREN
     12/18/80 TRUST .
(9)  THE ADDRESS OF JAY GUPTA IS 1173 DOLLY MADISON BLVD. MCLEAN VA. 22101.
(10) THE ADDRESS OF DR.  PANDEY IS C/O XECHEM  INTERNATIONAL,  INC.,  100 JERSEY
     AVENUE, BUILDING B, SUITE 310, NEW BRUNSWICK, NEW JERSEY 08901.
(11) DOES NOT  INCLUDE  707,000  SHARES  SUBJECT  TO THE PANDEY  OPTIONS,  WHICH
     PRESENTLY ARE NOT EXERCISABLE, AND WILL NOT BE EXERCISABLE,  WITHIN 60 DAYS
     FROM JUNE 9, 1999.
(12) GIVES  EFFECT TO THE VOTING  RIGHTS OF  100,000  SHARES OF CLASS C SERIES 4
     VOTING  PREFERRED  STOCK,  ALL OF WHICH  ARE  OWNED BY JAY  GUPTA AND WHICH
     ENTITLE  HIM TO CAST  400  VOTES  PER  SHARE  ON ALL  MATTERS  AS TO  WHICH
     SHAREHOLDERS ARE ENTITLED TO VOTE.
(13) THE ADDRESS OF STEPHEN BURG IS 3257 WINGED FOOT DRIVE, FAIRFIELD, CA 94533
(14) GIVES  EFFECT TO THE VOTING  RIGHTS OF  100,000  SHARES OF CLASS C SERIES 5
     VOTING  PREFERRED  STOCK,  ALL OF WHICH ARE OWNED BY DR.  PANDEY  AND WHICH
     ENTITLES HIM TO CAST  422.59318  VOTES PER SHARE ON ALL MATTERS AS TO WHICH
     SHAREHOLDERS ARE ENTITLED TO VOTE.
(15) 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
     THEIR CONTROL.  THESE PROXIES RELATE TO 83,299,495 SHARES OF COMPANY COMMON
     STOCK OR APPROXIMATELY 34.6% OF THE COMPANY'S PRESENTLY  OUTSTANDING SHARES
     OF COMMON STOCK

                                       42
<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,  some or all of which the Company  anticipates  will be
made  available  to other,  unrelated,  persons in India.  Both of Dr.  Pandey's
brothers  and Mr. Anil  Sharma,  a chartered  accountant,  serve as directors of
Xechem India. No  compensation is paid to Dr. Pandey,  his relatives or Mr. Anil
Sharma for  service as  directors.  See Item 1,  Description  of  Business - Raw
Material Supply.

     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 $60,606 in 1998 and $143,847 in 1999.

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

     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,  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
their control. These proxies relate to 83,299,495 shares of Company Common Stock
or approximately 34.6% of the Company's  presently  outstanding shares of Common
Stock.

     During 1997 and 1998, the Company made unsecured loans totaling $100,000 to
Consumers Choice Systems,  Inc. ("CCS"),  a company engaged in the marketing and
distribution  of products in the  over-the-counter  pharmaceutical  market.  The
Company has entered  into  negotiations  with CCS in  connection  with  possible
distribution of XetaPharm  nutraceuticals.  CCS is engaged in a private offering
of its securities and, upon completion of this offering,  The Edward Blech Trust
would own  approximately  30.8% of CCS's  common  stock.  In 1999 the balance of
these loans was deemed uncollectable and written off.

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

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

                                       43
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
          --------------------------------

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

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

3(i)(a)     Certificate of Incorporation.

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

3(ii)       By-Laws.

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

4.4         Form of Representative's Warrant.

10.2        Form of Pandey Option.

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

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

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

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

10.9        Form of Note issued to Dr. Pandey.

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

10.17       Patents.

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

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

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

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

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

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

10.27       Xechem/Apotex Restructuring Agreement.

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:

<PAGE>

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

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

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

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

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

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

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

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

Number      Exhibit

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


     (b)    The Company  filed no Reports on Form 8-K during the fourth  quarter
            of 1998.

<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: March 31, 2000                    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: March 31, 2000
     --------------------------------------
     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: March 31, 2000
     --------------------------------------
     Stephen Burg
     Director

<PAGE>

                                  EXHIBIT INDEX
                                  -------------

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

21          Subsidiaries of the Company

23          Consent of Wiss & Company, LLP