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, 1998

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

                         Commission File Number 0-23788

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

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

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

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

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

      Title of each class          Name of each exchange on which registered





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

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


                                (Title of Class)

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

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

    State issuer's revenues for its most recent fiscal year.  $ 87,735

    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. $9,155,300 as of June 5, 1999.

    The  number  of  shares  outstanding  of  the  Company's  Common  Stock  was
228,882,196 as of June 5, 1999.



<PAGE>



                                      INDEX

                                      Page
PART I
      Item 1.  Description of Business........................................01
      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.......31
      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

SIGNATURES


                                       (i)

<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  six U.S.  patents on
paclitaxel and its second generation  analogs from the U.S. Patent and Trademark
Office and several 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,  such as bleomycin and mitomycin,
which are  difficult to replicate  and no longer  enjoy patent  protection,  but
experience  limited  competition.  The Company has also  focused  certain of its
research  and  development  efforts on the  development  of drugs  from  sources
derived from Chinese and Indian traditional  medicinal plants in the 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 an  affiliate  office,  Xechem  (Europe)  U.  Stift,  in
Copenhagen,  Denmark for European  operations  and a subsidiary,  Xechem (India)
Pvt., Ltd., in New Delhi, India.

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

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

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

                                        1

<PAGE>



Recent Developments

Blech Stock Purchase Agreement

      On November  18,  1996,  the Company  entered  into and closed the initial
stage of a Stock Purchase Agreement (the "Blech Purchase  Agreement") with David
Blech or his designees  ("Blech")  providing for the sale of up to 55,000 shares
of Class C Series 2 Voting  Cumulative  Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying shares of Common Stock, over approximately nine months. At the
initial closing,  The Edward A. Blech Trust (the "Trust") purchased 5,000 Series
2 Preferred Shares for $500,000.  The Trust purchased an additional 5,000 Series
2 Preferred  Shares on December  30, 1996;  5,000  Series 2 Preferred  Shares on
January 8, 1997;  and 7,500 Series 2 Preferred  Shares on February 7, 1997.  The
Blech Purchase  Agreement was amended,  effective  March 27, 1997, to modify the
dates  for  closing  of other  purchases  of  portions  of the  shares  issuable
thereunder.  Pursuant to the Blech Purchase Agreement,  on February 7, 1997, Dr.
Ramesh Pandey,  the Company's  Chairman and Chief Executive  Officer,  exchanged
certain  indebtedness owed by the Company to him and the 1,070 shares of Class B
Preferred  Stock  of the  Company  held by him for  12,144  shares  of  Series 3
Preferred Shares.  Pursuant to their terms, effective February 8, 1997, the then
outstanding  22,500  Series 2  Preferred  Shares and 12,144  Series 3  Preferred
Shares were  converted into  45,000,000  and 19,430,400  shares of Common Stock,
respectively.  For the period  March 28, 1997 through  December  31,  1997,  The
Edward  Blech  Trust  purchased  2,300,000  shares of Common  Stock and 15 other
assignees  purchased  48,320,000  shares of Common  Stock,  which  included  two
affiliated  individuals  who purchased  1,960,000  shares of Common  Stock,  two
trusts, not otherwise  affiliated with Blech, each purchased 5,000,000 shares of
Common Stock on March 27, 1997 and Blech  purchased  5,000,000  shares of Common
Stock on April 14, 1997. On May 1, 1997,  Blech sold (at his cost) his 5,000,000
shares to the two referenced unaffiliated trusts and a third unaffiliated trust.
To date,  cash  payments of  $5,500,000  have been made to the Company under the
Blech Purchase Agreement and 127,000,000 shares of Common Stock have been issued
thereunder.

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

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


                                        2

<PAGE>



Sale of Net Operating Loses (NOLs)

      In July  1999 the  Company  applied  under the newly  revised  "State  Tax
Certificate Program" for over 1.3 million in New Jersey Tax Credits which may be
sold to any  qualified  buyer with a purchase  price not below 75% of value.  If
approved,  this will greatly help the Company's funding. The Company anticipates
the funds to be available in the fourth quarter of 1999.

Nasdaq Delisting

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

      The Company filed an appeal of the delisting  with the Nasdaq  Listing and
Hearing  Review  Committee  and was notified that the Hearing  Review  Committee
affirmed  the  decision  to delist  the  Company's  securities  from the  Nasdaq
SmallCap Market.

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  refactory 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 and 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

                                        3

<PAGE>



marketing  exclusivity  is granted to any firm which  develops  and  obtains FDA
approval of a non-patentable  new molecular  entity,  to compensate the firm for
development  efforts on such non-patentable  molecular  entities.  In connection
with its development of paclitaxel,  Bristol-Myers  was granted such a period of
marketing  exclusivity,  which was to expire on December 29, 1997,  but has been
extended for an additional  four year period.  The Company  intends to submit an
ANDA for paclitaxel before the 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 sublicensees, if any.

      In  August  1990 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.  Nordic Drugs also has an option agreement to
provide  contract  manufacturing  for Xechem of the  paclitaxel  products in the
European Union, exercisable on or before September 30, 1998.

      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,

                                        4

<PAGE>



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.

      The Company has also entered into negotiations with a Chinese company that
should be finalized in the 3rd quarter 1999.

      The Company  received  five U.S.  Patents in the year 1998,  four of which
were  regarding the various  aspects of paclitaxel  including the new analogs of
paclitaxel called next generation paclitaxel.

      U.S.  Patent No.  5,807,888 was issued to Xechem on September 15, 1998 for
"Preparation  of  Brominated  Paclitaxel  Analogues  and Their Use as  Effective
Antitumor  Agents".   These  novel  paclitaxel  analogues  have  paclitaxel-like
antitumor efficacy.

      On  October 6, 1998 the  Company  was issued  U.S.  Patent No.  5,817,510,
"Device  and  Method  for  Evaluating  Microorganisms".  This  patent  is  for a
multi-well  disposable  HEXOID(TM)  plate used for  identifying  and culturing a
variety of microorganisms.

      On November 24, 1998 the Company was issued U.S. Patent Nos. 5,840,748 and
5,840,930  containing broad coverage in the treatment of patients and methods of
production   respectively   for  2",3"-   dihalocephalomannine   compounds   and
formulations  containing  these  compounds all of which are designated as second
generation  to  paclitaxel.  These  are the  fifth  and  sixth  patents  in this
important area granted to Xechem.

      On  December  29,  1998  Xechem  was  issued  U.S.  Patent  No.  5,854,278
containing  broad  coverage  with respect to several  novel  paclitaxel  analogs
developed by the Company.  Preliminary studies have shown strong  antineoplastic
efficacy  of these  compounds  against a wide  array of cancer  tumor  cells and
leukemic cells.

      Xechem's  new  compounds  have been shown to have  significant  anticancer
activities against a wide array of tumors in preliminary studies.

Bleomycin

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

Apotex Agreements

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


                                        5
<PAGE>



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

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

NIH Master Agreements

      In 1993, NCI, a part of the National Institute of Health ("NIH"), selected
and awarded the Company three five-year master agreements with Dr. Ramesh Pandey
as the  Principal  Investigator  (P.I.) for the isolation  and  purification  of
anticancer  and  antiAIDS  agents  from  natural  plant  sources  or  microbial,
fermentation processes.

      Master agreements are issued  competitively based on criteria  established
by the NCI for each proposed  agreement.  Receipt of a master agreement does not
constitute an award of a specific project,  nor a grant of specific funding,  to
the recipient.  Rather, the master agreements qualify the recipient to be one of
a very small number  (generally three to five) of applicants for projects within
the scope of the master agreement. These agreements expired in the year 1998.

Niche Anticancer Drugs

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

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





                                        6

<PAGE>



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.

Research and Development of Proprietary Drugs

Paclitaxel Analogs

      During the  isolation  and  purification  of  paclitaxel,  the Company has
isolated  and  purified  at least nine  analogs of  paclitaxel,  which have been
tested in vitro in collaboration  with 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 several international patents are pending.

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,  the modification of existing compounds,  the generation of
analogs and the utilization of biotechnology  tools and techniques,  the Company
believes its approach of screening plants and modification through semisyntheses
have better chances of success in developing new drugs.

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

      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,


                                        7
<PAGE>



digitalis,  and paclitaxel  originated from plants found in temperate regions of
the  world.  Valuable  natural-product  pharmaceuticals  may be  derived  from a
variety of medicinal plants, marine sources and fermentation processes.

      Through a detailed  investigation  of  traditional  Chinese 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.

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
applied  for Small  Business  Innovative  Research  (SBIR)  Phase I grant to the
National Cancer Institute ("NCI") for this project.

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


                                        8
<PAGE>



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  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.



                                        9
<PAGE>



Xechem (Europe) U. Stift

      In 1997, the Company formed an affiliate,  Xechem (Europe) U. Stift,  with
its office in Copenhagen,  Denmark.  The purpose of this division is to seek out
potential  business  partners  in Europe  to form  strategic  alliances  for the
development,  manufacturing  and marketing of  pharmaceutical  and nutraceutical
products.  This has  resulted  in  negotiations  with two  companies  to license
production,  marketing  and  selling of bulk and  injectable  paclitaxel.  These
companies will be responsible for the  registration of injectable  paclitaxel in
Denmark and other  European  countries.  Xechem will also grant a license to the
companies to manufacture  and sell Xechem's  patented new paclitaxel  analogs as
well as a new  paclitaxel  formulation  without  Cremophor(TM)  or  ethanol.  In
return,  Xechem will be cross-licensed  by the companies to produce,  market and
sell certain key pharmaceutical  products in the United States and India. Xechem
will be  responsible  for the  registration  of these products with the FDA. The
aggregate market for these products currently exceeds $1,000,000,000.

      The  Company  planed an orderly  shut-down  of the Xechem  (Europe) in the
second Quarter of 1999, which was completed.

XetaPharm

      The  Company  established  XetaPharm  in 1996 to  bridge  the gap  between
pharmaceuticals and nutraceuticals.  XetaPharm's principal business objective is
to develop "quality"  nutraceutical  products for the consumer market.  Based on
meetings between the Office of Alternative  Medicine ("OAM"), a part of NIH, and
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); GingkoOnce(R);  GinsengOnce(R);
Gugulon(TM);  Melatonin;  and DHEA.  The  Company  has  designed a time  release
component  for the first three of these  products,  reducing the number of pills
that must be taken.  There can be no  assurances  as to the level of success for
this program.  XetaPharm's marketing efforts and sales have been limited, due to
the financial  constraints  of the Company.  The Company is evaluating  its long
term  commitment  which  includes  continued  investment in sales and marketing,
limited investment to product  development for other companies or divestiture of
XetaPharm.

      The Company is making  every effort to market this  product  line.  During
1999  the   Company   will  be  using  sales   representatives   to  market  the
nutraceuticals and establish world-wide web sales.

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.


                                        10
<PAGE>



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.

Other Areas

Small Business Innovative Research

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

Hexoid 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 in rapid  screening of microbial  infections  and
antibiotic  activity.  The test allows a researcher to conduct several different
tests simultaneously and inexpensively.  This test, used in evaluating microbial
infections,  could replace bulky,  cumbersome and expensive  laboratory  testing
equipment  presently in use. The Company  believes  that  applications  exist in
identification and characterization of microorganisms in clinical and veterinary
specimens (e.g. urine,  blood,  sputum),  in water samples, in cosmetics and for
pesticide detection and biocide evaluation.

      The  Company  has  received  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.

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


                                        11
<PAGE>



of the extension of Bristol-Myers Squibb 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.

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 1999,  when our 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 1999.  The  Company  is
seeking corporate alliances with large pharmaceutical  companies for some of its
programs  in order  to take  advantage  of such  companies'  abilities  to reach
broad-based markets.  There can be no assurance that the Company will be able to
enter into such collaborative  agreements. If the Company decides to conduct any
direct marketing of its potential  products,  there can be no assurance that the
Company will be successful in establishing a successful  in-house  marketing and
sales  force or that  sufficient  financing  will be  available  to develop  its
marketing and sales capabilities.

      XetaPharm sells its nutraceutical product line through health food stores,
pharmacies and a distributor.  The marketing of these products is through print,
radio and  television  advertising  and  trade  publications.  XetaPharm  has no
in-house  marketing  and sales  force at this time and is seeking  to  establish
alliances with more  distributors,  as well as marketing  firms,  to promote its
product  line.  The  Company may in the future  co-market  these  products  with
established  marketing  organizations and/or provide some of these products on a
private label basis.  During the second Quarter of 1999 the Company entered into
a Sales and Marketing  Agreement with "Armor Sales and Marketing,  Inc." to sell
and promote its  nutraceutical  line.  The  Company has also  established  sales
through   the   world-wide   web   and   E-commerce   through   the   web   site
www.XetaPharm.com.

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


                                        12
<PAGE>



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 several United States patent  applications  and 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.

Trademarks

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

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

Raw Material Supply

      Initially,  the Company  obtained  the raw material  for  paclitaxel  from
domestic  sources.  In  September  1994,  the Company  entered into a three-year
agreement with Guizhou Fanya  Pharmaceutical Co. Ltd. ("Guizhou") for Guizhou to
supply to the Company partially processed raw material for paclitaxel.  Pursuant
to that  Agreement,  the Company  purchased  2.5 kilograms of at least 50% crude
paclitaxel  (i.e.,  paclitaxel  already  extracted  from the bark) from  Guizhou
during 1995 and 2.5 kilograms in 1996. The Company's  obligation was to purchase
a minimum  of four  kilograms  in the year 1996 and four  kilograms  in the year
1997. Due to its financial condition, the Company was unable to make the minimum
purchases. Guizhou has agreed to continue to work with the Company as a supplier
of crude paclitaxel. Guizhou provided the Company with the necessary material to
prepare the Drug Master File  ("DMF") for  submission  to the United  States FDA
establishing  the origin and  processing  of the raw material  which the Company
needed in connection  with its  preparation of an ANDA on paclitaxel and for its
compliance files once it engages in production of


                                        13
<PAGE>



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 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


                                        14
<PAGE>



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.

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


                                        15
<PAGE>



"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,  has been  selling  the  product  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.

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

Nutraceuticals

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

Government Regulation

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

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


                                        16
<PAGE>



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

      Under the  Waxman-Hatch  Amendment  to the Food,  Drug and Cosmetic Act of
1984, a five-year  period of marketing  exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable  new molecular  entity, to
compensate the firm for  development  efforts on such  non-patentable  molecular
entities.  In connection with its development of paclitaxel,  Bristol-Myers  was
granted a period of marketing  exclusivity,  which was to expire on December 29,
1997,  but has been extended for four years.  Management  believes some, but not
all,  foreign  countries have given Bristol Myers exclusive rights to market the
compound.  The Company intends to submit an ANDA for paclitaxel  during the year
2000. 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


                                        17
<PAGE>



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.

Employees

      In order to keep the  operation  viable,  the  Company  made a decision to
reduce the scientific and administrative staff in September 1998. As of June 30,
1999, the Company had ten employees.  Of these  employees,  six are dedicated to
research,  development,  manufacturing  and regulatory  compliance.  Five of the
Company's employees hold doctorate degrees.  None of the Company's employees are
covered by a collective bargaining agreement. The Company believes all relations
with its employees are satisfactory.

Scientific Advisory Board

      The Company has  established  the Scientific  Advisory Board ("SAB") which
consists of scientists, researchers, and clinicians with recognized expertise in
the Company's areas of research.  Certain members of the SAB are asked from time
to time to review  the  Company's  research  programs,  advise  with  respect to
technical or clinical matters,  and recommend  personnel.  The Company initially
granted  options 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,


                                        18
<PAGE>



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.

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

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

      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.

      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.



                                        19
<PAGE>



      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.

      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 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.

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

      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.


                                        20
<PAGE>




      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.

Risks Affecting Forward Looking Statements and Stock Prices

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

Nasdaq Delisting

      Effective  following  the close of  business  on  February  4,  1997,  the
Company's  Common Stock and Warrants  were  delisted  from trading on the Nasdaq
SmallCap  Market which decision was affirmed on appeal by the Nasdaq Listing and
Hearing Review Committee. See "Recent Developments--Nasdaq Delisting."

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

Volatility of Stock Price

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



                                        21
<PAGE>



Control by Blech

      As of  December  31,  1998,  Blech  or  persons  who may be  deemed  to be
influenced by him  beneficially  owned  81,015,000  shares of Common  Stock,  or
approximately  57% of the 140,650,839  shares of issued and  outstanding  Common
Stock  (entitling Blech to cast 56.6% of the aggregate votes entitled to be cast
by all  stockholders  in  election of  directors).  As of June 30,  1999,  Blech
controlled  shares totaling  126,913,855 or approximately 47% of the 228,882,196
shares issued.  As a result,  Blech may be deemed to own or control a sufficient
number of shares of Common Stock to assert  effective  control over the business
and affairs of the  Company,  including,  but not  limited to having  sufficient
voting  power to control the  election of the Board of  Directors of the Company
and,  in  general,  to  substantially  determine  the  outcome of any  corporate
transaction or other matters  submitted to the  stockholders  of the Company for
approval, including mergers,  consolidations or the sale of substantially all of
the  Company's  assets or  preventing  or causing a change in the control of the
Company. In addition,  under the Blech Purchase  Agreement,  the Company and its
current  directors have agreed,  subject to their fiduciary duties, to take such
actions as Blech may request to cause his nominees to be elected to the Board of
Directors,  which may  enable  Blech to  exercise  control  over the Board  more
quickly than he otherwise  could.  In addition to Blech's ability to control the
affairs of the Company, Blech's potential control of the Company may deter other
potential financing sources from making an investment in the Company.

No Developed or Approved Products; Early Stage of Development

      The  Company  is  a  development  stage  company.  The  Company's  primary
potential  products,  paclitaxel and its analogs 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, 1998, the Company's accumulated deficit was approximately  $30,066,000 which
included losses from operations of $2,313,800, $5,272,100 and $3,032,500 for the
years  ended  December  31,  1998,  1997  and 1996  respectively.  Approximately
$12,963,000 of the Company's accumulated deficit resulted from a


                                        22
<PAGE>



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  and  1998  contain  an  explanatory  paragraph  indicating  that  there is
substantial  doubt about the Company's  ability to continue as a going  concern.
The Company's  continuation is dependent upon its ability to generate sufficient
cash flow to meet its  obligations  on a timely basis and  ultimately  to attain
profitable  operations.  The Company  anticipates that it will continue to incur
significant  losses until successful  commercialization  of one or more products
generates  sufficient  net  revenues  to  cover  all  costs of  operation.  As a
development stage company,  the 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, 1998, the Company has not
negotiated a contract with any packager to perform such  services.  It maintains
an efficient, ambient warehouse center to insure proper handling and shipping of
the  drugs.   While  the  Company  has  been  seeking   additional  and  back-up
manufacturers,  there can be no  assurance  that it will be able to locate  such
manufacturers,  or that it will be able  to  enter  into  agreements  with  such
manufacturers.  Although  the Company  believes  that it has the  capability  to
significantly  expand  production of bulk  paclitaxel,  should demand exceed the
Company's  manufacturing  capacity,  it may have to seek  third  party  contract
manufacturing.  In such  instance,  there can be no  assurance  that the Company
could  locate  satisfactory  contract  manufacturing  services  to perform  such
functions  at all or on  acceptable  terms,  or that it would  have the funds or
ability to develop such capability internally.

      Bleomycin and lovastatin (a second product which will go off-patent in the
year 1999 and under  development  by the  Company)  are  fermentation  products.
Certain of the other  niche  generic  anti-cancer  products  that the Company is
considering  for  production   (excluding   paclitaxel)  also  are  fermentation
products.  There is  presently a  world-wide  shortage of contract  fermentation
manufacturing  capacity  for  pharmaceutical  products.  Although the Company is
presently considering


                                        23
<PAGE>



several  sources  for the  production  of its  bleomycin,  lovastatin  and other
fermentation products it may develop, to date, it has not yet located a reliable
manufacturer.  Although  the Company may consider  the  development  of internal
capacity  for such  manufacture,  the  Company  currently  has no  intention  of
developing such internal  capabilities,  as such an effort would be costly, time
consuming  and  would  require  FDA  regulatory  approval,  which  might  not be
obtained.  Should the Company develop other fermentation products,  there can be
no assurances  that regular and reasonable  manufacture of bulk raw material can
be obtained.  Once pure bulk  material is obtained for  manufacture,  it must be
formulated,  packaged in single  dosage  quantities  and  warehoused in a manner
similar to that for paclitaxel,  subject to all the inherent  associated  risks.
See "Marketing" above.

      In order to  manufacture  pharmaceutical  products from its facility,  the
Company must obtain FDA approval that the facility is in  compliance  with cGMP.
The Company has  submitted  the Drug Master File (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  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.


                                        24
<PAGE>




      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,  similar  to  the  arrangement  originally
negotiated  between  the  Company and  Apotex.  There is no  assurance  that any
collaborations will be completed, or if completed, that they will be successful.
Should any  collaborative  partner fail in its  contribution  to the  discovery,
development,  manufacture or distribution of a marketable product, the Company's
business may be adversely affected.

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 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.



                                        25
<PAGE>



Patents

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

U.S. Patent Number             Title of Patent                    Date of Issue

  # 5,817,510    "Device and Method for Evaluating Microorganisms"      1998
  #5,654,448     "Isolation and Purification of Paclitaxel from Organic
                   Matter containing Paclitaxel, Cephalomannine and
                   Other Related Taxanes"1997
  #5,840,748     "Dihalocephalomannine and Methods of Use Therefor"     1998
  # 5,854,278    "Preparation of Chlorinated Paclitaxel Analogues and
                    Their Use Thereof as Antitumor Agents"              1998
  # 5,807,888    "Preparation of Brominated Paclitaxel Analogues and
                   Their Use as Effective Antitumor Agents"             1998
  # 5,840,930    "Method for Production of 2",3" Dihalocephalomannine"  1998
  # Des. 411,308 "Covered, Multi-Well Assay Plate"                      1999

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

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

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



                                        26
<PAGE>



Product and Professional Liability Exposure

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

Uncertainty of Healthcare Reimbursement; Government Healthcare Reform Proposal

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

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

Anti-Takeover Provisions

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




                                        27
<PAGE>



Absence of Dividends; Dividend Policy

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

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

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

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

Item 3.     Legal Proceedings.

      The Company is not involved in any legal proceedings.



                                        28
<PAGE>




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

      The Annual Meeting of  Stockholders of the Company was held at the offices
of the Company in New  Brunswick,  New Jersey on December 11, 1998 at 10:00 A.M.
Eastern  Standard  Time.  The purpose of the Annual Meeting was to consider the
vote on the following matters:

1.          To elect two directors to hold office until the next annual  meeting
            of  stockholders  of  otherwise  as  provided  in the  Corporation's
            By-Laws.

                                   Nominees

                             Ramesh C. Pandey, Ph.D.
                             Stephen F. Burg

            The nominees for director received the following number of votes:
            Ramesh C. Pandey and Stephen F. Burg

                                 Common Stock       Class A Preferred Stock
                                 ------------       -----------------------

            For                   58,132,429               2,500,000
            Withheld                 119,525                  -0-
            Non-votes                    -0-                  -0-

      2.    To amend the Company's Certificate of Incorporation to reflect a one
            share  for 75  shares  reverse  split of the  Company's  outstanding
            Common Stock

                                 Common Stock       Class A Preferred Stock
                                 ------------       -----------------------

            For                   58,043,304               2,500,000
            Against                  202,350                  -0-
            Abstentions                  -0-                  -0-
            Non-votes                    -0-                  -0-

      3.    To approve an increase in the number of shares of Common Stock which
            may be issued  under the  Xechem  International,  Inc.  Amended  and
            Restated Stock Option Plan.

                                 The vote of the stockholders was as follows:

                                 Common Stock       Class A Preferred Stock
                                 ------------       -----------------------

            For                   48,784,524               2,500,000
            Against                  351,860                  -0-
            Abstentions                8,000                  -0-
            Non-votes              9,107,570                  -0-



                                        29
<PAGE>




      4.    To  concur  in  the  selection  of  Moore  Stephens,   P.C.  as  the
            Corporation's   independent  auditor  for  the  fiscal  year  ending
            December 31, 1998.

                                 The vote of the stockholders was as follows:

                                 Common Stock       Class A Preferred Stock
                                 ------------       -----------------------

            For                   58,080,904               2,500,000
            Against                   55,450                  -0-
            Abstentions              115,600                  -0-
            Non-votes                    -0-                  -0-

      The  Stockholders  approved all of the above matters.  There were no other
matters voted on at the meeting.





                                        30
<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, 1997 through
December 31, 1998:

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

                 1997    1997     1997    1997    1998   1998     1998   1998
                 First  Second   Third  Fourth   First  Second   Third  Fourth
                Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
                ---------------------------------------------------------------

High Bid         1-1/8    1      15/16   11/16   3/16    3/16     3/32   1/16
Low Bid            0    3/16     9/32    9/32    3/16     1/8     1/16   1/32

                                   Warrants
                                   --------

                 1997    1997     1997    1997    1998   1998     1998   1998
                 First  Second   Third  Fourth   First  Second   Third  Fourth
                Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
                ---------------------------------------------------------------
High Bid          3/32     0       0       0       0       0       0       0
 Low Bid            0      0       0       0       0       0       0       0

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

      As of June 5, 1999, there were 208 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 June 5,
1999 there were 2,500 outstanding shares of Class A Preferred Stock.

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


                                        31
<PAGE>



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

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.










--------
      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>



Results of Operations

The Year Ended December 31, 1998 vs. The Year Ended December 31, 1997

      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, 1998 and for each of the years ended  December  31,  1998 and  December  31,
1997.
                                                                  Cumulative
                                                   Years Ended   Inception to
                                                   December 31    December 31
                                               1998        1997       1998
                                               ----        ----       ----
                                                 (in thousands)
Revenue                                      $    87.7  $   114.2   $    777.6
Research and development expense             $ 1,257.8  $ 2,418.3   $  8,313.2
Rent, general and administrative expenses    $ 1,143.7  $ 1,431.0   $  7,739.8
Writedown of inventory and intangibles                  $ 1,537.0   $  1,537.0
(Loss) from operations                       $(2,313.8) $(5,272.1)  $(16,812.4)

Revenue

      The $26,500  decrease in revenue from the year ended  December 31, 1997 to
the year ended  December  31,  1998 was  attributable  to a decrease in sales of
services  and  products.  Service  sales  increased  by $5,000 in the year ended
December  31, 1998 as compared to the year ended  December  31,  1997.  Sales of
paclitaxel for research  purposes for the year ended December 31, 1998 decreased
$51,000 as compared with the period ended December 31, 1997.  Sales increased by
$16,400, by the Company's  subsidiary,  XetaPharm,  which introduced its line of
over-the-counter natural health products,  commonly known as nutraceuticals,  in
June 1996. This represents a 26% increase over the year 1997.

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 $1,160,479 to $1,257,812,  or
48%, for the year ended December 31, 1998 as compared to the year ended December
31, 1997.

      Expenditures  on the  development  of the Company's  process for producing
paclitaxel of $32,000 represents a decrease of $879,600, as compared to the year
ended  December 31, 1997.  This  decrease was due to the  reduction of staff and
certain  testing  operations  because of the FDA's  extension of exclusivity for
Taxol(R) to Bristol - Myers Squibb to the year 2001.  Research  and  development
operations were severely  curtailed in 1998,  which resulted in a 48% 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 Squibb in the United States.

      Expenditures  for research and development may increase during 1999 if the
Company is 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.



                                        33
<PAGE>





Rent, General and Administrative

      Rent, general and administrative  expenses decreased $287,300, or 20%, for
the year ended  December  31, 1998 as compared  to the year ended  December  31,
1997.  The  significant  decreases for the period ending  December 31, 1998 were
salaries and employment  benefits of $56,200,  consulting  fees $60,000,  NASDAQ
fees of $42,900, office expenses of $23,300, repairs and maintenance of $48,800,
promotions  advertising of $24,000,and  telephone expenses of $13,300.  Bad debt
expense increased by $77,700 due to certain receivables deemed uncollectable.

      Legal  and  accounting  expenses  decreased  $72,400  for the  year  ended
December  31,  1998,  compared  to the same  period in 1997.  Other  general and
administrative  costs decreased $24,100,  in 1998 compared to the same period in
1997.

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

      The  Company's  loss from  operations  totaled  $2,313,804,  a decrease of
$2,958,286,  or 56.11%,  for the year ended December 31, 1998 as compared to the
same period in 1997.

      Interest expense increased approximately $14,800, or more than doubling to
$28,940,  in the year ended  December  31,  1998 as  compared  to the year ended
December  31,  1997.  This was due to the  Company's  receipt of more funds from
interim loans than from proceeds from the sale of stock.

Liquidity and Capital Resources; Plan of Operations

      On  December  31,  1998,  the  Company  had cash and cash  equivalents  of
$40,978,  negative  working  capital of $1,721,898 and  stockholder's  equity of
($503,181).

      As a result of its net losses to December 31, 1998 and accumulated deficit
since  inception,  the Company's  accountants,  in their report on the Company's
financial  statements  for  the  year  ended  December  31,  1998,  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


                                        34
<PAGE>



international  market in 1999.  Prior to commencing such sales, the Company must
file for and obtain  approvals from appropriate  regulatory  agencies in foreign
jurisdictions.  Additionally,  to the extent the Company  elects to  manufacture
bulk paclitaxel  domestically and ship it overseas for packaging,  the Company's
facilities must be approved for cGMP and the product must either be approved for
an investigational new drug exemption (not currently so approved),  or deemed in
compliance with the laws of 24  industrialized  "tier one" countries (not yet so
approved).  Otherwise,  the Company can produce the product  entirely  overseas;
however, it most likely would subcontract production to others from raw material
or  partially  processed  raw material  provided by the Company,  and might also
enter into joint venture or other marketing arrangements for sale of the product
overseas.  There can be no such assurance  that necessary  approvals will not be
delayed or subject to  conditions  or that the Company will be able to meet such
conditions.   In  addition,   the  Company  has  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  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.

      On November  18,  1996,  the Company  entered  into and closed the initial
stage of a Stock Purchase Agreement (the "Blech Purchase  Agreement") with David
Blech or his designees  ("Blech")  providing for the sale of up to 55,000 shares
of Class C Series 2 Voting  Cumulative  Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying shares of Common Stock, over approximately nine months. At the
initial closing,  The Edward A. Blech Trust (the "Trust") purchased 5,000 Series
2 Preferred Shares for $500,000.  The Trust purchased an additional 5,000 Series
2 Preferred  Shares on December  30, 1996;  5,000  Series 2 Preferred  Shares on
January 8, 1997; and 7,500 Series 2 Preferred Shares on


                                        35
<PAGE>



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

      The  Company has  conducted a rights  offering  (the  "Rights  Offering"),
pursuant to which it has offered to those holders ("Holders") of Xechem's Common
Stock, who purchased Common Stock pursuant to the Blech Purchase Agreement,  the
right to subscribe for an aggregate of 275,000,000  additional  shares of Common
Stock at a price of $.01 per share, subject to the proviso that until sufficient
Common Stock is authorized for issuance,  the Company will issue a new series of
Class C Preferred Shares which will be converted to Common Stock when sufficient
Common Stock is authorized.

      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.

Year 2000

      The Company has reviewed its  critical  information  systems for Year 2000
compliance and has upgraded its main software to be year 2000  compliance.  As a
result of the review and action  plan,  the  Company  believes  the cost of such
remedial corrective actions is not material to the Company's financial position,
results of operations or cash flows.

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

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



            We have  audited  the  accompanying  consolidated  balance  sheet of
Xechem International, Inc. and its subsidiaries (a development stage enterprise)
as of December 31, 1998, and the related consolidated  statements of operations,
stockholders' equity, and cash flows for the year 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 audit.

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

            In our opinion, the 1998 consolidated  financial statements referred
to above present fairly, in all material  respects,  the consolidated  financial
position of Xechem  International,  Inc. and its subsidiaries as of December 31,
1998, and the consolidated  results of their operations and their cash flows for
the year then ended 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 4 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 4. The consolidated  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.








                                          Wiss & Company, LLP


Livingston, New Jersey
May  28, 1999


                                       F-1

<PAGE>



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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
--------------------------------------------------------------------------------



Current Assets:
  Cash                                                            $    40,978
  Accounts Receivable                                                  14,309
  Inventories:
   Raw Materials                                                      212,064
   Finished Goods                                                     149,607
  Prepaid Expenses and Other Current Assets                            85,047
                                                                  -----------

  Total Current Assets                                                502,005

Equipment - Less Accumulated
  Depreciation of $645,594                                            793,663
Leasehold Improvements - Less Accumulated
  Amortization of $365,966                                            649,210
Loans Receivable - Related Party; Less Allowance for
  Doubtful Accounts of $118,418,                                       11,732
Cash Surrender Value of Officers Life Insurance                        43,544
Deposits                                                               18,867
                                                                  -----------

Total Assets                                                      $ 2,019,021
                                                                  ===========






















See Accompanying Notes to Consolidated Financial Statements.


                                        F-2

<PAGE>



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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
--------------------------------------------------------------------------------



Current Liabilities:
  Accounts Payable                                                 $   677,912
  Accrued Expenses                                                     358,194
  Loans Payable - Related Party                                      1,143,399
  Other Current Liabilities and Minority Interest                       44,397
                                                                   -----------

  Total Current Liabilities                                          2,223,902
                                                                   -----------

NOTES PAYABLE - RELATED PARTY                                          298,300
                                                                   -----------

Commitments and Contingencies

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

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

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

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

  Common Stock, $.00001 Par Value, 247,000,000
   Shares Authorized; 140,650,839 Shares Issued and Outstanding          1,405

  Additional Paid-in Capital                                        29,559,262

  Deficit Accumulated During the Development Stage                 (30,066,348)
                                                                   ------------

Total Stockholders' Deficiency                                        (503,181)
                                                                   -----------

                                                                   $ 2,019,021
                                                                   ===========

















See Accompanying Notes to Consolidated Financial Statements.


                                        F-3

<PAGE>



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


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



<TABLE>
                                                                         March 15,
                                                                       1990 (Date of
                                                  Years ended          Inception) to
                                                 December 31,          December 31,
                                              1 9 9 8      1 9 9 7        1 9 9 8
                                              -------      -------        -------

<S>                                         <C>          <C>           <C>
Revenues                                    $    87,735  $   114,187   $    777,652
                                            -----------  -----------   ------------

Expenses:
  Research and Development                    1,257,812    2,418,291      8,313,169
  Rent                                               --           --        410,065
  Rent - Related Party                           93,289       96,856        211,850
  General and Administrative                  1,050,438    1,334,130      7,117,923
  Writedown of Inventories                           --    1,020,000      1,020,000
  Writedown of Intangibles                           --      517,000        517,000
                                            -----------  -----------   ------------

  Total Expenses                              2,401,539    5,386,277     17,590,007
                                            -----------  -----------   ------------

  Loss from Operations                       (2,313,804)  (5,272,090)   (16,812,355)

Other Income - Net                                  561          459        274,139

Interest Income - Related Party                   4,911        4,211          9,122

Interest Expense - Related Party                (22,800)          --     (8,611,881)

Interest Expense                                 (6,140)     (14,132)    (4,925,373)
                                            -----------  -----------   ------------

  Net Loss                                  $(2,337,272) $(5,281,552)  $(30,066,348)
                                            ============ ============  =============


Basic and Diluted Loss per Share            $      (.02) $     (0.06)
                                            ===========  ===========

Average Number of Common Shares Outstanding 131,790,839   93,162,589
                                            ===========   ==========

</TABLE>















See Accompanying Notes to Consolidated Financial Statements.


                                        F-4

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


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


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

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

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

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

Balance - December 31, 1990                          --        --        --       --       --         --        --       --

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

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

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

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

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

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

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

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

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


See Accompanying Notes to Consolidated Financial Statements.

</TABLE>

                                              F-5

<PAGE>



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


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

<TABLE>

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

Balance - December 31, 1990             --       --        --       100   125,000         --         --      170,000      (159,271)

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

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

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

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

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

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

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

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

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


See Accompanying Notes to Consolidated Financial Statements.


</TABLE>
                                              F-5

<PAGE>



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


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
<TABLE>


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

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

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

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

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

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

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


See Accompanying Notes to Consolidated Financial Statements.

</TABLE>
                                              F-6

<PAGE>



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


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


<TABLE>

                                         Class C    Additional     Xechem, Inc.    Xechem International  Additional  (Deficit)
                                        Series 2      Paid-in      Common Stock        Common Stock        Paid-in  Accumulated
                              Voting Conv. Preferred  Capital                                             Capital   During the
                                     # of      Par                # of       Par      # of       Par                Development
                                    Shares    Value   Class C    Shares     Value    Shares     Value      Common     Stage
                                    ------    -----   -------    ------     -----    ------     -----      ------     -----
Balance - December 31, 1995 -
<S>                              <C>        <C>      <C>        <C>       <C>      <C>          <C>       <C>         <C>
 Forwarded                              --  $    --  $       --       --  $     --    6,583,478 $      66 $20,348,239 $(19,273,319)

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

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

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

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

See Accompanying Notes to Consolidated Financial Statements.


                                              F-6
</TABLE>

<PAGE>



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


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

<TABLE>

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

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


<S>                                             <C>      <C>       <C>        <C>      <C>      <C>       <C>       <C>
 Balance - December 31, 1997 - Forwarded          2,500  $     --  $  2,500       --   $   --   $     --        --  $    --

Private Placement - Common Stock at
 $0.05 Per Share                                     --        --        --       --       --         --        --       --
Private Placement - Common Stock and
 conversion of debt at $.05 per Share                --        --        --       --       --         --        --       --
Excess of Fair Market Value over
 Option Price of Non-Qualified Stock
 Options Exercised - Forth Quarter 1998              --        --        --       --       --         --        --       --
RECLASS                                              --        --        --       --       --         --        --       --
Net (loss) for the year                              --        --        --       --       --         --        --       --
                                                -------  --------  --------  -------   ------   --------  --------  -------

Balance - December 31, 1998                       2,500  $     --  $  2,500       --   $   --   $     --        --  $    --
                                                =======  ========  ========  =======   ======   ========  ========  =======


</TABLE>


See Accompanying Notes to Consolidated Financial Statements.


                                              F-7

<PAGE>


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


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

<TABLE>

                                         Class C    Additional     Xechem, Inc.    Xechem International  Additional  (Deficit)
                                        Series 2      Paid-in      Common Stock        Common Stock        Paid-in  Accumulated
                              Voting Conv. Preferred  Capital                                             Capital   During the
                                     # of      Par                # of       Par      # of       Par                Development
                                    Shares    Value   Class C    Shares     Value    Shares     Value      Common     Stage
                                    ------    -----   -------    ------     -----    ------     -----      ------     -----
<S>                              <C>        <C>      <C>        <C>       <C>      <C>          <C>        <C>         <C>
Balance - December 31, 1997 -
 Forwarded                               -- $    --  $     --        --  $     --  $119,870,839 $    1,197 $28,742,596 $(27,729,076)

Private Placement - Common Stock at
 $0.05 Per Share                         --      --        --        --        --    11,180,000        112     558,888           --
Private Placement - Common Stock and
 conversion of debt at $.05 per Share    --      --        --        --        --     8,800,000         88     439,912           --
Excess of Fair Market Value over
 Option Price of Non-Qualified Stock
 Options Exercised - Forth Quarter 1998  --      --        --        --        --       800,000          8          72           --
RECLASS                                  --      --        --        --        --            --         --    (261,000)          --
Net (loss) for the year                  --      --        --        --        --            --         --          --   (2,219,081)
                                   -------- -------  --------   -------  --------    ----------  --------- -----------  -----------

 Balance - December 31, 1998            --  $    --  $     --        --  $     --   140,650,839  $   1,405 $29,480,468 $(29,948,157)
                                  ========  =======  ========   =======  ========   ===========  ========= =========== ============




See Accompanying Notes to Consolidated Financial Statements.

</TABLE>
                                              F-7

<PAGE>




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


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

<TABLE>

                                                                         March 15,
                                                                       1990 (Date of
                                                 Years  ended          Inception) to
                                                 December 31,          December 31,
                                              1 9 9 8      1 9 9 7        1 9 9 8
                                              -------      -------        -------

Cash Flows from Operating Activities:
<S>                                         <C>          <C>           <C>
  Net Loss                                  $(2,337,272) $(5,281,552)  $(30,066,348)
                                            -----------  -----------   -------------
  Adjustments to Reconcile Net Loss to Net Cash
   Provided (Used) by Operating Activities:
   Depreciation                                 176,716      150,026        548,793
   Amortization                                  67,678       80,445        536,842
   (Gain)/Loss on Sale of Assets                     --        6,000          5,609
   Interest and Compensation Expense
   in Connection with Issuance of Equity Securities  --       46,240     14,259,740
   Write Down of Inventories                         --    1,020,000     1,020,000
   Write Down of Patents                             --      517,000        517,000
   Loss on investment in related party           34,500           --         34,500


  Changes in Operating Assets and Liabilities
   (Increase) Decrease in:
     Accounts Receivable                         51,920      (61,108)       (14,309)
     Inventories                               (145,484)     165,398     (1,376,991)
     Prepaid Expenses                           108,119       18,410         (9,622)
     Other Current Assets                       148,748     (115,000)        42,726
     Deposits                                     1,650        1,650        (18,867)
     Organizational Costs                            --           --        (13,828)
     Other Assets                                    --           --         (1,592)

   Increase (Decrease) in:
     Accounts Payable                           174,380      (59,745)       677,913
     Other Current Liabilities                 (120,929)         807          4,996
     Accrued Expenses                           195,921      (39,720)       358,194
                                            -----------  -----------   ------------

  Net Cash Flows from Operating
   Activities                                (1,644,053)  (3,551,149)   (13,495,244)
                                            ------------ -----------   ------------

Cash Flows from Investing Activities:
  Patent Issuance Costs                              --     (294,875)      (548,174)
  Purchases of Equipment and
   Leasehold Improvements                       (40,150)    (275,808)    (1,951,369)
  Proceeds from Sale of Asset                        --        2,000         28,700
  Investment in Related Party                   (34,500)          --        (34,500)
  Increase in Cash Surrender Value of
   Officers Life Insurance                      (43,544)          --        (43,544)
  Purchase of Marketable Securities                  --           --     (1,476,449)
  Proceeds from Sale of Marketable Securities        --           --     1,476,449
                                             ----------  -----------   ------------

  Net Cash Flows from Investing
   Activities                               $  (118,194) $  (568,683)  $ (2,548,887)
                                             -----------  -----------   ------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.



                                        F-8

<PAGE>



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


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


<TABLE>
                                                                         March 15,
                                                                       1990 (Date of
                                                 Years  ended          Inception) to
                                                 December 31,          December 31,
                                              1 9 9 8      1 9 9 7        1 9 9 8
                                              -------      -------        -------
Cash Flows from Financing Activities:
<S>                                         <C>          <C>           <C>
  Proceeds from Related Party Loans         $        --  $        --   $  1,294,582
  Proceeds from Notes Payable - Others          170,000       13,300        628,300
  Proceeds from Interim Loans                 1,056,399      280,000      2,306,694
  Proceeds from Bridge Financing                     --           --        640,000
  Capital Contribution                               --           --         95,000
  Payments on Interim Loans                    (193,000)          --       (498,000)
  Payments on Notes Payable -Others                  --           --       (520,000)
  Payment on Stockholder Loans                       --           --       (207,037)
  Proceeds from Issuance of
   Common Stock                                 719,000    2,291,000      8,094,343
  Proceeds from Issuance of Class C
   Series 1 Preferred Stock                          --           --      2,109,347
  Proceeds from Issuance of Class C
   Series 2 Preferred Stock                          --    1,249,190      2,131,630
  Proceeds from Exercise of Options                  --        1,256         10,250
                                            -----------  -----------   ------------

  Net Cash flows from  Financing Activities   1,752,399    3,834,746     16,085,109
                                            -----------  -----------   ------------

  Net Change in Cash                             (9,848)    (285,086)        40,978

Cash, Beginning of Year                          50,826      335,912             --
                                            -----------  -----------   ------------

Cash, End of Year                           $    40,978  $    50,826   $     40,978
                                            ===========  ===========   ============

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the periods for:
   Interest Paid - Related Party            $        --  $        --   $    104,992
                                            ===========  ===========   ============

   Interest Paid - Other                    $    28,000  $        --   $    161,818
                                            ===========  ===========   ============

   Income Taxes Paid                        $        --  $        --   $         --
                                            ===========  ===========   ============

Noncash Financing Activities

Net Assets of Xechem India Contributed to
  Capital and Minority Interest             $   118,191  $        --   $    118,191
                                            ===========  ===========   ============

</TABLE>









See Accompanying Notes to Consolidated Financial Statements.


                                        F-9

<PAGE>



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


(1) Organization and Basis of Presentation

The consolidated financial statements present the results of operations and cash
flows of Xechem International,  Inc. and its wholly-owned subsidiaries,  Xechem,
Inc., Xechem Laboratories, Inc. and XetaPharm, Inc. (collectively the "Company")
for the  cumulative  period  from  the date of  inception  (March  15,  1990) to
December 31, 1998, and the financial position of the Company at that date.

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

The Company is engaged in research and  technology  development  with respect to
the production of generic and proprietary  drugs from natural sources.  Research
and development efforts focus principally on 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.

(2) Summary of Significant Accounting Policies

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

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

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

Cash - The Company  considers  all highly  liquid  investments  with an original
maturity of three  months or less when  purchased,  to be cash  equivalents.  At
December 31, 1998, the Company had no cash equivalents.

Inventories  -  Inventories  are stated at the lower of cost or market.  Cost is
determined on a first-in,  first-out basis. Inventories at December 31, 1998 are
principally comprised of raw materials and finished goods of XetaPharm's dietary
supplement  products,  which management expects to be sold by December 31, 2000.
However, the amount at December 31, 1998 exceeds recent sales levels. It is

                                      F-10

<PAGE>



reasonably  possible  that a loss will be  incurred on the  disposition  of this
inventory  due to the  Company's  weak  financial  resources  and the  resulting
limited marketing efforts.

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

Impairment - Long-lived  assets of the Company are reviewed at least annually as
to whether their  carrying  value has become  impaired  pursuant of Statement of
Financial  Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived  Assets and for Long-Lived Assets to Be disposed Of." SFAS No. 121
requires  long-lived  assets,  if  impaired,  to be  remeasured  at fair  value,
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be  recoverable.  Management  also  reevaluates the periods of
amortization of long-lived  assets to determine whether events and circumstances
warrant revised estimates of useful lives.

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.

Equipment and Leasehold Improvements - All material expenditures for betterments
and additions  are  capitalized  at cost.  Expenditures  for normal  repairs and
maintenance   are  charged   against  income  as  incurred.   Depreciation   and
amortization are provided for financial  reporting  purposes on the basis of the
various  estimated useful lives of the assets,  using the  straight-line  method
over periods ranging from 5 to 15 years.  Depreciation and amortization  expense
for equipment and leasehold  improvements  for the years ended December 31, 1998
and 1997 was $244,394 and $230,471, respectively.

Patents - The cost of patents is charged to cost of operations when incurred. In
prior  years,   the  cost  of  patents  was   capitalized  and  amortized  on  a
straight-line  basis over the estimated  economic life of 15 years. In 1997, due
to the inability of the Company to project when revenues from  paclitaxel  would
be realized,  thereby giving  justification  to the economic life of patents,  a
total of $517,000  for current and prior years  patent and  trademark  costs was
charged to operations.

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

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

                                      F-11

<PAGE>



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

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect certain  reported  amounts and  disclosures.  Actual
results could differ from those estimates in the near term.  Also, as more fully
described under the equipment and leasehold  improvements,  the Company's policy
is to  depreciate  and  amortize  the net book value of such  assets  over their
respective  remaining useful lives. It is reasonably possible that the Company's
estimate that the carrying amount of such assets will be recoverable from future
operations  will  change  in the near  term  given  the  uncertainty  about  the
Company's ability to continue as a going concern as more fully discussed in Note
4.

Advertising - The Company's policy is to expense  advertising costs as incurred.
Advertising costs were  insignificant  for 1998 and  approximately  $101,000 for
1997.

Concentration  of Credit Risk - The  Company  maintains  cash  balances at three
different financial institutions in New Jersey. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1998 and 1997, the Company had no uninsured cash balances.

Loss Per Share - The Financial  Accounting  Standards  Board ("FASB") has issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share" and SFAS No. 129,  "Disclosure of Information about Capital Structure" in
February  1997.   SFAS  No.  128  simplifies  the  earnings  per  share  ("EPS")
calculation required by Accounting  Principles Board ("APB") Opinion No. 15, and
related  interpretations,  by replacing the  presentation  of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual  presentation of basic and
diluted EPS by entities with complex capital  structures.  Basic EPS includes no
dilution and is computed by dividing income available to common  stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS  reflects  the  potential  dilution  of  securities  that could share in the
earnings of an entity,  similar to the fully  diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for  financial  statements  issued for periods  ending
after December 15, 1997, including interim periods;  earlier application was not
permitted.  The Company has adopted SFAS No. 128 in these financial  statements.
Basic EPS is based on average common shares  outstanding and diluted EPS include
the  effects of  potential  common  stock,  such as,  options and  warrants,  if
dilutive. Adoption of SFAS No. 128 was not material to the Company.

(3) Development Stage Activities and Operations

For the  period  from the  incorporation  of Xechem  (see  Note 1) to date,  the
Company has been a "development  stage  enterprise."  Operations  have consisted
primarily of financial planning,  raising capital,  and research and development
activities.  The Company has  produced  minimal  revenues  since its  inception,
incurred a net loss of $2,337,272  and  $5,281,552  for the years ended December
31, 1998 and 1997,  respectively,  and has accumulated a deficit since inception
(March  15,  1990)  of  $30,066,348.  The  Company  has  financed  research  and
development  activities principally through capital contributions and loans made
by its stockholders  and other  investors,  banks, and through an initial public
offering and private  placement of its securities  (See Notes 5, 6, 7, 8, 10, 11
and 12).

(4) Going Concern

The accompanying consolidated financial statements have been prepared on a going
concern basis which  contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As shown in the
consolidated  financial  statements,  the  Company  has  incurred  net losses of
$2,337,272  and  $5,281,552  for the years  ended  December  31,  1998 and 1997,
respectively;  has  accumulated  a deficit since  inception  (March 15, 1990) of
$30,066,348;  and has a  cumulative  negative  cash flow from  operations  since
inception  amounting to  $13,495,244.  As discussed in Note 3, the Company is in
the development stage and has realized minimal revenues since its inception. The
Company's research and development activities are at an early stage and the time
and money  required to develop the  commercial  value and  marketability  of the
Company's proposed products cannot be

                                      F-12

<PAGE>



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 been  substantially  dependent on funds received under the Blech
Purchase  Agreement  (See Note 5). No  further  funds are  available  under this
agreement.

During the year,  the Company has cut  administrative  expenses  and reduced its
monthly cash requirements. At the same time, the Company has agreements with two
European  companies  for the sale of bulk  paclitaxel  and is  negotiating  with
several other companies outside the United Sates.

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.

(5) Blech Purchase Agreement

On November 18, 1996, the Company entered into and closed the initial stage of a
stock  purchase  agreement  (the "Blech  Purchase  Agreement")  with David Blech
and/or his designees  ("Blech") providing for the sale of up to 55,000 shares of
Class C Series 2 Voting  Cumulative  Preferred  Stock (the  "Series 2  Preferred
Shares") for a purchase price of $100 per share  ($5,500,000 in the  aggregate),
or the underlying  shares of Common Stock.  Subsequent to December 31, 1996, the
Blech Purchase Agreement was amended. In 1998, Blech purchased 14,380,000 shares
of Common Stock for a total of $719,000.
This completed the obligations under the Blech Purchase Agreement.

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

(6) Capital Transactions

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

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


                                      F-13

<PAGE>



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

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

(E) In the fourth quarter 1995 and the first quarter 1996,  under the terms of a
Private Placement Memorandum (see Note 8), 178,166 and 20,000 common shares were
issued  which  were  offset by the  return of 59,388  and 6,667  common  shares,
respectively, by Dr. Pandey. In a subsequent agreement with one of the investors
(who purchased 150,000 of the 198,166 shares issued in the private offering), an
additional 150,000 common shares were issued for no additional cash in December,
1996.

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

(G) In May 1996,  the Company  entered  into a settlement  agreement  with Ocean
Marine Services ("Ocean  Marine").  The lawsuit was settled by an agreement with
the  Company  to make a cash  payment of  $115,000  and issue  25,000  shares of
unregistered  Common Stock to Ocean Marine. Such shares are subject to piggyback
registration rights in favor of Ocean Marine (see Note 13).

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

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

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


                                      F-14

<PAGE>



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

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

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

(K) Blech Purchase Agreement

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

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

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

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

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

In August, 1997, under the terms of the Blech Purchase Agreement,  the Trust and
five individuals,  not otherwise affiliated with Blech,  purchased 1,500,000 and
25,820,000 shares of Common Stock,  respectively,  at a price of $.05 per common
share.

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

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

In  April,  1998,  under  the  terms  of  the  Blech  Purchase  Agreement,  five
individuals  not otherwise  affiliated  with David Blech,  purchased  11,180,000
shares of common stock at a price of $.05 per common share.


                                      F-15

<PAGE>



In June 1998, under the terms of the Blech Purchase Agreement,  five individuals
not otherwise affiliated with David Blech,  purchased 3,200,000 shares of common
stock at a price of $.05 per common share.

In June 1998, under the terms of the Blech Purchase Agreement,  five individuals
not  otherwise  affiliated  with  David  Blech,  converted  $280,000  of debt to
5,600,000 shares of common stock at a price of $.05 per common share.

(L) In December  1998,  in  accordance  with the  Fortress  Financial  Agreement
800,000  shares of common  stock  were  issued at a price of $.0001  per  common
share.

(7)  Initial Public Offering

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

(8) Private Placement Memorandum

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

(9) Income Taxes

Income taxes are provided based on the asset and liability  method of accounting
pursuant to  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 109,
"Accounting for Income Taxes." Prior to the  consummation of the Public Offering
(See Note 7), the Company was an "S" corporation  and, as such,  losses incurred
from date of inception to April 26, 1994 are not available to the Company as tax
loss carryforwards.

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

                          Amount                Expiration Date
                          ------                ---------------
                        $3,175,000                    2009
                         3,150,000                    2010
                         3,250,000                    2011
                         3,750,000                    2012
                         2,250,000                    2018

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  $6,500,000 at December 31, 1998.
Because  the  Company's  cumulative  losses  since  inception,   however,  raise
questions about the future  recoverability of any deferred tax asset established
for the Company's tax loss carryforwards, a corresponding valuation allowance of
the same amount has been established,  pursuant to SFAS No. 109. Accordingly, no
deferred tax asset is reflected in these financial statements. In addition, if a
change in control is deemed to have occurred, there may be a possible diminution
of any deferred tax asset.

(10) Related Parties

(A) Loans  Receivable  - Related  Parties - 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.


                                      F-16

<PAGE>



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 an
outstanding loan balance of $11,000 after a reserve of $44,000.

(B) Notes  Payable - Related Party - Dr. Pandey had made advances to the Company
prior to the Public Offering.  The principal amounts advanced (including accrued
salary of $110,000)  totaled $517,451 at December 31, 1996 and were evidenced by
an eight  percent (at simple  interest)  note payable  originally  due April 25,
1999,  to be paid in equal  monthly  installments  commencing  April  25,  1996.
However,  due to the  financial  condition of the Company,  Dr. Pandey agreed to
defer the monthly  installments until April 25, 1997 and subsequently  converted
this debt to equity under the Blech Purchase Agreement. Accrued interest totaled
$27,785 at December 31, 1996.  Interest  expense on the note amounted to $41,508
and $41,395 for the years ended December 31, 1996 and 1995, respectively

Additionally,  Dr. Pandey had made advances to the Company aggregating  $590,000
at December 31, 1996.  Such advances were  evidenced by eight percent (at simple
interest)  promissory note due December 31, 1996.  Interest  expense amounted to
$45,419 and $7,407 for the years ended December 31, 1996 and 1995, respectively.
Accrued interest totaled $52,826 at December 31, 1996 (See Notes 5 and 6).

Pursuant to the Blech  Agreement  (See Note 5), on February 7, 1997,  Dr. Pandey
exchanged  certain  indebtedness owed by the Company to him and the 1,070 shares
of Class B  Preferred  Stock of the  Company  held by him for  12,144  shares of
Series 3 Preferred  Shares.  These shares were then  converted  into  19,430,400
shares of Common Stock at $.0625 per share.  At December  31, 1998,  the Company
has an indebtedness to Dr. Pandey for the accrued interest on the notes totaling
$80,785.

(C) Xechem India - The Company currently receives its supplies of plant extracts
from India  through  informal  collaborative  relationships.  Dr. Pandey and his
brothers had  incorporated  a corporation  in India  ("Xechem  India") which was
established  to  formalize  such   relationships  by  obtaining   contracts  for
dependable supplies of plants and other raw materials.  Based on its discussions
with Indian  sources for such  materials,  the Company  believed  that an Indian
corporation would obtain such contracts on significantly better terms than would
a United  States-based  corporation.  During 1997, the Company purchased certain
raw  materials  from Xechem  India for  $47,000.  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.  Both of Dr.  Pandey's
brothers and Anil Sharma, a chartered  accountant,  serve as directors of Xechem
India. No  compensation  is paid to Dr. Pandey,  his relatives or Mr. Sharma for
service as directors of Xechem India.  As discussed in Note (1),  Xechem India's
operations  are  included in the 1998  consolidated  financial  statements.  All
intercompany balances and transactions have been eliminated in consolidation.

(D) Leases - The company  leases its  operating  facilities  under an  operating
lease that expires in  September  2000.  Dr.  Pandey owns 25% of the lessor as a
limited partner (See Note 13).

(E) Loans Payable - In 1998, the Company received  $845,545 from David Blech and
six  affiliated  individuals  in the form of loans.  Subsequent  to December 31,
1998, these loans were converted to common stock (See Note 6).

(11) Loans Payable - Others

In 1998,  the  Company  received  advances  from  various  individuals  totaling
approximately  $297,000.  Subsequent  to  December  31,  1998,  these loans were
converted to common stock (See Note 6).

Loans  payable at December  31, 1998  totaled  approximately  $1,143,000,  which
includes  advances  totaling  approximately  $846,000  from David  Blech and six
non-affiliated individuals (See Note 6).


                                      F-17

<PAGE>



An individual made two loans to the Company during 1996 aggregating to $115,000.
Each  of  these  loans  were  evidenced  by 10% and  12%  (at  simple  interest)
promissory notes, due six months from the date of the loan. Each promissory note
was subject to a six month extension,  which the Company exercised. In September
1997,  these two loans were extended for an additional one year evidenced by 12%
(at simple interest)  promissory notes. The accumulated  interest of $13,300 was
also converted into one year 12% promissory  notes. In 1998, the individual made
four additional loans to the Company aggregating  $170,000.  Each of these loans
was evidenced by 10% and 12% (simple  interest)  promissory  notes, due one year
from the date of the loan.  The  individual has agreed to extend the term of the
loans , which  aggregate  $298,300,  to  expire  in  September  2000 and  simple
interest will be at 12% per annum.

(12) Commitments and Contingencies

Employment Contract

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

      (a)   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.

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

(2)   In 1998 an amendment to Dr. Pandey's employment  agreement was signed with
      the following terms:

      (a)   Pandey  and the  Company  have  agreed  to  extend  the  term of the
            Employment Agreement for an additional two years, through July 2004.

      (b)   Dr.  Pandey has agreed to defer all  unpaid  compensation  otherwise
            payable to him  thereunder  until such time as the  Company  has the
            funds  to  pay  the  same  to  him.  At  December  31,  1998  unpaid
            compensation totaled $51,425.

      (c)   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.

(3)   In May 1997 an  agreement  between  the  Company  and an  employee  with a
      commencement  date of June 1, 1997 was made which  shall  remain in effect
      for a period of three (3)  years,  ending  May 31,  2000.  The  employment
      period shall  automatically renew for successive five (5) one year periods
      unless  terminated by either party by given written  notice of termination
      thirty (30) days in advance of renewal date, which primarily  provides for
      a salary of $43,000 per annum.

(B) Leases - The Company  leases its  operating  facilities  under an  operating
lease which began in April 1991 and expires on September 30, 2000. In 1996,  Dr.
Pandey  purchased a 25% beneficial  ownership in the lessor as a limited partner
in such entity,  which may be deemed to be an affiliate of Dr. Pandey. The lease
provides  the  Company  with  renewal  options  for three  additional  five year
periods.  Rent expense under the operating lease amounted to $93,289 and $96,856
for the years ended  December 31, 1998 and 1997,  respectively.  At December 31,
1998, the Company owes rent totaling  approximately  $114,000. In addition,  the
future minimum payments under  non-cancelable  operating leases consisted of the
following at December 31, 1998:


                                      F-18

<PAGE>



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

                                     $ 204,989
                                     =========

The operating lease also provides for cost escalation payments.

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

(D)  Purchase  Commitments  - In  September  1994,  the Company  entered into an
agreement with Guizhou Fanya  Pharmaceutical  Co., Ltd.  ("Guizhou"),  a Chinese
company,  for Guizhou to supply to the Company partially  processed raw material
for paclitaxel.  This purchase of the raw material by the Company was contingent
upon Guizhou meeting  specific  contractual  criteria which were met in 1995 and
the  purchases  were  consummated  in 1997 and 1996,  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 1998, no purchases were made.

(E) 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 1998, the Company did not incur any sales with respect to the agreement,  and
no royalties were paid.

(F)  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.

(13) Product Development Agreement

In June and August  1993,  the  Company  signed  contracts  with two  scientific
institutions  in China  for the  purchase  of plant  extracts  and/or  synthetic
compounds  which are  expected to be used in the  development  of the  Company's
proposed  products.  The Company also acquired the exclusive right and ownership
(outside  of China) of  scientific  research  and  development  with  respect to
certain plant  extracts and  synthetic  compounds  isolated by the  institutions
during the term of the  contracts.  The Company had committed to spend  $145,000
($95,000 had been paid in 1997) for the  extracts  and  compounds as long as the
institutions are not in default of any of their obligations under the contracts.
No payments were made in 1998. The contracts  also call for royalty  payments to
be negotiated among the parties if and when products are developed and marketed.


(14) Stock Plan


                                      F-19

<PAGE>



Effective  December 1993,  Xechem's sole  stockholder  approved the Share Option
Plan (the "Plan"),  providing for the issuance to  employees,  consultants,  and
directors  of options to  purchase  up to 200,000  shares of Common  Stock.  The
Company  assumed  Xechem's  obligations  under  the  Plan  at  the  time  of the
reorganization.  At the May 26,  1995,  June 25,  1996 and June 11,  1997 annual
meetings of stockholders,  an amended and restated Stock Option Plan was adopted
whereby the number of shares of Common Stock that could be issued under the Plan
was increased to 2,600,000  shares.  At the December 11, 1998 Board of Directors
Meeting,  an amended and restated  stock  option plan was  adopted,  whereby the
number of shares that could be issued under the plan was increased to 12,600,000
shares.  The Plan provides for the grant to employees of incentive stock options
("ISOs") and non-qualified stock options.

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

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

For options whose exercise price equaled the market price,  the weighted average
exercise price is $0.21 and $0.25 and the weighted average fair value of options
is $0.21 and $0.25 for the years ended December 31, 1998 and 1997, respectively.

For options whose exercise price exceeded the market price, the weighted average
exercise  price was $0.55 and the  weighted  average  fair value of options  was
$0.52 for the year ended December 31, 1997.

For options whose  exercise  price was less than the market price,  the weighted
average  exercise price was $0.20 and the weighted average fair value of options
was $0.31 for the year ended December 31, 1997.

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

                                   1998                             1997
                     --------------------------------- ------------------------
                                          Weighted-                Weighted-
                                           Average                  Average
                              Shares  Exercise Price    Shares    Exercise Price
                              ------  --------------    ------    --------------

Outstanding on January 1,      1,683      $ 0.44            369     $ 2.16

Granted                          330        0.21          1,421       0.50
Exercised                          0        0.00              1       0.01
Forfeited/Expired                387        0.40            106       2.92
                              ------      ------         ------     ------

  Outstanding on December 31,  1,626      $ 0.40          1,683     $ 0.44
                              ======      ======         ======     ======

  Exercisable on December 31,    515      $ 0.14            113     $ 0.17
                              ======      ======         ======     ======




                                      F-20

<PAGE>




The  following  table  summarizes  information  about stock  options at December
31,1998 (shares in thousands):

                          Outstanding Stock Options    Exercisable Stock Options
                           Weighted-
                            Average          Weighted
  Range of                 Remaining          Average           Weighted-Average
Exercise Prices   Shares Contractual Life Exercise Price Shares  Exercise Price
---------------   ------ ---------------- -------------- ------  --------------

$0.01 to 0.26     1,344      8.2               $0.05       515      $0.14
$0.27 to 0.50        107     9.5               $0.35         -      $   -
$0.56 to 1.00        175     9.5               $0.77         -      $   -
                  ------   -----               -----      ----      -----

     Totals       1,626      9.1               $0.14       515      $0.14
     ------       =====    =====               =====      ====      =====

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,
                                              1998              1997
                                              ----              ----
Net Loss:
   As Reported                            $     (2,337)     $     (5,282)
   Pro Forma                              $     (2,345)     $     (5,931)
Net Loss Per Share:
   As Reported                            $      (0.02)     $      (0.06)
   Pro Forma                              $      (0.02)     $      (0.06)

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 1998 and 1997,  respectively;  dividend yields of
$-0- for each year,  expected  volatility of approximately 182% in 1998 and 272%
in 1997,  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 $0.21 and $0.49 for the years  ended  December  31,  1998 and 1997,
respectively.

(15) Description of Securities

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

(B) Class A Voting  Preferred  Stock - There  are  currently  outstanding  2,500
shares of Class A Preferred  Stock. The holder of the Class A Preferred Stock is
entitled to receive  dividends  of $.00001  per share,  and $.00001 per share in
liquidation, before any dividends or distributions on liquidation, respectively,
may be paid to the holders of Common Stock.  The holder of the Class A Preferred
Stock is  entitled to cast 1,000  votes per share on each  matter  presented  to
stockholders of the Company,  voting together as a single class with the holders
of the  Common  Stock,  except  as  may be  required  by  the  Delaware  General
Corporation  Law, and except that the affirmative  vote or consent of the holder
of a majority of the outstanding  Class A Preferred Stock is required to approve
any action to  increase  the number of  authorized  shares of Class A  Preferred
Stock, to amend, alter, or repeal any of the preferences of the

                                      F-21

<PAGE>



Class A Preferred  Stock,  or to authorize any  reclassification  of the Class A
Preferred Stock. Dr. Pandey owns all of the outstanding Class A Preferred Stock.
The Company may redeem the Class A Preferred  Stock for $.00001 per share at any
time  after May 3,  2009,  however,  pursuant  to the  private  offering  of the
Company's  Common Stock in 1995-6,  Dr.  Pandey agreed with the  underwriter  to
redeem the Class A Preferred Stock in 1999.

(C) Class B 8% Preferred Stock - At December 31, 1998, there were no outstanding
shares of 8% Preferred Stock with a liquidation preference of $100 per share. In
February  1997,  in  accordance  with the Blech  Agreement,  1,070  shares of 8%
Preferred  Stock  owned  by  Dr.  Pandey  was  redeemed  by the  Company  at the
liquidation  preference price of $107,000. A total of 1,712,000 shares of Common
Stock  were  issued at a price of $.0625 per share.  The 8%  Preferred  Stock is
entitled to cumulative dividends on the liquidation preference at the rate of 8%
per annum,  payable  quarterly.  The 8%  Preferred  Stock may be redeemed at any
time, in whole or in part,  at the option of the Company for a redemption  price
equal to the liquidation preference plus accrued and unpaid dividends. After the
fifth  anniversary of issuance,  the holders of 8% Preferred  Stock may, at each
holder's  option,  convert  such 8%  Preferred  Stock  into  Common  Stock  at a
conversion price equal to $5.00 per share;  provided that if a change in control
has occurred such shares may be converted, regardless of whether five years have
elapsed at a conversion  price equal to the least of (I) $5.00,  (II) 25% of the
then-current  market price of the Common Stock or (III) the lowest price paid by
the hostile acquiror within the one year preceding the change in control. The 8%
Preferred Stock has no voting rights except for extraordinary  corporate actions
such as mergers,  consolidation, or sales of substantially all the assets of the
Company,  which will require the  affirmative  vote or consent of the holders or
majority of such shares, and except as may be required by law.

(D) Class C Preferred  Stock - The  Company's  Board of Directors  may,  without
further action by the Company's stockholders, from time to time, issue shares of
the  Class C  Preferred  Stock  in  series  and may,  at the  time of  issuance,
determine the rights, preferences,  and limitations of each series. Any dividend
preference  of any Class C Preferred  Stock which may be issued would reduce the
amount of funds  available  for the payment  dividends  on Common  Stock.  Also,
holders of the Class C Preferred  Stock would  normally be entitled to receive a
preference payment in the event of any liquidation,  dissolution,  or winding-up
of the Company  before any payment is made to the holders of Common  Stock.  The
Board of Directors of the Company,  without stockholder approval,  may issue the
Class C Preferred Stock with voting and conversion  rights which could adversely
affect the holders of Common Stock. As described in Note 6, in 1996, the Company
had authorized the issuance of up to 40,000 shares of Class C Series 1 Preferred
Stock,  up to  55,000  shares of Class C Series 2 Voting  Convertible  Preferred
Stock and 13,180 shares of Class C Series 3 Voting Convertible  Preferred Stock.
In March 1997,  the Board of Directors  approved the  retirement  of these three
series of Class C Preferred  Stock.  On December 31, 1998,  there were no issued
and outstanding Class C Preferred Stock.

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

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

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

                                      F-22

<PAGE>



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.

(16) New Authoritative Accounting Pronouncements

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
is  effective  for fiscal years  beginning  after  December  15,  1997.  Earlier
application is permitted.  Reclassification of financial  statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 did not have
any impact on the Company.

The FASB has issued SFAS No. 131,  "Disclosures  About Segments of an Enterprise
and  Related  Information".  SFAS No. 131  changes how  operating  segments  are
reported in annual  financial  statements and requires the reporting of selected
information  about  operating  segments in interim  financial  reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative  information for earlier years is to be restated. SFAS No.
131 need not be applied to interim  financial  statements in the initial year of
its application.  SFAS No. 131 did not have any effect on the Company, as it has
only one segment.

(17) Event  Subsequent to Date of Audit Report -  (Unaudited) - Effective  June,
1999 the Loans Payable - Related Parties were converted into common stock in the
amount of approximately $882,000. The proforma effect is as follows:

                                 Actual                                Proforma
                               December 31           Effect of          May 28,
                                    1998           Transactions           1999
                                --------           ------------      ---------

Current Liabilities           $ 2,223,902          $ (882,000)        $1,341,902
Stockholders Equity              (503,181)            882,000            378,819
                              ------------         ----------         ----------

Totals                        $ 1,720,721          $        0         $1,720,721
                              ===========          ==========         ==========


The 1,150,000 outstanding warrants expired in April 1999.

                                      F-23

<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)...........60      Chief Executive Officer, President,
                                           Chairman of the Board of Directors
                                           and Chief Accounting Officer

Stephen Burg (1)(2)(3).............61      Director

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

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

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

      Stephen F. Burg,  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,
through El Dorado Investments, serves as a consultant to various businesses.

Section 16(a) Beneficial Reporting Compliance

      The Company's executive officers,  directors and shareholders beneficially
owning  more  than 10% of the  Company's  Common  Stock are  required  under the
Exchange  Act to file  reports of  ownership of Common Stock of the Company with
the  Securities and Exchange  Commission and the NASDAQ Stock Market.  Copies of
those reports must also be furnished to the Company.  Based solely upon a review
of the copies of reports furnished to the Company and written representations

                                      38

<PAGE>



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.

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 1996, 1997
and 1998 for the Company's  President and Chief  Executive  Officer,  who is the
only executive officer of the Company whose compensation exceeded $100,000:

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

Dr. Ramesh
  Pandey    1996 $118,365   0    $ 13,375      0        0      0        0
            1997 $130,273   0    $  7,991      0        0      0        0
            1998 $136,233   0    $  7,340      0        0      0        0

Employment Agreements

      Ramesh C. Pandey is employed pursuant to an agreement which provides for a
base salary of $140,000 per year, subject to an annual increase in proportion to
the  increase in the  consumer  price  index,  such bonuses as a majority of the
disinterested  members of the board of the Company may determine,  and a royalty
of 2 1/2% of the Company's net profits before taxes with respect to any products
developed by the Company or its affiliates during the term of the agreement. The
royalty

                                      39

<PAGE>



will be payable to Dr. Pandey or his estate so long as the Company  continues to
sell such  products,  notwithstanding  any  termination  of the  agreement.  The
agreement  provides for a ten year term,  but permits  either party to terminate
the agreement  after five years;  if the Company  terminates the agreement,  Dr.
Pandey will be entitled to receive  severance equal to his  compensation for the
two years prior to  termination.  Dr. Pandey has agreed not to engage in certain
business  activities  (generally  similar to those  currently  engaged in by the
Company) for six months (four months, in certain cases) after the termination of
his  employment  with  the  Company.  If there  is a  change  in the  beneficial
ownership of 20% or more of the Company's  capital stock, Dr. Pandey may, at any
time within one year after such event,  terminate the agreement,  in which event
his noncompete and  confidentiality  agreement terminate and any indebtedness of
the Company to Dr. Pandey shall  accelerate.  Dr. Pandey has agreed and approved
the  transactions  contemplated  by  the  Blech  Purchase  Agreement  and  that,
accordingly,  such  transactions  do not and will not  result  in a  "Change  of
Control" as defined in the  Employment  Agreement.  In August  1996,  due to the
financial constraints of the Company, Dr. Pandey's salary was reduced by 54%. In
November  1996,  50% of the  reduction  was restored and in February  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 1998 Dr.  Pandey  deferred  $51,425.00  of salary until the Company has
funds to pay him as set forth in the "Amendment to 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
2,600,000  shares of Common Stock.  The Plan provides for the grant to employees
of incentive stock options ("ISOs") and non-qualified stock options.

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

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








                                      40

<PAGE>



Option Tables

      The following table sets forth certain information with respect to options
granted to the directors and executive  officers of the Company  during the year
ended  December 31, 1998 under the Company's  Stock Option Plan. The Company did
not grant any stock appreciation rights during the year.

                                       Individual Grants
                                       -----------------
            Number of Securities  % of Total Options
             Underlying Options  Granted to Employees Exercise Price Expiration
  Name             Granted          In Fiscal Year      (per Share)     Date
  ----             -------          --------------      -----------     ----
Stephen Burg       10,000                                 $0.01       06/10/07
Stephen Burg       50,000                                  0.01       12/01/08

  TOTAL            60,000                4.3%


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

      The following table provides  information on option  exercises  during the
year ended  December 31, 1998 by the  directors  and  executive  officers of the
Company and the value of such parties'  unexercised stock options as of December
31, 1998.

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

Dr. Ramesh C.
 Pandey           0        0          0     707,000(2)       0      $35,343
Stephen Burg      0        0     14,000      51,000       $640        2,040

(1)   Represents the excess, if any, of the closing price of the Common Stock as
      quoted on the OTC  Bulletin  Board on  December  31,  1998 ($.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  June 9,  1999  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>

                                                             Class A           Class C
                                        Common Stock       Preferred Stock     Preferred Stock   Percent of
                                       Number   Percent    Number    Percent   Number  Percent    Voting
Name and Address                      of Shares of Class  of Shares of Class of Shares of Class   Stock (1) (12)
----------------                      --------- --------  --------- -------- --------- --------   --------------


<S>                       <C>     <C>               <C>         <C>       <C>       <C>      <C>    <C>
The Edward A. Blech Trust (2)     72,300,000(3)     31.5%       0         -         0        -      26.6%

David Blech (4)                   84,550,000(3)(5)  36.8%       0         -         0        -      31.1%

Michael G. Jesselson (6)          15,050,000(7)(8)   6.6%       0         -         0        -       5.5%

EER Systems (9)                   20,000,000         8.7%       0         -   100,000(12)  100%     22.1%

Stephen Burg (13)                    500,000          .2%       0         -         0        -        .2%

Dr. Ramesh C. Pandey (10)         22,164,345(11)     9.7%   2,500(1)    100%        0        -       9.1%

All directors and executive
 officers as a group
 (2 persons)                      22,664,345(11)     9.9%   2,500(1)    100%        0        -       9.3%

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

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

(11) Does not  include  707,000  shares  subject  to the Pandey  Options,  which
     presently are not exercisable, and will not be exercisable,  within 60 days
     from June 9, 1999.

(12) Gives  effect  to the  voting  rights of  100,000  shares of Class C Voting
     Preferred  Stock,  all of which are owned by EER Systems and which  entitle
     them 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


                                      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  $110,491  in  1996,  including  $21,705
subsequent to June 25, 1996, and $130,258 in 1997.

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

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

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

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


                                      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.

                                      44

<PAGE>



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:

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
            Consent of Moore Stephens, P.C.

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


                                      45

<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: October 5, 1999                 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: October 5, 1999
     ----------------------------
     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: October 5, 1999
     ----------------------------
     Stephen Burg
     Director





<PAGE>



                                 EXHIBIT INDEX


Number      Exhibit

21          Subsidiaries of the Company

23          Consent of Wiss & Company, LLP

23          Consent of Moore Stephens, P.C.