<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-K/A

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended June 30, 1997

                         Commission file number 0-17822

                                 SYNETIC, INC.
             (Exact name of registrant as specified in its charter)


              DELAWARE                          22-2975182
    (State or other jurisdiction of          (I.R.S. Employer
    incorporation or organization)           Identification No.)

           669 RIVER DRIVE
       ELMWOOD PARK, NEW JERSEY                 07407-1361
(Address of principal executive offices)        (Zip Code)


Registrant's telephone number, including area code:  (201) 703-3400


Securities registered pursuant to Section 12(b) of the Act:  None
 

Securities registered pursuant to Section 12(g) of the Act:

                              TITLE OF EACH CLASS
                              -------------------

                          COMMON STOCK, $.01 PAR VALUE

                5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2007

          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.  YES  [X]  NO  [ ]

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.  [X]

          The aggregate market value of the registrant's voting stock (based on
the last sale price of registrant's voting stock on the NASDAQ National Market
System on September 15, 1997 and, for the purpose of this computation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) held by non-affiliates of the registrant was approximately
$484,876,600.

          The number of shares of registrant's Common Stock, $.01 par value, 
outstanding at September 15, 1997 was 17,650,965.

                      DOCUMENTS INCORPORATED BY REFERENCE

          None.

================================================================================
<PAGE>
                                    PART II
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.


     As described in "Item 1. Business--Introduction", the Company completed the
Divestiture of its Institutional Pharmacies Business on December 14, 1994.  The
Company's consolidated financial statements for the fiscal year ended June 30,
1995 report separately the results of operations and net assets of the
Institutional Pharmacies Business as discontinued operations.


     The following table sets forth for the periods indicated the percentage
which certain items in the financial statements of the Company bear to net
sales.

<TABLE>
<CAPTION>

                                                    PERCENTAGES OF NET SALES
                                                   FISCAL YEARS ENDED JUNE 30,
                                                   -------------------------- 
 
                                                      1997    1996    1995
                                                     -----   -----   -----
<S>                                                <C>       <C>     <C> 
Net sales........................................      100%    100%    100%
 
Costs and expenses
 Cost of sales...................................     54.9    55.6    58.7
 Selling, general and administrative.............     39.4    33.1    31.0
 Investment income...............................    (24.3)  (18.0)  (18.7)
 Interest expense................................      5.9      --     9.2
 Purchased research and development and other....     70.7      --    17.0
                                                     -----   -----   -----
                                                     146.6    70.7    97.2
                                                     -----   -----   -----
Income (loss) before provision for income taxes..    (46.6)   29.3     2.8
 
Provision for income taxes.......................      5.3    10.2     1.1
                                                     -----   -----   -----
 
Income (loss) from continuing operations.........    (51.9)%  19.1%    1.7%
                                                     =====   =====   =====
 
</TABLE>

     The historical operations of the Company are primarily related to its
plastics technology business.  All revenues and a significant majority of
operating expenses were derived from these operations.  As discussed below, the
consolidated financial statements for the fiscal year ended June 30, 1997
include certain costs associated with the Company's activities in developing its
healthcare communications business.


Fiscal Years Ended June 30, 1997 and 1996

Consolidated Results of Operations


     Net sales for the year ended June 30, 1997 increased by $7,757,000, or
17.2%, over the comparable prior year period.  The sales increase was due
primarily to increased unit sales in surgical products in the healthcare segment
and increased unit sales of writing components, pipette filters and pipette tips
in the consumer segment.


     Cost of sales for the year ended June 30, 1997 increased by $3,927,000, or
15.6%, over the comparable prior year period due to the increased sales volume
noted above and product development costs.  As a percent of net sales, cost of
sales for the year ended June 30, 1997 decreased to 54.9% from 55.6% in the
comparable prior year period principally due to increased leverage of certain
fixed costs which do not increase proportionally with sales and improvements in
material and labor usage.

                                       2
<PAGE>
 
     Selling, general and administrative expenses for the year ended June 30,
1997 increased by $5,911,000, or 39.6%, over the comparable prior year period
due primarily to the inclusion of expenses of $4,628,000 associated with the
Company's healthcare communications business which primarily related to research
and development activities.  Excluding these costs, as a percent of net sales,
selling, general and administrative expenses for the year ended June 30, 1997
decreased to 30.7% from 33.1% due principally to increased sales which were not
proportionately offset by such expenses, since a portion of these costs is fixed
in nature and does not vary directly with sales.


     Investment income, which is comprised of interest and other income and
dividend income, for the year ended June 30, 1997 increased by $4,782,000, or
58.9%, over the comparable prior year period primarily as a result of the income
earned on the proceeds of the Company's $165,000,000 5% Convertible Subordinated
Debentures due 2007 (the "Convertible Debentures") issued in February 1997.


     Interest expense for the year ended June 30, 1997 increased by $3,116,000
from the prior year period as a result of the interest expense associated with
the Company's Convertible Debentures.


     During the year ended June 30, 1997, the Company recorded non-recurring
charges to income of $37,413,000 related to purchased research and development
costs from the acquisitions of Avicenna and CareAgents and the acquisition of
rights to certain intellectual property and software technologies to be utilized
in the development of the Company's healthcare communications business.


     Excluding the portion of the research and development charge relating to
the acquisitions of Avicenna and CareAgents for which no tax benefits were
recognized, the effective tax rate for the year ended June 30, 1997 increased to
37.5% from 35% in the prior year period primarily as a result of the change in
composition of the Company's marketable securities resulting in the decrease in
investment income subject to the dividend received deduction.


Fiscal Years Ended June 30, 1996 and 1995

Consolidated Results of Operations


     Net sales for the year ended June 30, 1996 increased by $5,949,000, or
15.2%, over the comparable prior year period.  The sales increase was due
primarily to increased unit sales in medical products and plastic vials in the
healthcare segment and, to a lesser extent, to increased unit sales of writing
components, personal care items and home water filters in the consumer segment.


     Cost of sales for the year ended June 30, 1996 increased by $2,102,000, or
9.1%, over the comparable prior year period due to the increased sales volume
noted above and additional depreciation and product development costs.  As a
percent of net sales, cost of sales for the year ended June 30, 1996 decreased
to 55.6% from 58.7% in the comparable prior year period principally due to
certain fixed costs which do not increase proportionally with sales and
improvements in material and labor usage.


     Selling, general and administrative expenses for the year ended June 30,
1996 increased by $2,805,000, or 23.1%, over the comparable prior year period
due primarily to an increase in expenses associated with the increase in sales
volume noted above and an increase in corporate overhead expense.  As a percent
of net sales, selling, general and administrative expenses for the year ended
June 30, 1996 increased to 33.1% from 31.0% in the prior year primarily due to
the increased corporate overhead noted above.


     Interest and other income and dividend income for the year ended June 30,
1996 increased by $800,000, or 10.9%, over the comparable prior year period
primarily as a result of the income earned on a full year of investment of the
net proceeds received from the sale of the Institutional Pharmacies Business.

                                       3
<PAGE>
 
     Interest expense for the year ended June 30, 1996 decreased by $3,619,000
from the prior year period as a result of the conversion and redemption of the
Company's Convertible Subordinated Debentures due December 1, 2001 (the "1991
Debentures") into common stock of the Company in February 1995.

     Other expenses for the year ended June 30, 1996 decreased by $6,663,000
over the comparable prior year period as a result of the one-time charge in
December 1994 related to the issuance of stock options to certain officers as
compensation for services in conjunction with the consummation of the Purchase
and Sale Agreement and costs associated with the conversion and redemption in
February 1995 of the 1991 Debentures.

     The effective tax rate for the year ended June 30, 1996 decreased to 35%
from 41% in the prior year period primarily due to the nondeductibility of
certain conversion and redemption costs in the prior year.

Capital Resources and Liquidity

     As of June 30, 1997, the Company had $77,303,000 of cash and cash 
equivalents and $238,525,000 of marketable securities. 

     Cash and cash equivalents increased $55,093,000 for the fiscal year 
ended June 30, 1997 as a result of proceeds from the issuance of the 
Convertible Debentures, the majority of which were invested in marketable 
securities. Net cash provided by operations was $9,017,000, a decrease of 
$2,276,000 from the fiscal year ended June 30, 1996. This decrease was primarily
related to expenditures associated with the development of the Company's 
healthcare communications business and increased working capital requirements. 
The significant funds generated from operating activities are reinvested in 
existing businesses and are used to fund capital expenditures.

      Net cash provided by financing activites was $161,008,000 for the fiscal 
year ended June 30, 1997, primarily resulting from the issuance of the 
Convertible Debentures.

      Net cash used for investing activities was $114,932,000 for the fiscal 
year ended June 30, 1997, reflecting the investment of a portion of the proceeds
from the issuance of the Convertible Debentures in marketable securities. 

      As a result of the continuing efforts in developing its healthcare 
communications business, the Company expects to incur significant research and 
development expenditures in connection with this new area of business until the
products and services are successfully developed and marketed. During the second
half of the fiscal year ended June 30, 1997, the Company incurred expenditures 
of approximately $4,976,000 related to the development of its healthcare 
communications business. The Company expects to increase the rate of such 
expenditures during fiscal 1998. The Company believes that its cash flow from 
operations and the income earned on its investments are sufficient to meet the 
anticipated working capital requirements of its business, including the research
and development expenditures noted above.

     The Company continues to pursue an acquisition program pursuant to which it
seeks to effect one or more acquisitions or other similar business combinations 
with businesses it believes have significant growth potential. Financing for 
such acquisitions may come from several sources, including, without limitation, 
(a) the Company's cash, cash equivalents and marketable securities and (b) 
proceeds from the incurrence of additional indebtedness or the issuance of 
common stock, preferred stock, convertible debt or other securities. There can 
be no assurance that the Company's acquisition program will be successful. See 
"Item 1. Business--Acquisition Program".

                                       4
<PAGE>
 
                                    PART III



  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


       Pursuant to General Instruction G(3) to the Annual Report on Form 10-K,
  the information regarding executive officers of the Company required by Item
  401 of Regulation S-K is included in Part I of this report.


       The directors of the Company are as follows:

<TABLE>
<CAPTION>
 
                                       Director                      Principal
Name                              Age   Since                       Occupation
--------------------------------  ---  --------  -------------------------------------------------
<S>                               <C>  <C>       <C>
                              
  Thomas R. Ferguson               70      1989  Mr. Ferguson has been a member of the law firm of
                                                 Ferguson, Case, Orr, Paterson & Cunningham for
                                                 more than five years.
                              
  Mervyn L. Goldstein, M.D.        60      1989  Dr. Goldstein has been a physician in private
                                                 practice, Associate Clinical Professor of Medicine at
                                                 the Albert Einstein College of Medicine in New York
                                                 City and Attending Physician in Medicine and
                                                 Oncology at Montefiore Medical Center in New York
                                                 City for more than five years.
                              
  Ray E. Hannah                    61      1989  See "Part I.  Executive Officers."
                              
  Roger H. Licht                   43      1989  Mr. Licht has been a member of the law firm of
                                                 Licht & Licht for more than five years.
                              
  James V. Manning                 50      1989  See "Part I.  Executive Officers."
                              
  Charles A. Mele                  41      1989  See "Part I.  Executive Officers."
                              
  Herman Sarkowsky                 72      1989  Mr. Sarkowsky has been Chairman of the Board and
                                                 Chief Executive Officer of Sarkowsky Investment
                                                 Corporation, a diversified investment company, for
                                                 more than five years.  Since May 1992, he has been
                                                 a director of Seafirst Bank.  Mr. Sarkowsky is also
                                                 a director of Eagle Hardware & Garden Inc. and
                                                 Hollywood Park, Inc.
                              
  Paul C. Suthern                  45      1993  Mr. Suthern has been Vice Chairman of the
                                                 Company since July 1996 and was the President and
                                                 Chief Operating Officer of the Company from
                                                 February 1993 until July 1996 and was also the Chief
                                                 Executive Officer from October 1993 until January
                                                 1995.  Mr. Suthern was also President and Chief
                                                 Operating Officer of Medco Containment Services,
                                                 Inc. ("Medco") from November 1992 through
                                                 December 1994 and Assistant to Medco's Chairman
</TABLE>

                                       5
<PAGE>
 
<TABLE>

<S>                               <C>  <C>       <C>
                              
                                                 from December 1991 to November 1992.  Prior
                                                 thereto he was Executive Vice President--Operations
                                                 of Medco for more than five years.
                              
  Albert M. Weis                   70      1989  Mr. Weis has been President of A.M. Weis & Co.,
                                                 Inc., a commodities trading corporation, for more
                                                 than five years. Since August 1997, Mr. Weis has
                                                 been the Chairman of the Board of the New York
                                                 Cotton Exchange.  Mr. Weis is also a member of the
                                                 Board of the Commodities Clearing Corporation.
                              
  Martin J. Wygod                  57      1989  Mr. Wygod has been Chairman of the Board of the
                                                 Company since May 1989.  From May 1989 to
                                                 February 1993, Mr. Wygod also served as the
                                                 Company's President and Chief Executive Officer
                                                 and until May 1994 was an executive officer of the
                                                 Company.  Until May 1994, Mr. Wygod was
                                                 Chairman of the Board of Medco for more than five
                                                 years, and until January 1993 he also served as Chief
                                                 Executive Officer of Medco.  He is also engaged in
                                                 the business of racing, boarding and breeding
                                                 thoroughbred horses and is President of River Edge
                                                 Farm, Inc., which is engaged in the business of
                                                 breeding and boarding thoroughbred horses.
</TABLE>

        No family relationship exists among any of the directors or executive
  officers except that Martin J. Wygod, Chairman of the Board of the Company,
  and Paul C. Suthern are brothers-in-law.  No arrangement or understanding
  exists between any director or executive officer and any other person pursuant
  to which any director or executive officer was selected as a director or
  executive officer of the Company.  All executive officers are elected annually
  by the Board of Directors and serve at the discretion of the Board.


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


  SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE


       Based solely upon a review of Forms 3 and 4 and amendments thereto
  furnished to the Company during the year ended June 30, 1997 and Forms 5 and
  amendments thereto furnished to the Company for such year, no person failed to
  disclose on a timely basis, as disclosed in the above forms, reports required
  by Section 16(a) of the Securities Exchange Act of 1934, as amended, during
  such year.

                                       6
<PAGE>
 
  ITEM 11.  EXECUTIVE COMPENSATION.


       Prior to the consummation of the purchase of shares of Common Stock from
  Merck & Co., Inc. ("Merck") by the Company and SN Investors (the "Purchase")
  on December 14, 1994, the Company bore a proportionate share of the cost or
  expense in respect of Medco compensation, benefits and travel and
  entertainment expenses of certain officers of the Company who were also
  employees of Medco or its subsidiaries other than the Company.  During the
  period from July 1, 1994 through December 14, 1994, the executive officers of
  the Company, other than Ray E. Hannah, Vice President--Porex Technologies
  Group of the Company, did not receive any cash compensation for services to
  the Company or its subsidiaries.  In the case of Mr. Hannah, all amounts shown
  below were paid by the Company.  Following the consummation of the Purchase,
  the other executive officers of the Company became salaried employees of the
  Company and began to participate in the employee benefit plans and
  arrangements of the Company.


       The following table presents information concerning compensation paid for
  services to the Company during the last three fiscal years to Mr. Manning, the
  Chief Executive Officer of the Company, and to Messrs. Hannah, Marrero, Mele
  and Vuolo, the only other executive officers whose combined salary and bonus
  during the fiscal year ended June 30, 1997 exceeded $100,000 (the "Named
  Executive Officers"):

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
                          SUMMARY COMPENSATION TABLE
                          --------------------------
                                                                                    LONG TERM
                                                      ANNUAL COMPENSATION          COMPENSATION
                                              -----------------------------------  ------------
                                                                         OTHER     SECURITIES
                                                                         ANNUAL    UNDERLYING     ALL OTHER
                                                                        COMPEN-     OPTIONS/      COMPEN-
   NAME AND PRINCIPAL POSITION       YEAR      SALARY ($)   BONUS ($)  SATION ($)   SARS (#)      SATION ($)
---------------------------------  ---------  ------------  ---------  ----------  -----------  ---------------
<S>                                <C>        <C>           <C>        <C>         <C>          <C>
 
James V. Manning.................      1997     100,000           --          --           --             --
  President and Chief                  1996     100,000           --          --           --             --
   Executive Officer                   1995      50,000(1)        --          --      150,000             --
 
Ray E. Hannah....................       1997    163,461      100,000       4,505       40,000          5,901(2)
  Vice President                        1996    160,000       74,140          --           --          3,239(2)
  --Porex Technologies Group            1995    160,000           --          --           --          4,146(2)
 
Charles A. Mele..................       1997    150,000           --      12,000      195,000          2,019(3)
  Vice President and General            1996    150,000       12,460      12,000           --          1,540(3)
   Counsel                              1995         --           --          --           --             --
 
Anthony Vuolo....................       1997    150,000           --      12,000       81,000          2,019(3)
  Vice President and Chief              1996    150,000           --      12,000           --          1,419(3)
   Financial Officer (since May         1995     43,269(4)        --       3,461      125,000             --
   1997)
 
Victor L. Marrero................       1997    150,000           --      12,000       31,000          2,019(3)
  Vice President and Chief              1996    150,000           --      12,000           --          1,419(3)
   Financial Officer (through           1995     75,000(5)        --       6,000      125,000             --
   May 1997)
 
</TABLE>
----------------------

  (1)  During the period beginning on July 1, 1994 and ending on December 14,
       1994, the date of consummation of the Purchase, Mr. Manning was paid a
       salary of $186,923 by Medco, none of which was attributed to services
       rendered to the Company.  During the period beginning on December 15,
       1994 and ending on June 30, 1995, Mr. Manning was paid a salary of
       $50,000 by the Company.  Effective August 1, 1996, Mr. Manning assumed
       the responsibilities of acting President of the Company.

  (2)  Includes Company matching contributions to the Porex 401(k) plan and life
       insurance premiums paid on behalf of Mr. Hannah of $2,043 and $2,103,
       respectively, in the fiscal year ended June 30, 1995, $1,878 and $1,361,
       respectively, in the fiscal year ended June 30, 1996 and $3,795 and
       $2,106, respectively, in the fiscal year ended June 30, 1997.

  (3)  Comprised of Company matching contributions to the Porex 401(k) Plan.

  (4)  During the period beginning on July 1, 1994 and ending on December 14,
       1994, the date of consummation of the Purchase, Mr. Vuolo was paid a
       salary of approximately $115,000 by Medco, none of which was attributed
       to services rendered to the Company.  During the period beginning on
       December 15, 1994 and ending on June 30, 1995, Mr. Vuolo was paid a
       salary of $43,269 by the Company.

                                       8
<PAGE>
 
  (5)  During the period beginning on July 1, 1994 and ending on December 14,
       1994, the date of consummation of the Purchase, Mr. Marrero was paid a
       salary of approximately $115,000 by Medco, none of which was attributed
       to services rendered to the Company.  During the period beginning on
       December 15, 1994 and ending on June 30, 1995, Mr. Marrero was paid a
       salary of $75,000 by the Company.  Mr. Marrero was the Chief Financial
       Officer from December 1994 until May 1997, at which time Mr. Vuolo became
       the Chief Financial Officer.


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

       The following table presents information concerning the options granted
  to the Named Executive Officers during the last fiscal year.

<TABLE>
<CAPTION>
                             OPTION/SAR GRANTS IN LAST FISCAL YEAR
 
                                       INDIVIDUAL GRANTS
                     -----------------------------------------------------
                       NUMBER OF
                      SECURITIES      % OF TOTAL
                      UNDERLYING     OPTIONS/SARS    EXERCISE
                       OPTIONS/       GRANTED TO      OR BASE
                         SARS          EMPLOYEES       PRICE    EXPIRATION       GRANT DATE
       NAME           GRANTED (#)   IN FISCAL YEAR    ($/SH)       DATE     PRESENT VALUE ($)(2)
-------------------  -------------  ---------------  ---------  ----------  --------------------
<S>                  <C>            <C>              <C>        <C>         <C>
Ray E. Hannah......      40,000(1)        1.1%          35.50      4/16/07        459,998
Victor L. Marrero..      31,000(1)         .8%          32.25     10/02/06        309,874
Charles A. Mele....     195,000(1)        5.3%          32.25     10/02/06      1,949,204
Anthony Vuolo......      31,000(1)         .8%          32.25     10/02/06        309,874
                         50,000(1)        1.4%          35.53      6/23/07        575,981
</TABLE>
  ____________

  (1)  These options vest and become exercisable at the rate of 20% per year,
       commencing on the first anniversary of the date of grant and were granted
       on the following dates:  Mr. Hannah, all on April 16, 1997; Messrs.
       Marrero and Mele, all on October 2, 1996; and Mr. Vuolo, 31,000 on
       October 2, 1996 and 50,000 on June 23, 1997.


  (2)  The estimated grant date present value reflected in the above table is
       determined using the Black-Scholes model.  The material assumptions and
       adjustments incorporated in the Black-Scholes model in estimating the
       value of the options reflected in the above table include the following:
       (i) the respective option exercise price, specified above, equal to the
       fair market value of the underlying stock on the date of grant; (ii) the
       exercise of options within one year of the date that they become
       exercisable; (iii) a risk-free interest rate of 6.5% per annum; and (iv)
       volatility of 0.2722 calculated using daily stock prices of the Company
       during the period from the date of the Purchase to June 30, 1997.  The
       ultimate values of the options will depend on the future market price of
       the Company's stock, which cannot be forecasted with reasonable accuracy.
       The actual value, if any, an optionee will realize upon exercise of an
       option will depend on the excess of the market value of the Company's
       Common Stock over the exercise price on the date the option is exercised.
       There is no assurance that the value realized by an optionee will be at
       or near the value estimated by the Black-Scholes model or any other model
       applied to value the options.

                                       9
<PAGE>
 
       No options to purchase Common Stock were exercised by the Named Executive
  Officers during the fiscal year ended June 30, 1997.  Messrs. Marrero and
  Vuolo realized income of $2,522,534 and $2,006,240, respectively, from the
  exercise of options to purchase common stock of Merck granted prior to the
  closing of the Purchase, but which continued to vest and remained exercisable
  thereafter as a result of their employment by the Company.  See "Item 13.
  Certain Relationships and Related Transactions--Purchase and Sale Agreement;
  Divestiture."

       The following table presents information concerning the fiscal year-end
  value of options to purchase Common Stock held by the Named Executive
  Officers.

             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                        AND FY-END OPTION/SAR VALUES

                        NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                       UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS/
                     OPTIONS/SARS AT FY-END (#)      SARS AT FY-END ($)(1)
                     ---------------------------  ---------------------------
       NAME          EXERCISABLE   UNEXERCISABLE  EXERCISABLE   UNEXERCISABLE
-------------------  ---------------------------  ---------------------------

James V. Manning...        225,000        90,000      6,488,750     2,430,000
Ray E. Hannah......         64,000        40,000      1,754,500        60,000
Victor L. Marrero..         60,000       106,000      1,667,500     2,172,250
Charles A. Mele....         70,000       195,000      1,945,000       926,250
Anthony Vuolo......         86,000       164,000      2,293,000     2,482,500

-----------------------------
  (1)  Based upon the fiscal year-end closing price of the Common Stock of
       $37.00.

                                       10
<PAGE>
 
                     PLANS AND ARRANGEMENTS OF THE COMPANY

  PENSION PLAN

       Employees of the Company and certain of its subsidiaries who satisfy
  certain age and service requirements are eligible to participate in the
  Pension Plan for Employees of Porex Technologies Corp. (the "Pension Plan"), a
  defined benefit plan. The Company bears the entire cost of the Pension Plan.
  The Company's contributions to the Pension Plan are computed on an actuarial
  basis in order to fund the defined retirement benefits.

       Normal retirement benefits are payable monthly for life to a participant
  upon retirement at his or her retirement date (i.e., age 65), and are equal to
  1/12 of the sum of (a) 0.6% of the participant's average annual compensation
  for the five consecutive calendar years that the participant's compensation
  was the highest during the ten consecutive years of service immediately
  preceding retirement ("Final Average Compensation"), multiplied by the
  participant's credited years of service up to a maximum of 35 years, and (b)
  0.6% of the participant's Final Average Compensation in excess of the average
  annual Social Security taxable wage base for the 35-year period ending with
  the year the participant would reach normal retirement age, multiplied by the
  participant's credited years of service up to a maximum of 35 years. A
  participant becomes 100% vested in his or her accrued retirement benefit after
  completion of five years of service or upon attainment of normal retirement at
  age 65.  Retirement benefits are not subject to any deduction for Social
  Security or other offset amounts.

       Under a defined benefit plan such as the Pension Plan, contributions
  allocable to individual participants cannot be readily and accurately
  calculated.  The table below shows estimated annual retirement benefits for
  executives at specified levels of remuneration and years of service.  The
  estimates assume that benefits commence at age 65 under a straight life
  annuity form. The table discloses the benefits that an individual would
  receive at age 65 if he participated in the Pension Plan for 15, 20, 25, 30
  and 35 years.

                              PENSION PLAN TABLE


                    Years of Service 
---------------------------------------------------------

 Remuneration     15      20      25      30      35
--------------  ------  ------  ------  ------  ------
   100,000      15,363  20,484  25,604  30,725  35,864
   115,000      18,063  24,084  30,104  36,125  42,146
   125,000      19,863  26,484  33,104  39,725  46,346
   150,000      24,363  32,484  40,604  48,725  56,846
   152,000      24,723  32,964  41,204  49,445  57,686
   or more

      Ray E. Hannah, the only Named Executive Officer participating in the
  Pension Plan, had accrued 29 credited years of service under the Pension Plan
  and had annual remuneration covered by the Pension Plan of $160,000 as of
  January 1, 1997.  Sections 401(a)(17) and 415 of the Internal Revenue Code
  limit the amount of compensation that may be considered in computing benefits
  under a qualified retirement plan.  For 1995 and 1996, the maximum amount of
  compensation allowed for use in calculating an individual's pension benefits
  under the Retirement Plan was $150,000.  For 1997, the maximum increased to
  $160,000.

                                       11
<PAGE>
 
   COMPENSATION OF DIRECTORS

      Those directors who are not officers or employees of the Company received
  no cash compensation for serving as directors for the fiscal year ended June
  30, 1997.  The Company's 1991 Director Stock Option Plan (the "Director Plan")
  provides that on the first business day of each fiscal year of the Company,
  each director who is not an officer or employee of the Company then in office
  will automatically be granted an option to purchase 10,000 shares of Common
  Stock.  In addition, each director who is not an officer or employee of the
  Company automatically receives an option to purchase 10,000 shares of Common
  Stock at the time such director is first elected to the Board.  The Director
  Plan is administered by the Board of Directors or any executive officer or
  officers designated by the Board.  Non-employee directors have also received
  in the past options to purchase Common Stock under the Company's 1989 Class A
  Stock Option Plan (the "Class A Plan"), and the Company from time to time has
  granted options to purchase Common Stock to certain of such directors outside
  the Company's stock option plans on terms similar to those contained in the
  Class A Plan.

                                       12
<PAGE>
 
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                             PRINCIPAL STOCKHOLDERS

      The following table sets forth certain information as of September 15,
  1997 (except as otherwise indicated) concerning the beneficial ownership of
  the Company's Common Stock by each person known by the Company to own more
  than 5% of its Common Stock.

                                                  AMOUNT
NAME AND ADDRESS OF                           AND NATURE OF          PERCENT
BENEFICIAL OWNER                           BENEFICIAL OWNERSHIP    OF CLASS (1)
---------------------------------------  ------------------------  ------------
 
     Martin J. Wygod...................           5,421,468(2)(3)         30.3%
     River Edge Farm
     P.O. Box 1949
     Buellton, California  93427
 
     SN Investors, L.P.................             5,061,857(2)          28.7%
     P.O. Box 616
     Fair Lawn, New Jersey  07410
 
     FMR Corp..........................             1,157,582(4)           6.6%
     82 Devonshire Street
     Boston, Massachusetts  02107
 
     The Prudential Insurance Company..             1,019,743(5)           5.8%
     of America ("Prudential")
     Prudential Plaza
     Newark, New Jersey  07102
 
     James R. Buell....................             1,010,916(6)           5.7%
     Star Route Box 129
     Orovada, Nevada  89425

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

  (1) The number of shares of Common Stock deemed outstanding includes:  (i)
      17,650,965 shares of Common Stock outstanding as of September 15, 1997,
      (ii) the number of shares, if any, of Common Stock that the respective
      persons named in the above table have the right to acquire presently or
      within 60 days of September 15, 1997 upon exercise of stock options and
      (iii) the number of shares, if any, of Common Stock, which the respective
      persons named in the above table have the right to acquire upon conversion
      of the Company's 5% Convertible Subordinated Debentures due 2007
      ("Convertible Debentures").


  (2) SN Investors, the general partner of which is controlled by Mr. Wygod, is
      the record and beneficial owner of 5,061,857 shares of Common Stock.  Mr.
      Wygod is an indirect beneficial owner of such shares and they are included
      in the total of 5,421,468 shares listed as beneficially owned by Mr.
      Wygod.  See "Item 13.  Certain Relationships and Related Transactions--
      Purchase and Sale Agreement; Divestiture" and "--Investment Agreement" for
      additional information regarding SN Investors.

                                       13
<PAGE>
 
 (3) Includes 256,000 shares of Common Stock that Mr. Wygod has the right to
     acquire presently or within 60 days of September 15, 1997 upon exercise of
     stock options or upon conversion of Convertible Debentures.  Includes 2,000
     shares of Common Stock beneficially owned by Mr. Wygod's spouse, as to
     which shares Mr. Wygod disclaims beneficial ownership.  Does not include
     3,500 shares of Common Stock and shares of Common Stock issuable upon
     conversion of $1,500,000 principal amount of Convertible Debentures owned
     by Medco Containment Services Foundation, Inc., a charitable foundation of
     which Messrs. Manning, Suthern and Wygod are trustees and share voting and
     dispositive power nor 105,350 shares of Common Stock and shares of Common
     Stock issuable upon conversion of $500,000 principal amount of Convertible
     Debentures owned by the Rose Foundation, a private charitable foundation of
     which Messrs. Wygod and Mele are trustees and share voting and dispositive
     power.

 (4) The information shown is as of December 31, 1996 and is based upon
     information disclosed by FMR Corp., Fidelity Management and Research
     Company, Fidelity VIP Equity-Income Fund, Abigail P. Johnson and Edward C.
     Johnson, 3d, the controlling stockholder of FMR Corp., in a Schedule 13G
     filed with the Commission. Such persons reported that FMR Corp. is the
     parent holding company of Fidelity Management and Research Company, and
     that Edward C. Johnson, 3d, FMR Corp., through its control of Fidelity
     Management and Research Company, and the Funds each has sole power to
     dispose of such shares. Sole power to vote the shares resides in the Fund's
     Board of Trustees.

 (5) The information shown is as of December 31, 1996 and is based upon
     information disclosed by Prudential in its Schedule 13G filed with the
     Securities and Exchange Commission (the "Commission"). Prudential reported
     in its Schedule 13G that it has shared voting and dispositive power over
     such shares.


 (6) Includes 131,667 shares of Common Stock that Mr. Buell has the right to
     acquire presently or within 60 days of September 15, 1997 upon exercise of
     stock options or upon conversion of Convertible Debentures. The information
     shown is as of May 28, 1997 and is based upon information disclosed by Mr.
     Buell in his Schedule 13D filed with the Securities and Exchange
     Commission. Mr. Buell reported in his Schedule 13D that he has sole voting
     and dispositive power over such shares.

                                       14
<PAGE>
 
                        SECURITY OWNERSHIP OF MANAGEMENT


       The following table sets forth certain information, as of September 15,
  1997, concerning the ownership of Common Stock by each of the directors, each
  of the Named Executive Officers, and by all directors and executive officers
  of the Company as a group.


                                               AMOUNT AND
                                          NATURE OF BENEFICIAL    PERCENT OF
NAME OF BENEFICIAL OWNER                    OWNERSHIP (1)(2)       CLASS (3)
--------------------------------------  ------------------------  -----------
 
Thomas R. Ferguson....................           108,117            *
Mervyn L. Goldstein...................           110,717(4)         *
Ray E. Hannah.........................           137,628            *
Roger H. Licht........................            81,333            *
James V. Manning......................           269,740(5)         1.51%
Victor L. Marrero.....................            68,958            *
Charles A. Mele.......................           112,188(6)         *
Herman Sarkowsky......................           230,724(7)         1.30%
Paul C. Suthern.......................           202,500(5)         1.13%
Anthony Vuolo.........................            94,858            *
Albert M. Weis........................           157,169(8)         *
Martin J. Wygod.......................         5,421,468(5)(6)(9)   30.28%
All directors and executive officers
  as a group (13 persons).............         7,000,750            36.79%

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

  *  Less than one percent.

  (1)  The persons named in the table have sole voting and investment power with
       respect to all shares of Common Stock shown as beneficially owned by
       them, unless otherwise indicated in the following footnotes.


  (2)  Includes the following number of shares of Common Stock that the
       following persons have the right to acquire presently or within 60 days
       of September 15, 1997 upon exercise of stock options and the number of
       shares of Common Stock that the following persons have the right to
       acquire upon conversion of Convertible Debentures:  Mr. Ferguson,
       103,667; Dr. Goldstein, 98,667; Mr. Hannah, 64,167; Mr. Licht, 79,333;
       Mr. Manning, 233,333; Mr. Marrero, 67,033; Mr. Mele, 109,833; Mr.
       Sarkowsky, 127,000; Mr. Suthern, 200,500; Mr. Vuolo, 93,033; Mr. Weis,
       106,167; Mr. Wygod, 256,000; and all directors and executive officers as
       a group, 1,471,700.  Includes 1,461 shares of Common Stock allocated to
       the account of Mr. Hannah, 100 shares of Common Stock allocated to the
       account of Mr. Marrero, 105 shares of Common Stock allocated to the
       account of Mr. Mele and 100 shares of Common Stock allocated to the
       account of Mr. Vuolo under the Porex Technologies Corp. 401(k) Savings
       Plan as of June 30, 1997.

  (3)  The number of shares of Common Stock deemed outstanding includes:  
       (i) 17,650,965 shares of Common Stock outstanding as of September 15, 
       1997,
       (ii) the number of shares of Common Stock that the respective persons
       named in the above table have the right to acquire presently or within 60
       days of September 15, 1997 upon exercise of stock options and (iii) the
       number of shares of Common Stock that the respective persons named in the
       above table have the right to acquire upon conversion of Convertible
       Debentures.

  (4)  Includes 200 shares of Common Stock owned by Dr. Goldstein's spouse, as
       to which Dr. Goldstein disclaims beneficial ownership.

                                       15
<PAGE>
 
  (5)  Does not include 3,500 shares of Common Stock and shares of Common Stock
       issuable upon conversion of $1,500,000 principal amount of Convertible
       Debentures owned by Medco Containment Services Foundation, Inc., a
       charitable foundation of which Messrs. Manning, Suthern and Wygod are
       trustees and share voting and dispositive power.

  (6)  Does not include 105,350 shares of Common Stock and shares of Common
       Stock issuable upon conversion of $500,000 principal amount of
       Convertible Debentures owned by the Rose Foundation, a private charitable
       foundation of which Messrs. Wygod and Mele are trustees and share voting
       and dispositive power.

  (7)  Includes 14,705 shares of Common Stock owned by a charitable foundation
       of which Mr. Sarkowsky is a director.

  (8)  Includes 3,050 shares of Common Stock owned by a corporation of which Mr.
       Weis is the sole stockholder, sole director and president and 3,200
       shares of Common Stock held in trust for Mr. Weis's children.

  (9)  Includes 2,000 shares of Common Stock beneficially owned by Mr. Wygod's
       spouse, as to which shares Mr. Wygod disclaims beneficial ownership.  See
       also "Footnote 2 to Principal Stockholders Table".

                                       16
<PAGE>
 
  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


       PURCHASE AND SALE AGREEMENT; DIVESTITURE.  On December 14, 1994, pursuant
  to the Purchase and Sale Agreement dated as of May 24, 1994 between the
  Company and Merck (the "Purchase and Sale Agreement"), the Company purchased
  5,268,463 shares of the Company's Common Stock from Merck for an aggregate
  purchase price of $37,764,019.  At the time of the purchase by the Company, SN
  Investors purchased 5,061,857 shares of the Company's Common Stock (the "Wygod
  Shares" and, collectively with the shares purchased by the Company, the
  "Shares") from Merck for an aggregate purchase price of $36,283,079.  The
  purchase prices for the Shares stated above reflect a final purchase price
  adjustment, pursuant to the terms of the Purchase and Sale Agreement, in the
  amount of $2,331,256 that was paid by the Company to Merck on July 31, 1996,
  $1,142,315 of which was reimbursed to the Company by SN Investors.  The
  purchase by SN Investors was made pursuant to an assignment by the Company to
  Mr. Wygod of the right to purchase the Wygod Shares pursuant to the Investment
  Agreement between Mr. Wygod and the Company, dated as of September 13, 1994
  (the "Investment Agreement").  Mr. Wygod, as permitted under the Investment
  Agreement, further assigned to SN Investors his right to purchase the Wygod
  Shares.  The Investment Agreement governs the terms and conditions under which
  the Wygod Shares will be held by Mr. Wygod and his permitted assignees and
  transferees.  See "--Investment Agreement."


       Also on December 14, 1994, the Company consummated the sale (the
  "Divestiture") of the subsidiaries conducting the Company's institutional
  pharmacies business (the "Institutional Pharmacies Business") to Pharmacy
  Corporation of America, an indirect, wholly owned subsidiary of Beverly
  Enterprises, Inc. ("Beverly"), for approximately $107,300,000.


       In the Purchase and Sale Agreement, the Company agreed, until May 24,
  1999, to be bound by the restrictions contained in the Consulting Agreement
  described below under "--Consulting Agreement," provided that such
  restrictions shall be of no further force and effect in the event of the death
  of Mr. Wygod, or if Mr. Wygod ceases to be a director of the Company or any
  subsidiary of the Company, ceases to have any ownership interest in the
  Company (provided that if the Company is a public company he may have up to a
  1% equity interest in the Company), and is not a principal, agent or employee
  of or consultant to the Company or any subsidiary of the Company, or is not
  otherwise rendering any services to the Company or any subsidiary of the
  Company.


       Pursuant to the terms of the Purchase and Sale Agreement, options to
  purchase common stock of Merck and its subsidiaries (other than the Company
  and its subsidiaries) previously granted to certain employees and consultants
  were modified so that employment by or consulting services to the Company or
  its subsidiaries (in the case of employees and consultants continuing with the
  Company after the closing of the Purchase) or Beverly or its subsidiaries (in
  the case of employees and consultants continuing with the Institutional
  Pharmacies Business after the closing of the Divestiture) will be considered
  employment by or consulting services to Merck and its subsidiaries for
  purposes of vesting and continued exercisability of such options; provided
  that no further vesting of such options occurred after June 1, 1996.


       INVESTMENT AGREEMENT.  In the Investment Agreement, the Company assigned
  the rights and obligations to purchase the Wygod Shares to Mr. Wygod.  The
  Investment Agreement governs the terms and conditions under which the Wygod
  Shares will be held by Mr. Wygod and his permitted assignees and transferees.
  Mr. Wygod, as permitted under the Investment Agreement, assigned such rights
  and obligations to SN Investors.  Pursuant to the Investment Agreement, SN
  Investors was (1) required to be a limited partnership in which Mr. Wygod or
  an entity controlled by Mr. Wygod is the general partner and one or more of
  his family trusts and/or partnerships (collectively, the "Wygod Entities")
  and/or independent third parties are limited partners and (2) required to
  agree to be bound by all of the restrictions and obligations applicable to Mr.
  Wygod under the Investment Agreement.  The Investment Agreement required the
  initial investment of the Wygod Entities in SN Investors to be at least
  $20,000,000 (on a cost basis) (the "Wygod Investment").

                                       17
<PAGE>
 
       The Investment Agreement provides that, until the earliest to occur of
  (a) December 14, 1998, (b) the death or adjudication of incompetency of Mr.
  Wygod or (c) a Change of Control (as defined in the Investment Agreement) (the
  "Restriction Period"), in respect of the Wygod Investment, except to the
  extent of proceeds from sales of the Wygod Shares pursuant to a tender or
  exchange offer for shares of Common Stock that is not opposed by the Board of
  Directors of the Company, the Wygod Entities will at all times maintain
  (directly and/or through SN Investors) at least $20,000,000 (on a cost basis)
  in the Wygod Investment and will not cause or allow the amount of the Wygod
  Investment (on a cost basis) to be less than $20,000,000 (net of any
  disposition, transfer, pledge, distribution by SN Investors or any other
  arrangement involving the transfer of ownership or interests in Wygod Shares
  (or proceeds therefrom), but not taking into account any reduction in the
  Wygod Investment by virtue of a decline in the value of Wygod Shares).


       A "Change of Control" under the Investment Agreement means:  (a) the
  acquisition by any person, entity or group of at least 50% of the voting power
  of the voting securities of the Company other than the Wygod Shares; (b)
  individuals who, as of the date of the Investment Agreement, constitute the
  Board of Directors of the Company (the "Incumbent Board") ceasing for any
  reason to constitute at least a majority of the Board of Directors (provided
  that directors whose nomination or election was approved by the Incumbent
  Board are also generally deemed to be part of the Incumbent Board); (c) a
  reorganization, merger or consolidation or sale or other disposition of all or
  substantially all of the assets of the Company (a "Business Combination"),
  excluding, however, such a Business Combination pursuant to which (i) all or
  substantially all of the individuals and entities who were the beneficial
  owners of the Company's voting securities immediately prior to such Business
  Combination beneficially own more than 60% of, respectively, the then-
  outstanding shares of common stock and the combined voting power of the then-
  outstanding securities entitled to vote generally in the election of directors
  of the corporation resulting from such Business Combination, in substantially
  the same proportions as their ownership immediately prior to such Business
  Combination of the Company's voting securities, and (ii) at least a majority
  of the board of directors of the resulting corporation were members of the
  Incumbent Board at the time of the execution of the initial agreement or of
  the action of the Board of Directors providing for such Business Combination;
  (d) a complete liquidation or dissolution of the Company; or (e) the issuance
  by the Company following the closing of the Purchase of shares of Common Stock
  constituting in the aggregate more than 50% of the shares of Common Stock
  outstanding as of immediately following the closing of the Purchase.  As of
  September 15, 1997, the Company had issued 5,141,256 shares of Common Stock
  since the closing of the Purchase.  Accordingly, the issuance of an aggregate
  of 1,113,599 additional shares of Common Stock would be a "Change of Control"
  as defined in clause (e) above.


       Pursuant to the Investment Agreement, during the Restriction Period:  (a)
  Mr. Wygod and SN Investors are required to vote (or cause to be voted) the
  Wygod Shares (i) with respect to election of directors, for the nominees who
  would have been elected based on the vote of all shares of Common Stock, other
  than the Wygod Shares, in proportion to the votes that such nominees received,
  and (ii) on all other matters to come before the stockholders of the Company,
  in the same manner as a majority of the outstanding shares of Common Stock
  (other than the Wygod Shares) are voted; and (b) except for sales pursuant to
  a tender or exchange offer for the shares of Common Stock that is not opposed
  by the Board of Directors of the Company, neither Mr. Wygod nor SN Investors
  may transfer interests in the Wygod Shares (except that Mr. Wygod may transfer
  interests in SN Investors to the extent otherwise permitted by the Investment
  Agreement).  Upon the expiration of the obligations of Mr. Wygod and SN
  Investors described in this paragraph, Mr. Wygod and SN Investors may be in a
  position to influence the election of the Company's Board of Directors as well
  as the direction and future operations of the Company.


       Under the Investment Agreement, following the earlier to occur of (a)
  December 14, 1998 or (b) the death or adjudication of incompetency of Mr.
  Wygod:  (i) to the extent the Wygod Entities and/or SN Investors retain the
  power to vote Wygod Shares that have, in the aggregate, in excess of 20% of
  the voting power of the Company's voting securities outstanding at the time of
  any vote by stockholders of the Company, Mr. Wygod and SN Investors will vote
  (or cause to be voted) the portion of such Wygod Shares representing the
  excess above 20% of such voting power, (A) with respect to the election of
  directors, for the nominees who would have been elected

                                       18
<PAGE>
 
  based on the vote of all shares of Common Stock, other than the Wygod Shares,
  in proportion to the votes that such nominees received, and (B) on all other
  matters to come before the stockholders of the Company, in the same manner as
  a majority of the outstanding shares of Common Stock, other than the Wygod
  Shares, are voted; and (ii) to the extent that Wygod Entities and/or SN
  Investors retain beneficial ownership of Wygod Shares that have, in the
  aggregate, in excess of 20% of the voting power of the outstanding voting
  securities of the Company, the portion of such Wygod Shares representing the
  excess above 20% of such voting power at the time of any proposed sale or
  transfer thereof shall not be sold or transferred except (A) to transferees
  reasonably acceptable to the Company (provided that, without the Company's
  consent, no such transfer or series of transfers to a single person, entity or
  group will involve the transfer of more than 9.9% of the voting power of the
  Company's outstanding voting securities and no such transfer or series of
  transfers will be made to a single person, entity or group that will own,
  following such transfers, more than 50% of the voting power of the Company's
  outstanding voting securities), (B) to the partners of SN Investors in
  proportion to their respective interests in SN Investors (provided that,
  without the Company's consent, no such transfer or series of transfers to a
  single person, entity or group (other than Mr. Wygod or the Wygod Entities)
  will involve the transfer of more than 9.9% of the voting power of the
  Company's outstanding voting securities), (C) in ordinary open market
  transactions, or (D) pursuant to an underwritten public offering.


       The Investment Agreement provides that the restrictions described in the
  foregoing paragraph will not apply (a) in the event there has been, or from
  and after the occurrence of, a Change of Control (as defined in the Investment
  Agreement) of the Company, (b) at any time after December 14, 2004 or (c) to
  any person or entity, other than Mr. Wygod, the Wygod Entities or SN
  Investors, to whom Wygod Shares are transferred (including by means of
  distributions from SN Investors) in accordance with the provisions of the
  foregoing paragraph.


       The Investment Agreement also provides certain demand registration rights
  to Mr. Wygod at Mr. Wygod's expense that are assignable to any permitted
  transferee of the Wygod Shares; provided that, in no event is the Company
  required to file in the aggregate more than two registration statements in
  connection therewith.  Mr. Wygod has not assigned such registration rights to
  SN Investors.  While Mr. Wygod currently intends to assign such registration
  rights to SN Investors in the event the General Partner determines to sell or
  otherwise transfer the Wygod Shares under circumstances in which registration
  would be required, Mr. Wygod is under no obligation to do so.


       Certain provisions of the Investment Agreement may have the effect of
  deterring a change of control of the Company that is not supported by the
  Board of Directors of the Company or Mr. Wygod.  During the Restriction
  Period, Mr. Wygod and SN Investors are prohibited from transferring the Wygod
  Shares, except pursuant to a tender or exchange offer that is not opposed by
  the Board of Directors of the Company or to specified permitted transferees.
  In addition, under the Investment Agreement, in the event that a Change of
  Control (as defined in the Investment Agreement) were to occur during the
  Restriction Period, Mr. Wygod and SN Investors would no longer be obligated
  under the Investment Agreement to vote the Wygod Shares with respect to
  nominees for election as directors based on the vote of shares other than the
  Wygod Shares and with respect to other matters in the same manner as the
  majority of the other outstanding shares of Common Stock (other than the Wygod
  Shares) are voted, with the result that Mr. Wygod and SN Investors would have
  unrestricted voting power with respect to the Wygod Shares.  The effect of
  these provisions of the Investment Agreement may be to discourage the
  commencement of a tender or exchange offer opposed by the Board of Directors
  of the Company during the Restriction Period and to discourage a proxy
  solicitation to change a majority of the Board of Directors of the Company
  absent the support of Mr. Wygod.


       CONSULTING AGREEMENT.  In the Consulting Agreement, dated as of May 24,
  1994 (the "Consulting Agreement"), by and among Mr. Wygod, Merck and Medco,
  Mr. Wygod has agreed that, until May 24, 1999, absent Merck's prior written
  approval, he will not (as principal, agent, employee, consultant or otherwise)
  directly or indirectly engage in activities with, nor render services to, any
  business engaged or about to become engaged in a Competitive Business (as
  defined in the Consulting Agreement).  A "Competitive Business" is defined in
  the Consulting Agreement as:  (a) the pharmaceutical business of Merck and its
  affiliates (unless such business is subsequently disposed of and Mr. Wygod did
  not have material involvement in such business during the two-year period
  preceding May 24, 1994), (b) the business, as of either November 18, 1993 or
  May 24, 1994, of Medco

                                       19
<PAGE>
 
  and its subsidiaries (unless such business is subsequently disposed of and Mr.
  Wygod did not have material involvement in such business during the two-year
  period preceding May 24, 1994), other than the business of Porex and the other
  plastic businesses of the Company as conducted as of May 24, 1994, or (c) any
  other then-current business of Merck and its affiliates as to which Mr. Wygod
  became materially involved following November 18, 1993; provided, however,
  that the Consulting Agreement permits Mr. Wygod to have a 1% or less equity
  interest in a Competitive Business that is a public corporation.  In addition,
  the Consulting Agreement provides that, until May 24, 1999, Mr. Wygod will
  not, directly or indirectly:  (i) solicit or contact any customer or
  prospective customer of Medco and/or any of its affiliates as to matters that
  relate to a Competitive Business in which Medco or its affiliates is then
  engaged or which is in any way inconsistent or interferes therewith; (ii)
  induce, or attempt to induce, any employees or agents or consultants of Medco
  and/or its affiliates to do anything from which Mr. Wygod is restricted by
  reason of the Consulting Agreement; or (iii) offer or aid others to offer
  employment to any employees of Medco or its affiliates.


       OTHER. The Company was reimbursed approximately $121,600 and $49,500 by a
  corporation controlled by Mr. Wygod for the partial use of two of the
  Company's office facilities and for services rendered by one Company employee
  during the fiscal years ended June 30, 1997 and 1996, respectively.

                                       20
<PAGE>
 
                                    PART IV



  ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
            ON FORM 8-K.


       (a)(1)-(2) Financial Statements and Schedules:

                  The financial statements and schedules listed in the
                  accompanying Index to Consolidated Financial Statements and
                  Supplemental Data at page F-l are filed as part of this
                  Report.


       (a)(3)     Index to Exhibits:

                  See Index to Exhibits on page E-1.


       (b)        Reports on Form 8-K:

                  None.

                                       21
<PAGE>
 
                                   SIGNATURES



       Pursuant to the requirements of Section 13 or 15(d) of the Securities
  Exchange Act of 1934, the Registrant has duly caused this report to be signed
  on its behalf by the undersigned thereunto duly authorized.



                                    SYNETIC, INC.



  Date:  October 1, 1997            By:      /s/ Charles A. Mele
                                         ------------------------------------
                                         Name:  Charles A. Mele
                                         Title:  Vice President-General Counsel

                                       22
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                             AND SUPPLEMENTAL DATA



     The following financial statements of the Registrant and its subsidiaries
required to be included in Item 14.(a) (1) of Form 10-K are listed below:
 
                                                              PAGE
                                                              ----

     Report of Independent Public Accountants...............  F-2
 
     Consolidated Balance Sheets at June 30, 1997 and 1996..  F-3
 
     Consolidated Statements of Income for the
       Years Ended June 30, 1997, 1996 and 1995.............  F-5
 
     Consolidated Statements of Changes in
       Stockholders' Equity for the Years Ended
       June 30, 1997, 1996 and 1995.........................  F-6
 
     Consolidated Statements of Cash Flows for the
       Years Ended June 30, 1997, 1996 and 1995.............  F-7
 
     Notes to Consolidated Financial Statements.............  F-8

     The following financial statement supplementary data of the Registrant and
its subsidiaries required to be included in Item 14.(a) (2) of Form 10-K are
listed below:

                                                              PAGE
                                                              ----
     Schedule II - Valuation and Qualifying
       Accounts.............................................  S-1

     All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in the notes thereto.  Columns omitted from schedules filed have
been omitted because the information is not applicable.

     These financial statements have been prepared from the Company's books and
records after making all necessary adjustments thereto, and they represent the
final statements for the period under audit.

                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



TO SYNETIC, INC.:

     We have audited the accompanying consolidated balance sheets of Synetic,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
These consolidated financial statements and the schedule referred to below are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Synetic, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The schedule listed in the index to
consolidated financial statements and supplemental data is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements.  This schedule has been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.



                                       ARTHUR ANDERSEN LLP


New York, New York
September 24, 1997

                                      F-2
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
                                        
                                     ASSETS

<TABLE>
<CAPTION>
 
 
                                                                JUNE 30,
                                                          -------------------
                                                            1997       1996
                                                          -------------------
<S>                                                       <C>        <C>     
CURRENT ASSETS:
     Cash and cash equivalents..........................  $ 77,303   $ 22,210
     Marketable securities..............................    11,765    140,268
     Accounts receivable, net of allowances for
       doubtful accounts and sales returns of $739 and
       $671 at June 30, 1997 and 1996, respectively.....     9,094      7,299   
     Inventories........................................     5,505      5,253
     Other current assets...............................     9,233      4,821
                                                          --------   --------
       Total current assets.............................   112,900    179,851
                                                          --------   --------
 
PROPERTY, PLANT AND EQUIPMENT:
     Land and improvements..............................     1,613        823
     Buildings and improvements.........................     9,911      8,992
     Machinery and equipment............................    23,444     19,295   
     Furniture and fixtures.............................     3,283      2,856
     Construction in progress...........................     2,516      1,306
                                                          --------   --------
                                                            40,767     33,272
     Less:  Accumulated depreciation....................   (18,681)   (16,014)
                                                          --------   --------
 
       Property, plant and equipment, net...............    22,086     17,258
                                                          --------   --------
 
OTHER ASSETS:
     Marketable securities..............................   226,760          -
     Other..............................................    20,357      2,483
                                                          --------   --------
        Total other assets..............................   247,117      2,483
                                                          --------   --------
                                                          $382,103   $199,592
                                                          ========   ========
 
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                      F-3
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
                                        
                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
 
 
                                                                          JUNE 30,
                                                                  -------------------------
                                                                       1997         1996
                                                                  -------------------------
<S>                                                               <C>           <C>
 
CURRENT LIABILITIES:
     Accounts payable...........................................     $  2,344     $  1,303
     Accrued liabilities........................................       14,203        7,014
     Income taxes payable.......................................        3,044        5,206
                                                                     --------     --------
       Total current liabilities................................       19,591       13,523
                                                                     --------     --------
 
LONG TERM DEBT, LESS CURRENT PORTION............................      165,000            -
 
OTHER LIABILITIES...............................................        8,776        4,980
 
COMMITMENTS AND CONTINGENCIES (NOTE 10)
 
STOCKHOLDERS' EQUITY:
     Preferred stock, $.01 par value; 10,000,000 shares
       authorized; none issued..................................            -            -
     Common stock, $.01 par value; 50,000,000 shares
       authorized; 22,865,149 and 22,007,290 shares issued;
       17,564,980 and 16,738,827 shares issued and outstanding
       at June 30, 1997 and 1996, respectively..................          229          220
     Paid-in capital............................................      196,212      158,227
     Treasury stock, at cost; 5,300,169 and 5,268,463
       at June 30, 1997 and 1996, respectively..................      (39,462)     (36,575)
     Retained earnings..........................................       31,757       59,217
                                                                     --------     --------
       Total stockholders' equity...............................      188,736      181,089
                                                                     --------     --------
                                                                     $382,103     $199,592
                                                                     ========     ========
 
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                      F-4
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                     (in thousands, except per share data)
<TABLE>
<CAPTION>
 
 
                                                      YEARS ENDED JUNE 30,
                                                  -----------------------------
                                                    1997       1996      1995
                                                  ---------  --------  --------
<S>                                               <C>        <C>       <C>
 
Net sales.......................................  $ 52,885   $45,128   $39,179
                                                  --------   -------   -------
 
Costs and expenses:
  Cost of sales.................................    29,035    25,108    23,006
  Selling, general and administrative...........    20,841    14,930    12,125
  Interest and other income.....................   (11,065)   (3,952)   (4,757)
  Dividend income...............................    (1,829)   (4,160)   (2,555)
  Interest expense..............................     3,116         -     3,619
  Purchased research and development and other..    37,413         -         -
  Purchase and Sale Agreement related expenses
     and other..................................         -         -     6,663
                                                  --------   -------   -------
                                                    77,511    31,926    38,101
                                                  --------   -------   -------
 
Income (loss) from continuing operations
  before provision for income taxes.............   (24,626)   13,202     1,078
 
Provision for income taxes......................     2,834     4,617       443
                                                  --------   -------   -------
Income (loss) from continuing operations........  $(27,460)  $ 8,585   $   635
                                                  --------   -------   -------
 
Discontinued operations:
  Income from discontinued operations,
  net of provision for income taxes
  of $842.......................................         -         -       963
 
Gain on sale of Institutional Pharmacy
  operations, net of taxes of $23,037...........         -         -    14,496
                                                  --------   -------   -------
 
Net income (loss)...............................  $(27,460)  $ 8,585   $16,094
                                                  ========   =======   =======
 
Net income (loss) per share:
  Continuing operations.........................    $(1.60)     $.48   $   .04
  Discontinued operations.......................         -         -       .89
                                                  --------   -------   -------
 
Net income (loss) per share.....................    $(1.60)     $.48   $   .93
                                                  --------   =======   =======
 
Weighted average shares outstanding.............    17,133    18,026    17,379
                                                  ========   =======   =======
 
</TABLE>

 The accompanying notes are an integral part of these consolidated statements.

                                      F-5
<PAGE>
 
                       SYNETIC, INC. AND SUBSIDIARIES   
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>
                                                       Common Stock
                                                   --------------------
                                                      Number                                                 TOTAL
                                                        of               PAID-IN   RETAINED   TREASURY   STOCKHOLDERS'
                                                      Shares     AMOUNT  CAPITAL   EARNINGS     STOCK        EQUITY
                                                   ------------  ------  --------  ---------  ---------  --------------
<S>                                                <C>           <C>     <C>       <C>        <C>        <C>
 
Balance, June 30, 1994...........................        17,621    $176  $ 70,416  $ 34,538          -        $105,130
                                                         ------    ----  --------  --------   --------        --------
 
  Net income.....................................             -       -         -    16,094          -          16,094
 
  Issuance of common stock for exercise of
    stock options and 401(k) plan................           368       4     5,200         -          -           5,204
 
  Issuance of common stock for
    conversion of debentures.....................         3,877      39    76,940         -          -          76,979
 
  Purchase of 5,268,463 shares
    of common stock for Treasury.................             -       -         -         -    (36,575)        (36,575)
                                                         ------    ----  --------  --------   --------        --------
 
Balance, June 30, 1995...........................        21,866    $219  $152,556  $ 50,632   $(36,575)       $166,832
                                                         ------    ----  --------  --------   --------        --------
 
  Net income.....................................             -       -         -     8,585          -           8,585
 
  Issuance of common stock for exercise of
    stock options and 401(k) plan................           141       1     5,671         -          -           5,672
                                                         ------    ----  --------  --------   --------        --------
 
Balance, June 30, 1996...........................        22,007    $220  $158,227  $ 59,217   $(36,575)       $181,089
                                                         ------    ----  --------  --------   --------        --------
 
  Net (loss).....................................             -       -         -   (27,460)         -         (27,460)
 
  Issuance of common stock for exercise of
    stock options and 401(k) plan................           323       3    13,503         -          -          13,506
 
  Issuance of common stock and warrants for 
    acquisitions of Avicenna and CareAgents......           535       6    24,482         -          -          24,488
                              
 
  Adjustment to purchase price of Treasury
    stock........................................             -       -         -         -     (1,712)         (1,712)
 
  Purchase of 49,506 shares of common stock
    for Treasury, net of 17,800 shares reissued..             -       -         -         -     (1,175)         (1,175)
                                                         ------    ----  --------  --------   --------        --------
 
Balance, June 30, 1997...........................        22,865    $229  $196,212  $ 31,757   $(39,462)       $188,736
                                                         ======    ====  ========  ========   ========        ========
</TABLE>
 The accompanying notes are an integral part of these consolidated statements.

                                      F-6
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
 
                                                                     YEARS ENDED JUNE 30,
                                                              ----------------------------------
                                                                 1997        1996        1995
                                                              ----------  ----------  ----------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ (27,460)  $   8,585   $  16,094
  Adjustments to reconcile net income (loss) to net
     cash provided by operating activities:
     Write-off of purchased research and development costs..     37,413           -           -
     Income from discontinued operations....................          -           -        (963)
     Gain on sale of Institutional Pharmacy
     business...............................................          -           -     (14,496)
     Other expense..........................................          -           -       1,056
     Depreciation and amortization..........................      3,294       2,619       1,545
     Deferred income taxes..................................     (2,100)       (254)       (301)
 
  Changes in operating assets and liabilities,
     net of the effects of acquisitions:
       Accounts receivable, net.............................       (795)       (634)     (1,056)
       Inventories..........................................        147         193         804
       Other assets.........................................     (7,184)       (173)     (3,365)
       Accounts payable.....................................        776         655        (423)
       Accrued liabilities..................................      1,690      (2,323)      1,206
       Other liabilities....................................         48           -       4,980
       Income taxes payable.................................      3,188       2,625         946
                                                              ---------   ---------   ---------
          Net cash provided by
            operating activities............................      9,017      11,293       6,027
                                                              ---------   ---------   ---------
 
  Cash flows from investing activities:
     Sales of marketable securities.........................    396,638     708,685     383,064
     Purchases of marketable securities.....................   (494,895)   (704,099)   (430,916)
     Capital expenditures...................................     (6,063)     (2,790)     (3,398)
     Net proceeds from sale of Institutional
       Pharmacy business....................................          -           -      82,911
     Net cash paid for acquired businesses..................    (10,612)          -           -
                                                              ---------   ---------   ---------
 
          Net cash provided by (used for)
            investing activities............................   (114,932)      1,796      31,661
                                                              ---------   ---------   ---------
 
  Cash flows from financing activities:
     Purchases of Treasury stock............................     (3,570)          -     (36,575)
     Proceeds from issuance of stock options and
       401(k) purchases.....................................      3,688       1,838       4,369
     Proceeds from issuance of Convertible Debentures,
       net of underwriting discount.........................    160,890           -           -
     Payments on long-term debt.............................          -        (216)     (3,532)
                                                              ---------   ---------   ---------
          Net cash provided by (used for)
            financing activities............................    161,008       1,622     (35,738)
                                                              ---------   ---------   ---------
 
  Net increase in cash and cash equivalents.................     55,093      14,711       1,950
  Cash and cash equivalents, beginning of
     period.................................................     22,210       7,499       5,549
                                                              ---------   ---------   ---------
  Cash and cash equivalents, end of period..................  $  77,303   $  22,210   $   7,499
                                                              =========   =========   =========
</TABLE>
 The accompanying notes are an integral part of these consolidated statements.

                                      F-7
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  On November 18, 1993, Medco Containment Services, Inc. ("Medco") became a
wholly-owned subsidiary of Merck & Co., Inc. ("Merck").  As a result of this
transaction, Merck acquired voting control of Synetic, Inc. (the "Company").

  On May 24, 1994, Merck and the Company entered into a Purchase and Sale
Agreement (the "Agreement") by which the Company and its Chairman, Martin J.
Wygod, would purchase the Company's common stock owned by Merck.  As part of
this Agreement, the Company agreed to divest its Institutional Pharmacy
business.  On December 14, 1994, the Company consummated the transactions
described above pursuant to which (1) the Company sold its Institutional
Pharmacy business to Pharmacy Corporation of America ("PCA") for $107.3 million,
subject to certain closing adjustments, and (2) the Company and a limited
partnership, whose general partner is controlled by the Company's Chairman,
purchased from Merck the 10,330,320 shares of the Company's common stock held by
Merck.

  The Company has granted stock options with an exercise price below fair market
value on the date of award to certain officers in recognition of their
contribution in completing these transactions.  Accordingly, included in
Purchase and Sale Agreement related expenses and other in the accompanying
financial statements for the fiscal year ended June 30, 1995, the Company
recorded a non-recurring charge of approximately $5 million relating to such
stock options in conjunction with the consummation of these transactions.

  Principles of Consolidation--

  The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned operating subsidiaries, Porex Technologies Corp.
and subsidiaries ("Porex"), Avicenna and CareAgents, after elimination of all
material intercompany accounts and transactions.  On December 14, 1994, the
Company sold its Institutional Pharmacy business to Pharmacy Corporation of
America, a wholly-owned subsidiary of Beverly Enterprises, Inc., for
approximately $107.3 million in cash, subject to certain closing adjustments.
As a result of this transaction, the Company recorded an after-tax gain of
$14,496,000.  The consolidated financial statements for the fiscal year ended
June 30, 1995 report separately as discontinued operations the net assets and
operating results of the Institutional Pharmacy business.

  For the year ended June 30, 1997, the operations of the Company were primarily
related to its plastics technology business.  All revenues and a significant
majority of operating expenses were derived from these operations.  The
consolidated financial statements for the fiscal year ended June 30, 1997
include certain costs associated with the Company's efforts in developing its
healthcare communications business.

         Cash and Cash Equivalents--

     The Company considers all liquid investment instruments with an original
maturity of three months or less to be the equivalent of cash for purposes of
balance sheet presentation and for the consolidated statements of cash flows.
These short-term investments are stated at cost, which approximates market.

     Marketable Securities--

     Marketable securities consisted primarily of U.S. Treasury Notes and
Federal Agency Notes at June 30, 1997 and U.S. Treasury Notes, Federal Agency
Notes and Money Market Preferred Stock investments at June 30, 1996.  These
investments, which are carried at a cost of $238,525,000 and $140,268,000, net
of unamortized premium, at June 30, 1997 and June 30, 1996, respectively, had an
aggregate market value of $238,151,000 and $140,537,000 at June 30, 1997 and
1996, respectively.  At June 30, 1997, gross unrealized losses pertaining to
marketable securities and other investments were $374,000.  Gains and losses on
the sale of marketable securities and other investments are calculated using the
specific identification method.

                                      F-8
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

     Investments in Debt and Equity Securities--

     Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This Statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. At June 30, 1997, the
Company's investments consisted principally of U.S. Treasury Notes and Federal
Agency Notes. The U.S. Treasury Notes and Federal Agency Notes maturing January
2002 through March 2002 are classified as held-to-maturity and are carried at
cost, net of unamortized premium.

     Inventories--

     Inventories are stated at the lower of (first-in, first-out) cost or
market.  Cost includes raw materials, direct labor, and manufacturing overhead.
Market is based on current replacement cost for raw materials and supplies and
on net realizable value for work-in-process and finished goods.  Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
 
                                 JUNE 30,
                              --------------
                               1997    1996
                              ------  ------
<S>                           <C>     <C>
Raw materials and supplies..  $2,672  $2,468
Work-in-process.............     347     548
Finished goods..............   2.486   2,237
                              ------  ------
                              $5,505  $5,253
                              ======  ======
</TABLE>

     Property, Plant and Equipment--

     Property, plant and equipment are stated at cost.  For financial reporting
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets.  Annual depreciation rates range from
2% to 5% for buildings and improvements and from 9% to 33% for machinery and
equipment and furniture and fixtures.  For income tax purposes, certain assets
are depreciated using accelerated methods.  Expenditures for maintenance, repair
and renewals of minor items are charged to operations as incurred.  Major
betterments are capitalized.

     Development Costs--

     The Company capitalizes costs incurred for the production of computer
software used in the sale of its services.  Costs capitalized include direct
labor and related overhead for software produced by the Company and the costs of
software purchased from third parties.  All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established.  Once
technological feasibility has been established, such costs are capitalized until
the software is commercially available.  Such costs are recorded at the lower of
unamortized cost or net realizable value.  For the year ended June 30, 1997,
capitalized costs were not material and no costs were capitalized in previous
years.

     Company-sponsored development costs related to both present and future
products are expensed currently.  Total development expenses were $6,419,000,
$2,014,000, and $1,490,000 for the years ended June 30, 1997, 1996 and 1995,
respectively, of which $4,628,000 in 1997 related to the healthcare
communications business.

                                      F-9
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

     Accrued Liabilities--

     Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                             JUNE 30,
                                          ---------------
                                           1997     1996
                                          -------  ------
<S>                                       <C>      <C>
     Accrued payroll and benefit costs..  $ 4,633  $3,568
     Accrued interest...................    2,957       -
     Accrued acquisition costs..........    3,236       -
     Accrued legal costs................    1,575   1,890
     Other..............................    1,802   1,556
                                          -------  ------
         Total..........................  $14,203  $7,014
                                          =======  ======
</TABLE>
     Income Taxes--

     The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which uses the liability method to calculate deferred income taxes.  The
realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income.

     Foreign Currency Translation--

     The financial statements and transactions of Porex's foreign manufacturing
facilities are maintained in their functional currency (Deutsche mark and Pound
sterling) and translated into U.S. dollars.  The adjustments which result from
the process of translating these financial statements are not material and,
therefore, are not separately disclosed in the accompanying consolidated
financial statements.

     Revenue Recognition--

     The Company designs, manufactures and distributes porous and solid plastic
components and products used in healthcare, industrial and consumer
applications.  Revenue is recognized upon product shipment, net of sales returns
and allowances.

     Net Income (Loss) Per Share--

     Net income (loss) per share is determined by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
fiscal year and, if dilutive, common stock equivalents.  Common stock
equivalents consist of common stock which may be issuable upon exercise of
outstanding stock options as calculated using the treasury stock method.  The
Debentures, if converted, would not have had a dilutive effect on net income per
share for the periods presented.

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128").  The new standard simplifies the computation of net income per share and
increases comparability to international standards.  Under SFAS No. 128, primary
net income per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period.  Diluted net income per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.

                                      F-10
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

     The Company is required to adopt the new standard during fiscal 1998,
beginning with the December 31, 1997 interim consolidated financial statements.
All prior periods presented are required to be restated at that time.  The
pronouncement is not expected to have a material impact on the Company's
reported earnings per share.

     Reclassifications--

     Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.

     Accounting for Stock-Based Compensation--

     Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123").  As permitted by the standard, the Company has elected to continue
following the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), for measurement and
recognition of stock-based transactions with employees.  The Company discloses
on a pro-forma basis both net income and earnings per share as if the fair value
based accounting method were used and the difference between compensation cost
recognized by APB No. 25 and the fair value method of SFAS No. 123.  (See Note
9)

     Use of Estimates--

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

(2)  ACQUISITIONS:

     Avicenna --

     On December 24, 1996, the Company acquired the outstanding equity and
indebtedness (including employee stock options) of Avicenna, a privately-held,
developmental-stage company located in Cambridge, Massachusetts, for 428,643
shares of the Company's common stock and 161,015 shares of the Company's common
stock to be issued in connection with the exercise of employee stock options.
The shares issued are subject to certain limitations restricting the liquidity
and transferability of such shares. The shares were valued, based on an
independent appraisal, at approximately $47.37 per share. As additional
consideration, the Company agreed to issue to certain sellers, nontransferable
warrants covering 250,000 shares of the Company's common stock, exercisable
after December 23, 1998 at a price of $54.50 per share. Avicenna's business plan
has been to market and build Intranets for managed care organizations, hospitals
and physician groups. The acquisition was accounted for using the purchase
method with the purchase price being allocated to assets acquired and
liabilities assumed based on their appraised fair values. Avicenna's results of
operations have been included in the Company's financial statements since
December 24, 1996.

     A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
<CAPTION>
 
<S>                                             <C>      
          Cash                                  $    42
          Short-term investments                    240
          Other assets                              216  
          Property, plant and equipment             759
          Purchased research and development     28,600
          Intangible assets                       1,502
          Goodwill                                  116
                                                -------
                                                $31,475
                                                =======
</TABLE>

                                      F-11
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(2)  ACQUISITIONS: (CONTINUED)

     The amount allocated to purchased research and development of $28,600,000
was determined based on an independent appraisal using established valuation
techniques.  Remaining amounts have been allocated to intangible assets and
goodwill.

     CareAgents--

     On January 23, 1997, the Company acquired CareAgents for 106,029 shares of
the Company's common stock. The shares issued are subject to certain limitations
restricting the liquidity and transferability of such shares. The shares were
valued, based on an independent appraisal, at approximately $30.65 per share.
CareAgents was an early development stage company focused on Internet-based
clinical commerce applications. The acquisition was accounted for using the
purchase method with the purchase price being allocated entirely to purchased
research and development. CareAgents' results of operations have been included
in the Company's financial statements since January 23, 1997. The amount
allocated to purchased research and development of $3,585,000 was determined
based on an independent appraisal using established valuation techniques.

     The following summary, prepared on a pro forma basis, combines the results
of operations of the Company, Avicenna and CareAgents assuming the acquisitions
were consummated at the beginning of the period presented (in thousands, except
per share amount):

                                    Year ended
                                    June 30, 1997
                                    -------------
                                    (unaudited)
          Sales                     $ 52,885
          Net loss                  $(29,381)
          Net loss per share        $  (1.69)

     The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented.  In addition, they are not intended to be a projection of future
results.  The pro forma impact of the Avicenna and CareAgents acquisitions for
the year ended June 30, 1996 was not material.

     Purchased Research and Development and Other--

     The appraisal amounts allocated to purchased research and development of
approximately $28,600,000 and $3,585,000 related to Avicenna and CareAgents,
respectively, were expensed in the periods of acquisition, with no corresponding
tax benefits, as such research and development was in process at the time of the
acquisitions and had no alternative commercial use. In addition, in June 1997,
the Company charged to expense research and development costs of $5,228,000
associated with the acquisition of rights to certain intellectual property and
software technologies to be utilized in the development of the Company's
healthcare communications business.

(3)  Stockholders' Equity:

     In April 1997, the Company announced that its Board of Directors authorized
a repurchase program involving the purchase of the Company's common stock and
outstanding convertible debentures not to exceed $15 million in the aggregate.
For the year ended June 30, 1997, the Company repurchased 49,506 shares at a
cost of approximately $1,858,000 and the Company reissued 17,800 of these shares
for employee stock option exercises.  As of June 30, 1997, 31,706 of the shares
repurchased were included in Treasury stock.

     In January 1997, the Company issued 106,029 shares for the acquisition of
CareAgents and, in December 1996, the Company issued 428,643 shares for the
acquisition of Avicenna.

     In February 1995, the Company issued 3,877,607 shares of its common stock
resulting from the conversion of $79,104,000 aggregate principle amount of its
7% Convertible Subordinated Debentures due December 1, 2001 (the "1991
Debentures").  (See Note 4.)

                                      F-12
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(4)  LONG-TERM DEBT:

     In February 1997, the Company issued to the public $165,000,000 aggregate
principal amount of its 5% Convertible Subordinated Debentures due 2007 (the
"Convertible Debentures").  The Convertible Debentures are convertible at any
time prior to maturity, unless previously redeemed into shares of the Company's
common stock, at a conversion price of $60.00 per share, subject to adjustment
under certain circumstances. In connection with the issuance of the Convertible
Debentures, the Company recorded debt issuance costs of approximately $5.1
million which are included in other assets in the consolidated financial
statements. Such costs are being amortized to interest expense using the
effective interest method over the life of the Convertible Debentures.

     In December 1991, the Company issued to the public $80,500,000 aggregate
principal amount of its 1991 Debentures. The 1991 Debentures were convertible at
any time prior to maturity, unless previously redeemed, into shares of the
Company's common stock at a conversion price of $20.40 per share, subject to
adjustment under certain circumstances. On January 27, 1995, the Company called
for redemption on February 13, 1995 the 1991 Debentures. Holders of $79,104,000
aggregate principal amount of the 1991 Debentures surrendered them for
conversion into an aggregate of 3,877,607 shares of common stock. The remaining
$1,396,000 of the outstanding 1991 Debentures were redeemed at the redemption
price of 104% plus accrued interest. Included in Purchase and Sale Agreement
related expenses and other in the accompanying financial statements for the year
ended June 30, 1995 are approximately $1.1 million of costs associated with the
call for redemption.

(5)    INCOME TAXES:

     The income tax provisions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                      YEARS ENDED JUNE 30,
                                                  ---------------------------
                                                    1997     1996      1995
                                                  --------  -------  --------
<S>                                               <C>       <C>      <C>
Current:
  Federal..........................               $ 4,427   $4,060   $ 2,594
  State............................                   507      811       491
                                                  -------   ------   -------
     Total current.................                 4,934    4,871     3,085
                                                  -------   ------   -------
Deferred:
  Federal..........................                (2,057)    (194)   (2,070)
  State............................                   (43)     (60)     (572)
                                                  -------   ------   -------
     Total deferred................                (2,100)    (254)   (2,642)
                                                  -------   ------   -------
       Total income tax provision..               $ 2,834   $4,617   $   443
                                                  =======   ======   =======
</TABLE>
     A reconciliation of the income tax provision, computed by applying the
federal statutory rate to income before taxes, and the actual provision for
income taxes is as follows:
<TABLE>
<CAPTION>
 
                                                                                             YEARS ENDED JUNE 30,
                                                                                        ----------------------------- 
                                                                                           1997      1996      1995
                                                                                        ---------- --------- -------- 
<S>                                                                                     <C>        <C>       <C> 
Federal statutory rate..............................................................      (35.0)%    35.0%     35.0%
State tax, net of federal benefit...................................................        2.1      3.7      (4.8)
Dividend exclusion..................................................................       (2.0)    (7.7)    (52.3)
Non-deductible research and development.............................................       45.1        -         -
Non-deductible conversion costs.....................................................          -        -      67.6
Other, net..........................................................................        1.4      4.0      (4.4)
                                                                                         --------- --------- -------- 
                                                                                           11.6%    35.0%     41.1%
                                                                                          ========= ========= ======== 
</TABLE> 

                                      F-13
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
 
(5)   Income Taxes: (continued)
 
      Temporary differences resulted in the following deferred tax expense
      (benefit) (in thousands):

<TABLE> 
<CAPTION> 

                                                                           YEARS ENDED JUNE 30,
                                                                       ---------------------------
                                                                         1997     1996      1995
                                                                       -------- --------  --------
<S>                                                                    <C>      <C>       <C> 
Book/tax differences in accounting method            
 for assets acquired.................................                  $   (10)   $ (69)  $    15
Accrued expenses.....................................                     (716)    (140)     (643)
Deferred compensation - stock options................                        -        -    (2,038)
Difference between tax and book depreciation and     
 amortization........................................                   (1,414)     (45)       38
Other, net...........................................                       40        -       (14)
                                                                       -------    -----   -------
                                                                       $(2,100)   $(254)  $(2,642)
                                                                       =======    =====   =======
</TABLE> 

  Deferred tax liabilities (assets) at June 30, 1997, are comprised of the
   following (in thousands):

<TABLE> 
  <S>                                                                <C>    
  Tax over book depreciation and amortization.........               $    (767)
  Intangible assets amortization......................                      64
  Accrued expenses....................................                  (2,417)
  Deferred compensation - stock options...............                  (1,693)
  Inventory...........................................                    (347)
  Prepaids and other..................................                     (62)
                                                                     --------- 
                                                                     $  (5,222)
                                                                     ========= 
</TABLE> 

     In accordance with the disclosure provisions of SFAS No. 109, the Company
has included approximately $2,888,000 and $2,334,000 of deferred tax assets in
other current assets and other assets, respectively, representing the effects of
temporary differences between carrying amounts of assets and liabilities for
financial reporting purposes and the carrying amounts for income tax purposes.

(6)  Major Customers and Foreign and Export Product Sales:

     For the years ended June 30, 1997, 1996 and 1995, no customer accounted for
more than 10% of the Company's net sales.

     Foreign product sales and net income of Porex's foreign manufacturing
facilities, which are made principally in Europe, amounted to $7,854,000 and
$1,247,000; $6,665,000 and $975,000; and $5,381,000 and $397,000 for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.  Identifiable assets of
this facility were not material for the years presented.  Export product sales
of Porex, which are made principally to Europe and Asia, were $6,213,000,
$5,605,000 and $5,022,000 for the fiscal years ended June 30, 1997, 1996 and
1995, respectively.

(7)  Pension and Profit Sharing Plans:

     The Company has defined benefit pension plans covering substantially all of
its employees.  Net pension cost for the years ended June 30, 1997, 1996 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
 
                                  1997     1996    1995
                                --------  ------  ------
<S>                             <C>       <C>     <C>
Service cost..................  $   277   $ 269   $ 240
Interest cost.................      338     310     273
Actual return on plan assets..   (1,377)   (789)   (427)
Net amortization..............      923     447     127
                                -------   -----   -----
  Net pension cost............  $   161   $ 237   $ 213
                                =======   =====   =====
</TABLE>

                                      F-14
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

(7)  PENSION AND PROFIT SHARING PLANS: (CONTINUED)

          The following table sets forth the funded status of the plans and
amounts recognized in the Company's consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
                                                            JUNE 30,
                                                       ------------------
                                                         1997      1996
                                                       --------  --------
<S>                                                    <C>       <C>
     Actuarial present value of benefit obligation:
       Vested benefit obligation.....................  $(3,311)  $(2,944)
       Nonvested benefit obligation..................      (67)      (55)
                                                       -------   -------
       Accumulated benefit obligation................   (3,378)   (2,999)
       Effect of future salary increases.............   (1,600)   (1,548)
                                                       -------   -------
 
     Projected benefit obligation....................   (4,978)   (4,547)
     Plan assets at fair value.......................    6,703     5,105
                                                       -------   -------
 
     Funded status...................................    1,725       558
     Unrecognized net gain...........................   (1,848)     (792)
     Unrecognized net asset..........................     (194)     (216)
     Unrecognized prior service cost.................       56        61
                                                       -------   -------
       Consolidated balance sheets...................  $  (261)  $  (389)
                                                       =======   =======
</TABLE>

  The Company funds the plans through annual contributions representing no less
than the minimum amounts required as computed by actuaries to be consistent with
the plans' objectives and government regulations.  The net pension liability is
included in accrued liabilities.

  Assumptions used in the accounting for the Company's defined benefit plans as
of June 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
 
                                                           1997   1996
                                                           -----  -----
<S>                                                        <C>    <C>
            Discount rate................................   7.5%   7.5%
            Rate of increase in compensation levels......  0%-5%  0%-5%
            Expected long-term rate of return on assets..   8.0%   8.0%
</TABLE> 

            Plan assets consist primarily of debt and equity investments.

     In addition to the defined benefit pension plans discussed above, the
Company maintains a defined contribution profit sharing plan covering
substantially all of its employees.  Participants must be at least 21 years of
age and have completed one year of service and may contribute up to $9,500 of
their earnings annually.  Effective February 1, 1997 the Company matches 50% of
the first 2% and 25% of the second 4% of participants earnings which are
contributed to the plan.  From July 1, 1996 through January 31, 1997 and for the
fiscal years ending June 30, 1996 and June 30, 1995 the Company matched 25% of
the first 4% of participants earnings which were contributed to the plan.  For
the year ended June 30, 1997, the Company issued 3,341 shares of common stock to
the plan.  For the years ended June 30, 1997, 1996 and 1995, Company
contributions were approximately $132,500, $81,000 and $59,100, respectively.

(8)  Related Party Transactions:

     Tax-sharing agreement--

     The Company and Medco had a tax-sharing agreement which provided, among
other things, for the allocation of federal income taxes on a separate company
basis prior to July 6, 1989 and other related matters with respect to income
taxes of the Company.

                                      F-15
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

(8)  RELATED PARTY TRANSACTIONS: (CONTINUED)

     Services agreement--

     Through December 14, 1994, the Company and Medco had a services agreement
pursuant to which Medco provided the Company with various services of its
management.  The Company paid the actual costs of providing these services.
Where actual costs were not available, the Company paid amounts based on
mutually agreed upon allocation methods.  Costs for such services were
approximately $337,000 for the year ended June 30, 1995.  No costs were incurred
under this agreement for the years ended June 30, 1997 and June 30, 1996.

(9)  STOCK OPTIONS:

     In May 1989, the Company adopted two stock option plans, the 1989 Class A
Stock Option Plan (the "Class A Plan") and the 1989 Class B Stock Option Plan
(the "Class B Plan"). In September 1991, the Company adopted the 1991 Special
Non-qualified Stock Option Plan (the "1991 Special Plan") and in December 1991,
the Company adopted the 1991 Director Stock Option Plan (the "Director Plan").
In fiscal 1997, the Company adopted two stock option plans, the 1996 Class C
Stock Option Plan (the "Class C Plan") and the 1997 Class D Stock Option Plan
(the "Class D Plan"), and upon its acquisition of Avicenna, amended and assumed
the Avicenna Systems Corp. 1995 Stock Plan (the "Avicenna Plan"), and converted
options to purchase Avicenna shares into options to purchase the Company's
shares. Non-Qualified stock options are granted under the Class A Plan, Class C
Plan, Class D Plan, the 1991 Special Plan and the Director Plan. Options granted
under the Class B Plan may be either incentive stock options or non-qualified
stock options. Eligibility for the grant of options under the Class A Plan and
the Director Plan are limited to certain of the Company's directors. Eligibility
for the grant of options under the Class B Plan, the Class C Plan, the Class D
Plan and the 1991 Special Plan are limited to the Company's officers, certain
directors, employees, consultants, agents and key contractors. No additional
options may be granted under the Avicenna Plan subsequent to the December 24,
1996 acquisition closing date.

     Except for the Avicenna Plan, no options under the plans may be exercised
during the first year after the date of grant, and options granted under the
Plans become exercisable at a rate of either 20% in each successive year after
the date of grant, or 40% after the second anniversary of the grant and 20% in
each successive year. The Avicenna Plan options vested 50% on December 24, 1996
(the closing date of the Avicenna acquisition) with the remaining 50% vesting on
December 24, 1998 (the second anniversary of the closing date). No options may
be granted under any of the Plans after January 23, 2007, and all options expire
within ten to fifteen years from the date of the grant. Under the Class B, the
Class C, the Class D Plans, the 1991 Special Plan and the Director Plan, the
exercise price may not be less than 100% of the fair market value of the
Company's common stock on the date of grant. Under the Class A Plan, the
exercise price may not be less than 85% of the fair market value of the
Company's common stock on the date of grant. All options granted under the Class
A Plan had an exercise price equal to 100% of the fair market value on the date
of grant. The options granted under the Avicenna Plan were assumed and converted
to the Company's stock options at an exercise price of $1.25 per share and were
included in the acquisition cost of Avicenna. There are 7,920,045 shares
reserved for issuance under the Company's plans.

     In addition to the Company's stock option plans, the Company has granted
options to certain directors, consultants and key employees.  At June 30, 1997,
there were 438,000 options granted to these individuals.  The terms of these
grants are similar to the Company's non-qualified stock option plans.

                                      F-16
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9)  STOCK OPTIONS: (CONTINUED)

     The Company has elected to follow APB No. 25 in accounting for its employee
stock options.  Accordingly, no compensation cost has been recognized for the
Company's option plans.  Had the determination of compensation costs for these
plans been based on the fair value at the grant dates for awards under these
plans, consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:

 
                                1997     1996
                                ----     ----
      Net income (loss):
        As reported          $(27,460)  $8,585
        Pro forma            $(30,746)  $8,190
 
      Earnings per share:
        As reported          $  (1.60)  $ 0.48
        Pro forma            $  (1.79)  $ 0.45

     The pro forma results indicated above are not intended to be indicative of
or a projection of future results.

     The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model.  The following weighted average
assumptions were used for grants in 1997 and 1996:
 
                                            1997         1996
                                            ----         ----
      Expected dividend yield                   0%           0%
      Expected volatility                   .2722        .2722
      Risk-free interest rates                6.5%         6.5%
      Expected option lives (years)      .083-1.74    .083-1.74
 
Weighted average fair
  value of options granted
  during the year                      $     10.11   $     5.08

     A summary of the status of the Company's stock option plans for the three
year period ended June 30, 1997 is presented below:

<TABLE>
<CAPTION>
                                                          Years Ended June, 30
                                      -----------------------------------------------------------
                                              1997               1996                1995
                                      -------------------  ------------------  ------------------
                                                 Weighted            Weighted            Weighted
                                                 Average             Average             Average
                                                 Exercise            Exercise            Exercise
                                       Shares      Price    Shares     Price    Shares     Price
                                       ------    --------   ------   --------   ------  ---------
<S>                              <C>              <C>      <C>         <C>     <C>         <C>
Beginning of year..............       3,746,750    $12.52  3,591,900   $11.50  3,239,830   $12.16
Granted........................       4,047,264    $39.22    366,000   $24.54  1,228,000   $11.37
Exercised......................        (343,990)   $ 9.94   (137,350)  $12.81   (364,570)  $11.82
Canceled.......................        (313,445)   $39.90    (73,800)  $16.13   (511,360)  $15.17
                                      ---------            ---------           ---------
 
End of year....................       7,136,579    $26.58  3,746,750   $12.63  3,591,900   $11.50
                                      =========            =========           =========
 
Exercisable at
  end of year..................       2,379,281            2,160,050           1,846,300
                                      =========            =========           =========
</TABLE> 

                                      F-17
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES      
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(9)  STOCK OPTIONS: (CONTINUED)

The following table summarizes information with respect to options outstanding
and options exercisable at June 30, 1997:

<TABLE>
<CAPTION>
                                            Options Outstanding                   Options Exercisable
                           ---------------------------------------------------  ---------------------------      
                                            Weighted Average       Weighted                     Weighted   
Range of  Exercise           Options            Remaining          Average        Options       Average                
Prices (in dollars)        Outstanding      Contractual Life    Exercise Price  Exercisable  Exercise Price 
------------------         -----------      ----------------    --------------  -----------  -------------- 
<S>                        <C>              <C>                 <C>             <C>          <C> 
$1.25-$5.25                   647,547             3.60              $ 4.75          581,081      $ 5.15     
$6.63-$10.00                  977,000             7.51              $ 9.57          474,200      $ 9.11     
$11.50-$25.00               1,859,600             9.91              $16.32        1,322,400      $15.43     
$31.25-$37.00               2,179,250            12.30              $34.26            1,600      $32.94     
$46.88-$52.56               1,473,182            10.14              $49.07               --          --      
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES:

     Leases--

     The Company leases office and warehouse space, equipment and automobiles
under various noncancellable operating leases.  Rental expense was $803,000,
$318,000 and $197,000 for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.  The minimum aggregate rental commitments under noncancellable
leases, excluding renewal options, are as follows (in thousands):
 
     YEARS ENDING JUNE 30,
     ---------------------
     1998........                 $2,043
     1999........                  2,046
     2000........                  2,023
     2001........                  1,966
     2002........                  1,360
     Thereafter..                  3,625

     Legal proceedings--

     In the normal course of business, the Company is involved in various claims
and legal proceedings.  While the ultimate resolution of these matters has yet
to be determined, the Company does not believe that their outcome will have a
material adverse effect on its financial position.

     Porex has been named as one of many co-defendants in a number of actions 
brought by recipients of silicone mammary implants. One of the pending claims is
styled as a purported class action. Certain of the actions against Porex have 
been dismissed or settled by the manufacturer or insurance carriers of Porex 
without material cost to Porex. The Company believes its insurance coverage 
provides adequate coverage against liabilities that could arise from actions or 
claims arising out of Porex's distribution of implants.

                                      F-18
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES      
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(11) QUARTERLY FINANCIAL DATA (UNAUDITED):

     The following table summarizes the quarterly financial data for the fiscal
years ended June 30, 1997 and 1996 (in thousands, except per share data).  Net
income per share, excluding the non-recurring charges discussed in Note (2), are
also presented below.  Net income (loss) per share calculations for each of the
quarters are based on the weighted average number of shares outstanding for each
period; therefore, the sum of the quarters may not necessarily be equal to the
full fiscal year per share amount.
<TABLE> 
<CAPTION>
                                                                                                         
                                           INCOME                                                        
                                           (LOSS)                                    NET                           
                                           BEFORE                                  INCOME                         
                                          PROVISION                                (LOSS)                         
      QUARTER ENDED          NET SALES    FOR TAXES   NET INCOME (LOSS)           PER SHARE                       
--------------------------  ------------  ----------  -----------------  --------------------------                      
                                                                                        EXCLUDING        
                                                                                      NON-RECURRING      
                                                                             ACTUAL       ITEMS          
                                                                             ------       -----          
<S>                         <C>           <C>         <C>                <C>         <C>                 
1996                                                                                                     
----                                                                                                     
September 30, 1995........    $11,036       $ 3,127             $1,924        $.11        $.11
December 31, 1995.........     10,283         3,124              2,073         .12         .12
March 31, 1996............     11,311         3,184              2,101         .12         .12
June 30, 1996.............     12,498         3,767              2,487         .14         .14
 
Year ended June 30, 1996..    $45,128       $13,202             $8,585        $.48        $.48
<CAPTION>                                                                                               
                                                                                                        
                                           INCOME                                                       
                                           (LOSS)                                   NET                          
                                           BEFORE                                  INCOME                        
                                          PROVISION                                (LOSS)                        
      QUARTER ENDED          NET SALES    FOR TAXES   NET INCOME (LOSS)           PER SHARE                      
--------------------------  ------------  ----------  -----------------  --------------------------
                                                                                        EXCLUDING       
                                                                                      NON-RECURRING     
                                                                           ACTUAL(a)    ITEMS(b)      
                                                                           ---------    --------        
<S>                         <C>           <C>         <C>                <C>         <C>                
1997
----
September 30, 1996........    $11,185       $ 3,527             $2,389        $.13        $.13
December 31, 1996.........     11,899       (24,545)           (25,934)      (1.54)        .14
March 31, 1997............     14,243        (1,516)            (2,420)       (.14)        .06
June 30, 1997.............     15,558        (2,092)            (1,495)       (.09)        .10
                                                                                 
Year Ended June 30, 1997..    $52,885      $(24,626)          $(27,460)     $(1.60)       $.43
</TABLE>

(a) The per share amounts shown differ from those previously reported to reflect
    the anti-dilutive impact of common stock equivalents resulting from the net
    loss caused by the non-recurring charges discussed in Note 2.

(b) The per share amounts shown include expenses of $.09 and $.08 per share in
    the quarters ended March 31, 1997 and June 30, 1997, respectively, which
    primarily relate to research and development costs associated with the
    Company's healthcare communications business activities.

                                      F-19
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES      
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments."  The estimated fair value amounts have been determined
by the Company using available market information.   However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value.  Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.  The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
 
                                    AT JUNE 30, 1997
                                  --------------------
                                  CARRYING  ESTIMATED
                                   AMOUNT   FAIR VALUE
                                  --------  ----------
                                     (in thousands)
Assets:
     Cash and cash equivalents..  $ 77,303    $ 77,303
     Marketable securities......   238,525     238,151
 
Liabilities:
     Long term debt.............   165,000     146,025

Cash and cash equivalents--

     The carrying amounts of these items are a reasonable estimate of their fair
value.

Marketable securities--

     Marketable securities, consisting of publicly-traded U.S. Treasury Notes
and Federal Agency Notes, are valued based on quoted market prices or dealer
quotes.

Long term debt--

     The Convertible Debentures are publicly traded and are valued based on
quoted market prices.  (See Note (4).)

     The fair value estimates presented herein are based on information
available to the Company as of June 30, 1997.  Although the Company is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been revalued since that date, and current estimates of
fair value may differ significantly from the amounts presented herein.

                                      F-20
<PAGE>
 
                        SYNETIC, INC. AND SUBSIDIARIES      
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(13) SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
 
                           YEARS ENDED JUNE 30,
                          -----------------------
                           1997    1996    1995
                          ------  ------  -------
     Interest Paid......  $    -  $    6  $ 2,870
     Income Taxes Paid..   1,788   3,212   27,435

     The following non-cash transactions were excluded from the consolidated
statements of cash flows for the years ended June 30, 1997, 1996 and 1995:

     In fiscal years 1997, 1996 and 1995, the Company recognized tax benefits
related to the exercise of stock options as increases to additional paid in
capital and decreases to income taxes payable of $7,450,000, $3,833,000 and
$835,000, respectively.

     In February 1995, in connection with the call for redemption of the
Company's 1991 Debentures, holders of $79,104,000 aggregate principal amount of
the 1991 Debentures surrendered them for conversion into an aggregate of
3,877,607 shares of common stock. The remaining $1,396,000 of the outstanding
1991 Debentures were redeemed at the redemption price of 104% plus accrued
interest. (See Note (4).)

     Additional information with respect to the acquisitions referred to in Note
(2) above is as follows (in thousands):

                                       Year Ended
                                     June 30, 1997
                                     -------------
     Fair value of assets acquired       $47,537
     Net cash paid                      (10,612)
     Value of stock paid                (24,488)
                                        -------  
     Liabilities assumed                $12,437
                                        =======

                                      F-21
<PAGE>
 
                         SYNETIC, INC. AND SUBSIDIARIES
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                    Years Ended June 30, 1997, 1996 and 1995



<TABLE>
<CAPTION>
                 Col. A                     Col. B            Col. C               Col. D         Col. E
----------------------------------------  ----------  -----------------------  ---------------  ----------
                                                             Additions
                                                      -----------------------
                                          Balance at  Charges to  Charges to                    Balance at
                                          Beginning   Costs and      Other                        End of
              Description                 of Period    Expenses    Accounts     (Deductions)      Period
----------------------------------------  ----------  ----------  -----------  ---------------  ----------
<S>                                       <C>         <C>         <C>          <C>              <C>
 
Deducted in the Balance Sheet
   from the asset to which it applies:
 
Allowance for doubtful accounts
   and sales returns
June 30, 1997...........................    $671,000     205,000      14,000      (151,000)(1)    $739,000
June 30, 1996...........................    $636,000     126,000      (7,000)      (84,000)(1)    $671,000
June 30, 1995...........................    $393,000     307,000       7,000       (71,000)(1)    $636,000
</TABLE>


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

(1)  Write-off of uncollectible accounts and other reductions, net of
recoveries.

                                      S-1
<PAGE>
 
                               INDEX TO EXHIBITS


  Number                              Title
  ------                              -----

  3.1       Certificate of Incorporation of the Company, as amended.
            Incorporated by reference to Exhibit 3.1 to the Company's
            Registration Statement on Form S-1 (No. 33-28654) (the "Registration
            Statement").


  3.2       By-Laws of the Company, as amended. Incorporated by reference to
            Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
            fiscal year ended June 30, 1994 (the "1994 10-K").

  10.1      1989 Class A Non-Qualified Stock Option Plan of the Company.
            Incorporated by reference to Exhibit 10.1 to the Registration
            Statement.*

  10.2      1989 Class B Non-Qualified Stock Option Plan of the Company.
            Incorporated by reference to Exhibit 10.2 to the Registration
            Statement.*

  10.3      1991 Director Stock Option Plan of the Company.  Incorporated by
            reference to Exhibit 4.2 to the Company's Registration Statement on
            Form S-8 (No. 33-46640).*

  10.4      Form of Stock Option Agreement dated as of May 17, 1989 between the
            Company and the members of the Stock Option Committee of the Board
            of Directors.  Incorporated by reference to Exhibit 10.3 to the
            Registration Statement.*

  10.5      Retirement Plan for Salaried Employees of Porex Technologies Corp.
            of Georgia. Incorporated by reference to Exhibit 10.4 to the
            Registration Statement.*

  10.7      Form of Indemnification Agreement between the Company and the
            directors and officers of the Company. Incorporated by reference to
            Exhibit 10.6 to the Registration Statement.

  10.8      Form of Services Agreement between the Company and Medco.
            Incorporated by reference to Exhibit 10.7 to the Registration
            Statement.

  10.9      Form of Tax Sharing Agreement between the Company and Medco.
            Incorporated by reference to Exhibit 10.8 to the Registration
            Statement.

  10.10     Form of Indemnification Agreement between the Company and Medco.
            Incorporated by reference to Exhibit 10.9 to the Registration
            Statement.

  10.11     Purchase and Sale Agreement, dated as of May 24, 1994, between
            Merck & Co., Inc. and the Company (the "Purchase and Sale
            Agreement"). Incorporated by reference to Exhibit 99.1 to the
            Company's Current Report on Form 8-K dated June 6, 1994.

                                      E-1
<PAGE>
 
  Number                              Title
  ------                              -----

  10.12     Purchase Agreement, dated as of May 24, 1994, between Medco
            Containment Services, Inc. and Porex Technologies Corp. Incorporated
            by reference to Exhibit 10.23 to the 1994 10-K.

  10.13     Stock Purchase Agreement, dated as of August 9, 1994, between the
            Company and Pharmacy Corporation of America.  Incorporated by
            reference to Exhibit 10.24 to the 1994 10-K.

  10.14     Amended and Restated Investment Agreement, dated as of September 13,
            1994, between Martin J. Wygod and the Company.  Incorporated by
            reference to Exhibit 10.1 to the Company's Current Report on Form 8-
            K dated September 16, 1994.

  10.15     Form of Stock Option Agreement, made as of December 7, 1994, between
            the Company and each of James V. Manning (for 150,000 shares), Paul
            C. Suthern (for 180,000 shares), Victor L. Marrero (for 125,000
            shares), David J. Schlanger (for 125,000 shares), Pamela B. Spira
            (for 125,000 shares) and Anthony Vuolo (for 125,000 shares).
            Incorporated by reference to Annex A to the Company's Proxy
            Statement for its Annual Meeting of Stockholders held on May 17,
            1995.*

  10.16     Merger Agreement, dated December 23, 1996, among the Company,
            Synternet Acquisition Corp., a wholly owned subsidiary of the
            Company, Avicenna and the certain other individuals and entities.
            Incorporated by reference to Exhibit 10.2 to the Company's
            Registration Statement on Form S-3 (No. 333-18771).

  10.17     1996 Class C Stock Option Plan of the Company.  Incorporated by
            reference to Exhibit 4.1 to the Company's Registration Statement on
            Form S-8 (No. 333-36041).*

  10.18     1997 Class D Stock Option Plan of the Company.  Incorporated by
            reference to Exhibit 4.2 to the Company's Registration Statement on
            Form S-8 (No. 333-36041).*

  10.19     1991 Special Non-Qualified Stock Option Plan of the Company.
            Incorporated by reference to Exhibit 4.3 to the Company's
            Registration Statement on Form S-8 (No. 333-36041).*

  21.1**    Subsidiaries of the Company.

  23.1      Consent of Arthur Andersen LLP.

  23.2      Consent of Kegler, Brown, Hill & Ritter Co., L.P.A.

  24.1**    Powers of Attorney of the Company.

  27**      Financial Data Schedule.

  99.1      Excerpt from the Consulting Agreement between Merck & Co., Inc. and
            Martin J. Wygod relating to provisions incorporated in the Purchase
            and Sale

                                      E-2
<PAGE>
 
Number                                 Title
------                                 -----

            Agreement.  Incorporated by reference to Exhibit 99.1 to the
            Company's Current Report on Form 8-K dated June 6, 1994.


  ___________________________
  *  Management contract or compensation plan or arrangement.


  ** Previously filed with the Company's Annual Report on Form 10-K for the
  Fiscal Year Ended June 30, 1997.

                                      E-3