<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                               AMENDMENT NO. 1 TO
    
 
   
                                   FORM 10-K
    
                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                       OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
       FOR THE TRANSITION PERIOD FROM                TO                .
 
                         COMMISSION FILE NUMBER 1-11352
 
                                 DYNAGEN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      04-3029787
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
 
840 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS                       02139
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
                                 (617) 491-2527
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
   
<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
               TITLE OF CLASS                               ON WHICH REGISTERED
               --------------                              ---------------------
<S>                                            <C>
        COMMON STOCK, $.01 PAR VALUE                       BOSTON STOCK EXCHANGE
  REDEEMABLE COMMON STOCK PURCHASE WARRANTS                BOSTON STOCK EXCHANGE
</TABLE>
    
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                 TITLE OF CLASS
                                  -----------
 
                          COMMON STOCK, $.01 PAR VALUE
 
                   REDEEMABLE COMMON STOCK PURCHASE WARRANTS
 
     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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X] NO [ ]
 
     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, 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]
 
     As of March 31, 1998, 14,667,951 shares of the registrant's common stock,
$.01 par value ("Common Stock"), were issued and outstanding. The aggregate
market value of the registrant's voting stock held by non-affiliates of the
registrant as of March 31, 1998, based upon the closing price of such stock on
the Nasdaq Stock Market's SmallCap Market ("Nasdaq") on that date (approximately
$0.53) was $7,613,034.
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<PAGE>   2
 
                             SPECIAL CONSIDERATIONS
 
   
     During the year ended December 31, 1997, DynaGen, Inc. ("DynaGen" or the
"Company") experienced a substantial decrease in the Company's stock price and
market capitalization, continued losses from operations including an unexpected
loss at its Superior Pharmaceutical Company subsidiary and substantial and
continuing dilution to existing stockholders due to the conversion features of
convertible securities sold by the Company. The following special considerations
should be carefully noted by the reader:
    
 
  Financial Condition of the Company
 
   
     For the year ended December 31, 1997, the Company incurred net losses of
approximately $12,241,278. For the three months ended March 31, 1998, the
Company expects to incur substantial net losses. As of December 31, 1997, the
Company had approximately $697,045 in cash and cash equivalents and a net worth
of $2,624,628. The Company's current liabilities, as of such date, aggregated
approximately $25,644,392. The Company expects its operating cash needs for the
next twelve months to be approximately $7,000,000. The Company does not
presently have adequate cash from operations to meet these needs. In order to
meet its needs for cash to fund its operations, the Company must obtain
additional financing and renegotiate the terms of its current arrangements with
creditors. The Company is presently in default under a number of its
arrangements, agreements and instruments with creditors, with the result that
the Company's obligations under such agreements and instruments may be
accelerated. If the Company is unable to obtain significant additional financing
or to renegotiate its arrangements with existing creditors, it may be obliged to
seek protection from its creditors under the bankruptcy laws. See "Management's
Discussion and Analysis -- Liquidity and Capital Resources"; the financial
statements and notes thereto included as part of this Report; and "Risk
Factors -- Financial Condition."
    
 
  Company's Ability to Continue As A Going Concern
 
   
     The Company's independent auditors have issued an opinion on the financial
statements of the Company, as of December 31, 1997 and for the year then ended,
which includes an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern. Among the reasons cited by the
independent auditors as raising substantial doubt as to the Company's ability to
continue as a going concern are the following: the Company has incurred
recurring losses from operations resulting in an accumulated deficit and a
working capital deficiency at December 31, 1997. In addition, the Company has
debt obligations which are in default, and a liability of approximately
$5,000,000 to the selling stockholders of Superior Pharmaceutical
Company("Superior"). The ability of the Company to use cash generated by its
subsidiaries Superior and Generic Distributors, Incorporated ("GDI") is
restricted under the terms of the subsidiaries' Superior loan agreements. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. If the Company is unable to secure significant additional
financing or to renegotiate its agreements with its existing creditors, it may
be obliged to seek protection from its creditors under the bankruptcy laws. See
"Management's Discussion and Analysis -- Liquidity and Capital Resources"; the
financial statements and notes thereto included as part of this Report; and
"Risk Factors -- Ability to Continue As A Going Concern."
    
 
  Company's Common Stock May Be Delisted From Nasdaq Stock Market
 
     On February 26, 1998, the Company received a notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that it does not meet the applicable listing
requirements and that the Company's Common Stock is therefore subject to
delisting. The Company has contested the delisting of its securities in
accordance with Nasdaq's procedures. The Company does not meet the Nasdaq
listing requirements. Although Nasdaq has the discretion to grant exceptions to
the listing requirements, there is no assurance that it will do so in the
Company's case. The Company anticipates that, if its Common Stock is delisted
from the Nasdaq SmallCap Market, it will continue to trade on the Boston Stock
Exchange and may also be quoted on the OTC Bulletin Board. However, delisting of
the Company's Common Stock from the Nasdaq SmallCap Market could have a material
adverse effect on the liquidity of the Common Stock and on the Company's ability
to raise capital necessary for the Company's continued operations. See "Risk
Factors -- Common Stock Subject to Delisting From Nasdaq SmallCap Market."
 
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<PAGE>   3
 
  Subsequent Events
 
   
     Several material events have occurred since the end of the Company's latest
fiscal year, including the following:
    
 
   
     On August 20, 1997, the Company completed a placement of Series C and
Series D Convertible Preferred Shares with an investor. Under the terms of the
agreement, the Company was required to file registration statements for the
resale of the shares of Common Stock issuable upon conversion of both Series C
and D Preferred Shares within 45 days of the completion of the placement. The
Company filed the registration statement in March 1998, but it has not been
declared effective. In March 1998, the Company issued to the investor an 8%
convertible debenture in the amount of $328,500 in settlement of penalties due
to the late filing of the registration statement. This amount has been reflected
as a liability in the December 31, 1997 Financial Statements. In addition, in
March 1998 the Company issued to the investor a warrant to purchase, at any time
in the next three (3) years, 1% of the Company's fully diluted issued and
outstanding shares at the time of the exercise for $150,000. On March 19, 1998,
the investor purchased an additional $500,000 of Series D Preferred Shares from
the Company and waived certain restrictions which limited the drawdown to
$400,000 per month.
    
 
   
     On February 26, 1998, the Company received $500,000 from the placement of a
7% convertible debenture from another investor. On March 30, 1998, the investor
exchanged this debenture for a $500,000 tranche of Series D Preferred Shares and
also received an 8% convertible debentures in the amount of $87,500. This
debenture is convertible into common stock at the market price of the common
stock on the date of the conversion. On March 31, 1998, the Company sold another
tranche of $500,000 of Series D Preferred Stock, along with an 8% convertible
debenture in the amount of $87,500 convertible into common stock at the market
price, to this investor.
    
 
     During the months of February and March of 1998, the Chairman and Executive
Vice President and the President and Chief Executive Officer of the Company and
their family members advanced the Company $265,000 towards general working
capital purposes. The loans carry no interest, are unsecured, and subordinated
and can only be repaid through conversion into equity.
 
   
     On March 2, 1998, the Company through its subsidiary, Generic
Distributions, Incorporated ("GDI"), completed the acquisition of Generic
Distributors Limited Partnership ("GDLP"), of Monroe, LA. In connection with the
acquisition, the Company paid the limited partnership $1,200,000 in cash, and
$1,050,000 in Series E Convertible Preferred Shares and 1,500 shares of Series F
Convertible Preferred Stock valued at $100,000, for a total purchase price of
$2,350,000. The Series E Preferred Shares are convertible beginning 12 months
from the closing into the Company's common shares at the then prevailing market
prices. The Series F Preferred Stock is convertible into $100,000 in value of
the Company's Common Stock commencing 120 days after the closing. In connection
with this transaction, GDI received $1,200,000 in a five-year term loan from
Fleet Bank. The loan carries interest of LIBOR plus 3%, is payable in quarterly
installments of principal and interest and matures on April 26, 2003. Fleet Bank
also established a revolving line of credit for general working capital in the
amount of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are
secured by all of the assets of GDI and the Company's subsidiary Able
Laboratories, Inc. and a pledge of all of the common stock of GDI, and are
guaranteed by the Company. In addition, the Company entered into employment and
consulting agreements with the sellers which provide, among other things, for
annual compensation and a signing bonus of 1400 shares of Series F Preferred
Stock, convertible into $100,000 of the Company's Common Stock commencing 120
days after the closing.
    
 
   
     At a special meeting held on March 4, 1998, the stockholders approved a
recapitalization effecting a one-for-ten reverse split of the Company's Common
Stock. As a result of the stockholder vote, effective on the close of business
March 10, 1998, the Company's authorized shares of Common Stock were 75,000,000
and the total number of shares of Common Stock outstanding were approximately
7,500,000. As of March 31, 1998, the Company had 14,667,951 shares of Common
Stock outstanding. This increase is due to conversions of preferred stock.
    
 
   
     On March 24, 1998, the Company suspended conversions of its Series A and B
Preferred Shares into the Company's Common Stock. The purpose of this suspension
is to give the Company time to coordinate its efforts to negotiate orderly
settlements of these outstanding convertible preferred shares.
    
 
                                        3
<PAGE>   4
 
   
     On March 30, 1998, the Board of Directors unanimously voted to issue
options, warrants and the Company's common stock to several unaffiliated
individuals and entities for services rendered to date. The Board also
authorized the issuance of 800,000 shares for product development and FDA
related consulting services to various entities. The Company granted warrants to
purchase 650,000 shares to two consulting firms in connection with the Company's
investor relations program. All of the above grants of shares, options and
warrants are subject to vesting and may be canceled by the Board at its option.
    
 
   
     In March 1998, the Company received a letter from Nasdaq advising that the
Company did not meet the minimum listing criteria and will be subject to
delisting. The Company has responded to NASDAQ. To date, the Company has not
been informed of a decision from Nasdaq concerning its continued listing.
    
 
     These events could cause the Company's results of operations to be
substantially different from those described in the financial statements as of
December 31, 1997. See the financial statements and notes thereto, particularly
Note 13 entitled "Subsequent Events," included as part of this Report.
 
                                     PART I
 
ITEM 1.  BUSINESS
 
INTRODUCTION
 
     DynaGen, Inc. ("DynaGen" or the "Company") develops, manufactures and
distributes generic pharmaceuticals. From its inception in 1988 until 1996, the
Company was focused primarily on being a new drug development and licensing
company. However, during 1996 DynaGen began expanding its business focus to
building a generic pharmaceutical business while licensing its existing
portfolio of therapeutic and diagnostic products to larger pharmaceutical
companies for further development and commercialization in return for milestone
payments and royalties. The Company has also contributed two technologies to its
majority-owned subsidiaries for further development, licensing and
commercialization.
 
     In August 1997, the Company completed a multicenter pivotal Phase 3 study
of NicErase(R)-SL, a non-nicotine smoking cessation therapy. The study,
conducted on 750 smokers in three centers, showed efficacy in one of three
centers. While the study showed that higher compliance leads to statistically
significant results on the product, DynaGen did not have the necessary resources
to continue development and clinical testing.
 
     In December 1996, the Company licensed worldwide exclusive rights to
develop a lobeline sulfate nasal delivery formulation to Nastech Pharmaceutical
Company, Inc. Under the terms of this agreement, Nastech will be responsible for
all remaining preclinical and clinical development of the product. DynaGen and
Nastech will divide equally all future license and sales royalty revenues.
 
     In December 1996, the Company obtained United States Food and Drug
Administration (the "FDA") clearance to market its proprietary NicCheck(R) I
product for detection of nicotine and/or its metabolites in urine as an aid in
indicating smoking status of individuals. The Company has entered into an
agreement with Henry Schein, Inc., of Melville, NY. Henry Schein, the largest
direct marketer of health care products and services to office-based health care
practitioners, including dental practices and laboratories, plans to initiate
the marketing of the product this spring.
 
     In 1996, the Company changed its year end from June 30 to December 31.
Accordingly, the Company began a new 12-month fiscal year on January 1, 1997. In
March 1998, the Company completed a reverse split of its stock -- one share for
every ten shares outstanding.
 
  Multisource Business
 
     The U.S. multisource pharmaceutical market approximates $8 billion in
annual sales. This sector has grown due to a number of factors including the
large number of drugs coming off patent, the growing importance and impact of
managed care organizations which prefer lower cost generics to brand products,
and the increasing acceptance of generic drugs by physicians, pharmacists and
consumers. Generic drugs are the chemical and therapeutic equivalents of
brand-name drugs. They are required to meet the same governmental
 
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<PAGE>   5
 
standards as the brand-name drugs and must receive FDA approval prior to
manufacture and sale. Generic drugs may be manufactured and marketed only if
relevant patents (and any additional government-mandated market exclusivity
periods) have expired. These drugs are typically sold under their generic
chemical names at prices significantly below than those of their brand-name
equivalents.
 
     To successfully participate in the multisource business, DynaGen intends to
compete with other generic companies through vertical integration of two key
elements of the multisource business, such as manufacturing and distribution. In
August 1996, the Company acquired substantially all of the assets of Able
Laboratories, Inc. ("Able"), including its 46,000 square foot tablet and
suppository manufacturing facility. As part of this acquisition, the Company
obtained rights to eleven approved Abbreviated New Drug Applications ("ANDAs")
as well as other generic formulations. Since the acquisition, DynaGen has
updated and expanded Able's manufacturing capability, validated several of the
acquired products, retrained employees in quality assurance procedures, and
successfully met FDA requirements and guidelines to manufacture these products.
The Company is increasing sales of its current generic products through the
expansion of its distribution networks and by providing contract manufacturing
services to various pharmaceutical companies. The Company is currently marketing
three of the acquired ANDA products.
 
     In April 1997, the Company signed an agreement with Kali Laboratories Inc.
("Kali"), a privately-held company specializing in the development of generic
drugs. The agreement provides for Kali to assist DynaGen in developing several
generic drugs and obtaining FDA approval for these drugs. The patents on these
targeted drugs have expired or will expire over the next five years, providing
an opportunity for competitors to introduce generic equivalents. Kali's
management and its scientific staff have significant experience in developing
and obtaining approvals on generic drugs. DynaGen believed that, by initially
outsourcing such development and approval activities, it would have benefitted
from the experience of a highly seasoned team of scientists.
 
     Under this agreement, Kali has developed its first formulation for
labetalol hydrochloride (brand names: Normadyne(R)and Trandate(R)), a treatment
for hypertension. DynaGen filed its first ANDA for labetalol HCl in January
1998. The patent on the drug expires in August 1998. There is no assurance that
the filing will be approved by the FDA or if approved, that the Company will be
able to generate sales for this drug. Kali is now developing formulations for
other drugs which are at various stages of development and bioequivalency
testing.
 
     To complement the acquisition of Able, in June 1997 the Company acquired
Superior Pharmaceutical Company ("Superior") through a merger of Superior and a
wholly-owned subsidiary of DynaGen. Superior has its primary operations in
Cincinnati, OH where it employs approximately 65 people and has 4,000 square
feet of office, warehouse and distribution space. Superior has additional sales
people in Memphis, TN where the sales force operates under the name of Williams
Generics.
 
     In 1997, Superior experienced a sharp decline in sales and earnings
compared to 1996. This was due to the loss of sales of methylphenidate (brand
name: Ritalin(R)) which was being manufactured and supplied to Superior under
Superior label. This product resulted in sales of over $7.5 million for Superior
in 1996 and $5.1 in 1997. The decline in sales and margins was also due to the
loss of key personnel at Superior immediately after the acquisition, which
resulted in a loss of business with certain federal and corporate accounts.
There was further erosion in margins as price pressure continued in the generic
industry. Recently, however, as marginal manufacturers have either shut down
operations or discontinued production, the prices and margins are improving.
There can be no assurance, however, that these actions will improve Superior's
performance in the near future. In the past six months, Superior has hired and
trained additional sales staff, upgraded its systems and instituted controls to
improve margins. Superior is also aggressively bidding on federal and state
contracts and has won supply agreements with the governments of the states of
Florida, Ohio, Louisiana and Texas.
 
     In March 1998, the Company, through its wholly-owned subsidiary, Generic
Distributors Incorporated ("GDI"), acquired substantially all of the assets of
Generic Distributors Limited Partners, a distributor of generic drugs. GDI,
based in Monroe, LA, employs 23 people and operates out of an 11,000 sq. ft.
facility. DynaGen believes that GDI complements Superior by providing next-day
delivery service to the south and southeastern United States. GDI's customer
base is primarily independent pharmacies in the states of Louisiana, Texas,
Arkansas, Alabama and Mississippi. Management believes that GDI has the
potential to
 
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<PAGE>   6
 
grow its business through supply opportunities with institutional, hospital and
nursing home pharmacies. There can be no assurance that such opportunities will
arise, or that DynaGen will be able to exploit any such opportunities
profitably.
 
   
     The purchase price of $2,350,000 for GDI was financed by a $1,200,000
five-year secured term loan from Fleet Bank and $1,150,000 in DynaGen
convertible preferred shares. The preferred shares cannot be converted into
DynaGen common stock until one year from the date of closing. After that, the
preferred shares can only be converted at a rate of $40,000 per week at the
prevailing market price. Fleet Bank has also provided $300,000 in a second
working capital line of credit.
    
 
  Specialty Pharmaceutical Business
 
     DynaGen's specialty pharmaceutical business strategy is to create a
business based on branded products and multi-drug combinations in convenient
packaging for specific indications and treatments. Physicians routinely
prescribe two or more separate drugs for the treatment of several common medical
problems. These drugs are separately prescribed and dispensed but are taken at
various times during the course of the day as directed by the physician. A major
problem in such multi-drug therapies is lack of compliance by the patient and
therefore less than desirable therapeutic efficacy. For this reason, the Company
initially intends to focus its efforts in the area of compliance enhancement
packaging. DynaGen has identified near-term opportunities in compliance
enhancement packaging in the areas of women's healthcare products. The Company
is developing convenience packaging which it believes will provide ease of
prescription, dispensing, storage and self-administration. Convenience packaging
also provides cost advantages to the consumer since there is only a single
"co-pay" instead of multiple co-payments.
 
     The Company's proposed specialty pharmaceutical products are in an early
stage of development and therefore are subject to the risks of unsuccessful
development, marketing and commercialization. These proposed products will
require substantial further development which may include clinical testing, bio-
equivalency studies and regulatory approval, all at a substantial cost to the
Company. The use of specialty pharmaceuticals will require the acceptance of a
new way of prescribing medication and there can be no assurance a market will
develop for such products. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
 
     Licensed Products
 
     Since its inception, DynaGen's business consisted of developing proprietary
diagnostic and therapeutic products. These products included NicErase-SL, a
sublingual tablet containing the non-nicotine ingredient lobeline for smoking
cessation, and OrthoDyn(R), a bone-repair cement based on a family of
bioresorbable and biocompatible polymers derived from compounds naturally
occurring in the body. The Company has also developed a diagnostic product
portfolio targeted for infectious disease markets. The Company has licensed the
following products for further development, testing, manufacturing and marketing
to other healthcare companies.
 
           NicErase-SL.  In August 1997, the Company completed a Phase 3 trial
with NicErase-SL conducted on 750 smokers at three sites. NicErase-SL is a
sublingual tablet formulation that contains lobeline sulfate as the active
ingredient. The results of the Phase 3 study demonstrated efficacy in one of
three sites and also showed that higher compliance rates could significantly
affect results. The Company decided that it did not have the resources to pursue
further trials with this formulation. The Company has licensed the rights for
lobeline to Nastech Pharmaceutical Company of Hauppage, NY, for the development
of a lobeline nasal delivery formulation. Under the terms of the agreement,
Nastech will be responsible for the development of nasal delivery
formulation(s), all remaining preclinical animal studies and limited human
studies and shall bear all the development costs. DynaGen and Nastech will
cooperate in licensing the product to a third party, and will share equally in
licensing fees and in royalties. There can be no assurance that Nastech will
 
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<PAGE>   7
 
successfully develop a nasal delivery formulation of the lobeline sulfate-based
product, that such a formulation will lead to higher compliance that the Company
believes is necessary to demonstrate its efficiency, or that higher compliance
rates, if achieved, will in fact demonstrate that the nasal delivery formulation
is effective for smoking cessation. See "Management's Discussion and
Analysis -- Certain Factors That May Affect Future Results."
 
           Orthodyn Bioresorbable Bone Cement.  OrthoDyn, a bone repair cement,
is based on a family of bioresorbable, biocompatible polyesters derived from
compounds naturally occurring in the body. It is a composite polymer/filler
system and has strength and stiffness more similar to human bone than fully
ceramic systems. It is initially moldable, forming a very cohesive dough, cures
fast (10 to 30 minutes) with little or no heat evolution, and has strength,
stiffness and toughness similar to human bone. Preclinical studies have
demonstrated acceptable specifications with regard to degradation time,
biocompatibility and strength. These studies also have provided early
indications that new bone effectively grows into and replaces the cement. The
polymer component also has potential use for formation of preformed
bioresorbable pins, plates and screws.
 
     In line with DynaGen's goal to minimize development expenditures on
products which have long-term development and clinical approval programs, the
Company and Smith & Nephew PLC entered into an agreement providing Smith &
Nephew with an exclusive period of 12 months ending on May 1, 1998 to evaluate
the OrthoDyn product's human orthopaedic applications. There can be no assurance
that the Company will enter into a definitive agreement with Smith & Nephew or
that such an agreement will prove successful for DynaGen. Furthermore, no
assurance can be given that continued preclinical development of OrthoDyn will
be successful, that the necessary regulatory approvals will be obtained or that
the OrthoDyn products will be successfully marketed. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results."
 
     Diagnostic Products
 
     The health care industry is shifting to a managed care approach which
integrates prevention, diagnostic, therapeutic and compliance technologies into
a panel of products for specific disease management. The Company has developed
diagnostic products which may help in the prevention and diagnosis of disease
and in the determination of compliance with smoking cessation programs.
 
          NicCheck(R) I.
 
     NicCheck I is an FDA-cleared simple colorometric test for the detection of
nicotine and/or its metabolites in urine. The test distinguishes between smokers
and nonsmokers with 97% accuracy and is also able to distinguish between high
and low consumers of nicotine. The NicCheck I result may be used to determine
the appropriate level of nicotine replacement therapy during smoking cessation
efforts. Smokers who are trying to quit may become more motivated by observing a
decrease in color intensity of the NicCheck I results as they reduce nicotine
consumption. NicCheck I may also prove to be a cost-effective means for
insurance companies to employ risk assessment/risk management strategies.
 
     In October 1997, DynaGen signed a non-exclusive distribution agreement for
NicCheck I with Henry Schein, Inc., of Melville, NY. Henry Schein, the largest
direct marketer of health care products and services to office-based health care
practitioners, including dental practices and laboratories, intends to initiate
the marketing of the product in the spring of 1998. Henry Schein serves more
than 230,000 customers worldwide from its strategically located distribution
centers in the U.S. and Europe.
 
          Tuberculosis Diagnostic Products
 
     DynaGen has also developed proprietary diagnostic tests for certain
infectious diseases including tuberculosis ("TB"). The Company is currently
selling MycoDot(R), a product to detect antibodies against mycobacteria in blood
or serum, through distributors primarily in Southeast Asia, the Pacific Rim
countries, China, India, and Japan. DynaGen has received clearance under three
premarket notification (510(k)) from the FDA to market its MycoAKT(R) diagnostic
tests that identify three mycobacterial species in culture. The Company has
granted exclusive U.S. manufacturing and distribution rights and semi-exclusive
worldwide
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<PAGE>   8
 
rights for MycoAKT to a third party. The Company intends to continue to pursue
licensing arrangements for the promotion and distribution of these products, but
does not expect to generate material amounts of revenue from sales of these
products.
 
     Apex Pharmaceuticals, Inc.
 
     Apex Pharmaceuticals, Inc., a wholly owned subsidiary of DynaGen, has been
formed to further develop the Company's immune modulation drug technology for
the treatment of autoimmune diseases, including a potentially life threatening
autoimmune disorder known as immune thrombocytopenic purpura (ITP). ITP is
caused when the immune system destroys platelets which are involved in the
clotting process that prevents uncontrolled bleeding.
 
     In human clinical studies overseas, no significant adverse effects were
noted due to administration of the drug. Furthermore, preliminary efficacy was
demonstrated in ITP patients who had failed treatment with corticosteroids, the
first line of treatment for ITP. The product has also shown preliminary efficacy
in the treatment of HIV infection. The Company has obtained an orphan drug
designation form the FDA for the use of the product in the treatment of ITP, and
a notice of allowance from the U.S. patent office for its application in the
treatment of HIV infection. Patent applications for its use in ITP have been
filed.
 
     The Company has discontinued further R&D on this product and is seeking
licensing opportunities. There is no assurance that the Company will
successfully license this technology or receive any benefits (See "Risk
Factors -- Dependence on Patents and Proprietary Technology" and "Products in
Early Stage of Development").
 
     Biotrack, Inc.
 
     BioTrack Inc., another DynaGen subsidiary, was formed in 1997 to further
develop and commercialize a technology involving tumor localization and
tracking, which will allow breast biopsies to be performed in a cost-effective
and less invasive manner.
 
     In the United States, breast cancer is the leading cause of cancer death
among women aged 40 to 55. The direct cost for screening, diagnosis and
treatment of breast cancer in the U.S. is approximately $8.5 billion, of which
more than $4 billion is for diagnostic procedures.
 
     Current breast biopsy procedures involve an initial mammogram, the
insertion of wires (needles) in the breast to mark the location of the tumor and
a second mammogram to confirm the location. The surgeon then uses the wires as
guides to excise the lesion(s). This is an invasive and expensive procedure
which can also be emotionally traumatic to the patient. The BioTrack technology
uses an imaging and tracking system to locate the lesion and guide the surgeon's
tool, such as a scalpel, to the lesion without the need for guide wires. This
results in a much less intrusive procedure, greater accuracy of lesion
localization, substantially reduced procedural costs, and improved patient
comfort. In December 1997, the Company initiated bridge financing for BioTrack
through a placement agent. To date, the Company has completed the sale of units
consisting of promissory notes and shares of BioTrack common stock in the amount
of $300,000. The proceeds are being utilized for research and development and
general working capital purposes.
 
SALES AND MARKETING
 
     The Company's generic therapeutic products are sold through private label
arrangements primarily through direct sales efforts to drug wholesalers,
distributors and retail drug chains and other pharmaceutical companies. The
Company is also marketing its generic therapeutic products under its own "Able
Laboratories" name, as well as under its "Superior Pharmaceutical Company" name.
The Company markets its diagnostic products under its own name primarily through
distributors.
 
     Superior markets its product line to independent pharmacies, pharmacy
chains (such as CVS, Walgreens), nursing homes and federal, state and county
governments. Over 50% of its sales have been to independent pharmacies who
purchase almost on a weekly or biweekly basis. Sales to other customers are
under long term contracts which are either negotiated or bid by the sales staff.
 
                                        8
<PAGE>   9
 
     Superior employs over 40 telemarketers who have been given training in
products and sales techniques. Superior has developed a database of independent
pharmacies with the relevant information. The pharmacies routinely purchase from
several wholesalers and distributors. In addition to competitive price, service,
delivery, accuracy of shipment, and selling technique of the telemarketers are
factors in getting the business. Superior allocates territories and accounts to
its telemarketers who develop a relationship with the pharmacists. Superior
supports its sales staff through marketing and promotional events including mass
mailings, price specials, and general advertising. All sales people are
compensated based on their performance.
 
     GDI's marketing organization is similar to that of Superior. Almost 80% of
GDI's sales are to independent pharmacies in the southern states with minimal
sales to the chains and institutional pharmacies. Both Superior and GDI generate
approximately 75% of their business with existing customers.
 
     The Company has relatively limited experience in sales, marketing and
distribution. There can be no assurance that the Company can successfully
implement its sales and marketing strategy or that it can successfully market or
sell any of its products or proposed products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results."
 
INDUSTRY SEGMENTS AND SALES BY GEOGRAPHIC AREA
 
     Financial information with respect to the Company's business segments and
product sales by geographic area is presented in Note 11 of "Notes to
Consolidated Financial Statements."
 
BACKLOG
 
     Approximately 90% of the Company's sales are from its operations at
Superior and GDI. Both Superior and GDI generally ship orders within 24 to 48
hours of receipt. Therefore, the Company's backlog does not bear a significant
relationship to its overall sales. The dollar amount of backlog orders for the
Company's manufacturing subsidiary as of December 31, 1997 was approximately
$210,000. Although orders are subject to cancellation without penalty,
management expects to fill substantially all of them in the near future.
 
MANUFACTURING AND SUPPLIERS
 
     DynaGen's generic products are manufactured at its Able Laboratories
facility in South Plainfield, New Jersey. The principal components used in the
Company's generic products are active and inactive pharmaceutical ingredients
and certain packaging materials. Sources for certain materials for the Company's
products must be approved by the FDA, and in many instances only one source has
been approved. Active raw material ingredients are purchased primarily from
United States distributors of bulk pharmaceutical materials manufactured by
foreign companies. To date, the Company has experienced no significant
difficulty in obtaining raw materials. However, if raw materials from a
specified supplier were to become unavailable, the Company would be required to
file a supplement to its ANDA and revalidate the manufacturing process using the
new supplier's materials. Delays in revalidating the manufacturing process or in
obtaining new materials could result in the loss of revenues and have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors That May Affect Future Results."
 
     Superior Pharmaceutical Company stocks and sells over 2,000 different items
(stock keeping units or SKUs) consisting of tablets, capsules, injectables,
vaccines, over-the-counter products, vitamins and hospital supplies. A broad
product line of this nature is necessary to service the customer base consisting
of independent pharmacies, pharmacy chains and institutional pharmacies.
Superior negotiates and issues purchase orders, normally in the beginning of
each year, to vendors and manufacturers for these items. The supply agreements
are complex, as they normally provide for volume discounts (rebates), shelf
stock adjustments for lower prices, and returns of unsold goods. The competition
in generic drug manufacturers is intense and the pressure has resulted in
steadily declining prices. If multiple vendors are not available (i.e., if a
sole generic approval is granted by the FDA), the prices generally remain high
and the suppliers do not offer the traditional discounts.
 
                                        9
<PAGE>   10
 
     In general, the nature of the multisource business is such that there are
almost always multiple suppliers available for the products. Superior has
traditionally enjoyed good relationships with its vendors and has been able to
obtain preferential treatment due to its prominent sales force and its sales
volume.
 
     GDI's agreements with its suppliers, most of whom are common to Superior,
are similar in nature. The two companies are now combining their purchasing
functions, wherever possible, and are issuing purchase orders to vendors to take
advantage of higher volume. Both Superior and GDI consider their relationship
with the vendors satisfactory.
 
     The Company's strategy with respect to its diagnostic products is to
license such products for manufacture and distribution by third parties. The
Company has license agreements for the manufacture and distribution of its
MycoAKT and MycoDot products. MycoDot is produced by a single licensed
manufacturer in India. NicCheck I is produced by a contract manufacturer in the
United States. The Company is thus dependent upon third parties for the
manufacture and distribution of its diagnostic products. The Company's inability
to maintain satisfactory third party manufacturing and distribution arrangements
could have a materially adverse effect on its ability to deliver its diagnostic
products on a timely basis.
 
     The company's Cambridge, Massachusetts and South Plainfield, New Jersey
facilities are registered with the FDA and are subject to current Good
Manufacturing Practices ("cGMP") as prescribed by the FDA.
 
COMPETITION
 
     The Company competes with other generic manufacturers, specialized
biotechnology companies and major pharmaceutical companies. Many of these
competitors possess substantially greater financial and other resources, such as
expertise in clinical trials, FDA submissions and marketing, that are needed to
commercialize a pharmaceutical product.
 
     In the generic pharmaceutical market, the Company competes with off-patent
drug manufacturers, brand-name pharmaceutical companies that manufacture
off-patent drugs, the original manufacturers of brand-name drugs and
manufacturers of new drugs that may be used for the same indications as the
Company's products. Revenues and gross profit derived from generic
pharmaceutical products tend to follow a pattern based on regulatory and
competitive factors unique to the generic pharmaceutical industry. As patents
for brand name products and related exclusivity periods mandated by regulatory
authorities expire, the first generic manufacturer to receive regulatory
approval for generic equivalents of such products is usually able to achieve
relatively high revenues and gross profit. As other generic manufacturers
receive regulatory approvals on competing products, prices and revenues
typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand name companies are increasingly selling their products into the
generic market directly by acquiring or forming strategic alliances with generic
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to sell directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market. These competitive factors may have a material adverse effect on the
Company's ability to sell its generic products.
 
     Both Superior and GDI compete with other distributors and wholesalers of
generic drugs. The wholesalers are much larger, have a national network of
warehouse and distribution centers, and carry a full-line of products, including
branded (non-generic) pharmaceuticals. The wholesalers are also better
capitalized and obtain the best (or lowest) price from the vendors. Other
distributors are small, privately-held companies that distribute generic drugs
to regional pharmacies. Major wholesalers include Cardinal Health, Inc.,
McKesson Corp., and Andox Corporation.
 
     Superior and GDI believe that the size of the Company and the price are not
the only factors in achieving sales. Superior and GDI employ a direct
telemarketing force (comprising approximately 64 telemarketers
 
                                       10
<PAGE>   11
 
currently). The telemarketers call upon customers, assist them in providing
critical product information, and supply almost on a "just in time" basis.
Several customers, mostly the independent pharmacies, order product at least two
or three times a week to minimize inventory cost. The telemarketing force and an
efficient shipping operation provides a competitive advantage for Superior and
GDI. Several other distributors, who are smaller, less automated, and have a
smaller telemarketing force are not as efficient as Superior.
 
     There can be no assurance that the Company will be able to successfully
market any of its diagnostic products. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors That May
Affect Future Results."
 
GOVERNMENT REGULATION
 
     The Company's therapeutic and diagnostic products are subject to
significant government regulation in the United States principally by the FDA,
and to a lesser extent, by the Drug Enforcement Administration, state
governments and governmental agencies of other countries. Federal and state
regulations and statutes impose certain requirements on the testing,
manufacture, labeling, storage, recordkeeping, approval, advertising and
promotion of the Company's products. Noncompliance with applicable requirements
can result in judicially and administratively imposed sanctions including
seizures of adulterated or misbranded products, injunction actions, fines and
criminal prosecutions. Administrative enforcement measures can also involve
product recalls and the refusal of the government to approve new drug
applications ("NDAs") or abbreviated new drug applications ("ANDAs"). In order
to conduct clinical tests and produce and market products for human diagnostic
and therapeutic use, the Company must comply with mandatory procedures and
safety standards established by the FDA and comparable state and foreign
regulatory agencies. Typically, standards require that products be approved by
the FDA as safe and effective for their intended use prior to being marketed for
human applications.
 
     To obtain FDA approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA's cGMP regulations.
The FDA may inspect the manufacturer's facilities to assure such compliance
prior to approval or at any other reasonable time, and the Company must follow
cGMP regulations at all times during the manufacture and other processing of
drugs. To comply with the requirements set forth in these regulations, the
Company must continue to expend significant time and resources in the areas of
development, production, quality control and quality assurance.
 
     FDA approval is required before the Company can market any new drug,
including a generic equivalent of a previously approved drug or a new indication
or delivery method for a previously approved drug. There are three principal
ways to obtain FDA approval of a new drug:
 
          1) New Drug Application (NDA) -- A prospective manufacturer must
     submit to the FDA full reports of well-controlled clinical studies and
     other data to prove that a drug is safe and effective and meets other
     requirements for approval.
 
          2) "Paper" NDA -- Under certain circumstances, the FDA will permit
     safety and efficacy to be demonstrated by submission of published
     literature and journal articles.
 
          3) Abbreviated New Drug Application (ANDA) -- The Waxman-Hatch Act of
     1984 established a statutory procedure for the submission and FDA review
     and approval of ANDAs for generic versions of drugs previously approved by
     the FDA. Under the ANDA procedure, the FDA waives the requirement of
     conducting complete clinical studies of safety and efficacy, and instead
     typically requires the applicant to submit data illustrating that the
     generic drug formulation is bioequivalent to a previously approved drug.
     "Bioequivalence" means that the rate of absorption and the levels of
     concentration of a generic drug in the body needed to produce a therapeutic
     effect are substantially equivalent to those of the previously approved
     drug. For some drugs, the FDA may require other means of demonstrating that
     the generic drug is bioequivalent to the original drug. The NDA and ANDA
     approval processes both generally take a number of years and involve the
     expenditure of substantial resources.
 
     FDA approval of an NDA dealing with a new pharmaceutical or biological
product for human use is a multistep process. Generally, pre-clinical animal
testing first must be conducted to establish the safety and
 
                                       11
<PAGE>   12
 
potential efficacy of the experimental product for treatment of a given disease
or condition. Once the product has been found to be reasonably safe in animals,
suggesting that human testing would be appropriate, an investigational new drug
("IND") application is submitted to the FDA. FDA acceptance of the IND allows a
company to initiate clinical testing on human subjects. The initial phase of
clinical testing (Phase 1) is conducted to evaluate the safety and, if possible,
to gain early evidence of effectiveness of the experimental product in humans.
If acceptable product safety is demonstrated, then Phase 2 trials are initiated.
The Phase 2 trials involve studies in a small sample of the actual intended
patient population to assess the efficacy of the drug for a specific
application, to determine dose tolerance and the optimal dose range and to
gather additional information relating to safety and potential adverse side
effects. Phase 2 studies are also utilized to evaluate combinations of products
for therapeutic activity. Once an investigational drug is found to have some
efficacy and an acceptable safety profile in the targeted patient population,
Phase 3 trials may be initiated. Phase 3 trials are expanded controlled trials
that are intended to gather additional information about safety and
effectiveness in order to evaluate the overall risk-benefit relationship of the
experimental product and to provide an adequate basis for product labeling.
These trials also may compare the safety and activity of the experimental
product with currently available products. It is not possible to estimate the
time in which Phase 1, 2 and 3 studies will be completed with respect to a given
product, although the time period can be as long as several years.
 
     Upon completion of clinical testing, which demonstrates that the product is
safe and effective for a specific indication, an NDA or a Product License
Application ("PLA") for a biological product may be submitted to the FDA. This
application includes details of the manufacturing procedures, testing processes,
preclinical studies and clinical trials. The FDA first determines whether to
accept the application for filing. If it does, FDA's review commences; if it
does not, the Company may need to obtain additional data before resubmitting the
application. FDA approval of the application is required before the applicant
may market the new product. In addition, the FDA may impose conditions on the
approval, such as post-marketing testing and surveillance programs to monitor a
product's safety and effectiveness.
 
     The Waxman-Hatch Act establishes certain statutory protections for
FDA-approved drugs, which could preclude submission or delay the approval of a
competing ANDA. One such provision allows a five-year market exclusivity period
for NDAs involving new chemical compounds and a three-year market exclusivity
period for NDAs (including different dosage forms) containing data from new
clinical investigations essential to the approval of the application. Both
patented and non-patented drug products are subject to these market exclusivity
provisions. Another provision of the act extends patents for up to five years as
compensation for reduction of the effective market life of the patent resulting
from the time involved in the federal regulatory review process.
 
     The Orphan Drug Act also provides market exclusivity of seven years for the
first approved drug for certain rare diseases or conditions defined in the law.
A grant of exclusivity under this statute can preclude the approval of both NDAs
and ANDAs for the orphan indication.
 
     The Prescription Drug User Fee Act of 1992, enacted to expedite drug
approval by providing the FDA with resources to hire additional medical
reviewers, imposes three types of user fees on manufacturers of NDA-approved
prescription drugs. Applicants submitting only ANDAs and most other off-patent
drug manufacturers, including the Company, are not currently subject to any of
the three user fees. If the Company submits NDAs for non-ANDA products, the
Company may be subject to user fees.
 
     Penalties for wrongdoing in connection with the development or submission
of an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA. They may also
temporarily deny approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct, and under certain circumstances also
has authority to withdraw approval of an ANDA and to seek civil penalties. The
Company does not expect the law to have a material impact on the review or
approval of the Company's ANDAs.
 
                                       12
<PAGE>   13
 
     Reimbursement legislation such as Medicaid, Medicare, Veterans
Administration and other programs govern reimbursement levels. All
pharmaceutical manufacturers rebate to individual states a percentage of their
revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers
currently rebate 11% of average net sales price for products marketed under
ANDAs. NDA manufacturers are required to rebate the greater of 15.2% of average
net sales price or the difference between average net sales price and the lowest
net sales price during a specified period. The Company believes that the federal
and state governments may continue to enact measures in the future aimed at
reducing the cost of drugs and devices to the public. The Company cannot predict
the nature of such measures or their impact on the Company's profitability.
 
     The Company's manufacturing subsidiary, Able, currently manufactures
several products which are regulated as "old drugs" and subject to the
requirements of the Over-the-Counter Drug Review regulations promulgated by the
FDA. This class of drugs requires no prior approval from FDA before marketing,
but such products must comply with applicable FDA monographs which specify,
among other things, required ingredients, dosage levels, label contents and
permitted uses. These monographs may be changed from time to time, in which case
the Company may be required to change the formulation, packaging or labeling of
any affected product. Changes to monographs normally have a delayed effective
date, so while the Company may have to incur costs to comply with any such
changes, disruption of distribution is not likely.
 
     There are two principal methods by which FDA authorization may be obtained
to market medical device products, such as the Company's diagnostic test kits.
One method is to seek FDA clearance through a premarket notification filing
under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Applicants
under the 510(k) procedure must prove that the device for which marketing
clearance is sought is substantially equivalent to a device on the market prior
to the Medical Device Amendments of 1976 or a device marketed thereafter
pursuant to the 510(k) procedure. The review period for a 510(k) submission is
generally shorter than that of a premarket approval ("PMA") procedure, however,
it cannot be estimated with any degree of certainty.
 
     If the 510(k) procedure is not applicable, a PMA must be obtained from the
FDA. Under the PMA procedure, the applicant must conduct substantial clinical
testing that is required to determine the safety, effectiveness and potential
hazards of the product. Clinical testing requires prior review of the study
protocol by an institutional review board ("IRB") and patients' informed
consent, and may require submission of an investigational device exemption (IDE)
application to the FDA (for significant risk devices). Prior to human testing,
animal testing may be required to determine the safety of the product. The
review period under a PMA application is generally longer than review of a
510(k) and it may include review of the application by an outside advisory
committee of experts in the field. In addition, the preparation of a PMA
application is significantly more complex, expensive and time consuming than the
510(k) procedure and no assurance can be given that the FDA will grant approval
for the sale of the Company's products for routine clinical applications or that
the length of time the approval process will require will not be extensive.
 
     The FDA can also significantly delay the approval of a pending NDA, ANDA,
510(k) or PMA under its "Fraud, Untrue Statements of Material Facts, Bribery,
and Illegal Gratuities Policy." Manufacturers of drugs and devices must also
comply with the FDA's cGMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional applications.
 
     In addition, if the Company elects to manufacture its drugs, devices or
biological products itself, it will be required to meet mandated FDA
manufacturing requirements. This would include applying for appropriate FDA
establishment registration such as an Establishment License Application for
biological products, Drug Establishment Registration for its drug products and a
Device Establishment Registration for devices.
 
     There can be no assurance that the requisite approvals from the FDA will be
granted for any of the Company's proposed products or processes, that the
process to obtain such approvals will not be excessively expensive or lengthy,
or that the Company will have sufficient funds to pursue such approvals. The
failure to receive the requisite approvals for the Company's products or
processes, when and if developed, or significant delays in obtaining such
approvals, would prevent the Company from commercializing its products as
anticipated and would have a materially adverse effect on the business,
financial condition and results of
 
                                       13
<PAGE>   14
 
operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
 
     Able is subject to a consent decree entered by the court on April 9, 1992
in United States v. Able Laboratories, Inc., Civ. No. 91-4916 (D.N.J.) for
failure to comply with FDA cGMP and has been operating under this consent decree
since April 1992. The principals involved in the issuance of that order are no
longer employed by Able, DynaGen or any of its affiliates. Since the acquisition
by DynaGen, Able has made substantial commitments (both operational and
financial) to improve the plant, personnel, and equipment in order to effect an
improvement in its operations. Key management changes have been made with
individuals who have knowledge and commitment for cGMP in order to ensure
continued cGMP compliance. Ongoing cGMP training on a regularly scheduled basis
has also been provided to Able's employees.
 
     As generic drug distributors, Superior Pharmaceutical Company and GDI sell
products in almost every state in the U.S. They are each required to have a
wholesale distributor's license as well as a license for controlled substances
for the states of Ohio and Louisiana, respectively. The licenses that a
distributor is required to carry for other states varies from state to state.
For example, Kentucky, Massachusetts, Nebraska, New York and New Jersey, among
others, do not require that an out-of-state distributor obtain any licenses as a
condition to conducting trade in their states. Other states, such as Idaho,
Illinois, Maryland, Oregon and Montana, among others, require that an
out-of-state distributor obtain a wholesale distribution license as well as a
controlled substance license from that particular state in order to conduct
business. Thus, the distributor is required to ascertain which licenses are
required from each state and then obtain them accordingly. The licenses, once
obtained, need to be renewed periodically including the payment of fees which
vary from state to state. Furthermore, since several products carried by the
Company's distribution subsidiaries are controlled substances, the distribution
subsidiaries are each required to detail and hold a Federal license for
controlled substances from the Drug Enforcement Agency.
 
PRODUCT LIABILITY AND INSURANCE COVERAGE
 
     The Company presently maintains product liability insurance in the amount
of $3,000,000 for its products presently being marketed. The Company presently
maintains product liability insurance for those products in clinical
investigations. Although, the Company intends to obtain product liability
insurance prior to the commercialization of certain products which are not
presently insured, there can be no assurance that the Company will obtain such
insurance at favorable rates or, even if obtained, that any insurance will be
adequate to cover potential liabilities.
 
     In the event of a successful suit against the Company, insufficiency of
insurance coverage could have a materially adverse impact on the Company's
operations and financial condition. Furthermore, the costs of defending or
settling a product liability claim and any attendant negative publicity may have
a materially adverse impact on the Company, even if the Company ultimately
prevails. Furthermore, certain food and drug retailers require minimum product
liability insurance coverage as a precondition to purchasing or accepting
products for commercial distribution. Failure to satisfy these insurance
requirements could impede the Company's ability to achieve broad commercial
distribution of its proposed products, which could have a materially adverse
effect upon the business and financial condition of the Company.
 
RESEARCH AND DEVELOPMENT
 
     For the fiscal year ended December 31, 1997, the Company expended
$3,220,283 on research and development activities. For the transition period
ended December 31, 1996 the Company expended $1,092,253 on research and
development activities. For the fiscal years ended June 30, 1996 and 1995, the
Company expended $3,118,145 and $1,718,006, respectively, on research and
development activities.
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
     As part of its initial organization, the Company acquired several patents
related to the polymer technologies. In addition, the Company has filed several
U.S. and foreign patent applications for processes and products relating to its
controlled release delivery systems, smoking cessation technology, nicotine
detection
 
                                       14
<PAGE>   15
 
product, bioresorbable bone cement product, its immunomodulator and tumor
localization technologies. No assurance can be given that existing patent
applications will be granted or that any patents, if issued, will provide the
Company with adequate protection relating to the covered products, technology or
processes.
 
     To date, the Company has received two U.S. patents related to its
NicErase(R) technology covering: (i) the transdermal delivery system for the
administration of lobeline as an aid to smoking cessation and (ii) sublingual
tablet formulations. The Company has received a U.S. patent related to a
controlled release delivery system for drug dependency. In April 1997, the
Company received a notice of allowance from the U.S. patent office for the
Company's pulsed release vaccine delivery technology. In January 1998, the
company received a U.S. patent for its NicCheck(R) technology for the detection
of nicotine and its metabolites in urine. Competitors may have filed
applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of the Company. Accordingly, there can be no assurance that the
Company's patent applications will result in patents being issued or that, if
issued, the patents will afford protection against competitors with similar
technology; nor can there be any assurance that any patents issued to the
Company will not be infringed or circumvented by others or that others will not
obtain patents that the Company would need to license or circumvent. There can
be no assurance that licenses that might be required for the Company's processes
or products would be available on reasonable terms, if at all. In addition,
there can be no assurance that the Company's patents, if issued, would be held
valid by a court if challenged.
 
     The Company's generic and specialty pharmaceutical businesses rely upon
unpatented trade secrets and proprietary technologies and processes. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques, or gain access to the
Company's trade secrets or proprietary technology, or that the Company can
meaningfully protect its right to unpatented trade secrets. The Company requires
its employees, consultants and other advisors to execute confidentiality
agreements. However, there is no assurance that these agreements will provide
meaningful protection for the Company's trade secrets or adequate remedies in
the event of unauthorized use or disclosure of such information. The manufacture
and sale of certain products by the Company will involve the use of processes,
products or information, the rights to certain of which are owned by others.
Although the Company has obtained licenses with regard to the use of certain of
such processes, products and information, there can be no assurance that such
licenses will not be terminated or expire during critical periods, that the
Company will be able to obtain licenses for other rights which may be necessary,
or, if obtained, that such licenses will be obtained on commercially reasonable
terms. If the Company is unable to obtain such licenses, the Company may have to
develop alternatives to avoid infringing patents of others, potentially causing
increased costs and delays in product development and introduction or precluding
the Company from developing, manufacturing or selling its proposed products.
Additionally, there can be no assurance that the patents underlying any such
licenses will be valid and enforceable. To the extent any products developed by
the Company are based on licensed technology, royalty payments on the licenses
will reduce the Company's gross profit from such product sales and may render
the sales of such products uneconomical.
 
     MycoDot(R), NicErase(R), MycoAKT(R), NicCheck(R) and OrthoDyn(R) are
registered trademarks of the Company. Other trademarks included in this Report
are the property of their respective owners.
 
EMPLOYEES
 
     As of March 20, 1998, the Company and its subsidiaries had 133 full-time
employees, of whom 115 were employed in selling, general and administrative
activities and 18 were employed in research and development and manufacturing of
its products. Three of the Company's employees hold doctoral degrees. None of
the Company's employees are represented by a union. The Company believes its
relationship with its employees is good.
 
                                       15
<PAGE>   16
 
ITEM 2.  PROPERTIES
 
     The Company maintains its principal executive offices at 840 Memorial Drive
in Cambridge, Massachusetts. The premises, which consist of approximately 12,262
square feet of space, are leased from an unaffiliated party, for a term expiring
on September 19, 2002.
 
     The Able Laboratories subsidiary is located at a 46,000 square foot leased
manufacturing facility in South Plainfield, New Jersey. The premises are leased
from an unaffiliated party for a term expiring on March 31, 2000.
 
     Superior is located in a 37,300 square foot facility in Cincinatti, Ohio.
The property is leased from a partnership of three of Superior's former
stockholders for a term expiring on March 31, 2015.
 
     GDI is located in a 11,000 square foot leased facility in Monroe,
Louisiana. The property is leased from an unaffiliated party for a term expiring
on August 31, 1998.
 
     The Company believes that its present facilities are adequate to meet its
current needs. If new or additional space is required, the Company believes that
adequate facilities are available at competitive prices in the respective areas.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company is involved in certain legal proceedings incidental to its
normal business activities. While the outcome of any such proceedings cannot be
accurately predicted, the Company does not believe the ultimate resolution of
any existing matters should have a material adverse effect on its financial
position or results of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders, whether through
the solicitation of proxies or otherwise, during the year ended December 31,
1997.
 
                                       16
<PAGE>   17
 
PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock and Redeemable Common Stock Purchase Warrants
("Public Warrants") are traded principally on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "DYGND" and "DYGNW," respectively, and on the
Boston Stock Exchange under the symbols "DYG" and "DYGW," respectively. The
following table sets forth, for the periods indicated, the range of quarterly
high and low sale prices as reported on Nasdaq for the Company's Common Stock,
Public Warrants and Class A Public Warrants.
 
<TABLE>
<CAPTION>
                                                     COMMON            PUBLIC        CLASS A PUBLIC
                                                    STOCK(1)         WARRANTS(1)       WARRANTS(2)
                                                 ---------------   ---------------   ---------------
                                                  HIGH     LOW      HIGH     LOW      HIGH     LOW
                                                 ------   ------   ------   ------   ------   ------
<S>                                              <C>      <C>      <C>      <C>      <C>      <C>
Fiscal 1996
July 1 to September 30, 1995...................  $65.47   $16.25   $50.00   $ 5.00   $51.87   $10.00
October 1 to December 31, 1995.................   38.88    18.75    28.12    10.00    28.13     5.62
January 1 to March 31, 1996....................   36.56    23.13    24.37    13.12       --       --
April 1 to June 30, 1996.......................   31.87    21.25    25.00    11.25       --       --
 
Transition Period 1996
July 1 to September 30, 1996...................  $25.63   $15.00   $16.23   $ 8.74       --       --
October 1 to December 31, 1996.................   18.75    10.31    10.00     1.56       --       --
 
Fiscal 1997
January 1 to March 31, 1997....................  $24.69   $12.81   $15.00   $ 3.75       --       --
April 1 to June 30, 1997.......................   16.88     9.69     7.50     4.06       --       --
July 1 to September 30, 1997...................   10.63     3.75     5.94     0.63       --       --
October 1 to December 31, 1997.................    5.94     1.25     3.75     0.63       --       --
</TABLE>
 
---------------
(1) Prices have been adjusted to reflect a one-for-ten reverse split of the
    Company's outstanding shares of common stock effective March 10, 1998.
 
   
(2) The Company's Class A Public Warrants were redeemed in October 1995.
    
 
     On March 31, 1998, the last reported sale prices of the Company's Common
Stock and Public Warrants as reported on Nasdaq were $0.56 and $.16,
respectively.
 
   
     As of March 31, 1998, based upon information from the Company's transfer
agent, there were approximately 739 holders of record of the Company's Common
Stock. As of such date, the Company estimated that there were approximately
12,000 beneficial holders of the Company's Common Stock.
    
 
SALES OF UNREGISTERED SECURITIES
 
     Between October 10, 1997 and December 5, 1997, the Company sold 2,500
shares of Series A Preferred Stock and Common Stock Purchase Warrants to
purchase an aggregate of 20,000 shares of Common Stock to unaffiliated
accredited investors in private placements in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act. The firm of H.J.
Meyers & Co., Inc. acted as placement agent for the sale of these securities.
The Company received $250,000 in proceeds from the sale of the shares. The terms
of the subscription provided that the shares of Series A Preferred Stock would
be convertible into Common Stock at the lesser of (i) 120% of the average
closing bid price of the Company's Common Stock as reported by the Nasdaq
SmallCap Market (or such other exchange on which the Common Stock is then
traded) for the five trading days immediately preceding the date on which the
Securities and Exchange Commission (the "Commission") declared effective the
registration statement to be filed registering the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock and exercise of the
warrants or (ii) a discount on the average closing bid price of the Company's
Common Stock as reported by the Nasdaq SmallCap Market (or such other exchange
on which the Common Stock is then traded) for the five trading days immediately
preceding the date on which the Series A Preferred Stock is converted. The terms
of the warrants
 
                                       17
<PAGE>   18
 
provided that they would be exercisable at a price equal to 120% of the average
closing bid price of the Company's Common Stock as reported by the Nasdaq
SmallCap Market (or such other exchange on which the Common Stock is then
traded) for the five trading days immediately preceding the date on which the
Commission declared effective the registration statement to be filed registering
the shares of Common Stock issuable upon conversion of the Series A Preferred
Stock and exercise of the warrants. See Note 13 to the financial statements
included in this Report, entitled "Subsequent Events," for information relating
to sales of unregistered securities during the first quarter of 1998.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
herein.
 
   
<TABLE>
<CAPTION>
                                          TRANSITION
                           YEAR ENDED    PERIOD ENDED                   YEARS ENDED JUNE 30,
                          DECEMBER 31,   DECEMBER 31,   -----------------------------------------------------
                              1997           1996          1996          1995          1994          1993
                          ------------   ------------      ----          ----          ----          ----
<S>                       <C>            <C>            <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS
  DATA:
Revenues................  $ 14,009,730   $   359,908    $   555,745   $   497,553   $   437,005   $   883,910
Costs and Expenses......    24,087,512     4,687,745      5,899,650     3,836,295     4,264,141     4,388,575
Loss From Continuing
  Operations............   (12,241,278)   (4,306,140)    (5,097,419)   (3,042,383)   (3,645,804)   (3,405,387)
Loss From Discontinued
  Operations............            --            --             --            --       (14,945)      (48,095)
Net Loss................   (12,241,278)   (4,306,140)    (5,097,419)   (3,042,383)   (3,660,749)   (3,453,482)
Loss Per Share:
  From Continuing
     Operations.........         (4.48)        (2.44)         (2.09)        (1.44)        (2.21)        (2.64)
  From discontinued
     Operations.........                          --             --            --            --            --
  Net Loss..............         (4.48)        (2.44)         (2.09)        (1.44)        (2.21)        (2.64)
Weighted Average Number
  of Shares
  Outstanding...........     3,204,163     2,879,412      2,443,395     2,117,970     1,651,712     1,307,056
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                               AT             AT                             AT JUNE 30,
                          DECEMBER 31,   DECEMBER 31,   -----------------------------------------------------
                              1997           1996          1996          1995          1994          1993
                          ------------   ------------      ----          ----          ----          ----
<S>                       <C>            <C>            <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Total Assets............  $ 29,348,114   $ 7,463,149    $11,576,666   $ 5,114,021   $ 7,834,706   $ 5,602,289
Convertible Note Paya-
  ble...................       535,000     1,600,000      2,000,000            --            --            --
Long term debt..........       328,500            --             --            --            --            --
Warrant put liability...       750,594            --             --            --            --            --
Total Liabilities.......    26,723,486     2,409,133      2,733,032       587,207       420,964       441,171
Working Capital (Defi-
  cit)..................   (12,790,390)    5,502,295     10,203,693     4,102,747     6,967,894     4,584,747
Stockholders' Equity....     2,624,628     5,054,016      8,843,634     4,526,814     7,413,742     5,161,118
</TABLE>
    
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     Note: The information set forth below should be read in connection with the
financial statements and notes thereto, as well as other information contained
in this Report which could have a material adverse effect on the Company's
financial condition and results of operations. The reader's attention is
directed, in
 
                                       18
<PAGE>   19
 
particular, to the matters described under the headings "Special Considerations"
and "Risk Factors" contained elsewhere in this Report.
 
OVERVIEW
 
   
     The Company develops and markets proprietary and generic therapeutic and
diagnostic products for the human health care market. The Company has begun
expanding its business focus from being a development and licensing company to
building a diversified health care company focused on the manufacture and
distribution of generic drug products and specialty pharmaceuticals as well as
the continued development of therapeutic and diagnostic products. The Company
intends to implement this strategy through the acquisition of businesses,
technologies and products that the Company believes are undervalued as well as
through internal product development. In August 1996, the Company acquired the
tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical
product subsidiary of Alpharma, Inc. In addition, the Company has purchased all
of the outstanding shares of Superior Pharmaceutical Company ("Superior"), a
distributor of generic pharmaceuticals. In March 1998, the Company, through its
wholly-owned subsidiary Generic Distributors, Incorporated ("GDI"), completed
the acquisition of Generic Distributors Limited Partnership ("GDI").
    
 
   
     The Company has financed its operations primarily through the proceeds from
its public and private stock offerings, a convertible note, back debt and other
loans and limited revenues from product sales and technology license fees and
royalties. Management anticipates that revenues from product sales will not be
sufficient to fund its current operations or produce an operating profit until
such time as the Company is able to establish acceptance of its products in
their respective markets and expand its distribution channels. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
    
 
  Results of Operations
 
  Year Ended December 31, 1997 as Compared with the Six-Month Period Ended
December 31, 1996
 
   
     Revenues for the year ended December 31, 1997 were $14,009,730 versus
$359,908 for the six-month Transition Period ended December 31, 1996. This
increase of $13,323,758 is primarily the result of product sales by the
Company's wholly-owned generic pharmaceutical subsidiaries, Able (acquired in
August 1996) and Superior (acquired in June 1997). During the six-month
Transition Period ended December 31, 1996, the Company was primarily a research
and development company with limited reserves. The Company's revenues for the
Transition Period were derived primarily from the post-acquisition product sales
by Able.
    
 
   
     Cost of product sales was approximately 95% of product sales for the year
ended December 31, 1997 due to low production and sales levels at Able which did
not support the fixed manufacturing costs of the Able facility. Cost of product
sales for Superior for the period since acquisition was approximately 81%.
During the six-month Transition Period ended December 31, 1996, the cost of
sales was 99% of product sales, again reflecting extremely low utilization of
Able's manufacturing capacity.
    
 
   
     Research and development expenses for the year ended December 31, 1997 were
$3,220,283 versus $1,092,253 for the six-month Transition Period ended December
1996. 1997 R&D expenses were primarily the result of the NicErase-SL Phase 3
clinical trials, now concluded, and the NicErase-SL development program which
has been discontinued. The Company is also developing several generic versions
of branded pharmaceuticals to support its generic drug business.
    
 
   
     Selling, general and administrative expenses for the year ended December
31, 1997 were $7,611,578 versus $3,239,180 for the six-month Transition Period
ended December 31, 1996. 1997 expenses were primarily attributable to
acquisition and business development costs, compensation expense of $801,034
recognized from the issuance of stock options and warrants, and the inclusion in
1997 of selling, general and administrative expenses of the Company's subsidiary
operations at Able and Superior.
    
 
     Investment income was $120,359 for the year ended December 31, 1997 as
compared to $157,788 for the six-month Transition Period ended December 31,
1996, as the Company had less funds available for investment. Interest and
financing expenses of $2,283,855 for the year ended December 31, 1997, compared
to
 
                                       19
<PAGE>   20
 
$136,091 for the six-month Transition Period ended December 31, 1996, relate
primarily to private placements of equity as well as private debt financing for
the Superior acquisition.
 
  Six-Month Transition Period Ended December 31, 1996 Compared with the
Six-Month Period Ended December 31, 1995
 
  Revenues
 
     Revenues for the six month period ended December 31, 1996 (the "Transition
Period") were $360,000 versus $333,000 for the six months ended December 31,
1995. This increase of $27,000 is a result of an increase in Able product sales
partially offset by a decrease in fee revenue which was due to one-time fees
from Bristol-Meyers Products recognized during the six months ended December 31,
1995. The increase in product sales resulted from the Company realizing sales
from its Able subsidiary since its acquisition on August 19, 1996. The Company's
product sales also increased due to improved diagnostic products sales.
 
  Cost of Sales
 
     Cost of sales was 99% of product sales for the Transition Period compared
with 50% for the six months ended December 31, 1995. Tablet and suppository
production at Able during the Transition Period did not support the minimum
level of fixed manufacturing costs required at the facility. Management expects
that the cost of product sales, as a percentage of sales, will decrease as sales
orders and production volumes increase.
 
  Research and Development Expenses
 
     Research and development expenses for the Transition Period were $1,092,000
versus $1,037,000 for the six months ended December 31, 1995, an increase of
$55,000. This increase is primarily attributable to costs associated with the
ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a
510(k) application with the U.S. Food and Drug Administration for its
NicCheck(R) product. The Company is also conducting early stage research on a
bacterial extract for the treatment of infectious diseases.
 
  Selling, General and Administrative Expenses
 
     Selling, general and administrative expenses for the Transition Period were
$3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an
increase of $2,050,000. The increase in selling, general and administrative
expenses is primarily due to additional payroll and plant operating costs of
approximately $793,000 resulting from the acquisition of Able. In addition, the
Company incurred additional costs of approximately $865,000 for the use of
business consultants to develop, seek and obtain alliances for certain Company
products, potential products and financial development. The Company incurred
additional costs of approximately $80,000 towards patent applications for
several of its products. Legal expenses increased by approximately $106,000
primarily related to assistance with technology licensing, pending acquisitions
and corporate regulatory filings. The remainder is due to a net increase in
other operating expenses.
 
  Other Income (Expense)
 
     Investment income increased by $46,000 from $112,000 to $158,000 for the
Transition Period as compared to same period ended December 31, 1995. The
Company had greater funds available for investment during the Transition Period
compared to the six months ended December 31, 1995.
 
     The Company incurred interest expense of $74,000 and amortized debt
financing costs of $62,000 during the Transition Period, both associated with
the $2,000,000 convertible note issued in 1996.
 
  Income Taxes
 
     There were no provisions for income taxes for the Transition Period and the
six months ended December 31, 1995 due to operating losses incurred by the
Company and valuation reserves applied against deferred tax assets. As of
December 31, 1996 and December 31, 1995, for Federal and state income tax
reporting purposes, the Company had net operating loss carry forwards of
approximately $23,460,000 and
 
                                       20
<PAGE>   21
 
$19,270,000 respectively. In addition, the Company had Federal and state
research tax credit carry forwards of approximately $583,000 and $120,000,
respectively, available to reduce future tax liabilities.
 
  Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
 
  Revenues
 
     Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000
versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase
of $58,000 is a result of an increase in license fees of $85,000 offset by a
$27,000 decrease in product sales. The increase in license fee revenue is
attributable to one-time license fees received under distribution arrangements
for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec
product sales remained consistent between Fiscal 1996 and Fiscal 1995. The
decrease in total product sales resulted from lower shipments of other products
in Fiscal 1996.
 
  Cost of Sales
 
     Cost of product sales was 44% of net product sales in Fiscal 1996 compared
to 54% in Fiscal 1995. This decrease in the cost of sales percentage is
primarily attributable to a reallocation of certain manufacturing staff to
product marketing and support roles.
 
  Research and Development Expenses
 
     Research and development expenses were $3,118,000 for Fiscal 1996 versus
$1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is
primarily due to approximately $1,200,000 in additional therapeutic product
development costs and $285,000 in compensation expense resulting from stock
grants. The increase in therapeutic development is mainly attributable to the
initiation of the first of two planned pivotal Phase 3 clinical trials for the
Company's NicErase-SL smoking cessation product.
 
     The increase in research and development expenses was partially offset by a
decrease in diagnostic product development costs of $74,000. The Company has
limited diagnostic product development primarily to NicCheck, a test to detect
the presence of nicotine.
 
  Selling, General and Administrative Expenses
 
     Selling, general and administrative expenses for Fiscal 1996 were
$2,685,000 versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling,
general and administrative expenses increased in the following areas: staffing
-- $355,000, investor relations -- $165,000, consulting -- $111,000 and legal --
$62,000. The increase in investor relations expenses is attributable to a new
program designed to inform investors on corporate developments and strategy.
Legal expenses increased primarily for assistance with certain licensing
arrangements, regulatory issues, stock grants and options. The increase in
staffing expenses is primarily due to the award of stock grants and options.
Consulting expenses relate to assistance provided towards developing a strategy
for business alliances for certain Company products.
 
  Other Income (Expense)
 
     The increase in investment income is primarily due to greater funds
available for investment during Fiscal 1996. The increases in interest expense
and debt financing cost amortization are attributable to the $2,000,000
convertible note issued in 1996.
 
  Income Taxes
 
     There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995
due to operating losses incurred by the Company and valuation reserves applied
against deferred tax assets.
 
LIQUIDITY AND CAPITAL RESOURCES
 
   
     As of December 31, 1997, the Company had a working capital deficit of
$12,790,390, compared to working capital of $5,502,295 at December 31, 1996.
Cash and investment securities were $697,045 at December 31, 1997 compared to
$5,117,000 at December 31, 1996. Working capital was used primarily to
    
 
                                       21
<PAGE>   22
 
   
fund the Company's operating losses, including approximately $2,900,000 of
operating losses of its Able subsidiary, as well as accrual of a liability in
the amount of approximately $4,000,000 relating to a contingent share issuable
associated with the Superior acquisition and research and development costs of
approximately $3,000,000. The Company expects its cash needs for the next 12
months to be approximately $7,000,000. Of this amount, approximately $3,000,000
is expected to be general and administrative and approximately $4,000,000 is
expected to be for working capital. The Company expects to generate the needed
cash through additional financing activities. If the Company is not able to
raise the needed financing, it may need to seek the protection of the bankruptcy
courts. See "Special Considerations -- Financial Condition of the Company" and
"Risk Factors -- Financial Condition".
    
 
   
     In June 1997, the Company completed the acquisition of Superior
Pharmaceutical Company, of Cincinnati, Ohio, for a purchase price of $16.5
million in cash, notes and stock. The Company guaranteed that the selling
shareholders would receive at least $5,000,000 in the stock value as of June
1998. The agreement provides that the Company will make up any shortfall in this
guaranteed stock value through the issuance of additional stock and cash. The
Company is currently trying to renegotiate its obligations to the selling
shareholders of Superior. No assurance can be given that the Company will be
successful in this effort. If the Company is not able to renegotiate these
obligations, it may need to seek the protection of the bankruptcy courts. See
"Special Considerations -- Financial Condition." Superior markets and
distributes generic prescription and over-the-counter pharmaceuticals to
independent, chain and institutional pharmacies throughout the United States.
The Company financed this acquisition by issuing Series A and Series B Preferred
Shares which yielded $6,100,000 and subordinated debt of $3,000,000 obtained
from two institutional lenders. The Company also invested $1,500,000 in Superior
towards working capital as required by the secured lender. Superior has a
$9,000,000 secured revolving facility through Huntington National Bank, of
Cincinnati, Ohio.
    
 
   
     Furthermore, subsequent to the acquisition of Superior in June 1997,
Superior experienced loss of key personnel, declining revenues, erosion of
margins and an overall decline in its business. These factors have resulted in
the Company not meeting certain loan covenants stipulated by the secured and
subordinated lenders. As a result, the secured lender has agreed to extend the
credit line that matured in April 1998 for 60 days and upon review of the
Company's performance may consider further extension. The Company obtained a
waiver and extension of the third quarterly payment of $515,625 to the selling
shareholders which was due on March 31, 1998. The agreement provides that the
selling shareholders of Superior may draw this payment out of its operating cash
flows provided that Superior and DynaGen meet the loan covenants. The Company
has also received an extension on the payment of the $535,000 note which matured
on February 7, 1998.
    
 
   
     The Company has begun initial discussions with the selling shareholders of
Superior to renegotiate the payment of $5,000,000 in equity due in June 1998.
While these discussions have been positive, there is no assurance that the
parties will come to an agreement or that such an agreement, if reached, will be
on terms favorable to the Company. Failure to reach an agreement will result in
further defaults on the Company's loan covenants and may allow the selling
shareholders certain rights under the purchase and sale agreement, including but
not limited to the pledge of all of Superior's shares. While neither the selling
shareholders nor the secured lender nor the subordinated lender have informed
the Company of their intentions to exercise their rights under various
agreements, there is no assurance that the Company will successfully renegotiate
the covenants, come in compliance with the existing or proposed covenants and
reclassify its obligations as either long-term debt or equity. In such
circumstances, the Company will continue to show substantial working capital
deficit and continue to be in default of its agreements. If the Company is not
able to renegotiate the selling shareholders of Superior or renegotiate or meet
its obligations to Huntington National Bank, the Company may need to seek the
protection of the bankruptcy courts.
    
 
     The Company continues to operate its Able Laboratories, Inc. manufacturing
facility for manufacture and distribution of generic drugs. In March 1997, the
Company entered into an agreement with Kali Laboratories for development and
clinical testing of certain prescription pharmaceuticals. Under this agreement,
Kali would be reimbursed for its development efforts on a milestone basis and
receive royalties from the sale of the products. Able has a working capital
deficit and management expects Able will require approximately $4,000,000 in the
next 12 months to continue operations. No assurance can be given that such
                                       22
<PAGE>   23
 
financing will be available upon reasonable terms. If the Company cannot obtain
sufficient financing or otherwise meet Able's requirements, the Company may be
required to close that operation or seek protection of the bankruptcy courts.
 
   
     The Company's private placement of Series A and Series B Preferred Shares
allowed investors to convert into shares of common stock at a floating discount
to the market of approximately 25%. This investment, along with the outlicensing
of the Company's lead product, NicErase-SL, and continued losses at both DynaGen
and Able, resulted in a severe negative impact on the Company's stock price. The
stock price was further depressed due to below-market conversions and selling of
common shares by the holders of Series A and Series B Preferred Shares. As a
result, the Company reached its limit of 75,000,000 authorized shares. On March
4, 1998, the Company held a special meeting of stockholders and approved a one
for ten reverse split of its outstanding share. As a result, at the effective
date of the reverse split, March 10, 1998, 75,000,000 shares of common stock,
$0.01 par value per share, were authorized, and approximately 7,500,000 were
issued and outstanding. As of March 31, 1998, there were 14,667,951 shares of
Common Stock outstanding. This increase is due to conversions of preferred
stock.
    
 
     Management has initiated intensive reviews of its operations and is
implementing plans to cure defaults, raise additional equity, and improve the
liquidity and cash resources for general working capital purposes. Specifically,
at the corporate level, the Company has discontinued all R&D activity either
through terminating the programs or outlicensing the products to other
companies. The Company's lead product to date, NicErase-SL, has been licensed to
Nastech Pharmaceutical, of Hauppauge, NY. The Company has reduced its workforce
by approximately 40 employees through termination and attrition. The Company is
also negotiating to sublease all or part of its current facilities in Cambridge,
MA to further reduce its overhead expenses. In 1998, management expects to
maintain a skeleton staff of approximately seven full-time and four part-time
employees to manage the corporate functions of the Company. Management is also
actively reviewing every cost center for further optimization and cost
reductions.
 
     In November 1997, the Company initiated the same measures at its Able
manufacturing facility. The Company has reduced its workforce by 50 percent
through terminations and attrition. Management has actively initiated programs
to increase sales of its products to existing customers and is seeking to bring
back customers it has lost over the past two years. The Company is also
renegotiating its development agreement with Kali Laboratories to minimize
further cash outlays for product development. The Company has also received
offers from two service contractors for clinical testing in return for deferred
compensation, warrants and royalty payments on new products. The Company has
also initiated a modest internal R&D program at Able to develop prescription
drugs which do not require FDA approval. These "grandfathered" products are
expected to generate revenues by December 1998. Management expects that given
the capital resources, the operations at Able Laboratories could increase sales
and result in marginal losses beginning in the year 1999.
 
     Management in conjunction with key personnel at Superior has implemented a
program to reverse the decline in the general business of the Company. Specific
actions taken at Superior include recruitment of key personnel, optimization of
the product line, reduction in the G&A expenses and an aggressive program to
seek competitive business in both the government as well as corporate sectors.
Superior is also negotiating with its primary vendors' supply agreements on
favorable terms which will improve the gross margins and make Superior more
competitive in the marketplace.
 
     To date, the Company has met substantially all of its requirements for
capital through the sale of its securities. The negative impact of the events in
1997 has therefore severely limited the Company's ability to raise further
capital in a conventional sale of its securities. The Company plans to raise
capital in order to finance the working capital requirements. There can be no
assurance that the Company will be able to secure additional financing or that
such financing will be available on favorable terms. Specifically, the Company
is negotiating with an investment banker to provide the Company with
intermediate financing. It is anticipated that this financing will be either
repaid or converted into equity at the option of the Company at least 12 months
from the closing. Management believes that any financing which will create
short-term supply or additional common shares in the market would only result in
further depression of the price, making it even further difficult to raise
capital. Therefore, the Company intends to seek financing primarily from those
 
                                       23
<PAGE>   24
 
sources who will be long-term investors. In view of the Company's current stock
price and its financial condition, it is exceedingly difficult to find such
investors. However, the Company has had limited and preliminary discussions with
investors and the above-referenced investment banker and believes that the
short-term financing could become available over the next several weeks. The
Company plans to use the interim financing for general working capital, partial
payment to the creditors and the limited internal R&D program at Able. If the
Company cannot raise such financing, it may be forced to seek the protection of
the bankruptcy courts. See "Special Considerations" and "Risk
Factors -- Financial Condition."
 
     The Company is also pursuing additional sources of capital for the
long-term needs of the Company. The Company has engaged a merchant banking firm
to seek direct investments into its subsidiaries, specifically Able
Laboratories, in return for equity and royalties. There is no assurance that
such financing will be available, and if available will be on terms favorable to
the Company. Furthermore, management has evaluated proposals which may include
raising additional capital through the sale of registered securities. The
Company has filed a registration statement on Form S-3 for the sale of Series D
Convertible Preferred Shares. The registration statement has not been declared
effective. The Company expects to raise substantial additional capital through
this arrangement. If the Company cannot raise such financing, it may be forced
to seek the protection of the bankruptcy courts. See "Special Considerations"
and "Risk Factors -- Financial Condition."
 
     The Company has also been working with its trade creditors to reduce its
obligations. A substantial majority of the creditors have accepted the Company's
payments plans, which include periodic payments, discounts of amounts
outstanding, and acceptance of Company shares.
 
                                  RISK FACTORS
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including but not limited to, statements
contained in "Item 1. Business" relating to the Company's strategy with respect
to the development and marketing of the Company's products and to statements
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form 10-K,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
 
     The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
 
   
     Financial Condition.  For the year ended December 31, 1997, the Company
incurred net losses of approximately $12,241,278. For the three months ended
March 31, 1998, the Company expects to incur substantial net losses. As of
December 31, 1997, the Company had approximately $697,045 in cash and cash
equivalents and a net worth of $2,624,628. The Company's current liabilities, as
of such date, aggregated approximately $25,644,392. The Company expects its cash
needs for the next twelve months to be approximately $7,000,000. The Company
does not presently have adequate cash from operations to meet these needs. In
order to meet its needs for cash to fund its operations, the Company must obtain
additional financing and renegotiate the terms of its current arrangements with
creditors. The Company is presently in default under a number of its
arrangements, agreements and instruments with creditors, with the result that
the
    
                                       24
<PAGE>   25
 
Company's obligations under such agreements and instruments may be accelerated.
If the Company is unable to obtain significant additional financing or to
renegotiate its arrangements with existing creditors, it may be obliged to seek
protection from its creditors under the bankruptcy laws. See "Special
Considerations -- Company's Common Stock May Be Delisted From Nasdaq Stock
Market; "Management's Discussion and Analysis -- Liquidity and Capital
Resources"; and the financial statements and notes thereto included as part of
this Report.
 
     Ability to Continue As A Going Concern.  The Company's independent auditors
have issued an opinion on the financial statements of the Company, as of
December 31, 1997 and for the year then ended which includes an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern. Among the reasons cited by the independent auditors as
raising substantial doubt as to the Company's ability to continue as a going
concern are the following: the Company has incurred recurring losses from
operations resulting in an accumulated deficit and a working capital deficiency
at December 31, 1997. In addition, the Company has debt obligations which are in
default and a liability in connection with its acquisition of Superior
Pharmaceutical Company, and the equity of Superior Pharmaceutical Company is
restricted under the terms of Superior's loan agreement. These circumstance
raise substantial doubt about the Company's ability to continue as a going
concern. If the Company is unable to secure significant additional financing or
to renegotiate its agreements with its existing creditors, it may be obliged to
seek protection from its creditors under the bankruptcy laws. See "Special
Considerations -- Company's Ability to Continue As A Going Concern";
"Management's Discussion and Analysis -- Liquidity and Capital Resources"; and
the financial statements and notes thereto included as part of this Report.
 
     Common Stock Subject to Delisting From Nasdaq SmallCap Market.  The Company
has received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that it does
not meet the applicable listing requirements and that the Company's Common Stock
is therefore subject to delisting. The Company has contested the delisting of
its securities in accordance with Nasdaq's procedures. The Company does not meet
the Nasdaq listing requirements. Although Nasdaq has the discretion to grant
exceptions to the listing requirements, there is no assurance that it will do so
in the Company's case. The Company anticipates that, if its Common Stock is
delisted from the Nasdaq SmallCap Market, it will continue to trade on the
Boston Stock Exchange and may also be quoted on the OTC Bulletin Board. However,
delisting of the Company's Common Stock from the Nasdaq SmallCap Market could
have a material adverse effect on the liquidity of the Common Stock and on the
Company's ability to raise capital necessary for the Company's continued
operations. See "Special Considerations -- Company's Common Stock May Be
Delisted From Nasdaq Stock Market."
 
   
     History of Losses; Anticipation of Future Losses.  The Company has incurred
operating losses since its inception and has an accumulated deficit of
$36,556,469 as of December 31, 1997. The Company incurred a net loss of
$12,241,278 for the twelve months ended December 1997, as compared with a net
loss of $7,593,741 for the same period ended December 31, 1996. The Company
incurred a net loss of $4,306,140 for the six months ended December 31, 1996, as
compared with a net loss of $1,809,816 for the same period ended December 31,
1995. The Company incurred a net loss of $5,097,419 for the fiscal year ended
June 30, 1996, compared with a net loss of $3,042,383 for the fiscal year ended
June 30, 1995. Such losses have resulted principally from expenses incurred in
research and development and from general and administrative costs associated
with the Company's development efforts. In addition, the Company's Able
subsidiary has incurred operating losses resulting primarily from insufficient
revenues. The continued development of the Company's products will require the
commitment of substantial resources to conduct further development and
preclinical and clinical trials, and to establish manufacturing, sales,
marketing, regulatory and administrative capabilities. The Company expects to
incur substantial operating losses over the next several years as its product
programs expand, various clinical trials commence and marketing efforts are
launched. The amount of net losses and the time required by the Company to reach
sustained profitability are highly uncertain, and to achieve profitability the
Company must, among other things, successfully complete development of its
products, obtain regulatory approvals, and establish manufacturing and marketing
capabilities by itself or with third parties. There is no assurance that the
Company will ever generate substantial revenues from its proprietary and generic
products or achieve profitability.
    
 
                                       25
<PAGE>   26
 
     Future Capital Needs; Uncertainty of Additional Funding.  It is anticipated
that the Company will continue to expend significant amounts of capital to fund
its research and development, clinical trials and generic pharmaceutical
business and future acquisitions, if any. The Company's available working
capital is inadequate for completion of the Company's development programs, and
additional financing will be necessary for the continued support of the
Company's proposed products and operations, including the establishment of
manufacturing, marketing and distribution capabilities for its proposed products
and the continued operations of Able, Superior and GDI. There can be no
assurance that the Company will be able to secure additional financing or that
such financing will be available on favorable terms. If the Company is unable to
obtain such additional financing, the Company's ability to maintain its current
level of operations would be materially and adversely affected and the Company
will be required to reduce or eliminate its expenditures relating to its
business.
 
     Risks Associated with Subsidiary Operations.  The Company's results of
operations depend to a large degree upon the performance of its subsidiaries,
including its recently acquired subsidiaries Able, Superior and GDI. In its role
as a holding company with respect to these subsidiaries, the Company is
dependent on dividends or other intercompany transfers for funds from the
subsidiaries to meet the Company's obligations. Agreements between the Company
and certain of its creditors restrict the Company's ability to cause its
subsidiaries to make such dividends or other intercompany transfers. Claims of
creditors of the Company's subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims of
the Company and the holders of the Company's indebtedness.
 
   
     Contingent Obligations with Respect to Superior Acquisition.  The Company
used a combination of cash, a note and 166,667 shares of Common Stock (after
giving effect to a one-for-ten reverse split of the common stock outstanding) to
acquire Superior in June 1997. The Agreement and Plan of Merger for the Superior
acquisition provides that the Company is also obligated to issue to the former
stockholders of Superior up to an additional 1,666,667 shares of Common Stock if
on June 18, 1998 the Common Stock has not had an average closing bid price of at
least $3.00 per share for the 10 previous trading days. The merger agreement
provides further that if the Common Stock is not trading at least $1.50 per
share, DynaGen shall pay to the former Superior stockholders in immediately
available funds the difference between $5,000,000 and the then current aggregate
market value of the shares then held by the former Superior stockholders. If the
Common Stock continued to trade at its present price of approximately $0.50 per
share, the Company would become obligated to pay approximately $4,800,000 in
cash to the former stockholders of Superior. There can be no assurance that the
Common Stock will be traded at a price of $1.50 or greater as of June 18, 1998
or that the Company will have the ability to meet any future obligation to pay
cash to the former Superior stockholders. The Company's inability to meet any
such obligation or other fixed or contingent obligations of the Company as they
become due could have a material adverse effect on the Company's ability to
continue its operations.
    
 
     Uncertainties Related to NicErase.  Under applicable law, the Company's
current or future licensees will not be permitted to sell NicErase, and thus
generate any revenue from their development of NicErase, unless they obtain the
necessary regulatory approvals from the FDA for the commercial sale of that
product. To obtain such regulatory approvals, the Company's current or future
licensees must demonstrate to the satisfaction of the FDA, through preclinical
studies and clinical trials, that NicErase is safe and effective. In light of
the Company's recently completed pivotal Phase 3 clinical trial of NicErase-SL,
which did not show statistically significant efficacy, the Company is unable to
predict whether delivery formulations of lobeline other than sublingual will
demonstrate acceptable safety and efficacy to obtain FDA approval. There can be
no assurance that the Company's current or future licensees will be able to
successfully formulate new delivery systems for lobeline, that such licensees
will have sufficient technological or financial resources to initiate and
complete the required clinical trials, or that such trials will demonstrate
sufficient safety and efficacy to obtain the required regulatory approvals or
develop marketable products. A number of companies in the pharmaceutical
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. If any future clinical trials do not
show NicErase to be safe and effective in any alternative delivery format, and
if the Company's licensees are thus unable to commercialize NicErase, the
Company will not realize any revenues from the NicErase product.
 
                                       26
<PAGE>   27
 
     Integration of Acquisitions.  In August 1996, the Company acquired
substantially all of assets of Able, in June 1997, the Company purchased all of
the outstanding shares of Superior and in March 1998, the Company acquired
substantially all of the assets of GDI. There can be no assurance that the
anticipated benefits from the acquisitions will be realized. Additionally, there
can be no assurance that the Company will be able to effectively market the
existing Able products, that it will obtain FDA approval to market additional
generic drugs or that it will be successful in managing the combined operations.
The integration of operations of the Company's subsidiaries requires substantial
attention from management, many of whom have limited experience in integrating
acquisitions. The diversion of management's attention, the process of
integrating the businesses and any difficulties encountered in the transition
process could cause an interruption of business, and could have a material
adverse effect on the Company's operations and financial performance.
 
   
     Loss of key employees.  The Company and its subsidiaries have in the past
year experienced loss of key personnel due to layoffs and attrition. While the
management believes that the remaining employees have adequately performed
routine tasks, it will be necessary to fill several of these positions in the
near term. There is no assurance that the Company will be able to attract and
retain qualified employees and that the remaining employees will continue to
perform these functions satisfactorily. The Company's inability to attract and
retain qualified employees may result in further decline in the Company's
business and its financial condition.
    
 
     Risks Associated with Managing a Changing Business.  The Company has begun
to expand its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products as well as the continued development of
therapeutic and diagnostic products. In order to achieve this expansion, the
Company must undergo substantial changes in its operations, which may
significantly strain the Company's limited administrative, operational and
financial resources. The ability of the Company to achieve its business
objectives will depend in large part on its ability to build and expand its
manufacturing operations and sales and marketing capabilities, to generally
expand its operational capabilities and its financial and management information
systems, to develop the management skills of its managers and supervisors and to
train, motivate and manage both its existing employees and the additional
employees that will be required if the Company is to expand its business. There
can be no assurance that the Company will succeed in developing all or any of
these capabilities, and any failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     Limited Manufacturing Capability and Experience.  The Company's
NicCheck(R), MycoDot(R) and MycoAKT(R) products are currently made by licensed
manufacturers. The Company intends to enter into licenses, joint venture and
similar collaborative arrangements with third parties for the manufacture of
other proprietary products and proposed products. There are no other such
agreements and there can be no assurance that the Company will be successful in
securing manufacturing agreements for its products or that such agreements will
prove to be on terms favorable to the Company. In addition, the Company's
dependence upon third parties for the manufacture of its products and proposed
products could have an adverse effect on the Company's profitability and its
ability to deliver its proposed products on a timely and competitive basis. To
the extent that the Company attempts to manufacture any of its products, there
can be no assurance that the Company will be able to attract and retain
qualified manufacturing personnel, or build or rent manufacturing facilities.
 
     The Company's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. In order to maintain
compliance with FDA Good Manufacturing Practices ("GMP") standards, the Company
will have to make significant investments in its infrastructure and plant
facility. The Company will need to raise capital to finance these investments
and there can be no assurance that the Company will be able to obtain such
financing or that such financing will be available on favorable terms. There can
be no assurance that such capital expenditures and overhead costs will not have
a material adverse effect upon the Company's ability to achieve profitability.
There can be no assurance that the Company will retain the key employees it
acquired in the Able acquisition.
 
     Limited Commercialization of Proprietary Products.  The Company has
commercially introduced and is currently marketing through distributors only
three of its proprietary products, yielding limited revenues from
 
                                       27
<PAGE>   28
 
the sale of these products. Historically, substantially all of the Company's
revenues had been generated from research and development contracts and license
fees. The Company's ability to achieve profitability will depend on its ability
to develop and introduce commercially viable products, obtain regulatory
approvals for these products and either successfully manufacture, market and
distribute such products on its own or enter into collaborative agreements for
product manufacturing, marketing and distribution. Many of the Company's
proposed therapeutic and diagnostic products will require substantial further
development, preclinical and clinical testing, and investment by the Company or
third party licensees in manufacturing, marketing and sales infrastructures
prior to their commercialization. No assurance can be given that the Company's
development efforts will be successfully completed, that regulatory approvals
will be obtained, or that these products, once introduced, will be successfully
marketed.
 
     Potential Product Liability; Limited Insurance Coverage.  The testing,
marketing and sale of pharmaceutical products for human use entail inherent
risks. Liability might result from claims made directly by consumers or by
pharmaceutical companies or others selling the Company's products. The Company's
Superior and Able subsidiaries presently carry product liability insurance in
amounts that the Company believes to be adequate, but there can be no assurance
that such insurance will remain available at a reasonable cost or that any
insurance policy would offer coverage sufficient to meet any liability arising
as a result of a claim. The Company intends to seek to obtain insurance coverage
if and when its proposed products are commercialized but can give no assurance
that it will be able to obtain such insurance on reasonable terms or that, if
obtained, such insurance will be sufficient to protect the Company against such
potential liability or at a reasonable cost. The obligation to pay any product
liability claim or a recall of a product could have a material adverse affect on
the business, financial condition and future prospects of the Company.
 
     Lack of Marketing Experience.  The Company currently does not plan to
market its proprietary products directly and does not have adequate resources or
expertise to develop a substantial marketing organization and internal sales
force for these products. Since the Company does not have the financial or other
resources to undertake extensive direct marketing activities, the Company
intends to enter into marketing arrangements with third parties, including
possible joint venture, license or distribution arrangements. While the Company
intends to license its products for manufacture and sale to established health
care or pharmaceutical companies, it has had very limited success in its efforts
to enter into such agreements to date. There can be no assurance that the
Company will be able to locate collaborative partners or that these strategic
alliances, if consummated, will prove successful.
 
     With respect to the Company's generic therapeutic products, there can be no
assurance that present and potential customers of Able and Superior will
continue their recent buying patterns, and any significant delay or reduction in
orders could have a material adverse effect on the Company's near-term business
and results of operations.
 
     Regulation by Government Agencies.  The Company's research, preclinical
development, clinical trials, manufacturing and marketing of its proposed
products are subject to extensive regulation by numerous governmental
authorities in the United States (including the FDA), and other equivalent
foreign regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing or marketing of its proposed products. Further,
additional governmental regulation may be established which could prevent or
delay regulatory approval of the Company's products. The regulatory process may
delay for long periods, and ultimately prevent, marketing of new products or
impose costly procedures that would have a materially adverse effect on the
Company's business. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
 
     The Company's success in the generic drug market depends, in part, on its
ability to obtain FDA approval of ANDAs for its new products, as well as its
ability to procure a continuous supply of raw materials and to validate the
manufacturing processes used to produce consistent test batches for FDA
approval. Sources for certain materials for the Company's products must be
approved by the FDA, and in many instances only one source has been approved. If
raw materials from a specified supplier were to become unavailable, the
 
                                       28
<PAGE>   29
 
Company would be required to file a supplement to its ANDA and revalidate the
manufacturing process using a new supplier's materials. This could cause a delay
of several months in the manufacture of the drug involved and the consequent
loss of potential revenue and market share. Additionally, there is often a time
lag, sometimes significant, between the receipt of ANDA approval and the actual
marketing of the approved product due to this validation process.
 
     The Able Laboratories facility is subject to plant inspections by the FDA
to determine compliance with GMP standards. The Company could be subject to
fines and sanctions such as the suspension of manufacturing or the seizure of
drug products if it were found to be in non-compliance with GMP standards.
 
     Rapid Technological Advances and Competition.  The therapeutic and
diagnostic markets in which the Company competes have undergone and can be
expected to continue to undergo rapid and significant technological advances.
There can be no assurance that the technological developments of others will not
render the Company's technology or products incorporating such technology either
uneconomical or obsolete. The Company competes with a number of specialized
biotechnology companies and major pharmaceutical companies. Most of these
companies have substantially greater financial, technical and human resources
and research and development staffs and facilities, as well as substantially
greater experience in conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing products than does the Company. There
can be no assurance that the Company's products or proposed products will be
able to compete successfully.
 
     In addition, with its newly acquired generic product line, the Company is
now competing in a new market with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture off-patent drugs, the original
manufacturers of brand-name drugs and manufacturers of new drugs that may be
used for the same indications as the Company's products. There is no assurance
that the Company will compete successfully in this market. Revenues and gross
profit derived from generic pharmaceutical products tend to follow a pattern
based on regulatory and competitive factors unique to the generic pharmaceutical
industry. As patents for brand name products and related exclusivity periods
mandated by regulatory authorities expire, the first generic manufacturer to
receive regulatory approval for generic equivalents of such products is usually
able to achieve relatively high revenues and gross profit. As other generic
manufacturers receive regulatory approvals on competing products, prices and
revenues typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand name companies are increasingly selling their products into the
generic market directly by acquiring or forming strategic alliances with generic
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to sell directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market. These competitive factors may have a material adverse effect on the
Company's ability to sell its generic products.
 
     Dependence on Patents and Proprietary Technology.  The Company owns certain
patents and has applied for other patents relating to its technology and
proposed products. No assurance can be given, however, whether pending patent
applications will be granted or whether any patents granted will be enforceable
or provide the Company with meaningful protection from competitors. Even if a
competitor were to infringe the Company's patents, the costs of enforcing its
patent rights may be substantial or even prohibitive. In addition, there can be
no assurance that the Company's proposed products will not infringe the patent
rights of others. The Company may be forced to expend substantial resources if
the Company is required to defend against any such infringement claims. The
Company also may desire or be required to obtain licenses from others in order
to further develop, produce and market commercially viable products effectively.
There can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses will be
valid and enforceable or that the proprietary nature of the unpatented
technology underlying such licenses will remain proprietary. The Company also
relies on unpatented proprietary know-how and trade secrets, and employs various
methods including confidentiality
                                       29
<PAGE>   30
 
agreements with employees, consultants, manufacturing and marketing partners to
protect its trade secrets and know-how. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such trade secrets and know-how or obtain access thereto.
 
     The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain such processes, products and information, there can
be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products developed by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
 
     Early Stage of Product Development.  Several of the Company's proposed
products, including its specialty pharmaceuticals, are at an early stage of
development. The Company does not expect that its early stage products will be
available for a significant number of years, if at all. The early stage products
will require significant research and development, and potential products that
appear to be promising at early stages of development may not reach the market
for a number of reasons. Potential products may be found ineffective or cause
harmful side effects during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical to produce, fail to achieve market acceptance or be
precluded from commercialization by proprietary rights of third parties. There
can be no assurance that the Company's or its collaborative partners' product
development efforts will be successfully completed, that required regulatory
approvals will be obtained or that any products, if introduced, will be
successfully marketed or achieve customer acceptance.
 
     Uncertainty of Availability of Health Care Reimbursements.  The ability of
the Company to maintain profitability in Superior's generic distribution
business or to commercialize its product candidates depends in part on the
extent to which reimbursement for the cost of such products will be available
from government health administration authorities, private health insurers and
other organizations. Third party payors are attempting to control costs by
limiting the level of reimbursement for medical products, including
pharmaceuticals, which may adversely effect the pricing of the Company's product
candidates. Moreover, health care reform has been, and may continue to be, an
area of national and state focus, which could result in the adoption of measures
which could adversely affect the pricing of pharmaceuticals or the amount of
reimbursement available from third party payors. There can be no assurance that
health care reimbursement laws or policies will not materially adversely affect
the Company's ability to sell its products profitably or prevent the Company
from realizing an appropriate return on its investment in product development.
 
     Uncertainties Related to Product Suppliers.  Superior purchases its
products from several pharmaceutical manufacturers. If a manufacturer is unable
to supply a product or is unable to supply a product at a competitive price,
Superior may lose revenues or experience significantly reduced gross profit
margins. One or more of Superior's products could be subject to a manufacturer's
product recall due to manufacturing defects or other reasons. Such recalls would
result in lost revenues and additional costs to Superior. There can be no
assurance that Superior can maintain a continuous and uninterrupted supply of
products.
 
     Customer Concentration; Consolidation of Distribution Network.  The
distribution network for pharmaceutical products has in recent years been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses, thereby stimulating product returns to Superior.
Consolidation or financial difficulties could cause
 
                                       30
<PAGE>   31
 
customers to reduce their inventory levels, or otherwise reduce purchases of
Superior's products, which could have a materially adverse effect on the
Company's business, results of operations and financial condition.
 
   
     Volatility of Stock Price.  The market for securities of technology
companies, including those of the Company, has been highly volatile. The market
price of the Company's Common Stock has fluctuated between $7.00 and $0.13 from
January 1, 1993 to December 31, 1997 and was approximately $0.50 on April 14,
1998, and it is likely that the price of the Common Stock will continue to
fluctuate widely in the future. Announcements of technical innovations, new
commercial products, results of clinical trials, regulatory approvals, patent or
proprietary rights or other developments by the Company or its competitors could
have a significant impact on the Company's business and the market price of the
Common Stock.
    
 
     Adverse Consequences Associated with the Obligation to Issue Substantial
Shares of Common Stock Upon Conversion of Convertible Securities.  As of March
24, 1998 the Company was obligated to issue approximately 101,935,000 shares of
Common Stock for issuance upon the conversion or exercise of its outstanding
warrants, rights, convertible preferred stock and a convertible note and
16,860,718 shares of Common Stock have been reserved for issuance to employees,
officers, directors and consultants. The price which the Company may receive for
the Common Stock issuable upon exercise of such options and warrants will, in
all likelihood, be less than the market price of the Common Stock at the time of
such exercise. Consequently, for the life of such options and warrants the
holders thereof may have been given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock.
 
     The exercise of all of the aforementioned securities may also adversely
affect the terms under which the Company could obtain additional equity capital.
In all likelihood, the Company would be able to obtain additional equity capital
on terms more favorable to the Company at the time the holders of such
securities choose to exercise them. In addition, should a significant number of
these securities be exercised, the resulting increase in the amount of the
Common Stock in the public market could have a substantial dilutive effect on
the Company's outstanding Common Stock.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages. The financial statements
filed in this Item 8 are as follows:
 
     Independent Auditors' Report
 
     Financial Statements:
 
          Consolidated Balance Sheets -- December 31, 1997 and 1996
 
          Consolidated Statements of Loss -- Year Ended December 31, 1997, Six
     Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996 and
     1995
 
          Consolidated Statements of Changes in Stockholders' Equity -- Year
     Ended December 31, 1997, Six Months Ended December 31, 1996 and Years Ended
     June 30, 1996 and 1995
 
          Consolidated Statements of Cash Flows -- Year Ended December 31, 1997,
     Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996
     and 1995
 
          Notes to Consolidated Financial Statements
 
   
     Consolidated Financial Statements and Financial Statement Schedules as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 are filed as exhibits hereto and listed in Items 14(a)(1) and
(2), and are incorporated by reference herein except Schedule 1, which is to be
filed by amendment.
    
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       31
<PAGE>   32
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
  DYNAGEN, INC.
  Cambridge, Massachusetts
 
     We have audited the accompanying consolidated balance sheets of DynaGen,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of loss, changes in stockholders' equity and cash flows
for the year ended December 31, 1997, the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DynaGen, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995 in conformity with generally accepted accounting
principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred recurring
losses from operations resulting in an accumulated deficit and a working capital
deficiency at December 31, 1997. In addition, the Company has debt obligations
which are in default, a significant acquisition obligation in connection with
its acquisition of a subsidiary, Superior Pharmaceutical Company ("Superior"),
and restricted access to the cash and equity of Superior under the terms of
Superior's loan agreement. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
                                          WOLF & COMPANY, P.C.
 
Boston, Massachusetts
April 14, 1998
 
                                       32
<PAGE>   33
 
                                 DYNAGEN, INC.
                          CONSOLIDATED BALANCE SHEETS
 
   
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
ASSETS
(Note 6)
Current assets:
  Cash and cash equivalents (including interest-bearing
     deposits of $1,835,000 at December 31, 1996)...........  $   697,045    $ 2,112,300
  Investment securities available for sale at fair value
     (Note 3)...............................................           --      3,004,700
  Accounts receivable, net of allowance for doubtful
     accounts of $43,118 at December 31, 1997...............    3,152,779        261,932
  Rebates...................................................      713,976             --
  Inventory (Note 4)........................................    9,111,324        451,883
  Notes receivable (Note 8).................................      110,000        185,000
  Prepaid expenses and other current assets.................      147,972        295,613
                                                              -----------    -----------
     Total current assets...................................   13,933,096      6,311,428
                                                              -----------    -----------
  Property and equipment, net (Note 5)......................    1,772,878        673,969
                                                              -----------    -----------
Other assets:
  Customer lists, net of accumulated amortization of
     $1,361,200 (Note 2)....................................   12,250,800             --
  Goodwill, net of accumulated amortization of $22,751 (Note
     2).....................................................      363,468             --
  Patents and trademarks, net of accumulated amortization of
     $89,164 and $65,639....................................      345,381        265,840
  Deferred debt financing costs, net of accumulated
     amortization (Note 6)..................................      359,621        119,039
  Deposits and other assets.................................      322,870         92,873
                                                              -----------    -----------
     Total other assets.....................................   13,642,140        477,752
                                                              -----------    -----------
                                                              $29,348,114    $ 7,463,149
                                                              ===========    ===========
</TABLE>
    
 
                                       33
<PAGE>   34
                                 DYNAGEN, INC.
                   CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Bank overdraft............................................  $   142,616    $        --
  Notes payable (Note 6)....................................    8,348,333             --
  Loan payable -- bank (Note 6).............................    6,584,710             --
  Accounts payable..........................................    6,390,421        712,239
  Accrued payroll and payroll taxes.........................       95,312         96,894
  Acquisition obligation (Note 2)...........................    4,083,000             --
                                                              -----------    -----------
     Total current liabilities..............................   25,644,392        809,133
  Warrant put liability (Note 6)............................      750,594             --
  Long term debt (Notes 6 and 10)...........................      328,500      1,600,000
                                                              -----------    -----------
     Total liabilities......................................   26,723,486      2,409,133
                                                              -----------    -----------
  Commitments and contingencies (Note 9)....................
Stockholders' equity (Notes 1, 2, 6, 9, 10 and 13):
  Preferred stock, $.01 par value, 10,000,000 shares
     authorized, 63,522 shares of Series A, B, C and G
     outstanding, (liquidation value $6,348,417):...........          635             --
  Common stock, $.01 par value, 75,000,000 shares
     authorized, 4,315,137, and 2,910,623 shares issued and
     outstanding............................................       43,151         29,106
  Additional paid-in capital................................   39,137,311     29,338,794
  Accumulated deficit.......................................  (36,556,469)   (24,315,191)
                                                              -----------    -----------
                                                                2,624,628      5,052,709
  Unrealized gain on investment securities available for
     sale (Note 3)..........................................           --          1,307
                                                              -----------    -----------
     Total stockholders' equity.............................    2,624,628      5,054,016
                                                              -----------    -----------
                                                              $29,348,114    $ 7,463,149
                                                              ===========    ===========
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
                                       34
<PAGE>   35
 
                                 DYNAGEN, INC.
 
                        CONSOLIDATED STATEMENTS OF LOSS
 
   
<TABLE>
<CAPTION>
                                           YEAR ENDED        SIX MONTHS ENDED
                                          DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                          ------------   -------------------------   -------------------------
                                              1997          1996          1995          1996          1995
                                          ------------   -----------   -----------   -----------   -----------
                                                                      (UNAUDITED)
<S>                                       <C>            <C>           <C>           <C>           <C>
REVENUES (NOTE 11):
  Product sales.........................  $ 13,920,904   $   358,467   $    57,855   $   220,745   $   247,553
  Fees and royalties....................        88,826         1,441       275,000       335,000       250,000
                                          ------------   -----------   -----------   -----------   -----------
  Total revenues........................    14,009,730       359,908       332,855       555,745       497,553
                                          ------------   -----------   -----------   -----------   -----------
Costs and expenses:
  Cost of sales.........................    13,255,651       356,312        28,837        96,680       134,392
  Research and development..............     3,220,283     1,092,253     1,036,622     3,118,145     1,718,006
  Selling, general and administrative...     7,611,578     3,239,180     1,188,733     2,684,825     1,983,897
                                          ------------   -----------   -----------   -----------   -----------
  Total costs and expenses..............    24,087,512     4,687,745     2,254,192     5,899,650     3,836,295
                                          ------------   -----------   -----------   -----------   -----------
  Operating loss........................   (10,077,782)   (4,327,837)   (1,921,337)   (5,343,905)   (3,338,742)
                                          ------------   -----------   -----------   -----------   -----------
Other income (expense):
  Investment income, net................       120,359       157,788       111,521       367,715       296,555
  Interest and financing expense (Note
     6).................................    (2,283,855)     (136,091)           --      (121,229)         (196)
                                          ------------   -----------   -----------   -----------   -----------
  Other income (expense), net...........    (2,163,496)       21,697       111,521       246,486       296,359
                                          ------------   -----------   -----------   -----------   -----------
  Net loss..............................  $(12,241,278)  $(4,306,140)  $(1,809,816)  $(5,097,419)  $(3,042,383)
                                          ============   ===========   ===========   ===========   ===========
Net loss per share-basic (Note 1).......  $      (4.48)  $     (2.44)  $     (0.81)  $     (2.09)  $     (1.44)
                                          ============   ===========   ===========   ===========   ===========
Weighted average shares outstanding.....     3,204,163     2,879,412   2,221,765..     2,443,395     2,117,970
                                          ============   ===========   ===========   ===========   ===========
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
 
                                       35
<PAGE>   36
 
                                 DYNAGEN, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         (NOTES 1, 2, 6, 9, 10 AND 13)
<TABLE>
<CAPTION>
 
                                             PREFERRED STOCK           COMMON STOCK       ADDITIONAL
                                         -----------------------   --------------------     PAID-IN     ACCUMULATED
                                           SHARES       AMOUNT       SHARES     AMOUNT      CAPITAL       DEFICIT
                                         ----------   ----------   ----------   -------   -----------   ------------
<S>                                      <C>          <C>          <C>          <C>       <C>           <C>
Balance at June 30, 1994...............          --   $       --    2,117,454   $21,174   $19,300,479   $(11,869,249)
Exercise of stock options..............          --           --           50        1            374            --
Exercise of underwriters' warrants.....          --           --       27,345      274        128,483            --
Decrease in unrealized loss on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended June 30,
  1995.................................          --           --           --       --             --    (3,042,383)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at June 30, 1995...............          --           --    2,144,849   21,449     19,429,336   (14,911,632)
Exercise of underwriters' warrants.....          --           --       50,398      504         36,621            --
Exercise of public warrants............          --           --      324,449    3,244      3,851,963            --
Shares issued in private placements....   1,178,264    3,461,150      152,069    1,521      1,389,890            --
Conversion of preferred stock..........  (1,178,264)  (3,461,150)     161,283    1,613      3,459,537            --
Exercise of stock options..............          --           --        9,586       96          5,479            --
Employee stock and stock option
  grants...............................          --           --       11,725      117        558,740            --
Stock options issued for future
  services.............................          --           --           --       --         55,225            --
Stock issued for interest obligation...          --           --        1,641       16         37,317            --
Change in unrealized gain (loss) on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended June 30,
  1996.................................          --           --           --       --             --    (5,097,419)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at June 30, 1996...............          --           --    2,856,000   28,560     28,824,108   (20,009,051)
Exercise of stock options..............          --           --        8,177       82         16,418            --
Stock issued for interest obligation...          --           --        5,005       50         79,567            --
Stock options issued for services......          --           --           --       --         55,742            --
Conversion of note payable.............          --           --       41,441      414        362,959            --
Increase in unrealized gain on
  investment securities................          --           --           --       --             --            --
Net loss for the six months ended
  December 31, 1996....................          --           --           --       --             --    (4,306,140)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at December 31, 1996                     --           --    2,910,623   29,106     29,338,794   (24,315,191)
Shares issued in private placements....      69,950          699      147,500    1,475      6,672,473            --
Stock issued for Superior
  acquisition..........................          --           --      166,667    1,667        915,333            --
Exercise of stock options..............          --           --          150        2          1,123            --
Issuance of common stock purchase
  warrants.............................          --           --           --       --            450            --
Delayed registration penalty...........          --           --           --       --       (328,500)           --
Stock options and warrants issued for
  service..............................          --           --           --       --        801,034            --
Stock issued for interest obligation...          --           --        6,418       64         59,774            --
 
Conversions of notes payable...........       5,015           50      113,959    1,140      1,495,163            --
Conversion of preferred stock..........     (11,443)        (114)     757,320    7,573         (7,459)           --
Stock issued for services..............          --           --      212,500    2,124        189,126            --
Decrease in unrealized gain on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended December
  31, 1997.............................          --           --           --       --             --   (12,241,278)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at December 31, 1997...........      63,522   $      635    4,315,137   $43,151   $39,137,311   $(36,556,469)
                                         ==========   ==========   ==========   =======   ===========   ============
 
<CAPTION>
                                           UNREALIZED GAIN
                                              (LOSS) ON
                                              INVESTMENT
                                         SECURITIES AVAILABLE
                                               FOR SALE            TOTAL
                                         --------------------   ------------
<S>                                      <C>                    <C>
Balance at June 30, 1994...............         $(38,662)       $  7,413,742
Exercise of stock options..............               --                 375
Exercise of underwriters' warrants.....               --             128,757
Decrease in unrealized loss on
  investment securities................           26,323              26,323
Net loss for the year ended June 30,
  1995.................................               --          (3,042,383)
                                                --------        ------------
Balance at June 30, 1995...............          (12,339)          4,526,814
Exercise of underwriters' warrants.....               --              37,125
Exercise of public warrants............               --           3,855,207
Shares issued in private placements....               --           4,852,561
Conversion of preferred stock..........               --                  --
Exercise of stock options..............               --               5,575
Employee stock and stock option
  grants...............................               --             558,857
Stock options issued for future
  services.............................               --              55,225
Stock issued for interest obligation...               --              37,333
Change in unrealized gain (loss) on
  investment securities................           12,356              12,356
Net loss for the year ended June 30,
  1996.................................               --          (5,097,419)
                                                --------        ------------
Balance at June 30, 1996...............               17           8,843,634
Exercise of stock options..............               --              16,500
Stock issued for interest obligation...               --              79,617
Stock options issued for services......               --              55,742
Conversion of note payable.............               --             363,373
Increase in unrealized gain on
  investment securities................            1,290               1,290
Net loss for the six months ended
  December 31, 1996....................               --          (4,306,140)
                                                --------        ------------
Balance at December 31, 1996                       1,307           5,054,016
Shares issued in private placements....               --           6,674,647
Stock issued for Superior
  acquisition..........................               --             917,000
Exercise of stock options..............               --               1,125
Issuance of common stock purchase
  warrants.............................               --                 450
Delayed registration penalty...........               --            (328,500)
Stock options and warrants issued for
  service..............................               --             801,034
Stock issued for interest obligation...               --              59,838
Conversions of notes payable...........               --           1,496,353
Conversion of preferred stock..........               --                  --
Stock issued for services..............               --             191,250
Decrease in unrealized gain on
  investment securities................           (1,307)             (1,307)
Net loss for the year ended December
  31, 1997.............................               --         (12,241,278)
                                                --------        ------------
Balance at December 31, 1997...........         $     --        $  2,624,628
                                                ========        ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       36
<PAGE>   37
 
                                 DYNAGEN, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
<TABLE>
<CAPTION>
                                                  YEAR ENDED        SIX MONTHS ENDED
                                                 DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                                 ------------   -------------------------   -------------------------
                                                     1997          1996          1995          1996          1995
                                                 ------------   -----------   -----------   -----------   -----------
                                                                              (UNAUDITED)
<S>                                              <C>            <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.....................................  $(12,241,278)  $(4,306,140)  $(1,809,816)  $(5,097,419)  $(3,042,383)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Stock and stock options issued for
      services.................................       992,284        55,742            --       558,857            --
    Depreciation and amortization..............     1,714,250       129,558        32,440       125,610        64,195
    Amortization and accretion of (discounts)
      premiums on investment securities........       (10,152)      (31,497)      (19,539)     (134,474)      101,553
    Stock issued for interest obligation.......        59,838        79,617            --        37,333            --
    Write-off of patent costs..................            --            --            --        41,852        40,893
    (Increase) decrease in operating assets:
      Accounts receivable......................      (428,612)     (172,229)      (23,621)      (60,732)       30,518
      Rebates..................................      (215,672)           --            --            --            --
      Inventory................................    (1,268,351)     (138,583)           --            --            --
      Prepaid expenses and other current
        assets.................................       170,149        12,543       (47,227)      (57,780)       24,121
      Deposits and other assets................      (211,250)      (90,895)           --            --            --
    Increase (decrease) in operating
      liabilities:
      Accounts payable and accrued expenses....     4,521,843       142,068        (3,770)      329,858       (77,933)
      Deferred revenue.........................            --       (65,967)     (150,000)     (184,033)      250,000
                                                 ------------   -----------   -----------   -----------   -----------
        Net cash used for operating
          activities...........................    (6,916,951)   (4,385,783)   (2,021,533)   (4,440,928)   (2,609,036)
                                                 ------------   -----------   -----------   -----------   -----------
Cash flows from investing activities:
    Purchase of investment securities..........    (1,186,455)   (2,567,445)   (5,937,166)  (29,913,212)   (3,187,379)
    Proceeds from sales and maturities of
      investment securities....................     4,200,000     9,683,450     5,600,000    24,174,000     5,500,000
    Purchase of wholly-owned subsidiary........    (6,878,463)     (700,000)           --            --            --
    Purchase of property and equipment.........      (959,224)     (200,370)       (2,874)      (36,020)      (23,339)
    Patent and trademark costs.................      (103,067)           --       (32,867)      (72,611)      (69,293)
    Decrease in deposits.......................            --            --            --            --         9,325
    (Increase) decrease in notes receivable....        75,000      (110,000)           --       (75,000)           --
                                                 ------------   -----------   -----------   -----------   -----------
        Net cash provided by (used for)
          investing activities.................    (4,852,209)    6,105,635      (372,907)   (5,922,843)    2,229,314
                                                 ------------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Net proceeds from stock warrants and
    options....................................         1,125        16,500     3,896,088     3,897,907       129,132
  Net proceeds from private stock placements...     6,775,920            --            --     4,852,561            --
  Net proceeds from debt placements............     3,326,898            --            --     1,725,295            --
  Net repayments of loan payable -- bank.......       524,013            --            --            --            --
  Increase in bank overdraft...................       142,616            --            --            --            --
  Repayment of Superior notes payable..........      (416,667)           --            --            --            --
  Principal payments on capital lease..........            --            --            --            --        (5,824)
                                                 ------------   -----------   -----------   -----------   -----------
        Net cash provided by financing
          activities...........................    10,353,905        16,500     3,896,088    10,475,763       123,308
                                                 ------------   -----------   -----------   -----------   -----------
Net change in cash and cash equivalents........    (1,415,255)    1,736,352     1,501,648       111,992      (256,414)
Cash and cash equivalents at beginning of
  period.......................................     2,112,300       375,948       263,956       263,956       520,370
                                                 ------------   -----------   -----------   -----------   -----------
Cash and cash equivalents at end of period.....  $    697,045   $ 2,112,300   $ 1,765,604   $   375,948   $   263,956
                                                 ============   ===========   ===========   ===========   ===========
Supplemental cash flow information:
  Interest paid................................  $    574,300   $        --   $        --   $        --   $       196
Schedule of non cash investing and financing
  activities:
  On June 18, 1997, the Company purchased all
  of the common stock of Superior
  Pharmaceutical Company, Inc. for $16,250,000.
  In connection with the acquisition, non cash
  financing activities, liabilities assumed and
  goodwill and customer lists were as follows:
    Fair value of assets acquired..............  $ 10,810,660
    Cash paid for common stock.................    (6,250,000)
    Common stock issued and acquisition
      obligation...............................    (5,000,000)
    Note payable issued, net of adjustment.....    (4,600,000)
    Liabilities assumed........................    (8,263,478)
                                                 ------------
    Goodwill and customer lists (exclusive of
      other acquisition costs of $694,890).....  $ 13,302,818
                                                 ============
Additional cash flow information is included in Notes 2 and
  6.
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
                                       37
<PAGE>   38
 
                                 DYNAGEN, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business and Basis of Presentation
 
   
     The consolidated financial statements include the accounts of DynaGen, Inc.
(the "Company") and its wholly-owned subsidiaries, Able Laboratories, Inc.
("Able"), which is engaged in the manufacture of generic pharmaceuticals,
Superior Pharmaceutical Company ("Superior"), which is engaged in the
distribution of generic pharmaceuticals BioTrack, Inc. and Apex Pharmaceuticals,
Inc. which are developing diagnostic and therapeutic products. All significant
intercompany balances and transactions have been eliminated in consolidation. In
March 1998, the Company acquired Generic Distributors Limited Partnership which
is engaged in the distribution of generic pharmaceuticals. (See Note 13)
    
 
  Going Concern
 
   
     The Company has incurred recurring losses from operations resulting in an
accumulated deficit of $36,556,469 and a working capital deficiency of
$12,711,276 at December 31, 1997. In addition, the Company is in default with
respect to certain covenants in its debt agreements and obligated to make
payments as follows:
    
 
   
          GFL Performance Fund Limited -- The Company issued a 8% Convertible
     Note to GFL Performance Fund in the amount of $2,000,000 in February, 1996.
     The balance of this note, $535,000 was due on February 7, 1998, however
     ,the lender granted an extension on the payment of this note. In connection
     with this extension the Company agreed to increase the principal amount due
     to $789,755. The note and the increased principal amount are reflected as
     current liabilities in the balance sheet at December 31, 1997. (See Note
     6).
    
 
   
          Sirrom Capital Corporation ("Sirrom") and Odyssey Investment Partners,
     L.P. ("Odyssey") -- The Company issued secured promissory notes in the
     aggregate principal amount of $3,000,000 on June 18, 1997 and were due June
     17, 2002. In addition, the Company issued stock warrants to purchase in the
     aggregate 400,000 shares of the Company's common stock and granted Sirrom
     and Odyssey the right to sell to the Company the warrants (put warrants)
     under a put and substitution agreement. At the time of issuance, $702,000
     of the proceeds was allocated to the put warrants, resulting in a discount
     on the promissory notes.
    
 
   
          The discount on the notes was being amortized to expense over the term
     of the promissory notes. The Company is in default of certain covenants in
     the loan agreement and has not obtained a waiver of the defaults from the
     lender. Accordingly, the total principal amount of the loan, $3,000,000,
     has been classified as a current liability and the unamortized discount on
     the loan has been charged to expense at December 31, 1997. (See Note 6).
    
 
   
          Superior Pharmaceutical Company -- The Company acquired Superior on
     June 18, 1997 for $16,500,000. The purchase price was paid as follows:
     $6,500,000 in cash, $5,000,000 of 9.5% secured promissory notes to the
     former Superior stockholders due in quarterly installments through June 30,
     2000 and common stock of the Company with a guaranteed value of $5,000,000.
    
 
   
          A quarterly payment on the secured promissory notes was due on March
     31, 1998 and the Company received a waiver and extension from the former
     stockholders of Superior. The quarterly payment of principal and interest
     was extended to May 16, 1998. The total unpaid amount of the secured
     promissory notes $4,183,333 has been classified as a current liability.
    
 
          The Company issued 1,666,667 shares of common stock to the former
     Superior stockholders on the closing date. The Agreement and plan of merger
     with the Superior stockholders provided that at the first
 
                                       38
<PAGE>   39
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
   
     anniversary of the closing, June 18, 1998, the Superior stockholders would
     receive an additional 1,666,667 shares of common stock, if the Company's
     stock price was equal to or greater than $1.50. Any difference between the
     value of the stock received and the $5,000,000 guaranteed value is to be
     paid in cash. The Company does not anticipate that the common stock price
     will reach the specified level of $1.50 by June 18, 1998. Accordingly, the
     Company has accrued a current liability to the former Superior stockholders
     in the amount of $4,083,333 at December 31, 1997 and reduced the amount
     originally added to additional paid-in capital at the time of acquisition.
    
 
          The Huntington National Bank -- The Company's subsidiary, Superior has
     a line of credit with the Huntington National Bank in the amount of
     $9,000,000. At December 31, 1997, Superior is in default of certain loan
     covenants in the loan and security agreement with the bank. Superior is in
     negotiations with the bank with respect to the defaults, but has not
     received a waiver of the defaults at the present time.
 
   
          The Company has guaranteed the loan to the bank. The loan and security
     agreement with the bank requires the Company to achieve a tangible net
     worth, exclusive of the tangible net worth of Superior, of $4,000,000,
     which the Company has not achieved at December 31, 1997.
    
 
   
          The loan and security agreement with the bank allowed Superior to make
     distributions to the Company in amounts sufficient to enable the Company to
     pay the debt service due to the former stockholders of Superior, provided,
     however, that such permitted payments cannot be made by Superior in the
     event of a default.
    
 
Management Plans
 
   
     The following represents management's plans to improve the financial
condition of the Company including curing defaults and obtaining waivers
wherever applicable. These plans are targeted to the specific areas listed
below.
    
 
   
     GFL Performance Fund Limited -- The Company has received an extension of
the Company's payment obligation on February 7, 1998 (the maturity date). The
Company is negotiating with GFL to retire this debt through conversion into
common stock over the next several months. This would reduce or eliminate the
cash payment obligation and reduce the total liabilities of the Company.
    
 
   
     Sirrom and Odyssey -- The Company continues to make monthly interest
payments on its obligations to Sirrom and Odyssey. The defaults under the loan
agreements include the late filing of the Form 10-K and certain other financial
covenants.
    
 
   
     Management plans to improve upon its filing requirements by dedicating
additional personnel to meet the reporting requirements. In addition, the
Company is negotiating with the former stockholders of Superior to extend the
guaranteed stock payment due on June 17, 1998 which would require approximately
$4,000,000 in cash. The Company has had preliminary discussions with Sirrom and
Odyssey regarding the overall decline in Company's stock price and the effect on
their warrants. Management intends to discuss and negotiate with its lenders
opportunities for participation in the Company's overall plan which could
restore the economic benefits and obtain continued cooperation of Sirrom and
Odyssey.
    
 
   
     Superior Pharmaceutical Company -- The Company has obtained a waiver from
the former stockholders of Superior, waiving and extending the payment
obligation on the note due on March 31, 1998. The Company is negotiating with
the former stockholders, alternate ways in which it can meet its obligation of a
guaranteed stock payment on June 17, 1998. These proposed alternatives include
extension of the obligation, reduction or elimination of the cash payment in
exchange for additional stock payments and converting the common stock payment
to convertible Preferred Stock. The former stockholders have indicated their
willingness to entertain
    
 
                                       39
<PAGE>   40
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
the alternative offers and work with the management to come up with a
comprehensive solution to the payment obligations which secures their benefits
while allowing the Company to expand.
 
The Huntington National Bank
 
   
     The Company is in discussions with investment bankers to raise additional
equity for its ongoing operations. The net worth of the Company is less than
$4,000,000 as required in the loan agreement with the bank. However, in the past
the bank has considered subordinated debt, selling stockholder debt and the
equity line available to the Company under its Series D preferred shares as
equity capital and therefore applicable towards the net worth calculations.
Assuming that the bank continues to allow for this calculation and that the
Company is successful in obtaining additional financing, the net worth
deficiency will be corrected. In addition, the waiver of the former Superior
stockholders will, in managements view, eliminate the defaults of the covenants.
    
 
   
  Other
    
 
   
     Management also plans to implement programs to reverse the decline in
business at Superior, increase sales at Able and review every cost center for
further optimization and cost reductions.
    
 
  Change in Year End
 
     On January 30, 1997, the Company adopted December 31 as its fiscal year
end. The accompanying consolidated financial statements include audited
financial statements for the year ended December 31, 1997, the six month
transition period ended December 31, 1996 the years ended June 30, 1996 and
1995. Unaudited financial statements and the related notes thereto are presented
for the six months ended December 31, 1995 for comparative purposes only. All
adjustments, consisting of only normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the unaudited
financial information, have been made.
 
  Reverse Stock Split
 
   
     On March 4, 1998 the Company's Stockholders approved a 1 for 10 a reverse
stock split of the common shares. All common stock information presented herein
has been retroactively adjusted to reflect the reverse stock split.
    
 
  Use of Estimates
 
   
     In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and reported amounts of revenues and expenses during the
reporting period. Material estimates that are particularly susceptible to
significant change in the near term relate to the carrying values of rebates
receivable and intangible assets, the valuation of equity instruments issued by
the Company and the amount of obligations due as a result of defaults on certain
debt obligations. Actual results could differ from those estimates.
    
 
  Cash Equivalents
 
     Cash equivalents include interest-bearing deposits with original maturities
of three months or less.
 
                                       40
<PAGE>   41
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Investment Securities
 
     Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and carried at
amortized cost. Investments that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and carried at fair value, with unrealized gains and losses included in
earnings. Investments not classified as either of the above are classified as
"available for sale" and carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Gains and losses on
disposition of investment securities are computed by the specific identification
method.
 
  Rebates
 
     Rebates represent incentives provided by pharmaceutical suppliers based on
purchases. Management has estimated its rebates based upon agreements and
purchases during the year. Actual rebates could be different due to market
volatility and whether the Company continues to use these suppliers.
 
  Inventory
 
     Inventory is valued at the lower of average cost or market on a first-in
first-out (FIFO) method.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation expense is provided
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful life of the asset or the life of the related
lease term.
 
  Customer Lists and Goodwill
 
     Customer lists and goodwill are being amortized over estimated lives of
five and fifteen years, respectively. (See Note 2.)
 
  Patents, Trademarks and Deferred Debt Financing Costs
 
     Patent and trademark costs are amortized over a five-year period on a
straight-line basis commencing on the earlier of the date placed in service or
the date the patent or trademark is granted. Deferred debt financing costs are
being amortized on a straight-line basis over the two-year term of the
convertible note payable. The related amortization expense for the year ended
December 31, 1997 was $99,888. The related amortization expense for the six
months ended December 31, 1996 and 1995 was $73,107 and $10,792, respectively,
and for the years ended June 30, 1996 and 1995 was $79,660 and $11,385,
respectively.
 
  Revenue Recognition
 
     Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met.
 
  Advertising Costs
 
     Advertising costs are charged to expense when incurred.
 
  Income Taxes
 
     Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss, capital loss and tax credit carry forwards to the extent their
realization is more likely than not. The deferred
 
                                       41
<PAGE>   42
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
tax expense for the period represents the change in the deferred tax asset or
liability from the beginning to the end of the period.
 
  Stock-Based Compensation
 
     In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." This Statement encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plans generally have no intrinsic value at the grant
date, and under Opinion No. 25 no compensation cost is recognized for them. The
Company has elected to remain with the accounting in Opinion No. 25 and, as a
result, must make pro forma disclosures of net income and earnings per share and
other disclosures, as if the fair value based method of accounting had been
applied. The disclosure requirements of this Statement are effective for the
Company's consolidated financial statements for the six months ended December
31, 1996. The pro forma disclosures include the effects of all awards granted on
or after July 1, 1995. (See Note 10.)
 
  Earnings Per Share
 
     In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which
requires that earnings per share be calculated on a basic and a dilutive basis.
Basic earnings per share represents income available to common stock divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed conversion. The
Statement is effective for interim and annual periods ending after December 15,
1997, and requires the restatement of all prior-period earnings per share data
presented. Accordingly, the Company has restated all earnings per share data
presented herein.
 
   
     For the year ended December 31, 1997, the six months ended December 31,
1996 and 1995, and the years ended June 30, 1996 and 1995, options, warrants and
put warrants, were anti-dilutive and excluded from the diluted earnings per
share computations.
    
 
   
     The loss applicable to common stockholders has been increased by the stated
dividends on the convertible preferred stock and the amortization of discounts
on the convertible preferred stock due to the beneficial conversion feature.
Shares of common stock contingently issuable to the former stockholders of
Superior have not been included in diluted EPS because to do so would have been
anti-dilutive.
    
 
  Recent Accounting Pronouncements
 
     In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial
 
                                       42
<PAGE>   43
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
statements. Additionally, SFAS No. 130 requires that the accumulated balance of
other comprehensive income be displayed separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
Company will adopt these disclosure requirements beginning in the first quarter
of 1998.
 
     In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
 
2.  BUSINESS ACQUISITIONS
 
     On August 19, 1996, the Company acquired certain assets of Able
Laboratories, Inc. ("Able"). The purchase price consisted of $550,000 in cash
and acquisition costs of $150,000. The acquisition has been accounted for as a
purchase. The Company allocated $313,300 of the purchase price to inventory and
$386,700 to property and equipment. The results of operations related to Able
have been included with those of the Company since August 19, 1996.
 
   
     On June 18, 1997, the Company acquired all of the outstanding stock of
Superior Pharmaceutical Company ("Superior"), a distributor of generic
pharmaceutical products. The Company paid the shareholders of Superior
$6,250,000 in cash, $5,000,000 in three year secured promissory notes and
166,667 shares of DynaGen's common stock with a guaranteed value of $5,000,000.
DynaGen is obligated to issue to the shareholders up to an additional 1,666,667
shares of its common stock after twelve months if its common stock is not
trading at an average of at least $3.00 per share for 10 consecutive trading
days. If, immediately following the issuance of the additional 1,666,667 shares,
DynaGen's common stock is not trading for at least $1.50 per share, DynaGen
shall pay to the shareholders the difference between $1.50 and the then current
trading price of its common stock for each of the shares issued. DynaGen is
obligated to register the shares within eleven months after the closing of the
acquisition. The Company recorded a $4,083,000 acquisition obligation at
December 31, 1997 based on the difference between the current estimated fair
value of the 1,833,334 shares of common stock issued and issuable and the
guaranteed value of $5,000,000. The former shareholders of Superior, who remain
as senior management at Superior, may also receive certain incentive payments
based on Superior's performance during the three years following the closing of
the acquisition. Dynagen contributed $1,750,000 in additional capital to
Superior immediately following the closing.
    
 
   
     The Superior acquisition has been accounted for as a purchase. The results
of operations of Superior have been included in the Company's consolidated
financial statements since the date of acquisition. The purchase price
allocation was based on the estimated fair values at the date of acquisition.
The Company allocated $13,612,000 of the purchase price to customer lists, which
is being amortized on a straight-line basis over five years. Amortization of
customer lists amounted to $1,361,200 for the year ended December 31, 1997. In
addition, the Company recorded goodwill of $386,219, which is being amortized on
a straight-line basis over 15 years. Amortization expense for the year ended
December 31, 1997 was $22,751.
    
 
                                       43
<PAGE>   44
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
   
     Unaudited proforma consolidated operating results for the Company, assuming
the acquisitions of Able and Superior had been made as of the beginning of the
most recent fiscal year for each of the periods presented, are as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                DECEMBER 31, 1997
                                                                -----------------
<S>                                                             <C>
Revenues....................................................    $      26,019,467
                                                                =================
Net loss....................................................    $     (12,085,635)
                                                                =================
Net loss per share..........................................    $            4.43
                                                                =================
</TABLE>
    
 
     The unaudited proforma information is not necessarily indicative either of
the actual results of operations that would have occurred had the purchases been
made as of the beginning of each of the fiscal periods presented or of future
results of operations of the combined companies.
 
3.  INVESTMENT SECURITIES
 
     The amortized cost and fair value of investment securities available for
sale is as follows:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996
                                            ---------------------------------------------------
                                                            GROSS        GROSS
                                             AMORTIZED    UNREALIZED   UNREALIZED      FAIR
                                               COST         GAINS        LOSSES        VALUE
                                            -----------   ----------   ----------   -----------
    <S>                                     <C>           <C>          <C>          <C>
    U.S. Government agency obligations....  $1,499,696      $1,000      $    (71)   $ 1,500,625
    Corporate obligations.................   1,503,697         378            --      1,504,075
                                            -----------     ------      --------    -----------
                                            $3,003,393      $1,378      $    (71)   $ 3,004,700
                                            ===========     ======      ========    ===========
</TABLE>
 
   
     All debt securities matured during the year ended December 31, 1997 and
there were no sales of securities available for sale during the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995.
    
 
4.  INVENTORY
 
     Inventory consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                 1997         1996
                                                              ----------    --------
<S>                                                           <C>           <C>
Raw materials...............................................  $  311,166    $259,330
Work-in-progress............................................     136,240     163,847
Finished goods..............................................   8,663,918      28,706
                                                              ----------    --------
                                                              $9,111,324    $451,883
                                                              ==========    ========
</TABLE>
 
                                       44
<PAGE>   45
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
5.  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                         ------------------------     ESTIMATED
                                                            1997          1996       USEFUL LIVES
                                                         ----------    ----------    ------------
<S>                                                      <C>           <C>           <C>
     Machinery and equipment...........................  $1,347,683    $  702,141       7 years
     Furniture, fixtures and computers.................   1,027,228       270,353     3-7 years
     Leasehold improvements............................     235,904        39,288     1-2 years
                                                         ----------    ----------
                                                          2,610,815     1,011,782
     Less accumulated depreciation and amortization....    (837,937)     (337,813)
                                                         ----------    ----------
                                                         $1,772,878    $  673,969
                                                         ==========    ==========
</TABLE>
 
     Depreciation and amortization expense for the year ended December 31, 1997
was $230,411. Depreciation and amortization expense for the six months ended
December 1996 and 1995 was $56,451 and $21,648, respectively and for the years
ended June 30, 1996 and 1995 was $45,950 and $52,810 respectively.
 
6.  DEBT
 
     Notes payable consist of the following:
 
<TABLE>
<S>                                                           <C>
Convertible note payable....................................  $  535,000
Bridge loans................................................     630,000
Notes payable -- Superior Acquisition.......................   4,183,333
Senior subordinated debt....................................   3,000,000
                                                              ----------
                                                              $8,348,333
                                                              ==========
</TABLE>
 
  Convertible Note Payable
 
     On February 7, 1996, the Company issued a $2,000,000 convertible note
payable in connection with a private placement. The note matured on February 7,
1998 and bears interest at 8% per annum, with interest payable quarterly in cash
or the Company's common stock. The note is convertible into shares of common
stock at any time at the option of the investor at a rate of 67% of the five-day
average of the closing bid price per share of the Company's common stock one
trading day prior to the date the notice of conversion is received by the
Company. The Company may require conversion of the note under certain
circumstances. During the six months ended December 31, 1996, $400,000 of the
note payable was converted for 41,441 shares of the Company's common stock and
$36,627 of related deferred debt financing costs were charged to additional
paid-in capital. During the year ended December 31, 1997, $1,065,000 of the note
payable was converted for 98,959 shares of the Company's common stock and
$79,235 of related deferred debt financing costs were charged to additional
paid-in capital.
 
     Interest expense on the convertible note payable for the year ended
December 31, 1997 was $45,640, for the six months ended December 31, 1996 was
$74,282 and for the year ended June 30, 1996 was $63,999. Amortization expense
on deferred debt financing costs for the year ended December 31, 1997 was
$36,744, for the six months ended December 31, 1996 was $61,809, and for the
year ended June 30, 1996 was $57,230.
 
                                       45
<PAGE>   46
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Bridge Loans
 
     On December 19,1997 DynaGen sold a subordinated note in the principal
amount of $155,000 to a lender with an interest rate of 7% per annum. This
unsecured note was payable in full with interest on January 18, 1998. In
connection with this bridge loan, 150,000 shares of common stock of DynaGen were
issued to the investor. This note was converted into common stock on March 25,
1998.
 
     On October 3, 1997, BioTrack, Inc. received $250,000 in a subordinated note
from an employee of Superior at an interest rate of 18% per annum due on
November 30, 1997. The due date on this note was extended to June 30, 1998. The
proceeds were used as bridge-financing for BioTrack, Inc. and the investor has
the option of converting the note into mezzanine financing for BioTrack or to be
paid in full. This investor also received 10,000 shares of BioTrack common
stock.
 
     In addition, four investors invested $175,000 in BioTrack in December 1997
at 10% interest due on February 12, 1998. In February 1998, $75,000 of these
short-term loans were repaid in full with interest. These investors purchased
35,000 shares of BioTrack common stock for $1,750.
 
     In October 1997, Apex Pharmaceuticals Inc., received a $50,000 bridge loan
at an interest rate of 12% per annum from a consultant, this loan is to be
repaid by December 31, 1998, with interest.
 
     DynaGen obtained debt financing in the form of a bridge loan of $500,000,
from a private investor at an interest rate of 7% per annum and due September
30, 1997 related to its Superior acquisition. In connection with this bridge
loan, the Company has issued 150,000 shares of its unregistered common stock to
the investor. On October 10, 1997, the bridge loan and all accrued interest was
converted into 5,015 shares of Series B Preferred Stock in full satisfaction of
the debt. An additional 150,000 shares of common stock was issued to the
investor in connection with the conversion.
 
     Proceeds of $150,000 from the debt financing were allocated to the common
stock based on the fair value of the common stock at June 18, 1997. The balance
of the proceeds was allocated to the bridge loan. The debt discount of $150,000
on the bridge loan was fully amortized through December 31, 1997.
 
  Notes Payable -- Superior Acquisition
 
     In connection with the acquisition of Superior, the Company issued
$5,000,000 in secured promissory notes payable to the former Superior
stockholders. The notes are payable in quarterly installments of principal and
interest over three years at an interest rate of 9.5% and are secured by a
pledge of the Superior common stock. During the year ended December 31, 1997,
the Company made principal payments of $416,667 on the notes. In addition, the
notes were reduced by $400,000, due to a shortfall in the required net worth of
Superior as of the acquisition date. The Company has classified the notes
payable as a current liability on December 31, 1997 as it is currently unable to
make the payments due on the notes and is therefore in default.
 
     As of December 31, 1997, amounts payable on the notes over the next three
fiscal years are as follows:
 
<TABLE>
<CAPTION>
                  YEAR ENDED DECEMBER 31,                       AMOUNT
                  -----------------------                     ----------
<S>                                                           <C>
1997........................................................  $  433,333
1998........................................................   1,666,667
1999........................................................   1,666,667
2000........................................................     416,666
                                                              ----------
                                                              $4,183,333
                                                              ==========
</TABLE>
 
                                       46
<PAGE>   47
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Senior Subordinated Debt
 
     DynaGen obtained senior subordinated debt financing of $3,000,000 from two
private investors bearing interest at 13.5% payable in monthly installments. The
principal is payable upon maturity at the end of five years. The loan is secured
by a first-lien security interest on the assets of DynaGen, a second-lien
security interest on the assets of Superior and a second-lien interest in the
pledge of the Superior common stock.
 
     DynaGen also issued to the investors warrants to purchase 400,000 shares of
common stock of DynaGen at an exercise price of $.01 exercisable for five years.
Under certain circumstances, the two investors may exchange the warrants to buy
DynaGen common stock for warrants to purchase 15% of Superior's common stock at
an exercise price per share of $0.1. In addition, these warrants are subject to
put features under certain circumstances. Proceeds of $702,000 from this
financing were allocated to the DynaGen stock warrants, based on their estimated
fair value. This amount is reflected in the accompanying financial statements as
a warrant put liability because the warrants are subject to a put which gives
the holders the choice of a cash settlement under certain conditions. The put
allows the holders to sell two-thirds of the warrants to the Company after three
years for $667,000, and all of the warrants after five years for $1,500,000
unless the market value of the shares issuable pursuant to the warrant is equal
to or greater than the put value.
 
     The remaining proceeds from this offering $2,298,000 were allocated to the
subordinated debt. The debt discount of $702,000 was being amortized, using the
interest method, over the term of the debt. At December 31, 1997, the Company
amortized the entire debt discount as the Company is in default under the terms
of the debt agreement and the debt has been classified as a current liability.
 
  Loan Payable -- Bank
 
   
     Superior obtained a secured revolving line of credit of up to $9,000,000
from a bank to provide working capital for its general operations. Advances
under the line of credit are subject to a borrowing base consisting of the sum
of (I) 80% of Superior's eligible accounts receivable, plus (ii) 60% of
Superior's eligible inventory.
    
 
     The advances under the line are secured by a first-lien security interest
in all of the assets of Superior and are guaranteed by DynaGen. Superior may
draw on the line of credit until April 5, 1998. Interest on the line of credit
is based on the lower of the prime lending rate or LIBOR plus 2% (7.625% at
December 31, 1997).
 
7.  INCOME TAXES
 
     There was no provision for income taxes for the year ended December 31,
1997, for the six months ended December 31, 1996 and 1995 and for the years
ended June 30, 1996 and 1995 due to the Company's net operating losses. The
difference between the statutory Federal income tax rate of 34% and the
Company's effective tax rate is primarily due to net operating losses incurred
by the Company and the valuation reserve against the Company's deferred tax
asset.
 
     The components of the net deferred tax asset are as follows:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                   ---------------------------
                                                                       1997           1996
                                                                   ------------    -----------
    <S>                                                            <C>             <C>
    Deferred tax asset:
    Federal....................................................      11,477,000    $ 8,008,000
    State......................................................       2,634,000      1,986,000
                                                                   ------------    -----------
                                                                     14,111,000      9,994,000
    Valuation reserve..........................................     (14,111,000)    (9,994,000)
                                                                   ------------    -----------
    Net deferred tax asset.....................................    $         --    $        --
                                                                   ============    ===========
</TABLE>
 
                                       47
<PAGE>   48
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The following differences give rise to deferred income taxes:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                   ---------------------------
                                                                       1997           1996
                                                                   ------------    -----------
    <S>                                                            <C>             <C>
    Net operating loss carry forward...........................    $ 12,714,000    $ 9,185,000
    Research tax credit carryforward...........................         620,000        662,000
    Other......................................................         777,000        147,000
                                                                   ------------    -----------
                                                                     14,111,000      9,994,000
    Valuation reserve..........................................     (14,111,000)    (9,994,000)
                                                                   ------------    -----------
    Net deferred tax asset.....................................    $         --    $        --
                                                                   ============    ===========
</TABLE>
 
     The increases in the valuation reserve are due to the Company's net
operating losses.
 
     As of December 31, 1997, the Company has Federal and state net operating
loss carryforwards of approximately $32,750,000 and $25,200,000, respectively.
The Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1998, respectively. In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$56,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2003 and 2006, respectively.
 
     Use of net operating loss and tax credit carryforwards is subject to annual
limitations based on ownership changes in the Company's common stock as defined
by the Internal Revenue Code.
 
8.  RELATED PARTY TRANSACTIONS
 
  Notes Receivable
 
     During the year ended June 30, 1996, the Company loaned $75,000 in the
aggregate to an officer/director and an officer under notes which bear interest
at 5.05% per annum. These notes were secured by common stock of the Company
issuable on exercise of stock options held by the officers. In December 1997,
the entire amount, including accrued interest of $6,676, was forgiven and the
stock options were returned to the Company.
 
     In October 1996, the Company granted a $250,000 line-of-credit to each of
two officer/directors which bear interest at 6.07% per annum and mature on
October 4, 1998. These lines-of-credit are secured by common stock of the
Company held by the officer/directors. At December 31, 1997 and 1996, borrowings
of $110,000 were outstanding under the lines-of-credit.
 
     The Company recognized interest income on notes receivable of $10,464
during the year ended December 31, 1997 and $4,562 during the six months ended
December 31, 1996. At December 31, 1997 and 1996, accrued interest receivable of
$8,346 and $4,562, respectively, is included in the consolidated balance sheet.
 
  Accounts Payable
 
     In 1997, these officers/directors advanced an aggregate of $62,000 to the
Company, towards working capital requirements. These advances do not bear any
interest.
 
                                       48
<PAGE>   49
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Consulting Fees
 
     During 1996, the Company retained a consulting company for strategic
marketing and business development. The chief executive officer of the
consulting firm was also a director of the Company. During the six months ended
December 31, 1996 the Company paid the consulting firm $56,800 in fees. The
consulting fees for the year ended December 31, 1997 were $15,678.
 
     The Company paid $495,000 towards finder's fees to a consulting firm
relating to the acquisition of Superior. A former director of the Company was
also a minority shareholder of this consulting firm at the time of the
acquisition.
 
     The Company also entered into a marketing and business development
agreement for some of its technologies with another consulting firm. A principal
of this consulting firm is a director of the Company. During the year ended
December 31, 1997, fees of $20,833 were paid to this consulting firm and during
the six months ended December 31, 1996 the fees paid were $12,500.
 
     The Company retained a director as a consultant to assist with certain
public and investor relations matters. During the years ended June 30, 1996 and
1995, the director was paid fees of $31,000 and $49,000, respectively.
 
     In the year ended December 31, 1997, the Company paid fees of $20,050 and
for the years ended June 30, 1996 and 1995, $11,550 and $18,188, respectively to
the spouse of an officer/director for research and development services.
 
9.  COMMITMENTS AND CONTINGENCIES
 
  Lease Agreements
 
     The Company leases offices and warehouse facilities under operating leases
expiring in various years through 2014 that require the Company to pay certain
costs such as maintenance and insurance. The main facility at Superior is rented
from a related party. The related party rent was $162,000 for 1997.
 
     The following is a schedule of future minimum lease payments for all
operating leases (with initial or remaining terms in excess of one year) as of
December 31, 1997:
 
<TABLE>
<CAPTION>
                            YEAR                                AMOUNT
                            ----                              -----------
<S>                                                           <C>
1998........................................................  $   996,000
1999........................................................    1,003,000
2000........................................................    1,052,000
2001........................................................    1,054,000
2002........................................................      986,000
Thereafter..................................................    5,608,000
                                                              -----------
          Total minimum future lease payments...............  $10,699,000
                                                              ===========
</TABLE>
 
     Rent expense, net of subleases for the year ended December 31, 1997 was
$643,564 and for the six months ended December 31, 1996 and 1995 was $130,463
and $31,000 respectively. Rent expense for the years ended June 30, 1996 and
1995 was $61,366 and $71,031, respectively.
 
  Employment Agreements
 
     As of December 31, 1997, the Company has employment agreements with six
officers that provide for minimum annual salaries, reimbursement of business
related expenses and participation in other employee
 
                                       49
<PAGE>   50
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
benefit programs. The agreements also include confidentiality, non-disclosure,
severance, automatic renewal and non-competition provisions. Salary levels are
subject to periodic review by the Board of Directors.
 
  Consulting Agreements
 
     In February 1996, the Company entered into a six-month public and investor
relations services agreement with a public relations firm. As compensation for
these services, the firm was granted an option under the 1991 Stock Plan (see
Note 10) to purchase 20,000 shares of the Company's common stock at $.01 per
share exercisable through February 1, 2003 as long as the firm maintains a
business relationship with the Company. The Company valued the option at $55,225
and amortized the expense over the six month term of the agreement.
 
  Demand Registration Rights
 
     The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws certain shares of common stock issued in
connection with private placements and certain shares of common stock issuable
in connection with warrants issued to the Company's investment banker and agents
for the private placements. The Company will bear the cost of registering these
securities. (See Note 10).
 
  Contingencies
 
     Legal claims arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the
Company's financial position.
 
10.  PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
 
  1992 Public Offering Warrants
 
     In October 1992, the Company completed a public offering which included
redeemable common stock purchase warrants. Each warrant originally allowed the
holder to purchase one share of common stock at a price of $65, subject to
adjustment in certain instances, through September 24, 1995. As a result of
subsequent debt and equity financings, the 91,780 warrants that remain
outstanding have been adjusted to allow the holder to purchase 1.7 shares with
each warrant at an exercise price of $39 per warrant. The Company has extended
the expiration date of the warrants to September 24, 1998. During the year ended
June 30, 1996, 220 warrants were exercised to purchase 330 shares of common
stock. Net proceeds were $9,438.
 
  1994 Public Offering
 
     On March 23, 1994, the Company completed a public offering of 160,000 units
at $45 per unit. Each unit consisted of four shares of common stock and two
Class A redeemable common stock purchase warrants. Each warrant allowed the
holder to purchase one share of common stock at a price of $12, subject to
adjustment in certain instances, through March 16, 1999. Net proceeds of the
offering after deduction of all expenses were $5,617,729.
 
     The underwriting agreement granted the underwriters warrants to purchase
16,000 units at $74.25 per unit, subject to adjustment in certain instances,
during the period March 16, 1995 to March 16, 1999. The warrants contain, among
other things, a net exercise feature.
 
                                       50
<PAGE>   51
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Public Offering Warrants
 
     In May 1995, the Company filed a registration statement to register the
shares issuable upon the exercise of the warrants issued in the 1992 and 1994
public offerings and the shares issuable upon the exercise of the warrants
issued to the underwriters of the 1994 public offering. Registration costs of
$34,593 were deducted from net proceeds of warrant exercises during the year
ended June 30, 1995.
 
  1994 Public Offering Warrants
 
     In June 1995, 2,200 warrants issued to the underwriters of the 1994 public
offerings were exercised at $74.25 per warrant. The Company received proceeds of
$163,350 and issued the warrant holder 8,800 shares of common stock and 4,400
Class A redeemable common stock purchase warrants. In addition, in June 1995,
3,500 warrants issued to the underwriters of the 1994 public offering were
exercised, using their net exercise feature, in exchange for 18,545 shares of
common stock.
 
     During the period from July 1995 to November 1995, 10,300 warrants issued
to the underwriters of the 1994 public offering were exercised to acquire 50,398
shares of common stock and 1,000 Class A redeemable common stock purchase
warrants using their net exercise feature and payment to the Company of $37,125.
 
     In December 1995, the Company completed the redemption of the Class A
redeemable common stock purchase warrants resulting in the purchase of 324,119
shares of common stock yielding net proceeds of $3,845,769 after deducting
expenses. The remaining 1,280 unexercised warrants were redeemed by the Company
for $.10 per warrant.
 
  Private Placements
 
     During the year ended June 30, 1993, the Company entered into two common
stock private placement agreements and issued warrants to the placement agents
to purchase 6,833 shares of common stock. The agents' warrants are exercisable
over a four-year period commencing one year from the closing date and carry
certain demand registration rights. The exercise price is subject to adjustment
in certain instances. As a result of subsequent debt and equity financings, the
warrant exercise price has been adjusted to $43.70 per share.
 
     On February 7, 1996, the Company raised $3 million in a private placement,
from the sale to a single investor of 57,963 shares of common stock at a price
of approximately $17.30 per share and the issuance of a $2 million convertible
note. (See Note 6). Placement costs for this transaction were $421,157 of which
$146,452 was charged to additional paid-in capital and $274,705 was capitalized
as deferred debt financing costs. During the year ended December 31, 1997,
$1,065,000 of this note was converted for 98,959 shares of common stock and
$79,235 of related debt financing costs charged to additional paid-in-capital.
During the six months ended December 31, 1996, $400,000 of the note was
converted for 41,441 shares of common stock and $36,627 of related deferred debt
financing costs were charged to additional paid-in capital.
 
     On February 21, 1996 and March 4, 1996, the Company issued, in private
placements, an aggregate of 38,850 shares of common stock and 1,178,264 shares
of Series A preferred stock for aggregate consideration of $3,500,000. Placement
costs of $487,461 were charged to additional paid-in capital. The Series A
preferred stock was convertible into common stock 100 days after initial
issuance into that number of shares obtained by dividing the consideration paid
for the preferred stock by 80% of the five-day average of the closing bid price
per share of the common stock at the date of the conversion. Each share of
preferred stock had a liquidation value equal to $2.9375, the consideration paid
per share. In June 1996, the 1,178,264 shares of Series A preferred stock were
converted into 161,283 shares of common stock based on the above formula.
 
                                       51
<PAGE>   52
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     In February 1996, the Company issued, in a private placement, 55,256 shares
of common stock for aggregate consideration of $1,000,000. Placement costs of
$13,526 were charged to additional paid-in capital.
 
     During 1997, the Company sold 48,450 shares of Series A Preferred Stock and
warrants to purchase 38,760 shares of Common Stock for $4,845,000. The Series A
Preferred Stock has a stated dividend of $5.00 per share per annum. DynaGen is
obligated to register the shares of common stock issuable upon conversion of the
Series A Preferred Stock and exercise of the warrants within 90 days after the
issuance of the Preferred Stock. The exercise price of the warrants will be
$3.87 per share based on the five trading days immediately preceding December 4,
1997 on which date the registration statement is declared effective. The holders
of Series A Preferred Stock have certain rights of first refusal on future
equity financings.
 
     The Series A preferred stock may be converted into common stock at a
conversion price equal to the lesser of 120% of the average closing bid price,
as defined (the Series A Effective Price) or discounted percentages of the
Series A Effective Price decreasing from 80% to 74% over time. During 1997,
11,443 shares of Series A Preferred Stock with accumulated dividends was
converted into 757,320 shares of common stock. Any outstanding shares of the
Series A Preferred Stock will be automatically converted to common stock two
years from the issue date. The Company issued 100,000 shares to a placement
agent in connection with placement fees for Series A Preferred Stock.
 
     In June 1997, the Company sold 7,500 shares of Series B Preferred Stock and
22,500 shares of common stock for $750,000 to a private investor. The Series B
Preferred Stock has a stated dividend of $7.00 per share per annum.
Additionally, a $500,000 bridge loan provided in June 1997 and accrued interest
was converted to 5,015 shares of Series B Preferred Stock and 15,000 shares of
common stock in October 1997 per the terms of the bridge loan. Upon liquidation,
the Series B Preferred Stock ranks junior to the Series A Preferred Stock.
DynaGen is obligated to register the 22,500 shares of common stock issued and
the shares of common stock issuable upon conversion of the series B Preferred
Stock within 50 days after the closing of the acquisition.
 
     The Series B preferred stock may be converted into Common Stock at a
conversion price equal to the lesser of 125% of the average closing bid price,
as defined (the "Series B Effective Price") or discounted percentages of the
Series B Effective Price decreasing from 80% to 75% over time. Any outstanding
shares of the Series B Preferred Stock will be automatically converted to common
stock two years from the issue date.
 
     During 1997, the Company issued 7,500 shares, $.01 par value, of Series C
Preferred Stock and a Common Stock and a Common Stock Purchase Warrant to
purchase 25,000 shares of common stock to a private investor for a purchase
price of $750,000. The Series C Preferred Stock may be converted into common
stock at a conversion price equal to the average trading value at the lesser of
125% of average closing bid of common stock as discounted percentages of Series
C effective price of 80%.
 
     Effective December 31, 1997, the Company issued an 8% Debenture due April
19, 2009 for $328,500 to settle certain penalties related to delayed
registration of the Series C Preferred Stock. The Debenture is repayable solely
in common stock and may be converted at the trading value of company's stock,
for five trading days preceeding the Conversion date.
 
     The Company issued 6,500 shares, $.01 par value, of Series C Preferred
Stock in settlement of $650,000 of accrued expenses. These shares may be
converted into common stock at market prices beginning in 90 days from issue
date.
 
     The Series A, B and C Convertible Preferred Stock have conversion features
that were "in the money" at the date of issue ("beneficial conversion feature").
These securities may be convertible into common stock at the discount
percentages specified above. The beneficial conversion was recognized and
measured by allocating a portion of the proceeds equal to the intrinsic value of
the conversion feature to additional paid-in
 
                                       52
<PAGE>   53
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
   
capital. The intrinsic value was calculated at the date of issue of the
Convertible Preferred Stock as the difference between the conversion price and
the face value of the Common Stock into which the securities are convertible,
multiplied by the number of shares into which the security is convertible. A
summary of the amounts allocated to the beneficial conversion feature is as
follows:
    
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                CONVERTIBLE PREFERRED STOCK                      1997         1996
                ---------------------------                   ----------    --------
<S>                                                           <C>           <C>
Series A....................................................  $1,366,000    $865,000
Series B....................................................     374,000          --
Series C....................................................     178,000          --
                                                              ----------    --------
                                                              $1,918,000    $865,000
                                                              ==========    ========
</TABLE>
 
     The discount resulting from the allocation of proceeds to the beneficial
conversion feature is analogous to a dividend and has been recognized as a
return to the preferred shareholders from the date of issuance through the date
the security is first convertible. The discounts of $1,918,000 and $865,000 were
fully amortized at December 31, 1997 and 1996 by a charge against additional
paid-in capital because the company had no accumulated earnings at those dates.
 
     The amortization of the discount has been reflected as a return to the
preferred shareholders in the calculation of basic earnings per share.
 
  Bonus Compensation
 
     In February 1996, the Company granted to certain employees and a
consultant, bonus compensation paid in the form of (1) 11,725 shares of common
stock outside of the 1991 Stock Plan and the 1989 Stock Option Plan and (2)
stock options under the 1991 Stock Plan for 6,500 shares of common stock at an
exercise price of $.10 per share. The Company recognized $558,857 in
compensation expense associated with the grants.
 
                                       53
<PAGE>   54
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Stock Option Plans
 
     The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and
reserved 60,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1989 Plan, the Board of Directors will
grant options and establish the terms of the options in accordance with plan
provisions. The 1989 Plan options are exercisable for a period of ten years from
the date of issuance. The following table summarizes the activity of options
granted under the 1989 plan:
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED JUNE 30,
                          YEAR ENDED       SIX MONTHS ENDED    -------------------------------------
                       DECEMBER 31, 1997   DECEMBER 31, 1996         1996                1995
                       -----------------   -----------------   -----------------   -----------------
                                WEIGHTED            WEIGHTED            WEIGHTED            WEIGHTED
                                AVERAGE             AVERAGE             AVERAGE             AVERAGE
                                EXERCISE            EXERCISE            EXERCISE            EXERCISE
                       SHARES    PRICE     SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                       ------   --------   ------   --------   ------   --------   ------   --------
<S>                    <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at
  beginning of
  period.............  20,800    $8.80     22,000    $8.70     27,000    $7.10     27,000    $7.10
Granted..............     --        --        --        --        --        --        --        --
Canceled.............     --        --        --        --        --        --        --        --
Exercised............     --        --     (1,200)    7.50     (5,000)     .50        --        --
                       ------              ------              ------              ------
Outstanding at end of
  period.............  20,800     8.80     20,800     8.80     22,000     8.70     27,000     7.10
                       ======              ======              ======              ======
Exercisable at end of
  period.............  20,800     8.80     20,050     8.90     19,750     8.90     22,850     7.20
                       ======                                                      ======
Reserved for future
  grants at end of
  period.............     --                  --                  --                  --
                       ======              ======              ======              ======
</TABLE>
 
     Information pertaining to options outstanding under the 1989 Plan at
December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                                          OPTIONS EXERCISABLE
                                  OPTIONS OUTSTANDING                    ----------------------
                             ------------------------------   WEIGHTED                 WEIGHTED
                                           WEIGHTED AVERAGE   AVERAGE                  AVERAGE
                               NUMBER         REMAINING       EXERCISE     NUMBER      EXERCISE
        EXERCISE PRICES      OUTSTANDING   CONTRACTUAL LIFE    PRICE     EXERCISABLE    PRICE
        ---------------      -----------   ----------------   --------   -----------   --------
    <S>                      <C>           <C>                <C>        <C>           <C>
    $7.50-$8.80............    20,600         4.0 Years        $ 8.30      20,600       $ 8.30
    $58.70.................       200         3.6 Years         58.70         200        58.70
                                                                           ------
                               20,800         4.0 Years          8.80      20,800         8.80
                               ======                                      ======
</TABLE>
 
                                       54
<PAGE>   55
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved
260,000 shares of common stock for issuance to employees, officers, directors
and consultants. Under the 1991 Plan, the Board of Directors may grant options,
stock awards and purchase rights, and establish the terms of the grant in
accordance with the provisions of the plan. The 1991 Plan options are
exercisable for a period of seven years from the date of issuance and certain
options contain a net exercise provision. As of December 31, 1997, no stock
awards or purchase rights have been granted under the 1991 Plan. The following
table summarizes the activity of options granted under the 1991 Plan:
 
<TABLE>
<CAPTION>
                                                                                            YEARS ENDED JUNE 30,
                                              YEAR ENDED        SIX MONTHS ENDED    -------------------------------------
                                          DECEMBER 31, 1997    DECEMBER 31, 1996          1996                1995
                                          ------------------   ------------------   -----------------   -----------------
                                                    WEIGHTED             WEIGHTED            WEIGHTED            WEIGHTED
                                                    AVERAGE              AVERAGE             AVERAGE             AVERAGE
                                                    EXERCISE             EXERCISE            EXERCISE            EXERCISE
                                          SHARES     PRICE     SHARES     PRICE     SHARES    PRICE     SHARES    PRICE
                                          -------   --------   -------   --------   ------   --------   ------   --------
<S>                                       <C>       <C>        <C>       <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period......   79,790    $10.20     64,090    $10.40    60,910    $12.60    58,660    $11.80
Granted.................................   21,000      2.31     32,600     10.10    10,500      2.90    5,000      19.40
Canceled................................  (22,394)    10.00     (5,600)    18.10    (2,150)    52.90    (2,700)     8.50
                                                                                                        ------    ------
Exercised...............................     (150)     7.50    (11,300)     7.50    (5,170)     3.20      (50)      7.50
                                          -------              -------              ------              ------
Outstanding at end of period............   78,246      5.80     79,790     10.20    64,090     10.40    60,910     12.60
                                          =======              =======              ======              ======
Exercisable at end of period............   52,800      8.70     34,399     11.80    41,830     10.90    20,183     18.70
                                          =======              =======              ======              ======
Reserved for future grants at end of
  period................................  165,084               23,690              50,690              59,040
                                          =======              =======              ======              ======
Weighted average fair value of options
  granted during the period.............             $ 2.30               $12.30              $29.40                 N/A
</TABLE>
 
     Information pertaining to options outstanding under the 1991 Plan at
December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                             -------------------------              ----------------------
                                            WEIGHTED
                                             AVERAGE     WEIGHTED                 WEIGHTED
                                            REMAINING    AVERAGE                  AVERAGE
           EXERCISE            NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
            PRICES           OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
           --------          -----------   -----------   --------   -----------   --------
    <S>                      <C>           <C>           <C>        <C>           <C>
    $.01-$.75..............    40,000       4.0 Years     $ 3.25      27,200       $ 2.80
    $1.31-$1.94............    18,246       5.3 Years       6.20       5,600         6.95
    $5.25-$6.25............    20,000         1 Years      25.60      20,000        25.60
                               ------                                 ------
                               78,246       3.8 Years       5.80      52,800         8.70
                               ======                                 ======
</TABLE>
 
  Other Stock Options and Warrants
 
     On September 6, 1990, the Company's Board of Directors granted
non-qualified stock options to purchase 45,000 shares of common stock at a price
of $8.75 per share through September 2000, all of which are currently
exercisable by a former director of the Company. In January 1993, the Company
granted an option to purchase 2,000 shares of common stock at a price of $52.50
per share exercisable through January 15, 1999.
 
                                       55
<PAGE>   56
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     On November 20, 1995, the Company entered into a one-year investment
banking agreement with the underwriter of the Company's prior public offerings.
As compensation for services, the Company granted a warrant to purchase 40,000
shares of common stock at an exercise price of $25 per share. The warrant is
exercisable through November 20, 2000. The shares underlying the warrant were
registered on a Form S-3 registration statement declared effective on March 29,
1996. In September 1996, the Company and the underwriter amended the agreement,
and the Company paid the underwriter $500,000 in consulting fees for services
rendered.
 
     On July 24, 1996, the Company's Board of Directors granted non-qualified
stock options to two directors of the Company to purchase an aggregate of 66,000
shares of common stock at an exercise price of $19.40 per share. These options
are exercisable by the directors until July 24, 2003. On October 28, 1996, the
Company's Board of Directors granted a non-qualified stock option to a director
of the Company to purchase 33,000 shares of common stock at an exercise price of
$13.10 per share. This option is exercisable by the director until October 28,
2003. The weighted average fair value of these options, estimated using the
Black-Scholes option-pricing model, on the date of grant was $12 per share.
 
     On December 10, 1996, the Company granted warrants to purchase an aggregate
of 10,000 shares of common stock at an exercise price of $14.40 per share. These
warrants are exercisable through December 31, 2003. The Company valued the
warrants at $99,000 and is expensing the warrants over their vesting period.
Expense for the year ended December 31, 1997 and the six months ended December
31, 1996 was $39,598 and $19,800, respectively.
 
     On August 28, 1997, the Company issued a warrant to purchase 1,000,000
shares of Common Stock at an exercise price of $0.15 per share as consideration
of investment banking services rendered to the Company by an investment banker.
The Company recognized compensation expense of $452,000 in the third quarter of
Fiscal 1997 based on the fair value of the warrant.
 
  Stock-Based Compensation
 
     At December 31, 1997, the Company has two stock-based compensation plans
and stock options issued outside of the plans, which are described above. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
stock options issued to employees and directors. Had compensation cost for the
Company's stock options issued to employees and directors been determined based
on the fair value at the grant dates consistent with SFAS No. 123, the Company's
net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                       YEAR ENDED         DECEMBER 31,      YEAR ENDED
                                                    DECEMBER 31, 1997         1996         JUNE 30, 1996
                                                    -----------------   ----------------   -------------
    <S>                                             <C>                 <C>                <C>
    Net loss:
      As reported.................................    $(12,241,278)       $(4,306,140)      $(5,097,419)
      Pro forma...................................     (12,555,111)       $(4,489,433)      $(5,146,869)
    Net loss per share:
      As reported.................................    $      (4.48)       $     (2.44)      $     (2.09)
      Pro forma...................................    $      (4.58)       $     (2.60)      $     (2.11)
</TABLE>
 
   
     Common stock equivalents and contingently issuable shares have been
excluded from all calculations of net loss per share because the effect of
including them would be anti-dilutive.
    
 
                                       56
<PAGE>   57
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The fair value of each option grant under the 1991 Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants during the year ended December 31,
1997, the six months ended December 31, 1996 and the year ended June 30, 1996,
respectively; dividend yield of 0%; risk-free interest rates of 6.5%, 6.5% and
6.4%; expected volatility of 80%, 80% and 80% and expected lives of 1.0, 3.8 and
3.9 years.
 
     Weighted average assumptions used in valuing stock options issued outside
of the plans during the six months ended December 31, 1996 were dividend yield
of 0%; risk free interest rate of 6.8%; expected volatility of 81% and an
expected life of 5 years.
 
Common Stock Reserved
 
     The Company has reserved common stock at December 31, 1997 as follows:
 
   
<TABLE>
<CAPTION>
                                                                NUMBER OF SHARES
                                                                ----------------
<S>                                                             <C>
Convertible note payable....................................        1,539,143
1992 public offering warrants...............................          256,984
Private placement agents' warrants..........................            6,833
Stock option plans..........................................          112,446
Superior acquisition........................................        1,833,334
Preferred stock conversion..................................       10,745,916
Other stock options and warrants............................        2,366,062
                                                                   ----------
  Total.....................................................       16,860,718
                                                                   ==========
</TABLE>
    
 
     The number of shares of common stock reserved in connection with the
convertible note payable and convertible preferred stock is subject to
adjustment (see Notes 6 and 14.)
 
                                       57
<PAGE>   58
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
11.  REVENUES AND SEGMENT INFORMATION
 
  Product Sales
 
     During the six months ended December 31, 1996 and 1995, the Company's sales
to foreign customers amounted to 21% and 16% of total revenues, respectively.
During the years ended June 30, 1996 and 1995, the Company's sales to foreign
customers amounted to 36% and 42% of total revenues, respectively. Sales to two
domestic customers amounted to 53% and 14% of total revenues, and sales to one
foreign customer amounted to 18% of total revenues during the six months ended
December 31, 1996. Sales to one foreign customer amounted to 23% of total
revenues during the year ended June 30, 1996 and sales to a different foreign
customer amounted to 27% of total revenues during the year ended June 30, 1995.
A summary of sales by geographic area is as follows:
 
<TABLE>
<CAPTION>
                                   YEAR ENDED        SIX MONTHS ENDED
                                  DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                  ------------   -------------------------   -------------------------
                                      1997          1996          1995          1996          1995
                                  ------------   -----------   -----------   -----------   -----------
<S>                               <C>            <C>           <C>           <C>           <C>
Far East and Asia...............  $    31,970    $    68,815   $    39,812   $   183,706   $   185,997
United States...................   13,747,429        281,934         4,693        18,877        39,860
Europe..........................       11,542          7,403         5,622         8,466        16,462
Other...........................      129,963            315         7,728         9,696         5,234
                                  -----------    -----------   -----------   -----------   -----------
                                  $13,920,904    $   358,467   $    57,855   $   220,745   $   247,553
                                  ===========    ===========   ===========   ===========   ===========
</TABLE>
 
     A summary of sales by product is as follows:
 
<TABLE>
<CAPTION>
                                   YEAR ENDED        SIX MONTHS ENDED
                                  DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                  ------------   -------------------------   -------------------------
                                      1997          1996          1995          1996          1995
                                  ------------   -----------   -----------   -----------   -----------
<S>                               <C>            <C>           <C>           <C>           <C>
Diagnostic tests................  $   110,395    $    86,781   $    57,855   $   220,745   $   247,553
Generic pharmaceuticals.........   13,810,509        271,686            --            --            --
                                  -----------    -----------   -----------   -----------   -----------
                                  $13,920,904    $   358,467   $    57,855   $   220,745   $   247,553
                                  ===========    ===========   ===========   ===========   ===========
</TABLE>
 
  License Fees and Royalties
 
     During the year ended June 30, 1995, the Company entered into an agreement
where it granted a third party the right to evaluate licensing the Company's
smoking cessation technology for a $500,000 fee, $250,000 of which was
refundable should the Company license its smoking cessation technology to a
different party prior to October 15, 1995. On July 13, 1995, the third party
informed the Company that it would not exercise its right to license the
technology at this time. Revenues earned under this agreement were approximately
45% and 50% of total revenues for the years ended June 30, 1996 and 1995,
respectively.
 
     License fee revenue for the year ended June 30, 1996 includes $250,000
related to the smoking cessation technology mentioned above, $60,000 for certain
rights to manufacture and sell the Company's MycoAKT latex agglutination
products, and $25,000 for exclusive MycoDot distribution rights in Japan.
 
                                       58
<PAGE>   59
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Segment Information
 
     The Company has two principal operating segments: the development and
marketing of therapeutic and diagnostic products for the human health care
market and the manufacture and distribution of generic pharmaceuticals through
its recently acquired subsidiaries, Able Laboratories, Inc. and Superior
Pharmaceutical Company. During the years ended June 30, 1996 and 1995, the
Company's continuing operations consisted of the development and marketing of
therapeutic and diagnostic products for the human health care market. Segment
information is as follows:
 
<TABLE>
<CAPTION>
                                                    THERAPEUTICS AND          GENERIC
                                                   DIAGNOSTIC PRODUCTS    PHARMACEUTICALS
                                                   -------------------    ---------------
    <S>                                            <C>                    <C>
    YEAR ENDED DECEMBER 31, 1997
    Operating revenues.........................        $   110,395          $13,810,509
    Operating loss.............................         (5,964,823)          (2,658,370)
    Identifiable assets........................            435,570           16,091,669
    Depreciation and amortization..............             37,539              192,872
    Capital expenditures.......................             41,765              929,964
    SIX MONTHS ENDED DECEMBER 31, 1996
    Operating revenues.........................        $    88,222          $   271,686
    Operating loss.............................        $(1,867,120)         $  (842,877)
    Identifiable assets........................        $   509,885          $ 1,410,679
    Depreciation and amortization..............        $    94,626          $    34,932
    Capital expenditures.......................        $    10,449          $   576,621
</TABLE>
 
     Operating loss represents net sales less operating expenses for each
segment, and excludes general corporate expenses and other income and expenses
of a general corporate nature. Identifiable assets by segment are those assets
that are used in the Company's operations within that segment. General corporate
assets consist principally of cash, investment securities, notes receivables,
accrued interest receivable, certain office furniture and equipment, certain
intangible assets and deferred debt financing costs.
 
12.  EMPLOYEE BENEFIT PLAN
 
     The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan")
for the DynaGen and Able employees. Employees who have attained the age of 21
may elect to reduce their current compensation, subject to certain limitations,
and have that amount contributed to the 401(k) Plan. The Company may make
discretionary contributions to the 401(k) Plan up to 25% of employee
compensation, subject to certain limitations. Employee contributions to the
401(k) Plan are fully vested at all times and all Company contributions become
vested over a period of six years. The Company has made no contributions to the
401(k) Plan as of December 31, 1997.
 
     Superior provides its employees with a Section 401(k) profit sharing plan.
Eligible participants must be twenty-one years old and have worked for one year.
Employer matching and profit sharing contributions are discretionary. At
December 30, 1997, Superior matched $5,919 and contributed $18,208 in profit
sharing.
 
13.  SUBSEQUENT EVENTS
 
     On August 20, 1997, the Company completed a placement of Series C and
Series D Convertible Preferred Shares with an investor. At the time of the
closing, the investor purchased 7,500 shares of Series C
 
                                       59
<PAGE>   60
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
Preferred for $750,000. The purchase agreement provided that the Company may
require the investor to purchase on a monthly basis tranches of Series D
Preferred Shares in the amount of no less than $200,000 per month and on an
optional basis no more than an additional $200,000 per month with certain
exceptions. The Company is obligated to register for resale the shares of common
stock issuable upon conversion of the Series C and D Preferred Stock. The
Company also issued a stock purchase warrant to purchase 25,000 shares of its
common stock in connection with this offering.
 
     Under the registration rights agreement, the Company was required to file
registration of both Series C and D Preferred Shares within 45 days of the
completion of the placement. The Company filed the registration statement in
March 1998, but it has not been declared effective. In March 1998 the Company
issued a warrant to the investor to purchase at any time in the next three (3)
years 1% of the fully diluted issued and outstanding shares at the time of the
exercise for $150,000.
 
     On March 19, 1998, the investor purchased an additional $500,000 of Series
D Preferred Shares from the Company and waived certain restrictions which
limited the drawdown to $400,000 per month.
 
     On February 26, 1998, the Company received $500,000 from the placement of a
7% convertible debenture from another investor. On March 30, 1998, the investor
exchanged this debenture for a $500,000 tranche of Series D Preferred Shares and
also received an 8% convertible debentures in the amount of $87,500. This
debenture is convertible into common stock at the market price of the common
stock on the date of the conversion.
 
     On March 31, 1998, the Company sold another tranche of $500,000 of Series D
Preferred Stock, along with an 8% convertible debenture in the amount of $87,500
convertible into common stock at the market price, to another investor.
 
     During the months of February and March of 1998, the Chairman and Executive
Vice President and the President and Chief Executive Officer of the Company and
their family members advanced the Company $265,000 towards general working
capital purposes. The loans carry no interest, are unsecured, and subordinated
and can only be repaid through conversion into equity.
 
   
     On March 2, 1998, the Company through its subsidiary, Generic
Distributions, Incorporated ("GDI"), completed the acquisition of Generic
Distributors Limited Partnership ("GDLP"), of Monroe, LA. In connection with the
acquisition, the Company paid the limited partnership $1,200,000 in cash, and
$1,050,000 in Series E Convertible Preferred Shares and 1,500 shares of Series F
Convertible Preferred Stock valued at $100,000, for a total purchase price of
$2,350,000. The Preferred Shares are convertible beginning 12 months from the
closing into the Company's common shares at the then prevailing market prices.
The Series F Preferred Stock is convertible into $100,000 in value of the
Company's Common Stock commencing 120 days after the closing. In connection with
this transaction, GDI received $1,200,000 in a five-year term loan from Fleet
Bank. The loan carries an interest of LIBOR plus 3%, is payable in quarterly
installments of principal and interest and matures on April 26, 2003. Fleet Bank
also established a revolving line of credit for general working capital in the
amount of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are
secured by all of the assets of GDI and Able and a pledge of all of the common
stock of GDI, and are guaranteed by the Company. In addition, the Company
entered into employment and consulting agreements with the sellers which
provide, among other things, for annual compensation and a signing bonus of 1400
shares of Series F Preferred Stock, convertible into $100,000 of the Company's
Common Stock commencing 120 days after the closing.
    
 
   
     On March 24, 1998, the Company suspended conversions of its Series A and B
Preferred Shares into the Company's common stock. The purpose of this suspension
is to give the Company time to coordinate its efforts to negotiate orderly
settlements of these outstanding convertible preferred shares.
    
                                       60
<PAGE>   61
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     On March 30, 1998, the Board of Directors unanimously voted to issue
options, warrants and the Company's common stock to several individuals and
entities for services rendered to date and for future considerations. The Board
also authorized the issuance of 800,000 shares for product development and FDA
related consulting services to various entities. The Company granted warrants to
purchase 650,000 shares to two consulting firms in connection with the Company's
investor relations program. All of the above grants of shares, options and
warrants are subject to vesting and may be canceled by the Board at its option.
 
     In March 1998, the Company received a letter from NASDAQ advising that the
Company did not meet the minimum listing criteria and will be subject to
delisting. The Company has responded to NASDAQ. To date, the Company has not
been informed of a decision from NASDAQ concerning its continued listing.
 
   
     In January 1998, Biotrack, Inc. received $277,750 in bridge financing and
in March, 1998, the Company sold a portion of its shares of Biotrack, Inc. to
three investors for $125,000.
    
 
14.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     At December 31, 1997 and 1996, the Company's financial instruments include
investment securities which are carried at fair value (see Note 3), notes
receivable (see Note 8) and debt obligations (see Note 6). The carrying value of
the notes receivable approximate their fair value as these instruments bear
interest and mature in less than one year. The fair value of the outstanding
balance of the convertible note payable is approximately $799,000 and $2,786,000
at December 31, 1997 and 1996, respectively, based on the fair value of the
common stock issuable on conversion of the note. The carrying value of other
debt obligations approximate fair values based on their maturities and interest
rates.
 
15.  QUARTERLY DATA (UNAUDITED)
 
     Summaries of operating results on a quarterly basis are as follows:
 
<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                         DECEMBER 31,               YEAR ENDED JUNE 30,
                                            YEAR ENDED                 -----------------   -------------------------------------
                                         DECEMBER 31, 1997                   1996                          1996
                               -------------------------------------   -----------------   -------------------------------------
                               FOURTH     THIRD    SECOND     FIRST    SECOND     FIRST    FOURTH     THIRD    SECOND     FIRST
                               QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net product sales............  $6,662     5,572    $1,230    $  457    $  299    $   59    $   70    $   93    $   39    $    19
License fees and royalties...      --        38        50         1         1        --        25        35        25        250
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Total revenues...........   6,662     5,610     1,280       458       300        59        95       128        64        269
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Cost of sales................   6,402     4,645     1,255       454       331        25        22        46        21          8
Research and development.....     851       723     1,159       487       332       760     1,230       852       566        470
Selling, general and
  administrative.............   2,525     2,546     1,066     1,475     2,166     1,073       616       880       618        571
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Total costs and
      expenses...............   9,778     7,914     3,980     2,416     2,829     1,858     1,868     1,778     1,205      1,049
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Operating loss...............  (3,116)   (2,304)   (2,700)   (1,958)   (2,529)   (1,799)   (1,773)   (1,650)   (1,141)      (780)
Other income, net............  (1,623)     (514)      (95)       69         1        21        74        62        57         54
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Net loss.................  $(4,739)  $(2,818)  $(2,795)  $(1,889)  $(2,528)  $(1,778)  $(1,699)  $(1,588)  $(1,084)  $  (726)
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
Net loss per share...........  $(1.35)   $ (.87)   $ (.92)   $ (.63)   $ (.88)   $ (.62)   $ (.63)   $ (.61)   $ (.48)   $  (.34)
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
Weighted average shares
  outstanding................   3,525     3,246     3,041     2,998     2,897     2,862     2,729     2,606     2,263      2,180
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>
 
                                       61
<PAGE>   62
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS
 
     The current directors and executive officers of the Company, their ages and
their positions held in the Company are as follows:
 
<TABLE>
<CAPTION>
                    NAME                       AGE                   POSITION
                    ----                       ---                   --------
<S>                                            <C>   <C>
Dhananjay G. Wadekar.........................  44    Chairman of the Board, Executive Vice
                                                     President and Director
Dr. Indu A. Muni.............................  55    President, Chief Executive Officer,
                                                     Treasurer and Director
Dr. F. Howard Schneider(1)(2)................  58    Director
Steven Georgiev(1)(2)........................  64    Director
Dr. Michael Sorell...........................  51    Director
Peter J. Mione...............................  51    Vice President -- Clinical and
                                                     Regulatory Affairs
</TABLE>
 
---------------
 
(1) Member of the Audit Committee.
 
(2) Member of the Executive Compensation Committee.
 
     The By-laws of the Company provide for the annual election of the Board of
Directors. All Directors of the Company are elected to hold office until the
next annual meeting of Stockholders, and until their successors have been duly
elected and qualified. Officers are elected by, and serve at the discretion of,
the Board of Directors.
 
     Dhananjay G. Wadekar.  Mr. Wadekar is a co-founder of the Company and has
served as a director of the Company since inception and as Chairman of the Board
and Executive Vice President of the Company since November 1991. In addition, he
served as the Chairman, Chief Executive Officer and Treasurer of the Company
from its inception until July 1990 and as a consultant to the Company during the
period July 1990 to October 1991. Mr. Wadekar was a director of Holometrix,
Inc., a publicly traded thermal instrumentation company which he founded, from
1985 until November 1994.
 
     Dr. Indu A. Muni.  Dr. Muni is a co-founder of the Company and has served
as President and a director of the Company since inception and as Chief
Executive Officer and Treasurer since July 1990. From May 1988 to November 1988,
Dr. Muni served as Vice President of Biomaterial and Environmental Science and
Engineering for Holometrix, Inc., a publicly traded thermal instrumentation
company. Between July 1987 and May 1988, Dr. Muni provided biological consulting
services to pharmaceutical and biotechnology companies as an independent
consultant. From February 1981 to July 1987, Dr. Muni served as Executive Vice
President of Bioassay Systems Corporation, a publicly traded provider of
contract research and development services in the areas of pharmaceutical and
diagnostic systems.
 
     Dr. F. Howard Schneider.  Dr. Schneider has served as a director of the
Company since September 1989, was Chairman of the Board of the Company from July
1990 until February 1991 and became Senior Vice President -- Technology
effective June 1991 until his resignation in November 1997. Dr. Schneider was
previously a partner and Senior Vice President of Bogart Delafield Ferrier, Inc.
("Bogart Delafield Ferrier"), a healthcare consulting firm that provides
strategic consulting services to pharmaceutical and biotechnology companies. Dr.
Schneider participated in the management buyout of Bogart Delafield Ferrier from
its parent corporation, McCann Healthcare Group, a subsidiary of Inter Public
Group.
 
     Steven Georgiev.  Mr. Georgiev has served as a director of the Company
since July 1996. Since November 1993, he has been Chief Executive Officer of
Palomar Medical Technologies, Inc. ("Palomar"), a publicly traded Massachusetts
firm specializing in medical applications of lasers, and from November 1993
until August 1994 he was also President of Palomar. Mr. Georgiev was a
consultant to Palomar's predecessor, Dymed Corporation, from June 1991 until
Palomar's September 1991 merger with Dymed Corporation, at
 
                                       62
<PAGE>   63
 
which time he became Palomar's Chairman of the Board of Directors. Mr. Georgiev
has been a director of Excel Technology, Inc., a publicly traded laser system
and electro-optical component company, since October 1992, and of XXsys
Technology, Inc. since June 1994. Mr. Georgiev earned a B.S. degree in
Engineering Physics from Cornell University and a M.S. in Management from the
Massachusetts Institute of Technology.
 
     Dr. Michael Sorell.  Dr. Sorell has served as a director of the Corporation
since October 1996. Since February 1996, he has served as the Principal of MS
Capital, LLC, which provides strategic consulting in the areas of medical
technology and financial management to emerging biotech and healthcare
companies. From August 1994 to February 1996, Dr. Sorell was an emerging growth
strategist for Morgan Stanley & Co. Sciences Fund, a joint venture with Essex
Investment Management of Boston, MA. Dr. Sorell originally joined Morgan Stanley
in July 1986 as a Research Analyst covering pharmaceutical and biotechnology
companies, was promoted to Vice President in January 1990 and became a Principal
in January 1992. Prior to Morgan Stanley, Dr. Sorell was on the attending staff
of Memorial Sloan-Kettering Cancer Center as a pediatric oncologist and later
joined Schering-Plough Corporation in clinical research. Dr. Sorell earned an
M.D. degree from the Albert Einstein College of Medicine in 1972.
 
     Peter J. Mione.  Mr. Mione has served the Company as Vice President --
Clinical and Regulatory Affairs since November 1991 and initially as Manager of
Regulatory Affairs from May 1989 to October 1991. Mr. Mione is responsible for
monitoring clinical studies, preparation of protocols, and submission of data on
the Company's proposed products to the FDA for approval. Prior to joining the
Company, Mr. Mione was a independent consultant from October 1988 to April 1989
and served as Administrative Coordinator at Toxikon Corp. (from 1987 to 1988), a
company providing toxicology study services. Prior thereto, Mr. Mione was
Director of Regulatory Compliance at Genus Diagnostics, a manufacturer of
diagnostic kits.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market. Officers, directors and greater-than-ten percent
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with all Section 16(a) forms they file.
 
     Based solely on its review of the copies of such forms received by it, the
Company believes that during the fiscal year all of its officers, directors and
greater-than-ten percent stockholders complied with all Section 16(a) filing
requirements.
 
SIGNIFICANT EMPLOYEES
 
     The Company also relies on the services of the following significant
employees:
 
     Dennis B. Smith, age 42, has served as President and Chief Executive
Officer of Superior Pharmaceutical Company since 1989. Prior to 1989, Mr. Smith
was Business Development Vice President for Bioline Laboratories in 1988-1989.
He was Director of Sales at Bioline Laboratories in 1987-1988. Prior to joining
Bioline, Mr. Smith served as Midwest Region Sales Manager for Goldline
Laboratories in 1985-1987. He was Field Sales Representative for Generix Drug
Corporation in 1982-1985; Generix Drug was the precursor company to Goldline
Laboratories. He served as a field sales representative for Cooper Drug Company
in 1980-1982. Mr. Smith studied business management at Southern State College
and at the University of Cincinnati.
 
     Eric C. Hagerstrand, age 50, founded Superior Pharmaceutical Company in
1986 and has served as Chairman, Director, and Chief Financial Officer since
that time. He assumed the position of Chief of Operations in 1984. Mr.
Hagerstrand was engaged in the private practice of law for twenty years prior to
devoting his full time to Superior in 1994. He maintains full licensing and
membership in the Ohio State Bar Association and the Cincinnati Bar Association.
Mr. Hagerstrand graduated from Wittenberg University in 1969 with a major in
economics and earned his law degree from the University of Cincinnati College of
Law in 1974.
 
                                       63
<PAGE>   64
 
     Don Couvillon, age 50, founded Generic Distributors Incorporated, of
Monroe, LA, in August 1985. From 1978 until 1989 he was the sole owner of a
retail pharmacy, Don's Pharmasave. Prior to that, he worked in Eli Lilly and
Company from 1976 to 1977. Mr. Couvillon obtained his degree in pharmacy from
the NLU Pharmacy School in 1991.
 
     Dr. Saraswathy V. Nochur, age 37, became Director -- Diagnostic Products in
February 1994 and previously served DynaGen as Product Manager -- Diagnostic
Reagents from July 1991 to February 1994 and as Research Scientist from July
1989 to June 1991. Dr. Nochur initially served the Company as a consultant from
March 1989 to July 1989. From October 1983 to December 1988, Dr. Nochur
conducted research in connection with her doctoral dissertation at the
Massachusetts Institute of Technology on the deregulation of cellulase and the
optimization of ethanol production from cellulose. From 1982 to 1983, she was
employed by Hoechst Pharmaceuticals where her work involved the development of
immunodiagnostic products based on polyclonal antibody detection systems.
 
     Cynthia A. Kiley, age 37, has served DynaGen since inception, most recently
as Director, Human Resources. She was Manager of Administrations from May 1992
to September 1993 and prior to that served as Office Manager. Ms. Kiley was
Manager of Publications for Holometrix, Inc. from May 1988 to February 1989.
From 1984 to May 1988, Ms. Kiley was responsible for publications management for
Dynatech Scientific, Inc. Ms. Kiley received her Bachelor of Arts Degree in
Biology from Emmanuel College.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
COMPENSATION OF DIRECTORS
 
     Directors who are also employees of the Company are not compensated for
attending meetings of the Board of Directors. The Company has instituted a
policy of paying directors who are not employees of the Company a participation
fee of $1,000 for each meeting of the Board of Directors attended and for each
committee meeting attended, up to a maximum of $1,000 per calendar day,
regardless of how many meetings occur on one day. All directors are also
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings and other services as directors. Directors are entitled to receive
stock options under the 1998 Stock Option Plan, the 1991 Stock Plan and the 1989
Stock Option Plan.
 
EXECUTIVE COMPENSATION COMMITTEE
 
     On July 24, 1996, the Board established an Executive Compensation
Committee, of which Dr. Schneider and Mr. Georgiev are the current members. The
Executive Compensation Committee reviews and sets cash and non-cash compensation
for Dr. Muni and Mr. Wadekar and provides guidance to the Board of Directors on
the cash and non-cash compensation payable to other officers and employees of
the Company.
 
                                       64
<PAGE>   65
 
SUMMARY COMPENSATION TABLE
 
     The following table sets forth certain information concerning the
compensation for services rendered in all capacities to the Company for the
fiscal years ended December 31, 1997, June 30, 1996 and June 30, 1995 of (i) the
Chief Executive Officer of the Company during 1997 and (ii) the other executive
officers of the Company serving on December 31, 1997 whose salary and bonus for
1997 exceeded $100,000 (the "Named Executive Officers"):
 
<TABLE>
<CAPTION>
                                                                          LONG-TERM
                                                                         COMPENSATION
                                                                            AWARDS
                                                       COMPENSATION      ------------
                                                     -----------------    SECURITIES     ALL OTHER
                 NAME AND                   FISCAL   SALARY(1)   BONUS    UNDERLYING    COMPENSATION
            PRINCIPAL POSITION               YEAR       ($)       ($)     OPTIONS(#)        ($)
            ------------------              ------   ---------   -----    ----------    ------------
<S>                                         <C>      <C>         <C>     <C>            <C>
Dr. Indu A. Muni..........................   1997    $124,300      --           --          252(2)
  President, Chief Executive Officer         1996     115,500      --           --          304(2)
  and Treasurer                              1995     115,500      --           --          304(2)
 
Dhananjay G. Wadekar......................   1997    $124,300      --           --          252(2)
  Executive Vice President                   1996     115,500      --           --          304(2)
                                             1995     115,500      --           --          304(2)
 
Dr. F. Howard Schneider...................   1997    $ 98,898      --           --          252(2)
  Senior Vice President -- Technology        1996     115,500      --       10,000          304(2)
                                             1995     115,500      --           --          304(2)
</TABLE>
 
---------------
 
(1) Other than salary described herein, the Company did not pay any Named
    Executive Officer any compensation, including incidental personal benefits,
    in excess of 10% of such Named Executive Officer's salary.
 
(2) Amount represents the dollar value of group-term life insurance premiums
    paid by the Company for the benefit of the Named Executive Officer.
 
(3) Dr. Schneider resigned his position as Senior Vice President -- Technology
    on November 7, 1997. Dr. Schneider continues to serve on the Company's Board
    of Directors.
 
OPTION GRANTS
 
     No options were granted to any Named Executive Officer during fiscal 1997.
 
OPTION EXERCISES AND FISCAL YEAR END VALUES
 
     The following table sets forth certain information concerning the number
and value of unexercised stock options held by the Named Executive Officers as
of December 31, 1997. None of the Named Executive Officers exercised any stock
options during fiscal 1997.
 
<TABLE>
<CAPTION>
                                                NUMBER OF UNEXERCISED            VALUE OF UNEXERCISED
                                                   OPTIONS HELD AT            IN-THE-MONEY OPTIONS HELD
                                                 DECEMBER 31, 1997(#)         AT DECEMBER 31, 1997($)(1)
                                             ----------------------------    ----------------------------
                   NAME                      EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
                   ----                      -----------    -------------    -----------    -------------
<S>                                          <C>            <C>              <C>            <C>
Dr. Indu A. Muni...........................         --              --              --              --
Dhananjay G. Wadekar.......................         --              --              --              --
Dr. F. Howard Schneider....................    202,859              --         $ 1,100              --
</TABLE>
 
---------------
 
(1) Value is based on the December 31, 1997 closing price on the Nasdaq SmallCap
    Market of $0.13 per share. Actual gains, if any, on exercise will depend on
    the value of the Common Stock on the date of the sale of shares.
 
                                       65
<PAGE>   66
 
EMPLOYMENT AND CONSULTING AGREEMENTS
 
     The Company has entered into employment agreements with Dr. Muni, the
Company's President, Chief Executive Officer and Treasurer, Mr. Wadekar, the
Company's Chairman of the Board and Executive Vice President, Dr. Schneider, the
Company's Senior Vice President--Technology, also had a similar agreement until
his resignation from his position on November 7, 1997. Dr. Muni's agreement
expires in August 1998 and Mr. Wadekar's agreement expires in October 1998.
 
     For 1997, the Board of Directors and the Compensation Committee set Dr.
Muni and Mr. Wadekar's annual base salaries at $145,000 and approved an
arrangement whereby Dr. Schneider was paid an annual base salary of $116,000 for
a four-day work week. In addition, each of Dr. Muni, Mr. Wadekar and Dr.
Schneider have agreed that (i) during his respective period of employment with
the Company and for a period of one year thereafter, he will not engage in any
business activity engaged in or under development by the Company and (ii) for a
period of three years following his respective period of employment, he will not
engage in any activities for any direct competitor similar or related to those
activities engaged in during the preceding two years of employment with the
Company. In the event the Company terminates Dr. Muni's or Mr. Wadekar's
employment without cause, the Company is obligated to pay to him an amount equal
to three months base salary.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Board of Directors and the Compensation Committee were responsible for
determining compensation of executive officers of the Company. During fiscal
1997, Drs. Muni and Schneider and Mr. Wadekar served on the Board of Directors.
None of these three officers was present during discussion of and abstained from
voting with respect to his own compensation as an executive officer of the
Company. The Board of Directors did not grant any options to Drs. Muni or
Schneider or Mr. Wadekar during fiscal 1997.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding the beneficial
ownership of the company's voting securities as of March 31, 1998, by (i) each
person or entity known to the Company to own beneficially five percent or more
of the Company's Series A Stock, Series B Stock, Series C Stock and Common
Stock, (ii) each of the Company's directors, (iii) the Company's Principal
Executive Officer and each of the other Named Executive Officers, and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
noted, each beneficial owner has sole voting and investment power with respect
to the shares shown.
 
                                       66
<PAGE>   67
   
<TABLE>
<CAPTION>
                                                     SHARES BENEFICIALLY OWNED(1)
                                    ---------------------------------------------------------------
                                                                  SERIES A            SERIES B            SERIES C
                                         COMMON STOCK               STOCK               STOCK               STOCK
                                    -----------------------   -----------------   -----------------   -----------------
                                                 PERCENT(2)            PERCENT             PERCENT             PERCENT
                                      NUMBER      OF CLASS    NUMBER   OF CLASS   NUMBER   OF CLASS   NUMBER   OF CLASS
                                      ------     ----------   ------   --------   ------   --------   ------   --------
<S>                                 <C>          <C>          <C>      <C>        <C>      <C>        <C>      <C>
Dhananjay G. Wadekar..............     135,125       0.9%        --        --        --        --        --       --
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. Indu A. Muni..................     113,725       0.7%        --        --        --        --        --       --
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. F. Howard Schneider...........      27,285(3)       *        --        --        --        --        --       --
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Steven Georgiev...................       8,250(4)       *        --        --        --        --        --       --
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. Michael Sorell................       8,250(4)       *        --        --        --        --        --       --
 115 East 92nd Street
 New York, NY 10128
Sovereign Partners L.P............   1,133,947(9)     7.2%                           --        --        --       --
 Executive Pavilion
 90 Grove Street
 Ridgewood, Ct 06878
The Endeavor Capital Fund S.A.....   2,896,700(6)    16.5%                           --        --     7,500      100%
 c/o Endeavor Management
 14/14 Divrei Chaim St.
 Jerusalem 94479, Israel
Julius Baer Securities, Inc.......   2,002,610(7)    12.0%       --        --     7,500       100%       --       --
 As agent for certain
 non-U.S. persons
 330 Madison Ave.
 New York, NY 10017
GDLP..............................                               --        --                            --       --
 Mowrane
 2A
All directors and executive.......     303,736(8)     2.0%       --        --        --        --        --       --
 officers as group (6 persons)
 
<CAPTION>
 
                                        SERIES D                                   SERIES E
                                          STOCK                                      STOCK
                                    -----------------       COMMON STOCK       -----------------
                                             PERCENT    --------------------            PERCENT
                                    NUMBER   OF CLASS    NUMBER      PERCENT   NUMBER   OF CLASS
                                    ------   --------    ------      -------   ------   --------
<S>                                 <C>      <C>        <C>          <C>       <C>      <C>
Dhananjay G. Wadekar..............
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. Indu A. Muni..................
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. F. Howard Schneider...........
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Steven Georgiev...................
 c/o DynaGen, Inc.
 840 Memorial Drive
 Cambridge, MA 02139
Dr. Michael Sorell................
 115 East 92nd Street
 New York, NY 10128
Sovereign Partners L.P............  5,000       50%
 Executive Pavilion
 90 Grove Street
 Ridgewood, Ct 06878
The Endeavor Capital Fund S.A.....  5,000       50%
 c/o Endeavor Management
 14/14 Divrei Chaim St.
 Jerusalem 94479, Israel
Julius Baer Securities, Inc.......
 As agent for certain
 non-U.S. persons
 330 Madison Ave.
 New York, NY 10017
GDLP..............................                      2,024,096(10)  12.1%   10,500     100%
 Mowrane
 2A
All directors and executive.......
 officers as group (6 persons)
</TABLE>
    
 
                                       67
<PAGE>   68
 
---------------
  *  Less than one percent.
 
 (1) To the Company's knowledge, 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, subject to community property laws where
     applicable and the information contained in the footnotes to this table.
 
 (2) Percentage ownership is based on 14,667,951 shares of Common Stock
     outstanding, plus securities deemed to be outstanding, with respect to
     individual stockholders, pursuant to Rule 13d-3(d)(1) under the Exchange
     Act.
 
 (3) Includes 202,859 shares issuable to Dr. Schneider pursuant to immediately
     exercisable stock options. Does not include 100 shares owned by Dr.
     Schneider's wife, of which he disclaims any beneficial interest or control.
 
 (4) Consists of 82,500 shares issuable pursuant to immediately exercisable
     stock options.
 
 (5) Represents shares issuable upon conversion of shares of Series A Stock. The
     terms of the Series A Stock prohibit the holder from converting shares of
     Series A Stock if such conversion would result in beneficial ownership of
     more than 4.9% of the outstanding Common Stock.
 
 (6) Represents shares issuable upon conversion of Series C and Series D Stock.
     The terms of the Series C and Series D Stock prohibit the holder from
     converting shares of Series A or Series C Stock if such conversion would
     result in beneficial ownership of more than 4.9% of the outstanding Common
     Stock.
 
 (7) Represents shares issuable upon an assumed conversion of Series B Stock.
     The terms of the Series B Stock prohibit the holder from converting shares
     of Series B Stock if such conversion would result in beneficial ownership
     of more than 4.9% of the outstanding Common Stock.
 
 (8) Includes 457,859 shares issuable pursuant to immediately exercisable stock
     options.
 
 (9) Represents shares issuable upon conversion of Series D Stock. The terms of
     Series D Stock prohibit the holder from converting shares of Series D Stock
     if such conversion would result in beneficial ownership of more than 4.9%
     of the outstanding Common Stock.
 
(10) Represents shares issuable upon conversion of Series E Stock.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     In fiscal 1996, the Company entered into a strategic marketing relationship
for certain of the Company's technologies with Bogart Delafield Ferrier. In
connection with this relationship, the Company paid to Bogart Delafield Ferrier
during the calendar year 1996 $80,000 in fees plus $12,388 for expenses. Bogart
Delafield Ferrier is also entitled to royalties of 1 1/2% of the dollar value of
any transaction with respect to certain of the Company's technologies initiated
with a pharmaceutical or managed care company between March 12, 1996 and
December 31, 1996. No such transaction was initiated during this time period.
Dr. Ferrier, who became a director of the Company in July 1996, is Chief
Executive Officer and Chairman of Bogart Delafield Ferrier.
 
     The Company also entered into a consulting agreement with M.S. Capital,
LLC. to provide marketing and business development services with respect to
certain of the Company's technologies. Dr. Michael Sorell, a director of the
Corporation, is the principal of M.S. Capital, LLC. Pursuant to the consulting
agreement, the Company paid M.S. Capital, LLC $12,500 during the Transition
Period.
 
                                       68
<PAGE>   69
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as part of this report:
 
     1.  Financial Statements:
 
          The following financial statements are filed as part of this report:
 
          Independent Auditors' Report
 
          Consolidated Balance Sheets -- December 31, 1997 and 1996
 
          Consolidated Statements of Loss -- Six Months Ended December 31, 1996
     and 1995 and Years Ended June 30, 1996, 1995 and 1994
 
          Consolidated Statements of Changes in Stockholders' Equity -- Six
     Months Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994
 
          Consolidated Statements of Cash Flows -- Six Months Ended December 31,
     1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994
 
          Notes to Consolidated Financial Statements
 
     2.  Financial Statement Schedules:
 
     No financial statement schedules have been included as part of this report
because they are either not required or the information is otherwise included.
 
     3.  Index to Exhibits
 
     The following exhibits are filed as part of this report:
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
 2a      --   Asset Purchase Agreement, dated August 9, 1996, among
              DynaGen, Inc., Able Acquisition Corp., Able Laboratories,
              Inc. and Alpharma USPD Inc. (filed as Exhibit 2.1 to
              Registrant's Form 8-K dated August 19, 1996 and incorporated
              by reference).
 2b      --   Product supply Agreement, dated August 9, 1996, among
              DynaGen, Inc., Able Acquisition Corp. and Able Laboratories,
              Inc. (filed as Exhibit 2.2 to Registrant's Form 8-K dated
              August 19, 1996 and incorporated by reference).
 2c      --   Agreement and Plan of Merger among the Registrant, DynaGen
              Acquisition Corporation, Superior Pharmaceutical Company and
              the stockholders of Superior Pharmaceutical Company dated
              March 7, 1997 (filed herewith).
 3a      --   Certificate of Incorporation, as amended (filed herewith).
 3b      --   By-laws, as amended (filed as Exhibit 3b to Registrant's
              Registration Statement on Form S-1, No. 33-46445, and
              incorporated by reference).
 4a      --   Specimen Common Stock Certificate (filed as Exhibit 4a to
              Registrant's Registration Statement on Form S-18, No.
              33-31836-B, and incorporated by reference).
 4b      --   Specimen Warrant Certificate (filed as Exhibit 4b to
              Registrant's Registration Statement on Form S-1, No.
              33-46445, and incorporated by reference).
 4c      --   Form of Warrant Agreement (filed as Exhibit 1d to
              Registrant's Registration Statement on Form
              S-1, No. 33-46445, and incorporated herein by reference).
 4d      --   Subscription Agreement between the Registrant and GFL
              Performance Fund Limited, dated January 31, 1996 (filed as
              Exhibit 4b to Registrant's Registration Statement on From
              S-3 (File No. 333-1748) and incorporated herein by
              reference).
</TABLE>
 
                                       69
<PAGE>   70
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
 4e      --   Note Purchase Agreement between the Registrant and GFL
              Performance Fund Limited, dated January 31, 1996 (filed as
              Exhibit 4c to Registrant's Registration Statement on Form
              S-3 (File No. 33-1748) and incorporated herein by
              reference).
 4f      --   Convertible Note issued by the Registrant to GFL Performance
              Fund Limited, dated February 7, 1996 (filed as Exhibit 4d to
              Registrant's Registration Statement on Form S-3 (File No.
              333-1748) and incorporated herein by reference).
 4g      --   Registration Rights Agreement between the Registrant and GFL
              Performance Fund Limited, dated February 7, 1996 (filed as
              Exhibit 4e to Registrant's Registration Statement on Form
              S-3 (File No. 333-1748) and incorporated herein by
              reference).
 4h      --   Offshore Securities Subscription Agreement between the
              Registrant and Julius Baer Securities Inc., dated February
              16, 1996 (filed as Exhibit 4e to Registrant's Current Report
              on Form 8-K dated February 2, 1996 and incorporated herein
              by reference).
 4i      --   Offshore Securities Subscription Agreement between the
              Registrant and Julius Baer Securities Inc., dated February
              29, 1996 (filed as Exhibit 4f to Registrant's Current Report
              on Form 8-K dated February 2, 1996 and incorporated herein
              by reference).
 4j      --   Registration Rights Agreement between the Registrant and
              Julius Baer Securities Inc., dated February 16, 1996 (filed
              as Exhibit 4g to Registrant's Current Report on Form 8-K
              dated February 2, 1996 and incorporated herein by
              reference).
 4k      --   Registration Rights Agreement between the Registrant and
              Julius Baer Securities Inc., dated February 29, 1996 (filed
              as Exhibit 4h to Registrant's Current Report on Form 8-K
              dated February 2, 1996 and incorporated herein by
              reference).
 4l      --   Investment Banking Agreement between the Registrant and H.
              J. Meyers & Co., Inc., dated November 20, 1995 (filed as
              Exhibit 4f to Amendment No. 1 to Registrant's Registration
              Statement on Form S-3, No. 333-1748, and incorporated herein
              by reference).
 4m      --   Amendment No. 1 to Investment Banking Agreement between
              Registrant and H.J. Meyers & Co., Inc. dated September 23,
              1996 (filed as Exhibit 4m to Registrant's Transition Report
              on Form 10-K for the period ended December 31, 1996, and
              incorporated by reference).
 4n      --   Common Stock Purchase Warrant issued by the Registrant to H.
              J. Meyers & Co., Inc., dated November 20, 1995 (filed as
              Exhibit 4g to Amendment No. 1 to Registrant's Registration
              Statement on Form S-3, No. 333-1748, and incorporated herein
              by reference).
 4o      --   Form of Warrant Agent Agreement (filed as Exhibit 4g to
              Registrant's Registration Statement on Form S-1, No.
              33-71416, and incorporated by reference).
 4p      --   Common Stock Purchase Warrant issued by Registrant to Zach
              Spigelman dated December 10, 1996 (filed as Exhibit 4p to
              Registrant's Transition Report on Form 10-K for the period
              ended December 31, 1996, and incorporated by reference).
 4q      --   Common Stock Purchase Warrant issued by Registrant to Rich
              Theriault dated December 10, 1996 (filed as Exhibit 4q to
              Registrant's Transition Report on Form 10-K for the period
              ended December 31, 1996, and incorporated by reference).
 4r      --   Common Stock Purchase Warrant issued by Registrant to Shawn
              Basu dated December 10, 1996 (filed as Exhibit 4r to
              Registrant's Transition Report on Form 10-K for the period
              ended December 31, 1996, and incorporated by reference).
 4s      --   Common Stock Purchase Warrant issued to Leonardo G. Zangani
              dated January 15, 1997 (filed as Exhibit 4s to Registrant's
              Transition Report on Form 10-K for the period ended December
              31, 1996, and incorporated by reference).
 4t      --   Registration Rights Agreement dated June 18, 1997 among
              DynaGen and Eric Hagerstrand, Dennis Smith and Thomas
              Canning (filed as Exhibit 4.1 to Registrant's Current Report
              on Form 8-K dated June 18, 1997, and incorporated by
              reference).
</TABLE>
 
                                       70
<PAGE>   71
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
 4u      --   Secured Promissory Note dated June 18, 1997 issued by
              DynaGen to Eric C. Hagerstrand (filed as Exhibit 4.2 to
              Registrant's Current Report on Form 8-K dated June 18, 1997,
              and incorporated by reference).
 4v      --   Secured Promissory Note dated June 18, 1997 issued by
              DynaGen to Dennis B. Smith (filed as Exhibit 4.3 to
              Registrant's Current Report on Form 8-K dated June 18, 1997,
              and incorporated by reference).
 4w      --   Secured Promissory Note dated June 18, 1997 issued by
              DynaGen to Thomas L. Canning (filed as Exhibit 4.4 to
              Registrant's Current Report on Form 8-K dated June 18, 1997,
              and incorporated by reference).
 4x      --   Pledge Agreement dated June 18, 1997 among DynaGen and Eric
              Hagerstrand, Dennis Smith and Thomas Canning (filed as
              Exhibit 4.5 to Registrant's Current Report on Form 8-K dated
              June 18, 1997, and incorporated by reference).
 4y      --   Secured Promissory Note dated June 18, 1997 issued by
              DynaGen to Sirrom (filed as Exhibit 4.6 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4z      --   Secured Promissory Note dated June 18, 1997 issued by
              DynaGen to Odyssey (filed as Exhibit 4.7 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4aa     --   Stock Purchase Warrant dated June 18, 1997 issued by DynaGen
              to Sirrom (filed as Exhibit 4.8 to Registrant's Current
              Report on Form 8-K dated June 18, 1997, and incorporated by
              reference).
 4bb     --   Stock Purchase Warrant dated June 18, 1997 issued by DynaGen
              to Odyssey (filed as Exhibit 4.9 to Registrant's Current
              Report on Form 8-K dated June 18, 1997, and incorporated by
              reference).
 4cc     --   Pledge and Security Agreement dated June 18, 1997 issued by
              DynaGen to Sirrom (filed as Exhibit 4.10 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4dd     --   Subordinated Note dated June 18, 1997 issued by DynaGen to
              Coutts & Co. AG (filed as Exhibit 4.11 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4ee     --   Bridge Financing Purchase Agreement dated June 16, 1997
              between DynaGen and Coutts & Co. AG (filed as Exhibit 4.12
              to Registrant's Current Report on Form 8-K dated June 18,
              1997, and incorporated by reference).
 4ff     --   Securities Purchase Agreement dated June 16, 1997 among
              DynaGen and the purchasers of Series A Preferred Stock
              (filed as Exhibit 4.14 to Registrant's Current Report on
              Form 8-K dated June 18, 1997, and incorporated by
              reference).
 4gg     --   Registration Rights Agreement dated June 16, 1997 among
              DynaGen and the purchasers of Series A Preferred Stock
              (filed as Exhibit 4.15 to Registrant's Current Report on
              Form 8-K dated June 18, 1997, and incorporated by
              reference).
 4hh     --   Form of Common Stock Purchase Warrant dated June 18, 1997
              issued by DynaGen to the purchasers of Series A Preferred
              Stock (filed as Exhibit 4.16 to Registrant's Current Report
              on Form 8-K dated June 18, 1997, and incorporated by
              reference).
 4ii     --   Securities Purchase Agreement dated June 17, 1997 between
              DynaGen and Julius Baer Securities Inc. as agent for certain
              non-U.S. persons (filed as Exhibit 4.18 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4jj     --   Registration Rights Agreement dated June 17, 1997 between
              DynaGen and Julius Baer Securities Inc. as agent for certain
              non-U.S. persons (filed as Exhibit 4.19 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4kk     --   Stock Purchase Warrant dated June 18, 1997 issued by
              Superior to Sirrom (filed as Exhibit 4.20 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
</TABLE>
 
                                       71
<PAGE>   72
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
 4ll     --   Stock Purchase Warrant dated June 18, 1997 issued by
              Superior to Odyssey (filed as Exhibit 4.21 to Registrant's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4mm     --   Revolving Note dated June 18, 1997 issued by Superior to
              Huntington National Bank (filed as Exhibit 4.22 to DynaGen's
              Current Report on Form 8-K dated June 18, 1997, and
              incorporated by reference).
 4nn     --   Common Stock Purchase Warrant dated April 29, 1997 issued by
              DynaGen to Kali Laboratories, Inc. (filed as Exhibit 4u to
              Registrant's Report on Form 10-Q for the period ended June
              30, 1997 and, incorporated by reference).
 4oo     --   Form of Securities Purchase Agreement among the Company and
              the purchasers of Series A Preferred Stock filed as Exhibit
              4a to the Company's Report on Form 10-Q for the period ended
              September 30, 1997 and incorporated herein by reference).
 4pp     --   Master Registration Rights Agreement dated August 6, 1997
              among the Company and the purchasers of Series A Preferred
              Stock filed as Exhibit 4b to the Company's Report on Form
              10-Q for the period ended September 30, 1997 and
              incorporated herein by reference).
 4qq     --   Form of Common Stock Purchase Warrant issued by the Company
              to the purchasers of Series A Preferred Stock (filed as
              Exhibit 4.16 to the Registrant's Current Report on Form 8-K
              dated June 18, 1997, and incorporated by reference).
 4rr     --   Stock Purchase Agreement dated August 21, 1997 between the
              Company and Endeavour Capital Fund S.A. filed as Exhibit 4d
              to the Company's Report on Form 10-Q for the period ended
              September 30, 1997 and incorporated herein by reference).
 4ss     --   Registration Rights Agreement dated August 21, 1997 between
              the Company and Endeavour Capital Fund S.A. filed as Exhibit
              4e to the Company's Report on Form 10-Q for the period ended
              September 30, 1997 and incorporated herein by reference).
 4tt     --   Common Stock Purchase Warrant dated August 21, 1997 issued
              by the Company to Endeavour Capital Fund S.A. filed as
              Exhibit 4f to the Company's Report on Form 10-Q for the
              period ended September 30, 1997 and incorporated herein by
              reference).
 4uu     --   Common Stock Purchase Warrant dated August 28, 1997 issued
              by the Company to H.J. Meyers & Co., Inc. filed as Exhibit
              4g to the Company's Report on Form 10-Q for the period ended
              September 30, 1997 and incorporated herein by reference).
 4vv     --   Subordinated Notes dated December 19, 1997 issued by the
              Company to Sovereign Partners LP (filed herewith).
10a*     --   1989 Stock Option Plan, as amended (filed as Exhibit 10c to
              Registrant's Registration Statement on Form S-18, No.
              33-31836-B, and incorporated by reference).
10b*     --   Form of Incentive Stock Option Agreement under 1989 Stock
              Option Plan of the Registrant (filed as Exhibit 4.6 to
              Registrant's Registration Statement on Form S-8, No.
              33-66826, and incorporated by reference).
10c*     --   Form of Non-Qualified Stock Option Agreement under 1989
              Stock Option Plan of the Registrant (filed as Exhibit 4.7 to
              Registrant's Registration Statement on Form S-8, No.
              33-66826, and incorporated by reference).
10d*     --   1991 Stock Plan, as amended (filed as Exhibit 10d* to
              Registrant's Transition Report on Form 10-K for the period
              ended December 31, 1996, and incorporated by reference).
10e*     --   Form of Incentive Stock Option Agreement under 1991 Plan
              (filed as Exhibit 10aa to Registrant's Registration
              Statement on Form S-18, No. 33-31836-B, and incorporated by
              reference).
10f*     --   Form of Non-Qualified Stock Option Agreement under 1991 Plan
              (filed as Exhibit 10bb to Registrant's Registration
              Statement on Form S-18, No. 33-31836-B, and incorporated by
              reference).
</TABLE>
 
                                       72
<PAGE>   73
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
10h*     --   Non-Qualified Stock Option Agreement dated July 24, 1996
              granting a stock option to Steven Georgiev (filed as Exhibit
              10h to Registrant's Annual Report on Form 10-K for the
              fiscal year ended June 30, 1996, and incorporated by
              reference).
10i*     --   Employment Agreement dated September 1, 1989 by and between
              the Company and Dr. Indu A. Muni (filed as Exhibit 10a to
              Registrant's Registration Statement on Form S-18, No.
              33-31836-B, and incorporated by reference).
10j*     --   Amendment 1 to Key Employment Agreement by and between
              DynaGen, Inc. and Indu A. Muni (filed as Exhibit 10bb to
              Registrant's Registration Statement on Form S-1, No.
              33-71416, and incorporated by reference).
10k*     --   Employment Agreement dated October 1, 1991 by and between
              the Company and Dr. F. Howard Schneider (filed as Exhibit
              10w to Registrant's Registration Statement on Form S-18, No.
              33-31836-B, and incorporated by reference).
10l*     --   Employment Agreement dated November 1, 1991 by and between
              the Company and Dhananjay G. Wadekar (filed as Exhibit 10x
              to Registrant's Registration Statement on Form S-18, No.
              33-31836-B, and incorporated by reference).
10m*     --   Amendment 1 to Key Employment Agreement by and between
              DynaGen, Inc. and Dhananjay G. Wadekar (filed as Exhibit
              10cc to Registrant's Registration Statement on Form S-1, No.
              33-71416, and incorporated by reference).
10n      --   Lease Agreement dated September 26, 1991 by and between the
              Company and The 99 Erie Street Realty Trust and the Edward
              S. Stimpson Trust with respect to its facility at 99 Erie
              Street, Cambridge, Massachusetts (previously filed as the
              only Exhibit to Registrant's Form 10-Q for the quarter ended
              September 30, 1991).
10o      --   Amendment to Lease Agreement dated May 15, 1992 by and
              between the Company and The 99 Erie Street Realty Trust and
              the Edward S. Stimpson Trust with respect to its facility at
              99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
              10o to Registrant's Annual Report on Form 10-K for the
              fiscal year ended June 30, 1996, and incorporated by
              reference).
10p      --   Second Amendment to Lease Agreement dated May 31, 1993 by
              and between the Company and The 99 Erie Street Realty Trust
              and the Edward S. Stimpson Trust with respect to its
              facility at 99 Erie Street, Cambridge, Massachusetts (filed
              as Exhibit 10w to Registrant's Annual Report on Form 10-K
              for the fiscal year ended June 30, 1993, and incorporated by
              reference).
10q      --   Third Amendment to Lease Agreement dated April 1, 1995 by
              and between the Company and The 99 Erie Street Realty Trust
              and the Edward S. Stimpson Trust with respect to its
              facility at 99 Erie Street, Cambridge, Massachusetts (filed
              as Exhibit 10r to Registrant's Annual Report on Form 10-K
              for the fiscal year ended June 30, 1995, and incorporated by
              reference).
10r      --   Exercise of Option to Extend Lease Term dated May 3, 1996,
              from the Company to Meredith & Grew, Incorporated with
              respect to its facility at 99 Erie Street, Cambridge,
              Massachusetts (filed as Exhibit 10r to Registrant's Annual
              Report on Form 10-K for the fiscal year ended June 30, 1996,
              and incorporated by reference).
10s      --   Lease Agreement dated November 29, 1984 between Hollywood
              Court Associates and Able Laboratories, Inc. with respect to
              the Company's facility at 6 Hollywood Court, South
              Plainfield, New Jersey (filed as Exhibit 10s to Registrant's
              Annual Report on Form 10-K for the fiscal year ended June
              30, 1996, and incorporated by reference).
10t      --   Space Expansion and Term Extension Agreement dated April
              1988 between Hollywood Court Associates and Able
              Laboratories, Inc. with respect to the Company's facility at
              6 Hollywood Court, South Plainfield, New Jersey (filed as
              Exhibit 10t to Registrant's Annual Report on Form 10-K for
              the fiscal year ended June 30, 1996, and incorporated by
              reference).
</TABLE>
 
                                       73
<PAGE>   74
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
10u      --   Assignment of Lease dated April 1989 between Hollywood Court
              Associates and CVN Associates L.P. with respect to the
              Company's facility at 6 Hollywood Court, South Plainfield,
              New Jersey (filed as Exhibit 10u to Registrant's Annual
              Report on Form 10-K for the fiscal year ended June 30, 1996,
              and incorporated by reference).
10v      --   Space Expansion Agreement dated June 1993 between CVN
              Associates, L.P. and Able Laboratories, Inc. with respect to
              the Company's facility at 6 Hollywood Court, South
              Plainfield, New Jersey (filed as Exhibit 10v to Registrant's
              Annual Report on Form 10-K for the fiscal year ended June
              30, 1996, and incorporated by reference).
10w      --   Term Extension Agreement dated June 1993 between CVN
              Associates, L.P. and Able Laboratories, Inc. with respect to
              the Company's facility at 6 Hollywood Court, South
              Plainfield, New Jersey (filed as Exhibit 10w to Registrant's
              Annual Report on Form 10-K for the fiscal year ended June
              30, 1996, and incorporated by reference).
10x      --   Assignment of Lease dated August 19, 1996 between Able
              Laboratories, Inc. and Able Acquisition Corp. (predecessor
              corporation to Able) with respect to the Company's facility
              at 6 Hollywood Court, South Plainfield, New Jersey (filed as
              Exhibit 10w to Registrant's Annual Report on Form 10-K for
              the fiscal year ended June 30, 1996, and incorporated by
              reference).
10y      --   Landlord's Consent to Assignment of Lease dated August 19,
              1996 among CVN Associates, L.P., Able Acquisition Corp.
              (predecessor corporation to Able), Able Laboratories, Inc.
              and the Company with respect to the Company's facility at 6
              Hollywood Court, South Plainfield, New Jersey (filed as
              Exhibit 10y to Registrant's Annual Report on Form 10-K for
              the fiscal year ended June 30, 1996, and incorporated by
              reference).
10z      --   Guaranty of Lease dated August 19, 1996 between the Company
              and Able Laboratories, Inc. with respect to the Company's
              facility at 6 Hollywood Court, South Plainfield, New Jersey
              (filed as Exhibit 10z to Registrant's Annual Report on Form
              10-K for the fiscal year ended June 30, 1996, and
              incorporated by reference).
10aa*    --   Non Qualified Stock Option Agreement dated October 28, 1996
              granting a stock option to Dr. Michael Sorell (filed as
              Exhibit 10aa* to Registrant's Transition Report on Form 10-K
              for the period ended December 31, 1996, and incorporated by
              reference).
10bb     --   Loan Agreement dated June 18, 1997 among DynaGen, Sirrom and
              Odyssey (filed as Exhibit 99.1 to Registrant's Current
              Report on Form 8-K dated June 17, 1997, and incorporated by
              reference).
10cc     --   Security Agreement dated June 18, 1997 among DynaGen, Sirrom
              and Odyssey (filed as Exhibit 99.2 to Registrant's Current
              Report on Form 8-K dated June 17, 1997, and incorporated by
              reference).
10dd     --   Amended and Restated Loan and Security Agreement dated June
              18, 1997 among Huntington National Bank, Superior and
              DynaGen (filed as Exhibit 99.3 to Registrant's Current
              Report on Form 8-K dated June 17, 1997, and incorporated by
              reference).
10ee     --   Continuing Guaranty Unlimited dated June 18, 1997 from
              DynaGen to Huntington National Bank (filed as Exhibit 99.4
              to Registrant's Current Report on Form 8-K dated June 17,
              1997, and incorporated by reference).
10ff     --   Commercial Lease Agreement dated March 9, 1995 between SPC
              Properties Limited and Superior (filed as Exhibit 10e to
              Registrant's Report on Form 10-Q for the period ended June
              30, 1997, and incorporated by reference).
10gg     --   Amendment, Estoppel and Consent Agreement dated June 18,
              1997 between SPC Properties Limited and Superior (filed as
              Exhibit 10f to Registrant's Report on Form 10-Q for the
              period ended June 30, 1997, and incorporated by reference).
</TABLE>
 
                                       74
<PAGE>   75
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              ITEM AND REFERENCE
-------                            ------------------
<S>      <C>  <C>
10hh     --   Indenture of Lease dated July 1, 1997 between Rivertech
              Associates LLC and the Company (filed as Exhibit 10a to
              Registrant's Report on Form 10-Q for the period ended
              September 30, 1997, and incorporated by reference).
10ii     --   Term Extension Agreement dated August 28, 1997 between CVN
              Associates, Inc. and Able Laboratories, Inc. with respect to
              the Company's facility at 6 Hollywood Court, South
              Plainfield, New Jersey (filed herewith).
10jj     --   Agreement dated October 31, 1997 between the Company and M.
              Lee Hibbs together with Exhibits thereto (filed herewith).
21       --   Subsidiaries of the Registrant (filed herewith).
23a      --   Consent of Wolf & Company, P.C. dated April 15, 1998 (filed
              herewith).
24a      --   Power of Attorney is contained on page 31 of this Annual
              Report on Form 10-K.
27       --   Financial Data Schedules (filed herewith in electronic
              format only).
</TABLE>
 
---------------
 *  Indicates a management contract or any compensatory plan, contract or
arrangement.
 
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
 
(c) Exhibits:
The Company hereby files as part of this Form 10-K the exhibits listed in Item
14(a)(3) above.
 
(d) Financial Statement Schedules:
No financial statement schedules are filed as part of this Form 10-K.
 
                                       75
<PAGE>   76
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Cambridge, Commonwealth of Massachusetts on April
15, 1998.
    
 
                                          DYNAGEN, INC.
 
                                          By:       /s/ INDU A. MUNI
                                            ------------------------------------
                                                        Indu A. Muni
 
                                             President, Chief Executive Officer
                                                       and Treasurer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated; and each of the
undersigned officers and directors of DynaGen, Inc. hereby severally constitutes
and appoints Dhananjay G. Wadekar and Dr. Indu A. Muni, and each of them singly,
his true and lawful attorneys-in-fact and agents, with full power to them, and
each of them singly, to sign for him, in his name in the capacity indicated
below, all amendments to such report on Form 10-K, hereby ratifying and
confirming his signature as it may be signed by his attorneys to such report and
any and all amendments thereto.
 
<TABLE>
<CAPTION>
                       NAME                                      CAPACITY                    DATE
                       ----                                      --------                    ----
<C>                                                  <S>                                <C>
 
             /s/ DHANANJAY G. WADEKAR                Chairman of the Board, Executive   April 15, 1998
---------------------------------------------------    Vice President and Director
               Dhananjay G. Wadekar
 
               /s/ DR. INDU A. MUNI                  President, Chief Executive         April 15, 1998
---------------------------------------------------    Officer, Treasurer, (Principal
                 Dr. Indu A. Muni                      Executive, Financial and
                                                       Accounting Officer) and
                                                       Director
 
            /s/ DR. F. HOWARD SCHNEIDER              Director                           April 15, 1998
---------------------------------------------------
              Dr. F. Howard Schneider
 
                /s/ STEVEN GEORGIEV                  Director                           April 15, 1998
---------------------------------------------------
                  Steven Georgiev
 
                                                     Director                           April 15, 1998
---------------------------------------------------
                Dr. Michael Sorell
</TABLE>
 
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