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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K
                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
            [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                                       OR
          [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
        FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996.
                         COMMISSION FILE NUMBER 1-11352

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                                  DYNAGEN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

                Delaware                                        04-3029787
    (STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NUMBER)

99 ERIE STREET, CAMBRIDGE, MASSACHUSETTS                          02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)

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

                                 (617) 491-2527
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                      NAME OF EACH EXCHANGE
                TITLE OF CLASS                         ON WHICH REGISTERED
                --------------                         -------------------
         COMMON STOCK, $.01 PAR VALUE                 BOSTON STOCK EXCHANGE
   REDEEMABLE COMMON STOCK PURCHASE WARRANTS          BOSTON STOCK EXCHANGE

          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. [ ]

    As of April 24, 1997,  30,114,206  shares of the registrant's  Common Stock,
$.01 par value,  were issued and outstanding.  The aggregate market value of the
registrant's  voting stock held by  non-affiliates of the registrant as of April
24,  1997,  based  upon the  closing  price of such  stock on the  Nasdaq  Stock
Market's SmallCap Market ("Nasdaq") on that date ($1.22) was $33,589,902.

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                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

    DynaGen,  Inc. ("DynaGen" or the "Company") develops and markets proprietary
and generic therapeutic and diagnostic products for the human healthcare market.
During 1996, DynaGen began expanding 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  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 continued 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.

    Prior to the Able acquisition,  DynaGen's  business  consisted of developing
proprietary  diagnostic  products and  proprietary  therapeutic  and  diagnostic
product   candidates.   The  Company's  lead  therapeutic   product   candidate,
NicErase(r)-SL, is intended as an aid in smoking cessation and to provide relief
from  nicotine  withdrawal  symptoms.  The  Company is  currently  conducting  a
multi-center  pivotal Phase 3 clinical trial of  NicErase-SL.  Results from this
trial are  anticipated to be available in the second quarter of 1997.  There can
be no assurance that the results of the Company's ongoing Phase 3 clinical trial
of NicErase-SL  will be favorable for the Company.  In addition,  the Company is
also considering  alternative  delivery formats for its lobeline-based  NicErase
technology and intends to seek strategic  partners to further develop and market
these  delivery  formats.  In December 1996,  the  Company  licensed  worldwide,
exclusive  rights to  develop a lobeline  sulfate  nasal  delivery  formulation,
NicErase-NS, to Nastech Pharmaceutical Company, Inc. ("Nastech").

    DynaGen is also developing  OrthoDyn(r),  a bioresorbable bone cement system
for bone and joint  repair which is  currently  in the  preclinical  development
stage. In April 1997, the Company entered into an agreement with Smith & Nephew,
plc ("Smith & Nephew") providing Smith & Nephew an exclusive period of 12 months
to evaluate the OrthoDyn product's human orthopaedic applications. Additionally,
the Company expanded its resorbable  polymer technology patent base by obtaining
a patent for its Sleeper(tm)  vaccine  technology  which enables  vaccines to be
delivered in a single administration rather than in multiple vaccinations over a
period of time.

    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 recently  commenced
marketing  NicCheck  to  physicians,   smoking  cessation  programs,  HMOs,  and
insurance companies.

    In  December  1996,  the  Company  licensed  technology  from  BioLoc,  Inc.
("BioLoc") that is intended to improve the accuracy and  efficiency,  and reduce
the overall cost of,  breast  surgical  biopsy  procedures.  The Company is also
conducting  early stage  research  on a  proprietary  bacterial  extract for the
treatment of infectious diseases.

    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.  The six month
period  resulting from this change,  July 1, 1996 through  December 31, 1996, is
referred to as the "Transition Period."

 MULTISOURCE BUSINESS

    The U.S.  multisource  or  generic  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 physician, pharmacist and consumer acceptance
of generic drugs. Generic drugs are the chemical and therapeutic  equivalents of
brand-name drugs.  They are required to meet the same governmental  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 those of their brand-name equivalents.


                                       1


    To successfully participate in the multisource business,  DynaGen intends to
compete  with  other  generic  companies  through  vertical  integration  of key
elements of the  multisource  business  including  manufacturing,  packaging and
distribution.  In August 1996,  the Company  acquired Able, a 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 the manufacturing capability,  validated several of the
acquired products,  retrained employees in quality assurance procedures, and has
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 following is a list of generic
products that the Company obtained in the Able acquisition:


<TABLE>
<CAPTION>
                   GENERIC PRODUCT                         THERAPEUTIC CATEGORY        BRAND NAME(1)
                   ---------------                         --------------------        -------------
<S>                                                      <C>                       <C>
ANDA PRODUCTS:
Clorazepate tablets (three dosages)                      Anxiolytic                Tranxene
Clorazepate capsules (three dosages)(2)                  Anxiolytic                Tranxene
Loperamide tablets(2)                                    Antidiarrheal             Imodium
Acetaminophen suppositories (three dosages)(2)           Analgesic                 Tylenol suppositories
Hydrocortisone acetate cream (1%)(2)                     Anti-inflammatory         Anusol-HC cream

OTHER GENERIC FORMULATIONS:
Bisacodyl tablets                                        Laxative                  Dulcolax
Choline magnesium trisalicylate tablets (three dosages)  Anti-inflammatory         Trilisate
Methenamine Mandelate tablets (two dosages)              Urinary Antibacterial     Mandelamine
Phenazopyridine HCL tablets (two dosages)                Urinary Tract Analgesic   Pyridium
Salsalate tablets (two dosages)                          Anti-inflammatory         Disalcid
</TABLE>



--------
(1) All brand names are registered trademarks of their respective
    manufacturers.

(2) These products are not presently being marketed by the Company.

    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  seven
specific  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 and
provide an  opportunity  for DynaGen to introduce  generic  equivalents.  Kali's
management and its scientific  staff have  significant  experience in developing
and obtaining  approvals on generic drugs.  DynaGen believes that by outsourcing
the development and approval activities it will benefit from the experience of a
highly  seasoned  team of scientists  while  reducing the  requirement  of major
investment in personnel and laboratory equipment.

    To complement the acquisition of Able and pursue vertical  integration,  the
Company  recently  entered into an  agreement to acquire all of the  outstanding
shares  of  Superior  Pharmaceutical  Company  ("Superior"),   a  privately-held
distributor  of  generic  pharmaceutical  products.  Superior  has  its  primary
operations in Cincinnati,  Ohio, where it employs  approximately 65 people,  and
has 40,000 square feet of office,  warehouse and  distribution  space.  Superior
reported 1996 sales of approximately  $32 million with pre-tax income of over $3
million.  Under  the  terms  of  the  agreement,  DynaGen  will  pay  Superior's
shareholders a total of $16.5 million,  consisting of cash, three-year notes and
shares of DynaGen Common Stock.  The  shareholders may also receive certain cash
incentive  payments  based on  Superior's  performance  during  the three  years
following the close of the transaction. The aquisition of Superior is subject to
customary  closing  conditions and the Company intends to close this acquisition
during the second  quarter of 1997.  There can be no assurance that the Superior
aquisition will close in the second quarter of 1997, or at all.


                                       2



    The  Company  plans  to raise  capital  in order  to  finance  the  proposed
acquisition  of  Superior  through the sale of its  securities.  There can be no
assurance  that the Company  will be able to secure this  financing or that such
financing  will be  available on  favorable  terms.  If the Company is unable to
obtain  such  financing,  it will be unable to close the  Superior  acquisition.
Concurrently with the completion of the proposed Superior acquisition,  Superior
and the Company  intend to enter into a line of credit to provide  financing for
Superior.  The Company and Superior are currently  engaged in discussions with a
commercial  bank regarding  such line of credit.  There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable  terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company  intends  to fund  Superior's  operations  with the line of  credit  and
Superior's cash generated from operations.

 SPECIALTY PHARMACEUTICAL BUSINESS

    DynaGen's  specialty  or  emerging  pharmaceutical  business  strategy is to
create a business based on branded generic 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 this area on
compliance enhancement packaging. DynaGen has identified near-term opportunities
in  compliance  enhancement  packaging  in the areas of women's  healthcare  and
respiratory infection.  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."

THERAPEUTIC PRODUCTS

 OVERVIEW OF SMOKING CESSATION THERAPY

    The rationale behind  currently  marketed  nicotine based smoking  cessation
products is that by gradually  decreasing the  concentration and daily dosage of
nicotine, one can overcome nicotine  dependency without experiencing  withdrawal
problems.   Nicorette(r),   a  nicotine-containing  gum  currently  marketed  by
SmithKline  Beecham  Consumer  Health Care, was the first  prescription  product
approved  by  the  FDA  as an  aid  to  smoking  cessation.  Nicotine-containing
transdermal  patches and nasal  sprays have also been  developed  and  initially
approved by the FDA for prescription use and marketed as such by  pharmaceutical
companies.  Beginning in 1996,  the FDA granted  approval  for several  nicotine
patch and gum products,  including some of the products  mentioned  above, to be
sold over-the-counter  ("OTC"),  without  prescription.  The FDA approval of OTC
products  has  caused  a  shift  in  the  smoking  cessation   marketplace  from
prescription to OTC use.

    Until   December   1993,   there  was  a   variety   of   non-FDA   approved
over-the-counter smoking cessation products. Several of these products contained
lobeline as their active ingredient  because it was believed that lobeline could
temporarily  replace  nicotine  and help to  overcome  nicotine  dependency  and
withdrawal  problems.  The majority of the lobeline  products  were taken orally
assuming  that a  sufficient  quantity  of lobeline  would be absorbed  from the
gastrointestinal ("GI") tract into the bloodstream.  These formulations have not
been proven to be effective and they have not received FDA approval.


                                       3


    DynaGen's  research is consistent with the hypothesis that lobeline relieves
nicotine  withdrawal  symptoms  by binding to  nicotine  receptors  in the brain
without activating the addiction mechanisms. Based on the belief that a lobeline
formulation  which does not depend on  absorption  from the GI tract might be an
effective  tobacco  substitute,   DynaGen  has  developed  alternative  delivery
formulations, focusing primarily on the sublingual tablet, NicErase-SL.

    NICERASE-SL.  DynaGen is developing NicErase-SL, a sublingual tablet that is
held under the tongue where it  dissolves  in one to three  minutes and releases
lobeline,  the active  ingredient of the tablet.  As the tablet  dissolves,  the
lobeline enters the bloodstream  directly through blood vessels under the tongue
and in the mouth.  NicErase-SL  is designed for use by  individuals  who want to
stop smoking. It is expected that NicErase-SL will be used in a six-week program
that  includes  smoking  cessation  counseling,  as is the  case for  other  FDA
approved prescription smoking cessation products.

    DynaGen has shown in clinical studies that  NicErase-SL  reduces symptoms of
tobacco  withdrawal and is now evaluating its effectiveness as an aid in smoking
cessation in a 750 subject  multi-center pivotal Phase 3 clinical trial. Results
from this first trial are  anticipated  to be available in the second quarter of
1997. At a minimum,  a second  similar trial would also be necessary  before the
Company could file with the FDA a New Drug Application to market  NicErase-SL as
a  prescription  product.  The FDA  currently  requires  that smoking  cessation
products be initially  marketed for  prescription  use with a possible switch to
OTC only after a positive  history of prescription  use has been established and
demonstrated to the FDA's satisfaction.

    In light of the shift in the smoking  cessation market from  prescription to
OTC products and of the expanding  availability  of different  dosage formats of
nicotine-based  smoking cessation products such as the nicotine nasal spray, the
Company is refocusing its traditional  development  strategy by concentrating on
outlicensing  its  technology  to one or more  strategic  partners.  The Company
intends to minimize research and development expenditures on products which have
a long development and approval process. Since alternative drug delivery formats
have proven successful in the nicotine  replacement  therapy market, the Company
is considering the development of additional delivery formats for NicErase, such
as a transdermal  patch and adhesive buccal wafer.  The Company  believes that a
product  available in multiple  delivery  dosage formats may create more diverse
marketing opportunities.

    In December 1996, DynaGen  licensed its technology for the  development of a
lobeline-containing  nasal spray to Nastech.  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.

    To date,  the Company has not entered  into any  collaborative  arrangements
with any third party with respect to the  development and  commercialization  of
NicErase,  except for the agreement with Nastech.  The Company's future NicErase
development and commercialization  activities will depend on a number of factors
including the results of the Company's  current  pivotal Phase 3 clinical  trial
for NicErase-SL,  the changing  demands of the smoking  cessation market and the
Company's ability to secure a suitable marketing and development partner.  There
can be no  assurance  that the results of the current  pivotal  Phase 3 clinical
trial will be sufficient to support further clinical  development of NicErase-SL
or a second pivotal Phase 3 clinical trial.  Even if such results are promising,
there can be no assurance that such results will be repeated in future  clinical
trials, or that the Company will receive the necessary  regulatory  approvals to
commercialize  NicErase-SL  or any  other  NicErase  format.  See  "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Certain Factors That May Affect Future Results."

 ORTHODYN BIORESORBABLE BONE CEMENT

    The global orthopaedics market continues to expand, and the Company believes
that  resorbable  materials are one of the most rapidly  growing  sectors.  With
significant growth projected in the elderly population comes an increased demand
for orthopaedic  materials.  Advances continue to be made in the design of total
joint  prostheses and other fixation  devices.  The area of  bioresorbable  bone
substitutes is of prime interest to the major orthopaedics  manufacturers,  with
most having the goal of adding such materials to their product line.


                                       4



    OrthoDyn  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 have recently entered into an agreement  providing Smith & Nephew
with an exclusive  period of 12 months 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."

 ADDITIONAL BIORESORBABLE POLYMER TECHNOLOGIES

    Vaccine  delivery  represents a potential  area for the  application  of the
Company's  controlled  release delivery  systems.  DynaGen's patent  application
covering  its  Sleeper(tm)  technology  has  recently  been  granted  notice  of
allowance from the U.S. Patent and Trademark Office.  This technology involves a
unique  combination  of a  bioresorbable  polymer and a vaccine such that,  upon
injection,  the Sleeper delivery system immediately  releases the initial amount
of  vaccine  corresponding  to the first  shot and then,  after a  predetermined
period  of  time,  will  release  in  a  "burst"  the  second  load  of  vaccine
representing the "booster" shot.

    DynaGen  also has  developed  a polymer  system  that can be  applied to the
controlled,  sustained  release  of a wide  variety  of drugs.  The  Company  is
pursuing  both  corporate  alliances  and  outlicensing  approaches  for further
development of these resorbable polymer technologies.  There can be no assurance
that the Company will be able to find a suitable  development  partner for these
bioresorbable   polymer   technologies,   that  development  efforts  for  these
technologies 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."

 OTHER THERAPEUTIC PRODUCTS

    The  Company  is also  conducting  early  stage  research  on a  proprietary
bacterial  extract for the  treatment  of  infectious  diseases and is currently
engaged in the characterization and partial purification of the extract prior to
filing an  investigational  new drug application.  Management is also evaluating
potential clinical applications for this technology. These types of therapeutics
have  been  studied  in the past and have had  mixed  results.  There  can be no
assurance that the Company can  successfully  develop,  test and market products
based on this technology. 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  has  shifted to a managed  care  approach  which
integrates prevention,  diagnostic, therapeutic and compliance technologies into
a panel of products for specific disease management. In light of this structural
shift,  the  Company is  developing  diagnostic  products  which may help in the
prevention and diagnosis of disease and in the  determination of compliance with
smoking cessation programs.


                                       5


 BREAST BIOPSY TECHNOLOGY

    DynaGen  recently  licensed  technology  that is  intended  to  improve  the
accuracy and efficiency,  and reduce the overall cost, of breast surgical biopsy
procedures from BioLoc, a privately held Boston-based  company.  The acquisition
of the BioLoc  technology  fits  DynaGen's  strategy of  developing  distinctive
healthcare  products based on technologies  acquired by the Company from outside
sources.

    Core needle  biopsy,  the most  commonly  used  non-surgical  procedure  for
diagnosis of suspicious lesions in breasts, is limited in its ability due to the
difficulty in capturing the targeted  tissue and the need for multiple  attempts
to obtain  accurate  and  sufficient  samples,  resulting in  unnecessary  pain,
scarring  and  anxiety.  The BioLoc  technology  is  intended  to  overcome  the
shortcomings  of the core needle  biopsy  procedure  by  accurately  guiding the
surgical biopsy  instruments  directly to the suspected tissue lesion identified
during mammography  examination.  Imaging and location tracking technologies are
combined  to provide a  three-dimensional  view of the breast  tissue  which the
Company  believes  will allow the accurate  depiction  of the biopsy  target and
guidance  for its surgical  removal.  The Company is now  completing  its patent
application covering this technology and developing a prototype system.

    The BioLoc  technology is in an early stage of development  and therefore is
subject   to   the   risks   of   unsuccessful   development,    marketing   and
commercialization.  This  proposed  product  will  require  substantial  further
development and preclinical and clinical testing and regulatory  approval,  at a
substantial  cost  to the  Company.  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."

 SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS

    NICCHECK I.  NicCheck I is a 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.  NicCheck  I can be used  both as a  companion
product for NicErase-SL or independently for clinical evaluation. 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.  The FDA recently granted the Company clearance to market
NicCheck I in the United  States and the Company is now  attempting to establish
multilevel sales and marketing approaches.

    NICCHECK II. The Company is  initiating  preclinical  studies for  detecting
exposure to secondhand  smoke.  Secondhand smoke causes and exacerbates a number
of respiratory  problems in  nonsmokers.  The Company  believes that  physicians
could use NicCheck II to promote early intervention.

 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,  Pacific  Rim
countries,  China, India, and Japan.  DynaGen has received clearance under three
premarket  notification 510(k)s 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 rights for MycoAKT to a third party.  The Company  continues 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.



                                       6


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.  In the
near future, the Company also intends to market its generic therapeutic products
under its own "Able  Laboratories"  name.  The Company  markets  its  diagnostic
products under its own name primarily through distributors.

    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."

MAJOR CUSTOMERS

    During the  Transition  Period,  approximately  85% of total  revenues  were
derived from three major  customers:  Schein  Pharmaceutical  ("Schein")  (53%),
Genelabs Diagnostic Pte LTD ("Genelabs") (18%) and Alpharma, Inc. (14%). For the
fiscal  year ended  June 30,  1996,  approximately  79% of total  revenues  were
derived from three major customers: Bristol-Myers Products ("BMP") (45%), Hainan
OSROC Bio-Tech Co. Ltd.  ("OSROC") (23%) and Remel LP ("Remel")  (11%).  For the
fiscal  year ended  June 30,  1995,  approximately  77% of total  revenues  were
derived  from two major  customers:  BMP (50%) and Genelabs  (27%).  There is no
assurance  that the revenues  from Schein and Genelabs  will recur.  The revenue
from BMP  represents  the  recognition  over two years of a one-time  payment of
$500,000 and will not recur.  In addition,  the revenue from Alpharma,  Inc. was
derived from a temporary  supply  agreement  which ended in February 1997 and is
not expected to recur.  The loss of any key  customer  and the  inability of the
Company to replace  revenues  provided by a key  customer  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

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

    The  dollar  amount of  backlog  orders  for the  Company's  products  as of
December 31, 1996 was  approximately  $300,000.  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.  If unexpected  delays in obtaining new materials do
occur,  it 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."

    The Company's strategy is to license its diagnostic products for manufacture
and  distribution  by third  parties.  The  Company  has  entered  into  license
agreements  for the  manufacture  and  distribution  of its  MycoAKT and MycoDot
products.  MycoDot  is  produced  by a single  licensed  manufacturer  in India.
Nicheck I is  produced  by a contract  manufacturer  in the United  States.  The
Company's  dependence upon third parties for the manufacture and distribution of
its diagnostic  products could have a material  adverse effect on its ability to
deliver its products on a timely basis.


                                       7


    Clinical supplies of the Company's proprietary NicErase-SL product candidate
are manufactured by a third-party contract manufacturer.

    The Company's  Cambridge,  Massachusetts  and South  Plainfield,  New Jersey
facilities are registered with the FDA and 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  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.

    In the field of nicotine  addiction,  the NicErase-SL product candidate will
compete with both  prescription  and OTC  products.  In  particular,  management
believes that the principal drug  competition for its proposed  NicErase product
is nicotine  chewing  gum,  nicotine  nasal spray and the  nicotine  patch which
several  pharmaceutical  companies,  such as SmithKline Beecham,  Hoechst Marion
Roussel,  McNeil Consumer Products Co. and Ciba  Self-Medication  have developed
and are  marketing  in the United  States and  elsewhere.  Competition  has been
increasing due to the FDA approval of several nicotine patch and gum products to
be sold OTC, without prescription (see "Overview of Smoking Cessation Therapy").
These FDA  approvals  have caused a shift in the smoking  cessation  marketplace
from  prescription  to  OTC  use.  Other  programs  that  emphasize   behavioral
modification approaches, such as hypnosis, will create additional competition in
the smoking  cessation  market.  There can be no  assurance  that the results of
pivotal  Phase 3  clinical  trials  will  prove  successful  for  the  Company's
NicErase-SL  product candidate or that it will receive the necessary  regulatory
approvals and even if such  approvals  are  obtained,  that such product will be
commercially successful.

    OrthoDyn,  the Company's  orthopedic  product  candidate,  will compete with
products  from a number of much  larger  companies  in the bone  repair  market,
including,  but not limited to, Johnson & Johnson Co.,  Pfizer  (Howmedica)  and
Bristol-Myers Squibb Co. (Zimmer).  There can be no assurance that the Company's
OrthoDyn product candidate will receive the necessary  regulatory  approvals and
even if such  approvals  are obtained  that such  product  will be  commercially
successful.

    Management  believes  that the  Company's  current and  proposed  diagnostic
products  will  compete  on the basis of price,  performance  and  technological
features such as speed of detection, absence of radioactive substance,  accuracy
and reliability.  Management believes that Gen-Probe, Inc. and Becton-Dickinson,
among  others,  are its  immediate  competitors  and that  other  companies  may
introduce competing products. 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."


                                       8


GOVERNMENT REGULATION

    The  Company's  therapeutic  and  diagnostic  products  will be  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 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 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, such 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 to provide adequate  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"  NDAs -- 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  Applications  (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
    process  generally  takes a number of years and involves 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,  preclinical  animal
testing first must be conducted to establish  the safety and 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

                                       9


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. 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 protections  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 has market  exclusivity  provisions  of seven years
for the  first  approved  drug  for a rare  disease  or  condition.  A grant  of
exclusivity  under this act 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 will 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 also has  authority to withdraw
approval of an ANDA under certain circumstances 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.

    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/or 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, 


                                       10


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 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  necessary  to  meet  mandated  FDA
manufacturing   requirements  by  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  appropriate  approvals from the FDA will
be granted as to 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 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 directed 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 will also be provided to
Able's employees.


                                       11


    Additionally, the latest Establishment Inspection, conducted on November 12,
13, 18, and 19, 1996 under the authority of an Order of Permanent Injunction did
not result in the issuance of an FDA Form 483, and the Establishment  Inspection
Report (EIR) classified the inspection as "NN" -- no official action  indicated.
The Company is in the process of initiating changes and plans to request the FDA
to join Able in a petition for relief from the consent decree.

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 does not
presently maintain product liability  insurance on any of its proposed products.
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 Transition Period,  the Company expended  $1,092,253 on research and
development activities. For the fiscal years ended June 30, 1996, 1995 and 1994,
the Company expended  $3,118,145,  $1,718,006 and $2,183,849,  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 product,  bioresorbable bone cement product,  immunological  tests for
the diagnosis of mycobacterial disease, and other 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
smoking cessation 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. 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.

    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 otherwise

                                       12


gain access to the Company's trade secrets or disclose such 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 or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.

    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 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 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.

    MycoDot(R),   NicErase(R),   MycoAKT(R),  NicCheck(R)  and  OrthoDyn(R)  are
registered trademarks of the Company. Sleeper(tm) is a trademark of the Company.

EMPLOYEES

    As of April 24,  1997,  the  Company  and its  subsidiary  had 67  full-time
employees,  of whom 16 were  employed  in selling,  general  and  administrative
activities and 51 were employed in research and development and manufacturing of
its products. Six of the Company's employees hold doctoral degrees including one
who holds a Doctorate in Medicine  (M.D.).  None of the Company's  employees are
represented by a union. The Company believes its relationship with its employees
is good.

ITEM 2. PROPERTIES

    The  Company  maintains  its  principal  executive  offices  and  laboratory
facilities at 99 Erie Street in Cambridge,  Massachusetts.  The premises,  which
consist  of  approximately  27,000  square  feet of space,  are  leased  from an
unaffiliated party, for a term expiring on September 30, 1997.

    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.

    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  Boston,
Massachusetts and South Plainfield, New Jersey metropolitan
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 Transition Period.


                                       13



                                     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 "DYGN" and "DYGNW," respectively, and on the Boston
Stock Exchange under the symbols "DYG" and "DYGW,"  respectively.  The Company's
Class A Redeemable  Common Stock Purchase  Warrants ("Class A Public  Warrants")
traded  principally  on Nasdaq under the symbol  "DYGNZ" and on the Boston Stock
Exchange  under the symbol "DYGZ" until they were redeemed on December 14, 1995.
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>
                                                                                 CLASS A
                                          COMMON STOCK   PUBLIC WARRANTS    PUBLIC WARRANTS(1)
                                          ------------   ---------------    ------------------
                                          HIGH    LOW     HIGH      LOW      HIGH       LOW
                                          ----    ---     ----      ---      ----       ---
FISCAL 1995
<S>                                      <C>     <C>      <C>      <C>       <C>       <C>
July 1 to September 30, 1994             $1.44   $ .53    $ .44    $ .13     $ .56     $ .13
October 1 to December 31, 1994            2.75    1.19      .75      .34      1.69       .47
January 1 to March 31, 1995               3.13    1.63     1.38      .38      2.25       .88
April 1 to June 30, 1995                  4.63    2.13     2.63      .75      3.81      1.25

FISCAL 1996
-----------
July 1 to September 30, 1995              6.55    1.63     5.00      .50      5.19      1.00
October 1 to December 31, 1995            3.88    1.88     2.81     1.00      2.81       .56
January 1 to March 31, 1996               3.66    2.19     2.44     1.13      --        --
April 1 to June 30, 1996                  3.19    2.13     2.50     1.13      --        --

TRANSITION PERIOD
-----------------
July 1 to September 30, 1996              2.56    1.50     1.63      .88      --        --
October 1 to December 31, 1996            1.88    1.03     1.00      .16      --        --

</TABLE>


--------
(1) Redeemed on December 14, 1995.

    On April 24, 1997,  the last reported  sale prices of the  Company's  Common
Stock  and  Public   Warrants  as  reported  on  Nasdaq  were  $1.22  and  $.50,
respectively.

    As of April 24, 1997,  based upon  information  from the Company's  transfer
agent,  there were  approximately  753 holders of record of the Company's Common
Stock.  As of such date,  the  Company  estimates  that there are  approximately
12,000 beneficial holders of the Company's Common Stock.

    The Company has not declared or paid any cash dividends  since its inception
and does not  anticipate  paying any cash dividends to its  stockholders  in the
foreseeable future. The Company currently intends to retain earnings, if any, to
fund the development and future growth of its business.


                                       14


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>
                                                                      YEARS ENDED JUNE 30,
                                                                      --------------------
                               TRANSITION
                              PERIOD ENDED
                              DECEMBER 31,
                                  1996           1996          1995          1994          1993           1992
                                  ----           ----          ----          ----          ----           ----
<S>                            <C>            <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues                       $   359,908    $   555,745   $   497,553   $   437,005   $   883,910   $    192,332
Costs and Expenses               4,687,745      5,899,650     3,836,295     4,264,141     4,388,575      2,837,862
Loss From Continuing
  Operations                    (4,306,140)    (5,097,419)   (3,042,383)   (3,645,804)   (3,405,387)    (2,660,040)
Loss From Discontinued                  
  Operations                            --             --            --       (14,945)      (48,095)       (40,984)
Net Loss                        (4,306,140)    (5,097,419)   (3,042,383)   (3,660,749)   (3,453,482)    (2,701,024)
Loss Per Share:
  From Continuing
   Operations                         (.15)          (.21)         (.14)         (.22)         (.26)          (.23)
  From discontinued
   Operations                           --             --            --            --            --           (.01)
  Net Loss                            (.15)          (.21)         (.14)         (.22)         (.26)          (.24)
Weighted Average Number of
  Shares Outstanding            28,794,118     24,433,949    21,179,703    16,517,117    13,070,565    11,471,849
</TABLE>


<TABLE>
<CAPTION>
                                                                        AT JUNE 30,
                                                                        -----------
                                   AT
                              DECEMBER 31,
                                  1996           1996          1995         1994         1993         1992
                                  ----           ----          ----         ----         ----         ----
<S>                            <C>            <C>           <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Total Assets                   $7,463,149     $11,576,666   $5,114,021   $7,834,706   $5,602,289   $  1,942,367
Convertible Note Payable        1,600,000       2,000,000       --           --           --           --
Total Liabilities               2,409,133       2,733,032      587,207      420,964      441,171        604,238
Working Capital                 5,502,295      10,203,693    4,102,747    6,967,894    4,584,747        739,465
Stockholders' Equity            5,054,016       8,843,634    4,526,814    7,413,742    5,161,118      1,338,129
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

    The Company  develops and markets  proprietary  and generic  therapeutic and
diagnostic  products  for the human  healthcare  market.  The  Company has begun
expanding 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 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 signed an
agreement  to purchase all of the  outstanding  shares  Superior  Pharmaceutical
Company ("Superior"), a distributor of generic pharmaceuticals.  

    The Company has financed its operations  primarily through the proceeds from
its public and private stock offerings,  a convertible note 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


                                       15


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

    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.

                                       16


    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  carryforwards  of
approximately $23,460,000 and $19,270,000 respectively. In addition, the Company
had  Federal  and state  research  tax  credit  carryforwards  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.


                                       17


    YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994

    REVENUES

    Revenues for Fiscal 1995 were  $498,000  versus  $437,000 for the year ended
June 30, 1994 ("Fiscal 1994").  This increase of $61,000, or 14%, is a result of
an  increase in  diagnostic  product  sales of $248,000  offset by a decrease in
contract  service  revenue  of  $138,000  and a  decrease  in  license  fees and
royalties  of  $49,000.  Product  sales were  realized  primarily  from sales of
MycoDot, a tuberculosis  antibody  detection product,  to a distributor in Asia.
The Company also recognized fee revenue of $250,000 from Bristol-Myers  Products
("BMP").  The Company  granted BMP the right to evaluate  its smoking  cessation
technology for which the Company received a $500,000 payment,  of which $250,000
was  deferred as revenue  until  Fiscal  1996.  In July 1995,  BMP  informed the
Company that it decided not to exercise its option to license the  technology as
BMP's strategic interest was in developing an over-the-counter smoking cessation
product. The Company's  NicErase-SL smoking cessation product is being developed
for prescription use. In Fiscal 1994,  royalties were attributable to a one-time
payment  under  an  agreement  to  license   certain   tuberculosis   diagnostic
technology.  Contract  service revenues for Fiscal 1994 related to the Company's
development of a vaccine delivery system under a U.S. Army contract completed in
Fiscal 1994. The Company is no longer performing any contract development work.

    COST OF SALES

    Cost of product sales for Fiscal 1995 was 54% of net product sales.

    RESEARCH AND DEVELOPMENT EXPENSES

    Research and  development  expenses were  $1,718,000  for Fiscal 1995 versus
$2,184,000  for Fiscal 1994, a decrease of $466,000 or 21%. In Fiscal 1995,  the
Company  expended  $1,476,000 on therapeutic  product  development  and $242,000
towards  diagnostic  product  development,  compared to $1,500,000 and $684,000,
respectively,  in Fiscal 1994.  This is  reflective  of the  Company's  strategy
whereby  resources were directed  towards  NicErase-SL  development with limited
expenditures  towards other  therapeutic  and  diagnostic  product  development.
During  Fiscal  1995,  therapeutic  product  development  focused  primarily  on
NicErase-SL,  as the  Company  completed a  multi-center  pilot Phase 3 clinical
trial.

    Diagnostic product development  included limited development efforts for the
Company's  NicCheck and MycoAKT  products.  In March 1995, the Company  received
clearance from the FDA to market the MycoAKT  products and is currently  seeking
and evaluating  strategic alliances with third parties.  MycoAKT diagnostic test
kits are used to identify three mycobacterial species. The Company continued its
manufacturing  development scale-up and regulatory approval efforts with respect
to NicCheck, a nicotine detection product.

    SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses for Fiscal 1995 were $1,984,000
versus $1,997,000 for Fiscal 1994, a decrease of $13,000.  Comparing Fiscal 1995
to Fiscal  1994,  savings  realized  from  decreases  in  salaries  and  related
benefits, public relations expenditures, use of outside business consultants and
travel expenses were offset by increases in product  marketing and support costs
and business insurance.  Product marketing and support efforts focused primarily
on  the  implementation  of  distribution   arrangements  (including  sales  and
marketing  support in connection with such  distribution  arrangements)  for the
Company's  tuberculosis  related  diagnostic  products and business  development
efforts for NicCheck.

    OTHER INCOME (EXPENSE)

    Investment  income  increased  by $113,000  from  $183,000 to $296,000  when
comparing  Fiscal 1994 to Fiscal 1995.  The Company had greater funds  available
for investment during Fiscal 1995 as a result of the Company's March 1994 public
offering.

    INCOME TAXES

    There were no  provisions  for income  taxes for Fiscal 1995 and 1994 due to
operating losses incurred by the Company.

                                       18



    DISCONTINUED OPERATIONS

    In May 1994,  the Company sold certain  assets of its contract  research and
development  business  that related to the Company's  fluid  systems  consulting
services  ("FSD").  The Company sold  accounts  receivable,  work in process and
certain  furniture and equipment for $165,000,  and assigned to the buyer all of
the outstanding  consulting  projects.  In addition,  the Company entered into a
sub-lease  agreement  whereby  the  buyer  occupies  the  space  used by the FSD
business.  This  transaction  resulted  in a loss on  disposal  of  $13,000.  In
management's opinion,  these services did not fit the strategic direction of the
Company's core  therapeutic and diagnostic  business.  Moreover,  these services
were not expected to be a significant source of revenues, profit or cash flow to
the Company in the future.

LIQUIDITY AND CAPITAL RESOURCES

    As of December  31,  1996,  the Company  had working  capital of  $5,502,000
versus  working  capital of  $10,204,000  at June 30, 1996.  Cash and investment
securities  were  $5,117,000 at December 31, 1996 as compared to  $10,464,000 at
June 30, 1996.  Working  capital was used primarily for research and development
and to fund  the  purchase  of Able and its  operations  during  the  Transition
Period.

    As  discussed in Note 2 to the  financial  statements,  in August 1996,  the
Company  acquired  certain  assets of Able,  a generic  pharmaceutical  products
subsidiary  of Alpharma  Inc.,  for  $550,000 in cash and  acquisition  costs of
$150,000.  Able  manufactures  and  markets  prescription  and  over-the-counter
pharmaceuticals from a 46,000 square foot leased manufacturing facility in South
Plainfield,  New Jersey.  DynaGen  obtained the rights to several  approved ANDA
products  through this purchase.  DynaGen plans to increase sales of its generic
product  portfolio by expanding Able's  distribution  network,  by reintroducing
discontinued  products and by developing new ANDA products.  The acquisition has
increased revenues,  costs and expenses,  capital expenditures and net cash used
for operating  activities.  DynaGen intends to fund Able's  operations  until it
becomes  self-supporting.  There can be no  assurance  that the Company  will be
successful  in  assimilating  this or any future  acquisition  or that Able will
generate sufficient revenues to become self-supporting.

    Management anticipates that the available working capital will be sufficient
to fund the current level of operations,  including the Able  business,  through
June 1997, but that the available working capital will not be sufficient to fund
the  acquisition  of Superior.  The Company has realized  limited  revenues from
license fees and the sale of its diagnostic  products.  Its future prospects and
revenue  potential from product sales cannot be determined with any certainty at
this time.

    The  Company  plans  to raise  capital  in order  to  finance  the  proposed
acquisition  of  Superior  through the sale of its  securities.  There can be no
assurance  that the Company  will be able to secure this  financing or that such
financing  will be  available on  favorable  terms.  If the Company is unable to
obtain  such  financing,  it will be unable to close the  Superior  acquisition.
Concurrently with the completion of the proposed Superior acquisition,  Superior
and the Company  intend to enter into a line of credit to provide  financing for
Superior.  The  Company  and  Superior  are  currently  in  discussions  with  a
commercial  bank regarding  such line of credit.  There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable  terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company  intends  to fund  Superior's  operations  with the line of  credit  and
Superior's cash generated from operations.

    The Company also continues to pursue additional  sources of capital in order
to fund the growth of the Able generic drug business and its product development
efforts.  The Able  financing may take the form of a line of credit or equipment
notes or leases.  There can be no  assurance  that the  Company  will be able to
secure  additional  financing  for the Able  business or its  continued  product
development  efforts or that 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  certain
expenditures,  including its research and  development  activity with respect to
certain proposed products.

ENVIRONMENTAL LIABILITY

    The Company has no known material environmental violations or assessments.


                                       19


RECENT ACCOUNTING PRONOUNCEMENTS

    The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to Be  Disposed  Of" and  SFAS  No.  123,  "Accounting  for  Stock-Based
Compensation" in the Transition  Period. As discussed in Note 1 to the financial
statements,  the  adoption  of SFAS No.  121 and No. 123 did not have a material
effect on the  Company's  financial  position,  results of  operations  and cash
flows.

    The Financial  Accounting Standards Board issued SFAS No. 128, "Earnings per
Share," in February 1997. SFAS No. 128  establishes  standards for computing and
presenting earnings per share, and is effective for financial  statements issued
for  periods  ending  after  December  15,  1997.  Earlier  application  is  not
permitted.  SFAS No. 128 requires the restatement of all  prior-period  earnings
per share data presented.

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.

    History of Losses;  Anticipation of Future Losses.  The Company has incurred
operating  losses  since  its  inception  and  has  an  accumulated  deficit  of
$24,315,191  as of  December  31,  1996.  The  Company  incurred  a net  loss of
$4,306,140 for the Transition Period 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.  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.  In addition, the
Company's recently acquired subsidiary,  Able, has incurred net operating losses
in the past.  The Company  expects to provide its Able  subsidiary  with working
capital during the foreseeable future until Able can become self-supporting. 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 or
achieve profitability.


                                       20



    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 the proposed  acquisition  of Superior.  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.  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  its  overall  expenditures   including  its  research  and
development activity with respect to certain proposed products.

    In  addition,  the Company  will  require  additional  financing to fund the
proposed  Superior   acquisition  and  a  line  of  credit  to  fund  Superior's
operations.  There can be no  assurance  that the Company will be able to secure
such  financing or line of credit or that such  financing or line of credit will
be  available  on  favorable  terms.  If the  Company is unable to  obtain  such
financing  or  line  of  credit,  it  will  be  unable  to  close  the  Superior
acquisition.

    Uncertainties Related to NicErase-SL. Under applicable law, the Company will
not be permitted  to sell  NicErase-SL,  and thus  generate any revenue from its
development of NicErase-SL, unless it obtains the necessary regulatory approvals
from the FDA for the commercial sale of that product.  To obtain such regulatory
approvals,  the Company must demonstrate to the satisfaction of the FDA, through
preclinical studies and clinical trials, that NicErase-SL is safe and effective.
Although  the  results  of the  Company's  pilot  Phase 3 clinical  trials  were
encouraging,  they do not necessarily indicate, and they do not guarantee,  that
the results of the ongoing multi-center Phase 3 clinical trial will be favorable
to the  Company.  Nor do the  results  obtained in the  small-scale  pilot tests
completed  by the Company to date  necessarily  indicate  that the Company  will
ultimately  succeed  in  obtaining  FDA  approval  for  the  commercial  sale of
NicErase-SL.  The results from preclinical studies and early clinical trials may
not be predictive of results that will be obtained in large-scale  testing,  and
there can be no assurance that the Company's  clinical  trials will  demonstrate
sufficient safety and efficacy to obtain the requisite  regulatory  approvals or
will result in 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 NicErase-SL is not shown to be
safe and effective in either current ongoing, or any future clinical trials, and
if the  Company  is thus  unable to  commercialize  NicErase-SL  it would have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

    Integration of Able and Superior  Acquisitions.  In August 1996, the Company
acquired  certain  assets of Able,  and in March  1997,  the  Company  signed an
agreement to purchase all of the outstanding shares of Superior. There can be no
assurance  that  the  anticipated  benefits  from the  Able  acquisition  or the
proposed Superior  acquisition 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 Able and Superior  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.

    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


                                       21


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.

    Future  Acquisitions.  Management  may  from  time  to time  consider  other
acquisitions of assets,  businesses or technologies that will enable the Company
to acquire complementary skills and capabilities, offer new products, expand its
customer base or obtain other competitive advantages.  There can be no assurance
that the Company  will be able to  successfully  identify  suitable  acquisition
candidates,  obtain  financing on  satisfactory  terms,  complete  acquisitions,
integrate  acquired  operations into its existing  operations or expand into new
markets.  Acquisitions  may result in potentially  dilutive  issuances of equity
securities, the incurrence of debt and contingent liabilities,  and amortization
expense related to intangible  assets  acquired,  any of which could  materially
adversely affect the Company's business and results of operations. Acquisitions,
including the Company's recent  acquisition of Able and the proposed purchase of
Superior,  involve a number of potential  risks,  including  difficulties in the
assimilation  of the acquired  company's  operations and products,  diversion of
management's resources,  uncertainties  associated with operating in new markets
and working with new employees  and  customers,  and the  potential  loss of the
acquired  company's key employees.  There can also be no assurance that the Able
acquisition, the proposed Superior acquisition and future acquisitions,  if any,
will not have a material adverse effect upon the Company's  business and results
of operations.  Once integrated,  acquired  operations may not achieve levels of
revenues,  profitability  or  productivity  comparable to those  achieved by the
Company's existing operations, or otherwise perform as expected.

    Limited  Manufacturing  Capability and Experience.  The Company's  NicCheck,
MycoDot and MycoAKT 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 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  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 two
of its proprietary  products,  yielding  limited revenues from 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.


                                       22


    Early  Stage of  Product  Development.  Several  of the  Company's  proposed
products,  including its specialty pharmeceuticals,  OrthoDyn, the breast biopsy
technology being licensed from BioLoc and the bacterial extract for treatment of
infectious diseases, 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.

    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 will  continue  their
recent  buying  patterns  without  regard  to  the  Able  acquisition,  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  material  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 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.


                                       23


    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  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


                                       24



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.

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, 1996 and June 30, 1996 and
       1995

      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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    There  have  been  no  changes  in  or  disagreements  with  accountants  on
accounting or financial disclosure matters.



                                       25




                                 DYNAGEN, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                    PAGE
        <S>                                                                                          <C>
        Independent Auditors' Report .............................................................   27
        Financial Statements:
            Consolidated  Balance  Sheets -- December 31, 1996 and June 30, 1996 and 1995 ........   28  
            Consolidated  Statements  of Loss -- Six  Months  Ended December 31, 1996 and 1995
             and Years Ended June 30, 1996, 1995 and 1994 ........................................   29
            Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended
             December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 ......................   30
            Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and
             1995 and Years Ended June 30, 1996, 1995 and 1994 ...................................   31
            Notes to Consolidated Financial Statements ...........................................   32
</TABLE>



                                    26




                          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  subsidiary  as of December 31, 1996 and June 30, 1996 and 1995 and the
related  consolidated  statements of loss,  changes in stockholders'  equity and
cash flows for the six months ended  December 31, 1996 and for each of the years
in the  three-year  period ended June 30,  1996.  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 financial  position of DynaGen,
Inc. and  subsidiary as of December 31, 1996 and June 30, 1996 and 1995, and the
results  of their  operations  and their  cash  flows for the six  months  ended
December 31, 1996 and for each of the years in the three-year  period ended June
30, 1996 in conformity with generally accepted accounting principles.

    As indicated in Note 1 to the consolidated financial statements, the Company
needs  additional  capital to fund its  operations,  its acquisition of Superior
Pharmaceutical Company and the continued support of its proposed products.

                                            WOLF & COMPANY, P.C.

Boston, Massachusetts
February 14, 1997, except for Note 14
 as to which the date is March 7, 1997



                                       27



                                  DYNAGEN, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           JUNE 30,
                                                                   DECEMBER 31,   ------------------------
                                                                      1996           1996           1995
                                                                      ----           ----           ----
<S>                                                               <C>            <C>            <C>
                                                   ASSETS
Current assets:
   Cash and cash equivalents (including interest-bearing deposits
     of $1,835,000, $154,000 and $142,000, respectively)          $  2,112,300   $    375,948  $     263,956
   Investment securities available for sale at fair value (Note 3)   3,004,700     10,087,918      4,201,876
   Accounts receivable                                                 261,932         89,703         28,971
   Inventory (Note 4)                                                  451,883        --             --
   Notes receivable (Note 8)                                           185,000         75,000        --
   Accrued interest receivable                                          40,179         86,873         86,653
   Prepaid expenses and other current assets                           255,434        221,283        108,498
                                                                       -------        -------        -------
       Total current assets                                          6,311,428     10,936,725      4,689,954
                                                                     ---------     ----------      ---------
Property and equipment, net (Notes 5 and 6)                            673,969        143,350        153,280
                                   -     -                             -------        -------        -------
Other assets:
   Patents and trademarks, net of accumulated amortization of
     $65,639, $54,341 and $46,024, respectively                        265,840        277,138        268,809
   Deferred debt financing costs, net of accumulated amortization
     of $119,039 and $57,230, respectively (Note 6)                    119,039        217,475        --
   Deposits and other assets                                            92,873          1,978          1,978
                                                                        ------          -----          -----
       Total other assets                                              477,752        496,591        270,787
                                                                       -------        -------        -------
                                                                  $  7,463,149   $ 11,576,666   $  5,114,021
                                                                  ============   ============   ============

                                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                               $    712,239   $    519,624   $    263,786
   Accrued payroll and payroll taxes                                    96,894        147,441         73,421
   Deferred revenue                                                    --              65,967        250,000
                                                                     ---------      ---------        -------  
       Total current liabilities                                       809,133        733,032        587,207
Convertible note payable (Notes 6, 10 and 14)                        1,600,000      2,000,000        --
                                                                     ---------      ---------        -------        
       Total liabilities                                             2,409,133      2,733,032        587,207
                                                                     ---------      ---------        -------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 10 and 14):
   Preferred stock, $.01 par value, 10,000,000 shares authorized,
     none outstanding                                                  --             --             --
   Common stock, $.01 par value, 75,000,000 shares authorized,
     29,106,231, 28,559,999 and 21,448,487 shares, respectively,
     issued and outstanding                                            291,062        285,600        214,485
   Additional paid-in capital                                       29,076,838     28,567,068     19,236,300
   Accumulated deficit                                             (24,315,191)   (20,009,051)   (14,911,632)
                                                                  ------------   ------------   ------------
                                                                     5,052,709      8,843,617      4,539,153
   Unrealized gain (loss) on investment securities available for
     sale (Note 3)                                                       1,307             17        (12,339)
                                                                     ---------      ---------        ------- 
       Total stockholders' equity                                    5,054,016      8,843,634      4,526,814
                                                                     ---------      ---------      ---------
                                                                  $  7,463,149   $  11,576,666  $   5,114,021
                                                                  ============   =============  =============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       28



                                 DYNAGEN, INC.
                         CONSOLIDATED STATEMENTS OF LOSS


<TABLE>
<CAPTION>
                                                 SIX MONTHS ENDED DECEMBER 31,             YEARS ENDED JUNE 30,
                                                 -----------------------------             --------------------
                                                   1996            1995           1996           1995          1994
                                                   ----            ----           ----           ----          ----
                                                                (UNAUDITED)
<S>                                             <C>             <C>            <C>           <C>           <C>
Revenues (Note 11):
   Net product sales                            $   358,467     $    57,855    $   220,745   $    247,553      -- $
   Contract revenues                                --              --             --            --            138,255
   License fees and royalties                         1,441         275,000        335,000       250,000       298,750
                                                 ----------      ----------     ----------    ----------    ---------- 
       Total revenues                               359,908         332,855        555,745       497,553       437,005
                                                 ----------      ----------     ----------    ----------    ---------- 
Costs and expenses:
   Cost of sales                                    356,312          28,837         96,680       134,392       --
   Contract costs                                   --              --             --            --             82,903
   Research and development                       1,092,253       1,036,622      3,118,145     1,718,006     2,183,849
   Selling, general and administrative            3,239,180       1,188,733      2,684,825     1,983,897     1,997,389
                                                 ----------      ----------     ----------    ----------    ---------- 
       Total costs and expenses                   4,687,745       2,254,192      5,899,650     3,836,295     4,264,141
                                                 ----------      ----------     ----------    ----------    ---------- 
       Operating loss                            (4,327,837)     (1,921,337)    (5,343,905)   (3,338,742)   (3,827,136)
                                                 ----------      ----------     ----------    ----------    ---------- 
Other income (expense):
   Investment income                                157,788         111,521        367,715       296,555       183,082
   Interest expense (Note 6)                        (74,282)        --             (63,999)         (196)       (1,750)
   Amortization of debt financing costs (Note 6)    (61,809)        --             (57,230)      --            --
                                                 ----------      ----------     ----------    ----------    ---------- 
       Other income (expense), net                   21,697         111,521        246,486       296,359       181,332
                                                 ----------      ----------     ----------    ----------    ---------- 
       Loss from continuing operations           (4,306,140)     (1,809,816)    (5,097,419)   (3,042,383)   (3,645,804)
                                                 ----------      ----------     ----------    ----------    ---------- 
   Loss from operations of fluid systems
     consulting services                            --              --             --            --             (1,538)
   Loss on disposal of fluid systems consulting
     services                                       --              --             --            --            (13,407)
                                                 ----------      ----------     ----------    ----------    ---------- 
                                                    --              --             --            --            (14,945)
                                                 ----------      ----------     ----------    ----------    ---------- 
       Net loss                                 $(4,306,140)    $(1,809,816)   $(5,097,419)  $(3,042,383)  $(3,660,749)
                                                ===========     ===========    ===========   ===========   =========== 
Net loss per share                              $      (.15)    $      (.08)   $      (.21)  $      (.14)  $      (.22)
                                                ===========     ===========    ===========   ============  ============ 
Weighted average shares outstanding              28,794,118      22,217,645     24,433,949    21,179,703    16,517,117
                                                 ==========      ==========     ==========    ==========    ==========

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       29




                                  DYNAGEN, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 SIX MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
                             (NOTES 6, 9, 10 AND 14)


<TABLE>
<CAPTION>
                                
                                
                                                                                                               UNREALIZED
                                                                                                               GAIN (LOSS)
                                SERIES A CONVERTIBLE                                                          ON INVESTMENT
                                  PREFERRED STOCK            COMMON STOCK         ADDITIONAL                    SECURITIES
                               -----------------------   ---------------------     PAID-IN     ACCUMULATED      AVAILABLE
                                SHARES       AMOUNT        SHARES      AMOUNT      CAPITAL       DEFICIT        FOR SALE     TOTAL
                                ------       ------        ------      ------      -------       -------        --------     -----
<S>                             <C>        <C>           <C>          <C>        <C>           <C>            <C>        <C>
Balance at June 30, 1993          --       $   --        14,544,297   $145,443   $13,224,175   $ (8,208,500)   $    --   $5,161,118
Shares issued in 1994 public
  offering                        --           --         6,400,000     64,000     5,553,729        --             --     5,617,729
Shares issued in private
  placement                       --           --           128,571      1,286       385,227        --             --       386,513
Cancellation of stock options
  issued for future services      --           --            --          --          (72,540)       --             --       (72,540)
Exercise of lenders' warrants     --           --           101,667      1,016        19,317        --             --        20,333
Change in method of accounting
  for investment securities       --           --            --          --          --             --           (38,662)   (38,662)
Net loss for the year ended June
  30, 1994                        --           --            --          --          --          (3,660,749)       --    (3,660,749)
                                -----       -------       ---------    -------    -------        ----------      -------  ---------
Balance at June 30, 1994          --           --        21,174,535    211,745    19,109,908    (11,869,249)     (38,662) 7,413,742
Exercise of stock options         --           --               500          5           370        --             --           375
Exercise of underwriters'
  warrants                        --           --           273,452      2,735       126,022        --             --       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)       --    (3,042,383)
                                -----       -------       ---------    -------    -------        ----------      -------  ---------
Balance at June 30, 1995          --           --        21,448,487    214,485    19,236,300    (14,911,632)     (12,339) 4,526,814
Exercise of underwriters'
  warrants                        --           --           503,982      5,040        32,085        --             --        37,125
Exercise of public warrants       --           --         3,244,494     32,445     3,822,762        --             --     3,855,207
Shares issued in private
  placements                   1,178,264    3,461,150     1,520,686     15,207     1,376,204        --             --     4,852,561
Conversion of preferred stock (1,178,264)  (3,461,150)    1,612,834     16,128     3,445,022        --             --        --
Exercise of stock options         --           --            95,855        959         4,616        --             --         5,575
Employee stock and stock
  option grants                   --           --           117,250      1,172       557,685        --             --       558,857
Stock options issued for
  future services                 --           --            --          --           55,225        --             --        55,225
Stock issued for interest
  obligation                      --           --            16,411        164        37,169        --             --        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)       --    (5,097,419)
                                -----       -------       ---------    -------    -------        ----------      -------  ---------
Balance at June 30, 1996          --           --        28,559,999    285,600    28,567,068    (20,009,051)          17  8,843,634
Exercise of stock options         --           --            81,767        818        15,682        --             --        16,500
Stock issued for interest
  obligation                      --           --            50,052        500        79,117        --             --        79,617
Stock options issued for
  services                        --           --            --          --           55,742        --             --        55,742
Conversion of note payable        --           --           414,413      4,144       359,229        --             --       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)       --    (4,306,140)
                                -----       -------       ---------    -------    -------        ----------      -------  ---------
Balance at December 31, 1996      --       $   --         29,106,231   $291,062   $29,076,838   $(24,315,191)   $  1,307 $5,054,016
                              ==========   =========     ===========   ========   ===========   =============   ========  =========

</TABLE>

       See accompanying notes to consolidated financial statements.

                                       30




                                 DYNAGEN, INC.
                   CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                          SIX MONTHS ENDED
                                                            DECEMBER 31,                  YEARS ENDED JUNE 30,
                                                            ------------                  --------------------
                                                         1996          1995           1996          1995       1994
                                                         ----          ----           ----          ----       ----
<S>                                                  <C>            <C>           <C>            <C>          <C>
Cash flows from operating activities:
   Net loss                                          $(4,306,140)   $(1,809,816)  $ (5,097,419)  $(3,042,383) $(3,660,749)
   Adjustments to reconcile net loss to net cash used
     for operating activities:
       Stock and stock options issued for services        55,742        --             558,857       --           --
       Depreciation and amortization                     129,558         32,440        125,610        64,195       91,163
       Amortization and accretion of (discounts) 
        premiums on investment securities                (31,497)       (19,539)      (134,474)      101,553       50,997
       Stock issued for interest obligation               79,617        --              37,333       --           --
       Write-off of patent costs                         --             --              41,852        40,893      --
       Gain on sales of investment securities            --             --             --            --            (4,424)
       Loss on disposal of fluid systems consulting
        services                                         --             --             --            --            13,407
       (Increase) decrease in operating assets:
          Accounts receivable                           (172,229)       (23,621)       (60,732)       30,518      (70,317)
          Inventory                                     (138,583)       --             --            --           --
          Prepaid expenses and other current assets       12,543        (47,227)       (57,780)       24,121      (48,667)
          Deposits and other assets                      (90,895)       --             --            --           --
       Increase (decrease) in operating liabilities:
          Accounts payable and accrued expenses          142,068         (3,770)       329,858       (77,933)     (11,534)
          Deferred revenue                               (65,967)      (150,000)      (184,033)      250,000      --
                                                      ----------     ----------     ----------    ----------   ---------- 
             Net cash used for operating activities   (4,385,783)    (2,021,533)    (4,440,928)   (2,609,036)  (3,640,124)
                                                      ----------     ----------     ----------    ----------   ---------- 
Cash flows from investing activities:
   Purchase of investment securities                  (2,567,445)    (5,937,166)   (29,913,212)   (3,187,379)  (7,198,023)
   Proceeds from sales and maturities of investment
     securities                                        9,683,450      5,600,000     24,174,000     5,500,000    4,136,330
   Purchase of wholly-owned subsidiary                  (700,000)       --             --            --           --
   Purchase of property and equipment                   (200,370)        (2,874)       (36,020)      (23,339)     (32,522)
   Patent and trademark costs                            --             (32,867)       (72,611)      (69,293)     (63,911)
   Decrease in deposits                                  --             --             --              9,325        2,971
   Net proceeds from disposal of fluid systems
     consulting services                                 --             --             --            --           153,752
   (Increase) decrease in notes receivable              (110,000)       --             (75,000)      --            16,072
                                                      ----------     ----------     ----------    ----------   ---------- 
             Net cash provided by (used for)
               investing activities                    6,105,635       (372,907)    (5,922,843)    2,229,314   (2,985,331)
                                                      ----------     ----------     ----------    ----------   ---------- 
Cash flows from financing activities:
   Net proceeds from stock warrants and options           16,500      3,896,088      3,897,907       129,132       20,333
   Net proceeds from private stock placements            --             --           4,852,561       --           386,513
   Net proceeds from convertible note payable            --             --           1,725,295       --           --
   Net proceeds from public stock offerings              --             --             --            --         5,617,729
   Decrease in deferred offering costs                   --             --             --            --            50,000
   Principal payments on capital lease                   --             --             --             (5,824)      (8,673)
                                                      ----------     ----------     ----------    ----------   ---------- 
             Net cash provided by financing
               activities                                 16,500      3,896,088     10,475,763       123,308    6,065,902
                                                      ----------     ----------     ----------    ----------   ---------- 
Net change in cash and cash equivalents                1,736,352      1,501,648        111,992      (256,414)    (559,553)
Cash and cash equivalents at beginning of period         375,948        263,956        263,956       520,370    1,079,923
                                                      ----------     ----------     ----------    ----------   ---------- 
Cash and cash equivalents at end of period           $ 2,112,300    $ 1,765,604   $    375,948   $   263,956   $  520,370
                                                     ===========    ===========   ============   ===========   ==========
Supplemental cash flow information:
   Interest paid on capital lease                    $   --         $  --         $  --          $       196   $    1,750
   Stock options issued (cancelled) in exchange for
     future services                                     --             --              55,225       --           (72,540)
   Conversion of preferred stock to common stock         --             --           3,461,150       --           --
Additional cash flow information is included in Notes 2 and 6.

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       31





                                  DYNAGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (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")  which is developing and marketing  therapeutic  and diagnostic
products for the human health care market and its wholly-owned subsidiary,  Able
Laboratories,  Inc.  ("Able"),  which is engaged in the  manufacture  of generic
pharmaceuticals.  (See  Note  2.)  All  significant  intercompany  balances  and
transactions have been eliminated in consolidation.

 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,  its
generic pharmaceutical  business and the proposed acquisition of Superior.  (See
Note 14.) 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. The Company plans to secure
financing  for the Superior  acquisition  through the sale of equity and/or debt
securities.  In addition, the Company plans to obtain lines of credit, equipment
notes or leases from  financial  institutions  to support the operations of both
Superior and Able.  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 its
overall  expenditures  including  its research  and  development  activity  with
respect to certain proposed products.

 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 six month transition period ended December 31, 1996.  Audited
financial  statements  are also  presented for the three fiscal years ended June
30, 1996, 1995 and 1994.  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.

 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. Actual results could differ from those estimates.

 Cash Equivalents

    Cash equivalents include interest-bearing  deposits with original maturities
of three months or less.

 Investment Securities

    Effective June 30, 1994, the Company  adopted the provisions of Statement of
Financial  Accounting  Standards  ("SFAS")  No.  115,  "Accounting  for  Certain
Investments  in Debt and Equity  Securities."  Accordingly,  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

                                       32




                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

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.  The  cumulative  effect  of  the  change  in  accounting
principle  at June 30,  1994 was to  decrease  stockholders'  equity by $38,662.
There was no effect on the net loss for the year ended June 30, 1994.

    Prior to June 30, 1994, investment securities were carried at amortized cost
which  approximated  fair value.  Gains and losses on  disposition of investment
securities are computed by the specific identification method.

 Inventory

Inventory  is valued at the  lower of 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.

 Goodwill, Organization Expenses, Patents, Trademarks and Deferred Debt
Financing Costs

    Goodwill and organization expenses were amortized over a five-year period on
a straight-line  basis and were fully amortized as of June 30, 1994.  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 six months ended December 31, 1996 and 1995
was $73,107 and  $10,792,  respectively,  and for the years ended June 30, 1996,
1995 and 1994 was $79,660, $11,385 and $21,388, respectively.

 Deferred Offering Costs

    Deferred  offering costs represent costs incurred in connection with raising
capital.  Upon  completion  of an offering,  the amount  credited to  additional
paid-in capital is reduced by the deferred offering costs.

 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.  Revenues  earned under  long-term  contracts are recognized
using the  percentage-of-completion  method.  Anticipated  losses on uncompleted
contracts are charged to operations 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  carryforwards  to the extent their
realization  is more likely than not.  The  deferred  tax expense for the period
represents  the change in the deferred tax asset or liability from the beginning
to the end of the period.

                                       33




                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

Stock-Based Compensation

    In October 1995, the Financial  Accounting  Standards  Board ("FASB") issued
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.)

 Net Loss Per Share

    Net loss per share is  calculated  based on the weighted  average  number of
common  shares  outstanding  during the year.  The  effect of all  common  stock
equivalents has been excluded from the calculation  since its inclusion would be
anti-dilutive.

 New Accounting Pronouncements

    The FASB issued SFAS No. 121,  "Accounting  for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed Of" in March 1995. SFAS No. 121
requires the Company to review for  impairment  of  long-lived  assets,  certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable.  In certain situations,  an impairment loss would be recognized.
SFAS No. 121 is effective for the six months ended December 31, 1996. The impact
of adoption of the new  standard  was not  material to the  Company's  financial
position, results of operations and cash flows.

    The FASB issued SFAS No. 128,  "Earnings per Share," in February 1997.  SFAS
No. 128 establishes  standards for computing and presenting  earnings per share,
and is  effective  for  financial  statements  issued for periods  ending  after
December 15, 1997, earlier  application is not permitted.  SFAS No. 128 requires
the restatement of all prior period earnings per share data presented.

2. ACQUISITION OF ABLE LABORATORIES, INC.

    On August 19, 1996, the Company  acquired  certain assets of Able consisting
primarily  of  machinery  and  equipment,   raw  materials  and  finished  goods
inventory,  and other assets of the tablet business. The assets were transferred
by the  Company  to a  newly  formed  and  wholly-owned  subsidiary  named  Able
Laboratories,  Inc.  The  purchase  price  consisted  of  $550,000  in cash  and
acquisition  costs of $150,000.  The  acquisition  has been  accounted  for as a
purchase in  accordance  with  Accounting  Principles  Board Opinion No. 16. 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.

                                       34





                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

2. ACQUISITION OF ABLE LABORATORIES, INC. -- (CONTINUED)

    Unaudited pro forma consolidated operating results for the Company, assuming
the acquisition of Able had been made as of July 1, 1995 are as follows:

<TABLE>
<CAPTION>
                                              SIX MONTHS ENDED DECEMBER 31,
                                              -----------------------------
                                                                              YEAR ENDED
                                                 1996            1995       JUNE 30, 1996
                                                 ----            ----       -------------
<S>                                          <C>             <C>            <C>
Revenues .................................   $   378,733     $ 2,406,200     $ 4,875,562
Net loss .................................   $(4,415,080)    $(1,755,997)    $(6,598,550)
Net loss per share .......................   $      (.15)    $      (.08)    $      (.27)

</TABLE>

    The unaudited pro forma information is not necessarily  indicative either of
the results of operations that would have occurred had the purchase been made on
July 1, 1995 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>

<TABLE>
<CAPTION>
                                                                       JUNE 30, 1996
                                                     -------------------------------------------------
                                                                    GROSS        GROSS
                                                     AMORTIZED    UNREALIZED   UNREALIZED       FAIR
                                                        COST         GAINS       LOSSES        VALUE
                                                        ----         -----       ------        -----
<S>                                                 <C>             <C>          <C>        <C>
U.S. Government obligations .....................   $   187,301     $  --        $  (100)   $   187,201
U.S. Government agency obligations ..............     4,295,274      3,445        (1,252)     4,297,467
Corporate obligations ...........................     5,605,326          2        (2,078)     5,603,250
                                                      ---------     ------        ------      ---------
                                                    $10,087,901     $3,447       $(3,430)   $10,087,918
                                                    ===========     ======       =======    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                      JUNE 30, 1995
                                                     -------------------------------------------------
                                                                    GROSS        GROSS
                                                     AMORTIZED   UNREALIZED   UNREALIZED      FAIR
                                                       COST         GAINS       LOSSES        VALUE
                                                       ----         -----       ------        -----
<S>                                                 <C>             <C>        <C>         <C>
U.S. Government agency obligations ..............   $1,702,408       $ 97      $  (8,209)  $1,694,296
Corporate obligations ...........................    2,511,807       --          (4,227)    2,507,580
                                                      ---------     ------        ------      ---------
                                                    $4,214,215       $ 97      $(12,436)   $4,201,876
                                                    ===========     ======       =======    ===========
</TABLE>

    At December 31, 1996, all debt securities mature within one year. There were
no sales of securities  available for sale during the six months ended  December
31, 1996 and the years ended June 30, 1996 and 1995.

                                       35





                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

4. INVENTORY

    Inventory consists of the following at December 31, 1996:

                     Raw materials ......................   $259,330
                     Work-in-progress ...................    163,847
                     Finished goods .....................     28,706
                                                            --------
                                                            $451,883
                                                            ========

5. PROPERTY AND EQUIPMENT

    Property and equipment consist of:

<TABLE>
<CAPTION>
                                                         JUNE 30,
                                     DECEMBER 31,   ------------------       ESTIMATED
                                        1996         1996         1995      USEFUL LIVES
                                        ----         ----         ----      ------------
<S>                                  <C>           <C>         <C>         <C>
Laboratory equipment ..............   $ 702,141    $ 220,164    $220,164        7 years
Furniture and fixtures ............     270,353      173,572     143,091      3-7 years
Leasehold improvements ............      39,288       30,976      25,437      1-2 years
                                         ------       ------      ------           
                                      1,011,782      424,712     388,692
Less accumulated depreciation and
  amortization ....................    (337,813)    (281,362)  (235,412)
                                       --------     --------   -------- 
                                      $ 673,969    $ 143,350    $153,280
                                      =========    =========    ========
</TABLE>

    Depreciation and amortization  expense for the six months ended December 31,
1996  and  1995  was  $56,451  and  $21,648,   respectively.   Depreciation  and
amortization  expense  for the  years  ended  June 30,  1996,  1995 and 1994 was
$45,950, $52,810 and $69,775, respectively.

6. DEBT

 Convertible Note Payable

    On  February 7, 1996,  the  Company  issued a  $2,000,000  convertible  note
payable in connection  with a private  placement.  Deferred debt financing costs
were  $274,705.  (See Note 10.) The note  matures 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  414,413  shares of the  Company's  common  stock and  $36,627 of
related  deferred  debt  financing  costs  were  charged to  additional  paid-in
capital. (See Note 14.)

    Interest  expense on the  convertible  note payable 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 six months ended
December 31, 1996 was $61,809 and for the year ended June 30, 1996 was $57,230.

 Capital Lease

    In December 1991, the Company  entered into a lease  agreement for telephone
equipment  with a cost of  $25,329.  During the year ended  June 30,  1995,  the
Company  made the final  payment due under the lease and  acquired  title to the
equipment.  Interest  expense on the lease for the years ended June 30, 1995 and
1994 was $196 and $1,750, respectively.



                                       36





                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)


7. INCOME TAXES

The Company adopted SFAS No. 109,  "Accounting for Income Taxes"  effective July
1,  1993.  There was no  provision  for income  taxes for the six  months  ended
December 31, 1996 and 1995 and for the years ended June 30, 1996,  1995 and 1994
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>
                                                                          JUNE 30,
                                              DECEMBER 31,      -----------------------------
                                                1996               1996             1995
                                                ----               ----             ----
<S>                                         <C>                <C>                <C>
Deferred tax asset:
   Federal ..............................   $ 8,008,000        $ 6,523,000        $ 4,929,000
   State ................................     1,986,000          1,793,000          1,433,000
                                              ---------          ---------          ---------
                                              9,994,000          8,316,000          6,362,000
Valuation reserve .......................    (9,994,000)        (8,316,000)        (6,362,000)
                                             ----------         ----------         ---------- 
Net deferred tax asset ..................   $    --            $     --           $     --
                                            ===========        ===========        ===========  
                      
</TABLE>

    The following differences give rise to deferred income taxes:

<TABLE>
<CAPTION>
                                                                          JUNE 30,
                                              DECEMBER 31,     -------------------------------
                                                  1996               1996             1995
<S>                                         <C>                <C>                <C>
Net operating loss carryforward .........   $ 9,185,000        $ 7,533,000        $ 5,496,000
Research tax credit carryforward ........       662,000            657,000            672,000
Other ...................................       147,000            126,000            194,000
                                                -------            -------            -------
                                              9,994,000          8,316,000          6,362,000
Valuation reserve .......................    (9,994,000)        (8,316,000)        (6,362,000)
                                             ----------         ----------         ---------- 
Net deferred tax asset ..................   $     --           $     --           $      --
                                            ============       ===========        ===========  
                      
</TABLE>

    The change in the valuation reserve is as follows:

<TABLE>
<CAPTION>
                                             SIX MONTHS ENDED
                                               DECEMBER 31,                 YEARS ENDED JUNE 30,
                                               ------------                 --------------------
                                            1996         1995         1996          1995         1994
                                            ----         ----         ----          ----         ----
<S>                                      <C>          <C>          <C>           <C>          <C>
Balance at beginning of period ......... $8,316,000   $6,362,000   $6,362,000    $5,084,000   $  --
Adoption of SFAS No. 109 ...............     --           --           --            --        3,525,000
Increase due to current period net
  operating loss .......................  1,678,000      688,000    1,954,000     1,278,000    1,559,000
                                          ---------      -------    ---------     ---------    ---------
Balance at end of period ............... $9,994,000   $7,050,000   $8,316,000    $6,362,000   $5,084,000
                                         ==========   ==========   ==========    ==========   ==========
</TABLE>

    As of December  31,  1996,  the Company has Federal and state net  operating
loss carryforwards of approximately  $23,460,000 and $19,270,000,  respectively.
The Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1997,  respectively.  In addition, the Company has Federal
and state  research  tax credit  carryforwards  of  approximately  $583,000  and
$120,000, 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.

                                       37




                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

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 and have an extended due date of August 1, 1997.  These notes
are secured by common stock of the Company issuable on exercise of stock options
held by the officers.

    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,  1997.  These  lines-of-credit  are  secured  by common  stock of the
Company  held by the  officer/directors.  At December 31,  1996,  borrowings  of
$110,000 were outstanding under the lines-of-credit.

    The Company recognized  interest income on notes receivable of $4,562 during
the six months ended December 31, 1996. At December 31, 1996,  accrued  interest
receivable of $4,562 is included in the consolidated balance sheet.

    During the year ended June 30, 1994,  an  officer/director  repaid $900 of a
note receivable and the Company forgave the balance of $15,172.

 Consulting Fees

    During  1996,  the  Company  retained a  consulting  company  for  strategic
marketing  and  business  development.   The  chief  executive  officer  of  the
consulting  firm is 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 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 six  months  ended
December 31, 1996, fees of $12,500 were paid to this consulting firm.

    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.

    During the years ended June 30, 1996 and 1995,  the Company paid  consulting
fees of $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's  current  lease  agreement  for  its  corporate  headquarters
provides for a monthly  rental of $15,188  plus real estate taxes and  operating
expenses through September 30, 1997. The lease agreement for Able provides for a
monthly rental of $21,965 plus real estate taxes and certain operating  expenses
through  March 31, 2000.  At December 31, 1996,  the  aggregate  future  minimum
rental  expense  (excluding  real estate taxes and operating  expenses)  payable
under the lease agreements amounts to approximately $400,000, $264,000, $264,000
and $66,000,  respectively,  for the years ending December 31, 1997,  1998, 1999
and 2000.  Future minimum  rentals to be received in 1997 under a  noncancelable
sublease are $70,000.

    Rent expense,  net of subleases,  for the six months ended December 31, 1996
and 1995 was $130,463 and  $31,000,  respectively,  and for the years ended June
30, 1996, 1995 and 1994 was $61,366,  $71,031 and $142,917,  respectively.  Real
estate tax  expense  for the six months  ended  December  31,  1996 and 1995 was
$53,976 and $44,000,  respectively,  and for the years ended June 30, 1996, 1995
and 1994 was $90,637, $91,307 and $70,479, respectively.



                                       38




                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

9. COMMITMENTS AND CONTINGENCIES -- (Continued)

 Employment Agreements

    As of December 31, 1996,  the Company has employment  agreements  with three
officer/directors  that provide for minimum annual  salaries,  reimbursement  of
business related expenses and  participation in other employee 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 May 1993, the Company  entered into a two-year  consulting  agreement for
public  relations  services.  As part of the compensation for the services to be
rendered,  the  consultant  was granted an option under the 1991 Stock Plan (see
Note 10) to purchase 37,200 shares of common stock at $.60 per share exercisable
through  May 1,  2000.  The  Company  valued  the  option  at  $145,080  and was
amortizing this expense over the term of the consulting agreement.  In May 1994,
the consulting agreement was terminated and options to purchase 18,600 shares of
common stock valued at $72,540 were cancelled.

    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 of 920,000 units at
$5.00  per  unit,  each unit  consisted  of one  share of  common  stock and one
redeemable common stock purchase  warrant.  The warrant  originally  allowed the
holder to  purchase  one share of common  stock at a price of $6.50,  subject to
adjustment  in certain  instances,  through  September  24, 1995. As a result of
subsequent  debt  and  equity  financings,  the  917,800  warrants  that  remain
outstanding  have been  adjusted to allow the holder to purchase 1.7 shares with
each warrant at an exercise price of $3.90 per warrant.  Furthermore,  on August
7, 1995, the Company  extended the expiration  date of the warrants to September
24, 1997.  During the year ended June 30, 1996, 2,200 warrants were exercised to
purchase 3,300 shares of common stock. Net proceeds were $9,438.



                                       39





                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)

 1994 Public Offering

    On March 23,  1994,  the Company  completed a public  offering of  1,600,000
units at $4.50 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 $1.20,  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
160,000 units at $7.425 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.

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,  22,000 warrants issued to the underwriters of the 1994 public
offering were exercised at $7.425 per warrant.  The Company received proceeds of
$163,350 and issued the warrant  holder 88,000 shares of common stock and 44,000
Class A redeemable common stock purchase  warrants.  In addition,  in June 1995,
35,000  warrants  issued to the  underwriters  of the 1994 public  offering were
exercised,  using their net exercise feature,  in exchange for 185,452 shares of
common stock.

    During the period from July 1995 to November 1995,  103,000  warrants issued
to the  underwriters  of the 1994  public  offering  were  exercised  to acquire
503,982  shares of common  stock and  10,000  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 3,241,194
shares of common  stock  yielding  net proceeds of  $3,845,769  after  deducting
expenses. The remaining 12,806 unexercised warrants were redeemed by the Company
for $.01 per warrant.

 Private Placements

    During the year ended June 30,  1993,  the Company  entered  into two common
stock  private  placement  agreements.  In July 1993,  the Company  sold 128,571
shares of common stock at $3.50 per share.  Net  proceeds  were  $386,513  after
deducting commissions and expenses of $63,486.

    The Company  issued  warrants  to the  placement  agents to purchase  68,328
shares of common  stock at $4.75 per share and 47,400  shares of common stock at
$5.53 per share.  During the year ended June 30,  1995,  the warrant to purchase
47,400  shares was  cancelled.  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 $4.37 per share.

    On February 7, 1996, the Company  raised $3 million in a private  placement,
from the sale to a single  investor of 579,626 shares of common stock at a price
of  approximately  $1.73 per share and the issuance of a $2 million  convertible
note. (See Note 6.) Placement costs for this transaction were $421,157 of



                                       40




                                  DYNAGEN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)

which  $146,452  was charged to  additional  paid-in  capital and  $274,705  was
capitalized  as  deferred  debt  financing  costs.  During the six months  ended
December  31, 1996,  $400,000 of the note was  converted  for 414,413  shares of
common stock and $36,627 of related  deferred debt financing  costs were charged
to additional paid-in capital. (See Note 14.)

    On February  21,  1996 and March 4, 1996,  the  Company  issued,  in private
placements,  an aggregate of 388,500 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 1,612,834 shares of common stock based on the above formula.

    In February 1996, the Company issued, in a private placement, 552,560 shares
of common stock for aggregate  consideration  of $1,000,000.  Placement costs of
$13,526 were charged to additional paid-in capital.

 Bonus Compensation

    In February 1996, the Company granted to certain employees and a consultant,
bonus  compensation  paid in the form of (1)  117,250  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  65,000  shares  of common  stock at an
exercise  price  of  $.01  per  share.  The  Company   recognized   $558,857  in
compensation expense associated with the grants.

 Stock Option Plans

    The  Company  adopted  the 1989  Stock  Option  Plan (the  "1989  Plan") and
reserved  600,000  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>
                                                                       
                                     SIX MONTHS                       YEARS ENDED JUNE 30,
                                        ENDED        --------------------------------------------------------       
                                    DECEMBER 31,
                                        1996                 1996                  1995            1994
                                  -----------------  -------------------    ------------------ --------------
                                           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 ......................  220,000     $.87     270,000     $.71     270,000     $.71   270,000 $1.98
Granted .......................    --         --        --         --        --          --    83,000   .75
Cancelled .....................    --         --        --         --        --          --   (83,000) 4.87
Exercised .....................  (12,000)     .75     (50,000)     .05       --          --     --     --
Outstanding at end of period ..  208,000      .88     220,000      .87     270,000      .71   270,000   .71
                                 =======              =======              =======            =======      
Exercisable at end of period ..  200,500      .89     197,500      .89     228,500      .72   187,000   .71
                                 =======              =======              =======            =======   
Reserved for future grants at
  end of period ...............    --                   --                   --                 --
                                 ========             ========             =======             ======    
</TABLE>


                                       41




                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)

    Information  pertaining  to  options  outstanding  under  the  1989  Plan at
December 31, 1996 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>
$.75-$.88 ...............     206,000      4.6 Years     $ .83       198,500       $ .84
$5.87 ...................       2,000      4.7 Years      5.87         2,000        5.87
                              -------                                -------
                              208,000      4.6 Years       .88       200,500         .89
                              =======                                =======         
</TABLE>

    The  Company  adopted  the 1991 Stock Plan (the  "1991  Plan") and  reserved
1,200,000 shares of common stock for issuance to employees,  officers, directors
and consultants.  (See Note 14.) 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, 1996,  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,
                                      SIX MONTHS         ------------------------------------------------------
                                        ENDED
                                     DECEMBER 31,
                                         1996                 1996                  1995             1994
                                         ----                 ----                  ----             ----
                                            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 .......................  640,900     $1.04    609,100     $1.26    586,600     $1.18   597,200 $5.14
Granted ........................  326,000      1.01    105,000       .29     50,000      1.94   589,000  1.09
Cancelled ......................  (56,000)     1.81    (21,500)     5.29    (27,000)      .75  (599,600) 5.05
Exercised ...................... (113,000)      .75    (51,700)      .32       (500)      .75     --     --
Outstanding at end of period ...  797,900      1.02    640,900      1.04    609,100      1.26   586,600  1.18
                                  =======              =======              =======             =======  
Exercisable at end of period ...  343,992      1.18    418,300      1.09    201,826      1.87    58,600  4.18
                                  =======              =======              =======             =======  
Reserved for future grants at end
  of period ....................  236,900              506,900              590,400             613,400
                                  =======              =======              =======             =======
Weighted average fair value of
  options granted during the
  period .......................              $1.23                $2.94                  N/A             N/A
</TABLE>



                                       42






                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)

    Information  pertaining  to  options  outstanding  under  the  1991  Plan at
December 31, 1996 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 ........   587,900       5.1 Years     $ .61       276,300      $ .59
$1.31-$1.94 ......   180,000       6.8 Years      1.54        37,692       1.71
$5.25-$6.25 ......    30,000       2.1 Years      5.92        30,000       5.92
                     -------                                 -------
                     797,900       5.0 Years      1.02       343,992       1.18
                     =======                                 =======
</TABLE>

 Other Stock Options and Warrants

    On September 6, 1990, the Company's Board of Directors granted non-qualified
stock options to purchase 450,000 shares of common stock at a price of $.875 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 20,000 shares of common stock at a price of $5.25 per share exercisable
through January 15, 1999.

    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  400,000
shares of common stock at an exercise  price of $2.50 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
660,000  shares of common stock at an exercise  price of $1.94 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  330,000  shares of  common  stock at an
exercise  price of $1.31 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
$1.20 per share.

    On December 10, 1996, the Company granted  warrants to purchase an aggregate
of 100,000 shares of common stock at an exercise price of $1.44 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 six months ended December 31, 1996 was $19,800.

 Stock-Based Compensation

    At December 31, 1996, 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


                                    43



                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
   (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)

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, 1996      JUNE 30, 1996
                                            -----------------      -------------
<S>                                         <C>                    <C>
Net loss:
          As reported .....................    $(4,306,140)         $(5,097,419)
          Pro forma .......................    $(4,489,433)         $(5,146,869)
Net loss per share:
          As reported .....................    $      (.15)         $      (.21)
          Pro forma .......................    $      (.16)         $      (.21)
</TABLE>

    Common stock  equivalents  have been excluded from all  calculations  of net
loss per share because the effect of including them would be anti-dilutive.

    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 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% and 6.4%; expected volatility of 80% and
80% and expected lives of 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, 1996 as follows:

<TABLE>
<CAPTION>
                                                                 NUMBER OF
                                                                  SHARES
<S>                                                             <C>
Convertible note payable ....................................    2,122,000
1992 public offering warrants ...............................    1,560,260
Private placement agents' warrants ..........................       68,328
Stock option plans ..........................................    1,242,800
Other stock options and warrants ............................    1,960,000
                                                                 ---------
   Total ....................................................    6,953,388
                                                                 =========

</TABLE>

    The  number of  shares  of common  stock  reserved  in  connection  with the
convertible note payable is subject to adjustment (see Notes 6 and 14.)

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,

                                    44



                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)

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>
                                                  SIX MONTHS ENDED
                                                     DECEMBER 31,      YEARS ENDED JUNE 30,
                                                     ------------      --------------------
                                                   1996       1995       1996        1995
                                                   ----       ----       ----        ----
<S>                                              <C>         <C>       <C>         <C>
Far East and Asia ...........................    $ 68,815    $39,812   $183,706    $185,997
United States ...............................     281,934      4,693     18,877      39,860
Europe ......................................       7,403      5,622      8,466      16,462
Other .......................................         315      7,728      9,696       5,234
                                                 --------    -------   --------    --------
                                                 $358,467    $57,855   $220,745    $247,553
                                                 ========    =======   ========    ========
</TABLE>

    A summary of sales by product is as follows:

<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED
                                                     DECEMBER 31,      YEARS ENDED JUNE 30,
                                                     ------------      --------------------
                                                   1996       1995       1996        1995
                                                   ----       ----       ----        ----
<S>                                              <C>         <C>       <C>         <C>
Diagnostic tests ............................    $ 86,781    $57,855   $220,745    $247,553
Generic pharmaceuticals .....................     271,686      --         --          --
                                                 --------    -------   --------    --------
                                                 $358,467    $57,855   $220,745    $247,553
                                                 ========    =======   ========    ========

</TABLE>

 Contract Revenues

    The  Company  had a contract  with the U.S.  Government  which  amounted  to
approximately 32% of total revenues during the year ended June 30, 1994.

 License Fees and Royalties

    During the year ended June 30, 1994, the Company  received  $273,750 in full
satisfaction of all minimum royalties due under an agreement in which it granted
world-wide  licenses to manufacture and sell certain  diagnostic tests.  Revenue
under this agreement was 63% of total revenues for the year ended June 30, 1994.

    In May 1994, the Company  received a  non-refundable  payment of $25,000 for
entering into a letter of intent  relating to a  distribution  agreement for its
MycoDot diagnostic test.

    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.


                                    45



                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)

 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 subsidiary, Able Laboratories, Inc. During the years ended
June 30, 1996, 1995 and 1994, the Company's  continuing  operations consisted of
the  development  and marketing of therapeutic  and diagnostic  products for the
human health care market.  Segment information for the six months ended December
31, 1996 is as follows:


<TABLE>
<CAPTION>
                                                      THERAPEUTICS AND        GENERIC
                                                    DIAGNOSTIC PRODUCTS   PHARMACEUTICALS
                                                    -------------------   ---------------
<S>                                                 <C>                   <C>
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 and deferred
debt financing costs.

12. EMPLOYEE BENEFIT PLAN

    The Company has a Section  401(k) Profit  Sharing Plan (the "401(k)  Plan").
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, 1996.

13. DISCONTINUED OPERATIONS

    The Company sold the assets of its fluid systems consulting  business on May
6, 1994. A summary of the loss on disposal is as follows:

<TABLE>
<CAPTION>
<S>                                                                          <C>
 Net proceeds on sale ..................................................     $153,752

 Book values of assets sold:
   Accounts receivable .................................................      (92,373)
   Recoverable amounts on long-term contracts ..........................      (45,871)
   Property and equipment ..............................................      (28,915)
                                                                              ------- 
 Loss on disposal ......................................................     $(13,407)
                                                                             ======== 
</TABLE>

                                    46


                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

13. DISCONTINUED OPERATIONS -- (Continued)

    A  summary  of the loss from  operations  of the  fluid  systems  consulting
business for the year ended June 30, 1994 is as follows:


<TABLE>
<CAPTION>
<S>                                                                       <C>
Contract revenues .....................................................   $502,057
Contract costs ........................................................    288,480
Selling, general and administrative expenses ..........................    215,115
                                                                           -------
Loss from operations ..................................................   $ (1,538)
                                                                          ======== 
</TABLE>

14. SUBSEQUENT EVENTS

    On January 13, 1997,  $1,065,000  of the  convertible  note (see Note 6) was
exchanged for 989,594 shares of common stock of the Company.

    On January  15,  1997 the Company  granted  warrants  to a public  relations
consultant  to purchase  50,000  shares of common stock at an exercise  price of
$1.97. These warrants are exercisable through January 15, 2002.

    On January 30, 1997, the stockholders  approved an increase in the number of
authorized  shares of common stock from  40,000,000  to 75,000,000  shares.  The
stockholders  also voted to amend the 1991 Stock Plan to increase  the number of
shares of common stock  authorized  for issuance  thereunder  from  1,200,000 to
2,600,000 shares.

    On March 7, 1997, the Company entered into an agreement to acquire the stock
of Superior Pharmaceutical Company ("Superior") of Cincinnati, Ohio. Superior, a
privately-held company,  markets and distributes generic pharmaceutical products
to independent,  retail chain and  institutional  pharmacies.  Superior reported
1996 sales of $32 million with pre-tax income of over $3.0 million.

    Under the terms of the agreement, DynaGen will pay Superior's shareholders a
total of $16.5  million,  consisting  of $6.5  million in cash to be paid at the
closing,  $5 million in three-year  notes and 1,666,666 shares of DynaGen common
stock.  The agreement  provides that the aggregate  value of the DynaGen  common
stock to be issued is to be equal to  $5,000,000.  If at the first  twelve-month
anniversary  of the  closing,  the value of the common stock issued is less than
$5,000,000,  then DynaGen shall deliver to the selling  stockholders  additional
shares  (and cash,  if average  closing bid price is less than $1.50) to satisfy
the deficiency.  The  shareholders may also receive certain  incentive  payments
based on Superior's  performance  during the three years  following the close of
the  transaction.  The successful  completion of the  transaction is subject to,
among  other  closing  conditions,   obtaining   satisfactory  equity  and  debt
financing.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

    At December 31, 1996 and June 30, 1996, the Company's financial  instruments
include  investment  securities  which are  carried  at fair value (see Note 3),
notes  receivable (see Note 8) and a convertible  note payable (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
$2,786,000 and $2,985,000 at December 31, 1996 and June 30, 1996,  respectively,
based on the fair value of the common stock issuable on conversion of the note.

                                    47



                               DYNAGEN, INC.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                  AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
      (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

16. QUARTERLY DATA (UNAUDITED)

    Summaries of operating results on a quarterly basis are as follows:

<TABLE>
<CAPTION>
                         SIX MONTHS ENDED
                           DECEMBER 31,                                   YEARS ENDED JUNE 30,
                           ------------                                   --------------------
                               1996                           1996                                    1995
                               ----                           ----                                    ----
                         SECOND     FIRST     FOURTH    THIRD     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>
Net product sales .....  $   299   $    59   $    70   $    93   $    39   $    19   $    25   $    154  $     41  $     28
License fees and
  royalties ...........        1     --           25        35        25       250     --           250     --        --
                         -------   -------   -------   -------   -------    ------    -------   -------    ------    -------
   Total revenues .....      300        59        95       128        64       269        25        404        41        28
                         -------   -------   -------   -------   -------    ------    -------   -------    ------    ------- 
Cost of sales .........      331        25        22        46        21         8        14         76        24        20
Research and
  development .........      332       760     1,230       852       566       470       420        340       434       524
Selling, general and
  administrative ......    2,166     1,073       616       880       618       571       462        499       588       435
                         -------   -------   -------   -------   -------    ------    -------   -------    ------    -------
   Total costs and
     expenses .........    2,829     1,858     1,868     1,778     1,205     1,049       896        915     1,046       979
                         -------   -------   -------   -------   -------    ------    -------   -------    ------    -------
Operating loss ........   (2,529)   (1,799)   (1,773)   (1,650)   (1,141)     (780)     (871)      (511)   (1,005)     (951)
Other income, net .....        1        21        74        62        57        54        70         69        75        82
                         -------   -------   -------   -------   -------    ------    -------   -------    ------    -------
   Net loss ...........  $(2,528)  $(1,778)  $(1,699)  $(1,588)  $(1,084)  $  (726)  $  (801)   $  (442)  $  (930)  $  (869)
                         =======   =======   =======   =======   =======   ========   =======   =======    ======    ======= 

Net loss per share ....  $  (.09)  $  (.06)  $  (.06)  $  (.06)  $  (.05)  $  (.03)  $  (.04)   $  (.02)  $   (.04) $  (.04)
                         =======   =======   =======   =======   =======   =======   =======    =======   ========  ======= 
Weighted average
  shares outstanding ..   28,972    28,616    27,288    26,062    22,628    21,808    21,195     21,175    21,175    21,175
                         =======   =======   =======   =======   =======   =======   =======    =======   ========  ======= 

</TABLE>


                                    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              43    Chairman of the Board, Executive Vice
                                        President and Director
Dr. Indu A. Muni                  54    President, Chief Executive Officer, Treasurer
                                         and Director
Dr. F. Howard Schneider           57    Senior Vice President -- Technology and
                                         Director
Dr. Ian R. Ferrier(1)(2)          54    Director
Steven Georgiev(1)(2)             63    Director
Dr. Michael Sorell                49    Director
Peter J. Mione                    50    Vice President -- Clinical and
                                         Regulatory Affairs
Theodore A. Olsson                43    Vice President -- Corporate Development


</TABLE>
---------

(1)  Member of the Audit Committee.
(2)  Member of the Executive  Compensation  Committee,  which was established on
     July 24, 1996.

    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.  Since April 1996, Mr. Wadekar has served as a
director of CSL Lighting Manufacturing,  Inc., a publicly traded manufacturer of
high-end lighting  fixtures.  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. 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.


                                       49




    DR. IAN R.  FERRIER.  Dr.  Ferrier  has served as a director  of the Company
since July 1996. In 1982, he founded Bogart Delafield  Ferrier.  Dr. Ferrier has
served as Chief Executive  Officer of Bogart Delafield Ferrier since 1982 and as
Chairman since 1989. He earned a medical  degree from  Edinburgh  University and
specialized in clinical  pharmacology  during  postgraduate  training.  Prior to
founding  Bogart  Delafield  Ferrier,  he held  various  clinical  research  and
management  positions with ICI  Pharmaceuticals,  Kalipharma  Inc., and the Tech
America Group.  He serves as a director on the board of Nastech  Pharmaceuticals
Co., Inc., a publicly  traded  company,  and on the boards of several  privately
held biotechnology and pharmaceutical companies.


    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 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 an 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.

    THEODORE A.  OLSSON.  Mr.  Olsson has served as Vice  President -- Corporate
Development  since  August  1996,  and  initially  served as  Director,  Polymer
Products from November  1993 to August 1996.  Prior to joining the Company,  Mr.
Olsson served as Senior  Consultant and Unit Manager for Arthur D. Little,  Inc.
from July 1990 to November  1993. Mr. Olsson has a Bachelor of Science degree in
Biochemistry from the University of Massachusetts, Amherst.

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.


                                       50




    Based  solely on its review of the copies of such forms  received by it, the
Company  believes  that  during  the  Transition  Period  all of  its  officers,
directors and greater-than-ten  percent  stockholders  complied with all Section
16(a) filing  requirements except for Theodore Olsson. Mr. Olsson, an officer of
the Company, was late in filing his Initial Statement of Beneficial Ownership of
Securities of the  Corporation  on Form 3, which was due on August 30, 1996, and
subsequently filed it on November 6, 1996.

SIGNIFICANT EMPLOYEES

    The  Company  also  relies  on the  services  of the  following  significant
employees:


    SUSAN  BARRETT,  age 41,  has served as  General  Manager  of the  Company's
subsidiary Able Laboratories, since November 1996. Ms. Barrett has over 15 years
of operations,  quality,  and sales and marketing  experience in the multisource
pharmaceutical  industry. From November 1995 to November 1996, Ms. Barrett was a
consultant  to  pharmaceutical  wholesalers  and  manufacturers  in the areas of
quality,  regulatory,  sales  and  marketing  and  strategic  planning.  She was
Director  of Sales  at  Qualitest  Products,  Inc.,  a  privately  held  generic
pharmaceutical distributor and manufacturer,  from May 1995 to November 1995 and
at Alpharma,  Inc.,  a publicly  traded  generic  pharmaceutical  company,  from
January 1993 to April 1995. From March 1991 to December 1992, Ms. Barrett worked
for Zenith Laboratories and was responsible for development of sales strategies.
Ms.  Barrett  has a  Bachelor  of  Science  Degree  from New York  Institute  of
Technology in Industrial Management.

    DR. NICOLAE ISTRATE, age 53, has served as Section Leader,  Immunology since
September 1991 and as Senior Research  Immunologist  for the Company since April
1990, and as a Consultant to the Company for six months prior to that time. From
December  1988 to October  1989,  Dr.  Istrate was the Director of the Hybridoma
Laboratory   for  Cambridge   Medical   Technology   Corporation  of  Billerica,
Massachusetts  where  his  responsibilities  included  the  establishment  of  a
monoclonal  antibody  laboratory and research in diagnostic methods and testing.
From March 1987 to September  1988, Dr. Istrate was Manager of the  Departmental
Laboratory for Swine and Bovine Viral Vaccines in Timisoara,  Romania,  where he
developed  methods for viral diagnosis and viral  vaccines.  Dr. Istrate holds a
Doctorate  Degree in Veterinary  Medicine and a Ph.D. in  Microbiology  from the
Faculty of Veterinary Medicine in Bucharest, Romania.

    DR. SARASWATHY V. NOCHUR, age 37, became Director -- Diagnostic  Products in
February 1994 and previously served the Company 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.

    DENNIS R.  BILODEAU,  CPA, age 39, has served as Controller  for the Company
since July 1992. Prior to joining the Company,  Mr. Bilodeau was a self employed
CPA from January 1992 to July 1992. From May 1990 to December 1991, Mr. Bilodeau
was  a  senior   supervisor  at  Siegfried  and  Associates,   Certified  Public
Accountants.  Mr.  Bilodeau's prior experience  included  positions in financial
management  and public  accounting.  Mr Bilodeau  received a Bachelor  Degree in
accounting from the University of Massachusetts, Amherst.

    CYNTHIA A.  KILEY,  age 36, has served the  Company  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.

                                       51




SCIENTIFIC ADVISORY BOARD

    To  provide  scientific   guidance  to  the  Company's  product  development
programs,  as well as assistance in recruiting employees and collaborators,  the
Company works with a network of experts who serve as consultants to the Company.
Each consultant has entered into a consulting agreement with the Company.  These
consulting  agreements  typically  specify  the  compensation  to be paid to the
consultant  and require that all  information  about the Company's  products and
technology  be  kept  confidential.  Most of the  consultants  are  employed  by
employers  other than the Company and may have  commitments  to or consulting or
advisory agreements with other entities that may limit their availability to the
Company.  The consultants have agreed,  however,  not to provide any services to
any other  entities that might  conflict with the services that they provide the
Company.  Members of the Company's  Scientific Advisory Board offer consultation
on specific issues encountered by the Company.

    The current members of the Scientific Advisory Board are:

    DR. F. HOWARD SCHNEIDER,  Chairman of the Scientific  Advisory Board, Senior
Vice President -- Technology and Director.

    DR. JUDITH K. OCKENE,  Professor of Medicine and Director of the Division of
Preventive and Behavioral  Medicine at the University of  Massachusetts  Medical
School in  Worcester,  MA. Dr.  Ockene  has  served as a member of the  Advisory
Committee  and  Scientific  Editor of Surgeon  General's  Reports on Smoking and
Health.

    DR. LEE B.  REICHMAN,  Director of the New Jersey  Medical  School  National
Tuberculosis Center and Professor of Medicine, Preventive Medicine and Community
Health at the University of Medicine and Dentistry of New Jersey.  Dr.  Reichman
is a leading expert on tuberculosis.

    DR. THOMAS J. RYAN,  Professor of Medicine and former Chief of Cardiology at
The University  Hospital in Boston. Dr. Ryan is a past President of the American
Heart Association.

    DR. SAUL TZIPORI,  Professor  and Division  Head in  Infectious  Diseases at
Tufts University School of Veterinary  Medicine and Professor of Medicine at New
England  Medical Center in Boston.  Dr. Tzipori is a past Associate  Director of
the International Center for Diarrheal Disease Research in Bangladesh.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

    Directors who are not employees of the Company receive 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 may  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 1991 Stock Plan and the 1989 Stock Option Plan. To date,
Mr.  Wadekar  and Dr.  Muni have  received no  options,  and Dr.  Schneider  has
received  options to purchase a total of 310,000 shares of the Company's  Common
Stock under the 1991 Stock Plan and 1989 Stock  Option Plan.  In  addition,  the
Board of Directors  granted to Dr. Ferrier,  Mr. Georgiev and Dr. Sorell options
to purchase  330,000 shares each, which options were granted outside of the 1991
Stock Plan and 1989 Stock Option Plan. The Board of Directors, which administers
the Company's  1989 Stock Option Plan and 1991 Stock Plan,  has a general policy
of  awarding  stock  options at not less than fair  market  value at the date of
grant, and options  generally vest over 2, 3 or 4 years.  During the fiscal year
ended June 30, 1996,  however,  stock options were awarded to Dr.  Schneider and
certain  other  employees  of the  Company at an exercise  price of $.01,  which
options were fully vested on the date of grant.


                                       52



EXECUTIVE COMPENSATION COMMITTEE

    On July 24, 1996, the Board established an Executive Compensation Committee,
of  which  Dr.  Ferrier  and  Mr.  Georgiev  are  the  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.


SUMMARY COMPENSATION TABLE

    The  following  table  sets  forth  information  concerning  the  annual and
long-term  compensation  for services in all  capacities  to the Company for the
Transition  Period and for the fiscal years ended June 30, 1996,  1995 and 1994,
of those persons who were at December 31, 1996 (i) the chief  executive  officer
and (ii) each other executive  officer of the Company whose annual  compensation
exceeded $100,000 (the "Named Officers"):

<TABLE>
<CAPTION>
                                                                                    LONG-TERM      
                                                                                  COMPENSATION(3)  
                                                                                  ---------------- 
                                                                                       AWARDS      
                                                    ANNUAL COMPENSATION(2)        ----------------
                                                    ----------------------            NUMBER OF
                                    FISCAL    SALARY    BONUS     OTHER ANNUAL         OPTIONS/           ALL OTHER
   NAME AND PRINCIPAL POSITION      YEAR(1)     ($)      ($)    COMPENSATION ($)       SARS (#)      COMPENSATION ($)(4)
   ---------------------------      -------     ---      ---    ----------------       --------      -------------------
<S>                                 <C>       <C>        <C>    <C>                <C>               <C>
DR. INDU A. MUNI  ...............   1996A      72,500      --           --               --                    297
  President, Chief Executive        1996      115,500      --           --               --                    304
  Officer and Treasurer
                                    1995      115,500      --           --               --                    304
                                    1994      112,875      --           --               --                    304
DHANANJAY G. WADEKAR  ...........   1996A      72,500      --           --               --                    297
  Chairman of the Board and         1996      115,500      --           --               --                    304
  Executive Vice President
                                    1995      115,500      --           --               --                    304
                                    1994      112,875      --           --               --                    304
DR. F. HOWARD SCHNEIDER .........   1996A      62,833      --           --               --                    297
  Senior Vice President --          1996      115,500      --           --               10,000                304
  Technology
                                    1995      115,500      --           --               --                    304
                                    1994      112,875      --           --            150,000(5)            15,476
</TABLE>


---------
(1) Information regarding the Transition Period is set forth in the row  headed
    "1996A".

(2) Excludes  perquisites  and other  personal  benefits,  the aggregate  annual
    amount of which for each  officer was less than the lesser of $50,000 or 10%
    of the total salary and bonus reported.

(3) The Company did not grant any restricted stock awards or stock  appreciation
    rights  ("SARs") or make any  long-term  incentive  plan payouts  during the
    Transition Period or the fiscal years ended June 30, 1996, 1995 and 1994.

(4) Amount  represents the dollar value of group-term  life  insurance  premiums
    paid by the Company for the benefit of the Named Officer except with respect
    to Dr.  Schneider  in the  fiscal  year  ended  1994 for which the amount is
    comprised of: (i) $15,172 representing  forgiveness from repayment of a loan
    owed to the Company by Dr.  Schneider and (ii) $304  representing the dollar
    value of group-term life insurance premiums paid by the Company.

(5) The  Company  repriced  certain of Dr.  Schneider's  outstanding  options in
    Fiscal 1994 as follows:  Options to purchase  150,000 shares granted in July
    1992 at an exercise  price of $5.25 were canceled in exchange for options to
    purchase  150,000  shares at an exercise  price of $.75 per share,  the fair
    market value of the  Company's  Common Stock on the date of exchange,  April
    27, 1994.


OPTIONS/SAR GRANTS TABLE

    There  were no grants of stock  options  or SARs made to the Named  Officers
during the Transition Period.

                                       53



OPTION EXERCISES AND FISCAL YEAR END VALUES

    Presented  below is further  information  with respect to unexercised  stock
options to purchase the Company's  Common Stock held by each Named Officer as of
December 31, 1996. None of the Named Officers exercised any stock options during
the Transition Period.


<TABLE>
<CAPTION>
                                            NUMBER OF UNEXERCISED          VALUE OF UNEXERCISED
                                               OPTIONS HELD AT           IN-THE-MONEY OPTIONS AT
                                            DECEMBER 31, 1996 (#)         DECEMBER 31, 1996 ($)
                                            ---------------------         ---------------------
                 NAME                    EXERCISABLE   UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
                 ----                    -----------   -------------   -----------    -------------
<S>                                      <C>           <C>             <C>            <C>
Dr. Indu A. Muni .....................       --              --            --              --
Dhananjay G. Wadekar .................       --              --            --              --
Dr. F. Howard Schneider ..............     200,000         60,000        107,400         33,750
</TABLE>

    Stock Plans. The Company  currently  maintains two employee stock plans: the
1989 Stock Option Plan and the 1991 Stock Plan. Each plan is administered by the
Board of  Directors.  The 1991 Stock Plan  currently  provides  for the grant of
incentive stock options,  non-qualified  options,  awards and  authorizations to
purchase up to 2,600,000  shares of Common  Stock.  The terms of options  issued
under the 1991 Stock Plan, including number of shares,  exercise price, duration
and vesting, are generally determined by the Board of Directors. As of April 24,
1997,  options  to  purchase  a total of  786,400  shares of Common  Stock  were
outstanding  under the 1991 Stock Plan, of which options for 342,492 shares were
then exercisable,  and 1,636,900 shares of Common Stock were reserved for future
option grants.

    The 1989 Stock Option Plan provides for the grant of incentive stock options
and  non-qualified  options to purchase up to an aggregate of 600,000  shares of
Common Stock to the Company's  employees,  officers,  directors and consultants.
The terms of such options,  including number of shares, exercise price, duration
and vesting, are generally determined by the Board of Directors. As of April 24,
1997,  options  to  purchase  a total of  208,000  shares of Common  Stock  were
exercisable  and  outstanding  under the 1989 Stock Option Plan and no shares of
Common Stock were reserved for future option grants.


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, and Dr. Schneider,
the Company's Senior Vice President -- Technology.  Dr. Muni's agreement expires
in August 1997,  and Mr.  Wadekar's  and Dr.  Schneider's  agreements  expire in
October 1997. Under the agreements, Dr. Muni, Mr. Wadekar and Dr. Schneider were
paid annual base salaries of $115,500, effective October 1, 1993.

    Effective July 1, 1996, the Executive  Compensation  Committee increased Dr.
Muni and Mr.  Wadekar's  annual  base  salaries  to  $145,000  and  approved  an
arrangement  whereby Dr. Schneider is paid an annual base salary of $116,000 for
a four-day work week.

    In addition,  Dr. Muni, Mr. Wadekar and Dr.  Schneider have each 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,  Mr.  Wadekar's  or Dr.  Schneider's
employment without cause, the Company is obligated to pay to him an amount equal
to three months base salary.



                                       54


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    The  Executive  Compensation  Committee  and  the  Board  of  Directors  are
responsible for determining  compensation for executive officers of the Company.
Drs. Muni and Schneider and Mr. Wadekar serve 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following  table sets forth, as of April 24, 1997,  certain  information
concerning  the ownership of the Company's  Common Stock by: (i) each person who
is  known  by the  Company  to own  beneficially  five  percent  or  more of the
outstanding  shares of the Company's  Common  Stock;  (ii) each of the Company's
directors;  (iii) each  Named  Officer;  and (iv) all  directors  and  executive
officers as a group.  Except as  otherwise  indicated,  to the  knowledge of the
Company,  the persons listed in the table have sole voting and investment powers
with respect to the shares indicated.

<TABLE>
<CAPTION>
                                                                             SHARES       PERCENTAGE OF
                                                                          BENEFICIALLY     OUTSTANDING
                       NAME OF BENEFICIAL OWNER                               OWNED      COMMON STOCK(1)
                       ------------------------                               -----      ---------------
<S>                                                                         <C>          <C>
Dhananjay G. Wadekar  .................................................     1,351,250          4.5%
  99 Erie Street
  Cambridge, Massachusetts 02139
Dr. Indu A. Muni  .....................................................     1,137,250          3.8%
  99 Erie Street
  Cambridge, Massachusetts 02139
Dr. F. Howard Schneider(2)  ...........................................       330,000          1.1%
  99 Erie Street
  Cambridge, Massachusetts 02139
Dr. Ian R. Ferrier  ...................................................             0            0%
  c/o Bogart Delafield Ferrier, Inc.
  North Tower, 5th Floor
  49 Headquarters Plaza
  Morristown, New Jersey 07960
Steven Georgiev  ......................................................             0            0%
  c/o Palomar Medical Technologies, Inc.
  66 Cherry Hill Drive
  Beverly, Massachusetts 01915
Dr. Michael Sorell  ...................................................             0            0%
  115 East 42nd Street
  New York, NY 10128
All Directors and Executive Officers as a group (8 persons)(3)              2,946,500          9.7%

</TABLE>

----------
(1) As of April 24, 1997,  there were 30,114,206  shares of the Company's Common
    Stock  outstanding.  Pursuant to the rules of the  Securities  and  Exchange
    Commission (the "Commission"),  shares of Common Stock that an individual or
    group has a right to acquire on or before  June 23,  1997  (i.e.,  within 60
    days after April 24, 1997) pursuant to the exercise of presently exercisable
    or outstanding options,  warrants or conversion  privileges are deemed to be
    outstanding  for the purpose of computing the  percentage  ownership of such
    individual or group, but are not deemed to be outstanding for the purpose of
    computing the  percentage  ownership of any other person shown in the table.
    Information  with respect to beneficial  ownership is based upon information
    furnished by such stockholder.



                                       55




(2) Includes  260,000 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.

(3) Includes 365,000 shares issuable  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.



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 calender 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.


                                       56





                                  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, 1996 and June 30,
           1996 and 1995

           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. List of Exhibits:

       The following exhibits, required by Item 601 of Regulation S-K, are filed
    as a part  of this  Annual  Report  on Form  10-K.  Exhibit  numbers,  where
    applicable, in the left column correspond to those of Item 601 of Regulation
    S-K.

<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                     ITEM AND REFERENCE
   ---                                     ------------------
   <S>           <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 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 Form S-3 (File No. 333-1748) and incorporated herein by reference).

    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. 333-1748) 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).


</TABLE>

                                       57





<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                     ITEM AND REFERENCE
   ---                                     ------------------
   <S>           <C>
    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 herewith).

    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 herewith).

    4q           -- Common Stock Purchase Warrant issued by Registrant to Rich Theriault dated December
                    10, 1996 (filed herewith).

    4r           -- Common Stock Purchase Warrant issued by Registrant to Shawn Basu dated December
                    10, 1996 (filed herewith).

    4s           -- Common Stock Purchase Warrant issued to Leonardo G. Zangani dated January 15,
                    1997 (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 herewith).

   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).


</TABLE>



                                       58



<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                     ITEM AND REFERENCE
   ---                                     ------------------
   <S>           <C>
   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).

   10g*          -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
                    to Dr. Ian Ferrier (filed as Exhibit 10g to Registrant's Annual Report on Form
                    10-K for the fiscal year ended June 30, 1996, and incorporated by reference).

   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).
</TABLE>


                                       59



<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                     ITEM AND REFERENCE
   ---                                     ------------------
   <S>           <C>
   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).

   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
                    10 w 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 herewith).

   21            -- Subsidiary of the Registrant (filed herewith).

   23a           -- Consent of Wolf & Company, P.C. dated April 29, 1997 (filed herewith).

   24a           -- Power of Attorney is contained on page 61 of this Annual Report on Form 10-K.

   27            -- Financial Data Schedule (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,
1996.

    (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.

                                       60




                                   SIGNATURES


    PURSUANT  TO THE  REQUIREMENTS  OF  SECTION  13 OR 15(D)  OF THE  SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT 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 30, 1997.


                                  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,  DR. INDU A. MUNI AND  JOHN M. HESSION,  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
                  ----                                    --------                       ----
       <S>                                 <C>                                      <C>
        /s/ DHANANJAY G. WADEKAR            Chairman of the Board, Executive        April 30, 1997
---------------------------------------        Vice President and Director
          DHANANJAY G. WADEKAR               

        /s/ DR. INDU A. MUNI                President, Chief Executive Officer,     April 30, 1997
---------------------------------------        Treasurer, (Principal Executive, 
            DR. INDU A. MUNI                   Financial and Accounting Officer)
                                               and Director                     
                                               
        /s/ DR. F. HOWARD SCHNEIDER         Senior Vice President -- Technology     April 30, 1997
---------------------------------------        and Director 
         DR. F. HOWARD SCHNEIDER               

                                            Director                                April 30, 1997     
---------------------------------------
             STEVEN GEORGIEV                

        /s/ DR. IAN R. FERRIER              Director                                April 30, 1997
----------------------------------------
           DR. IAN R. FERRIER

                                            Director                                April 30, 1997
----------------------------------------
           DR. MICHAEL SORELL               


</TABLE>

                                       61