<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                                  FORM 10-K/A
    
   
                          AMENDMENT NO. 3 TO FORM 10-K
    
 
                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                       OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
       FOR THE TRANSITION PERIOD FROM                TO                .
 
                         COMMISSION FILE NUMBER 1-11352
 
                                 DYNAGEN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      04-3029787
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
 
840 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS                       02139
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
                                 (617) 491-2527
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
               TITLE OF CLASS                               ON WHICH REGISTERED
               --------------                              ---------------------
<S>                                            <C>
        COMMON STOCK, $.01 PAR VALUE                       BOSTON STOCK EXCHANGE
  REDEEMABLE COMMON STOCK PURCHASE WARRANTS                BOSTON STOCK EXCHANGE
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                 TITLE OF CLASS
                                  -----------
 
                          COMMON STOCK, $.01 PAR VALUE
 
                   REDEEMABLE COMMON STOCK PURCHASE WARRANTS
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X] NO [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[X]
 
     As of June 1, 1998, 19,724,245 shares of the registrant's common stock,
$.01 par value ("Common Stock"), were issued and outstanding. The aggregate
market value of the registrant's voting stock held by non-affiliates of the
registrant as of June 1, 1998, based upon the closing price of such stock on the
Nasdaq Stock Market's SmallCap Market ("Nasdaq") on that date (approximately
$0.51) was $10,059,365.
 
   
     Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, the
Registrant hereby amends its Annual Report on Form 10-K for the year ended
December 31, 1997 by amending and restating Items 6, 7 and 8 in their entirety
as follows:
    
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<PAGE>   2
 
   
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. The Company acquired certain assets of Able Laboratories, Inc. on August
19, 1996 and acquired Superior Pharmaceutical Company on June 18, 1997. These
acquisitions affect the comparability of the data presented below, in that the
results of Able and Superior are included after the respective acquisition
dates. The acquisitions were accounted for as purchases. See Note 2 to the
Financial Statements, entitled "Business Acquisitions."
 
   
<TABLE>
<CAPTION>
                                          TRANSITION
                                            PERIOD
                                             ENDED
                            YEAR ENDED     DECEMBER                     YEARS ENDED JUNE 30,
                           DECEMBER 31,       31,       -----------------------------------------------------
                               1997          1996          1996          1995          1994          1993
                           ------------   ----------       ----          ----          ----          ----
<S>                        <C>            <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS
  DATA:
Revenues.................  $ 14,009,730   $   359,908   $   555,745   $   497,553   $   437,005   $   883,910
Costs and Expenses.......    24,087,512     4,687,745     5,899,650     3,836,295     4,264,141     4,388,575
Loss From Continuing
  Operations.............   (12,241,278)   (4,306,140)   (6,082,494)   (3,042,383)   (3,645,804)   (3,405,387)
Loss From Discontinued
  Operations.............            --            --            --            --       (14,945)      (48,095)
Net Loss.................   (12,241,278)   (4,306,140)   (6,082,494)   (3,042,383)   (3,660,749)   (3,453,482)
Less returns to preferred
  stock including benefi-
  cial conversion
  features...............     2,108,000            --       865,000            --            --            --
Net loss applicable to
  common stock...........   (14,349,278)   (4,306,140)   (6,947,494)   (3,042,383)   (3,660,749)   (3,453,482)
Loss Per Share:
  From Continuing
     Operations..........         (4.48)        (1.50)        (2.84)        (1.44)        (2.21)        (2.64)
  From discontinued
     Operations..........                          --            --            --            --            --
  Net Loss...............         (4.48)        (1.50)        (2.84)        (1.44)        (2.21)        (2.64)
Weighted Average Number
  of Shares
  Outstanding............     3,204,163     2,879,412     2,443,395     2,117,970     1,651,712     1,307,056
</TABLE>
    
 
                                       19
<PAGE>   3
 
   
<TABLE>
<CAPTION>
                               AT             AT                             AT JUNE 30,
                          DECEMBER 31,   DECEMBER 31,   -----------------------------------------------------
                              1997           1996          1996          1995          1994          1993
                          ------------   ------------      ----          ----          ----          ----
<S>                       <C>            <C>            <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Total Assets............  $ 29,348,114   $ 7,463,149    $11,576,666   $ 5,114,021   $ 7,834,706   $ 5,602,289
Convertible Note Paya-
  ble...................       535,000     1,600,000      2,000,000            --            --            --
Long term debt..........       328,500            --             --            --            --            --
Warrant put liability...       750,594            --             --            --            --            --
Total Liabilities.......    26,723,486     2,409,133      2,733,032       587,207       420,964       441,171
Working Capital (Defi-
  cit)..................   (11,711,296)    5,502,295     10,203,693     4,102,747     6,967,894     4,584,747
Stockholders' Equity....     2,624,628     5,054,016      8,843,634     4,526,814     7,413,742     5,161,118
</TABLE>
    
 
   
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
 
     Note: The information set forth below should be read in connection with the
financial statements and notes thereto, as well as other information contained
in this Report which could have a material adverse effect on the Company's
financial condition and results of operations. The reader's attention is
directed, in particular, to the matters described under the headings "Special
Considerations" and "Risk Factors" contained elsewhere in this Report.
 
OVERVIEW
 
   
     The Company develops and markets proprietary and generic therapeutic and
diagnostic products for the human health care market. The Company has begun
expanding its business focus from being a development and licensing company to
building a diversified health care company focused on the manufacture and
distribution of generic drug products and specialty pharmaceuticals as well as
the continued development of therapeutic and diagnostic products. The Company
intends to implement this strategy through the acquisition of businesses,
technologies and products that the Company believes are undervalued as well as
through internal product development. In August 1996, the Company acquired the
tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical
product subsidiary of Alpharma, Inc. In addition, the Company has purchased all
of the outstanding shares of Superior Pharmaceutical Company ("Superior"), a
distributor of generic pharmaceuticals. In March 1998, the Company, through its
wholly-owned subsidiary Generic Distributors, Incorporated ("GDI"), completed
the acquisition of Generic Distributors Limited Partnership.
    
 
     The Company has financed its operations primarily through the proceeds from
its public and private stock offerings, a convertible note, back debt and other
loans and limited revenues from product sales and technology license fees and
royalties. Management anticipates that revenues from product sales will not be
sufficient to fund its current operations or produce an operating profit until
such time as the Company is able to establish acceptance of its products in
their respective markets and expand its distribution channels. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
 
  Results of Operations
 
  Year Ended December 31, 1997 as Compared with the Six-Month Period Ended
December 31, 1996
 
   
     Revenues for the year ended December 31, 1997 were $14,009,730 versus
$359,908 for the six-month Transition Period ended December 31, 1996. This
increase of $13,649,822 is primarily the result of product sales by the
Company's wholly-owned generic pharmaceutical subsidiaries, Able (acquired in
August 1996) and Superior (acquired in June 1997). During the six-month
Transition Period ended December 31, 1996, the Company was primarily a research
and development company with limited revenues. The Company's revenues for the
Transition Period were derived primarily from the post-acquisition product sales
by Able.
    
 
                                       20
<PAGE>   4
 
     Cost of product sales was approximately 95% of product sales for the year
ended December 31, 1997 due to low production and sales levels at Able which did
not support the fixed manufacturing costs of the Able facility. Cost of product
sales for Superior for the period since acquisition was approximately 81%.
During the six-month Transition Period ended December 31, 1996, the cost of
sales was 99% of product sales, again reflecting extremely low utilization of
Able's manufacturing capacity.
 
     Research and development expenses for the year ended December 31, 1997 were
$3,220,283 versus $1,092,253 for the six-month Transition Period ended December
1996. 1997 R&D expenses were primarily the result of the NicErase-SL Phase 3
clinical trials, now concluded, and the NicErase-SL development program which
has been discontinued. The Company is also developing several generic versions
of branded pharmaceuticals to support its generic drug business.
 
     Selling, general and administrative expenses for the year ended December
31, 1997 were $7,611,578 versus $3,239,180 for the six-month Transition Period
ended December 31, 1996. 1997 expenses were primarily attributable to
acquisition and business development costs, compensation expense of $801,034
recognized from the issuance of stock options and warrants, and the inclusion in
1997 of selling, general and administrative expenses of the Company's subsidiary
operations at Able and Superior.
 
     Investment income was $120,359 for the year ended December 31, 1997 as
compared to $157,788 for the six-month Transition Period ended December 31,
1996, as the Company had less funds available for investment. Interest and
financing expenses of $2,283,855 for the year ended December 31, 1997, compared
to $136,091 for the six-month Transition Period ended December 31, 1996, relate
primarily to private placements of equity as well as private debt financing for
the Superior acquisition.
 
  Six-Month Transition Period Ended December 31, 1996 Compared with the
Six-Month Period Ended December 31, 1995
 
  Revenues
 
     Revenues for the six month period ended December 31, 1996 (the "Transition
Period") were $360,000 versus $333,000 for the six months ended December 31,
1995. This increase of $27,000 is a result of an increase in Able product sales
partially offset by a decrease in fee revenue which was due to one-time fees
from Bristol-Meyers Products recognized during the six months ended December 31,
1995. The increase in product sales resulted from the Company realizing sales
from its Able subsidiary since its acquisition on August 19, 1996. The Company's
product sales also increased due to improved diagnostic products sales.
 
  Cost of Sales
 
     Cost of sales was 99% of product sales for the Transition Period compared
with 50% for the six months ended December 31, 1995. Tablet and suppository
production at Able during the Transition Period did not support the minimum
level of fixed manufacturing costs required at the facility. Management expects
that the cost of product sales, as a percentage of sales, will decrease as sales
orders and production volumes increase.
 
  Research and Development Expenses
 
     Research and development expenses for the Transition Period were $1,092,000
versus $1,037,000 for the six months ended December 31, 1995, an increase of
$55,000. This increase is primarily attributable to costs associated with the
ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a
510(k) application with the U.S. Food and Drug Administration for its
NicCheck(R) product. The Company is also conducting early stage research on a
bacterial extract for the treatment of infectious diseases.
 
  Selling, General and Administrative Expenses
 
     Selling, general and administrative expenses for the Transition Period were
$3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an
increase of $2,050,000. The increase in selling, general and administrative
expenses is primarily due to additional payroll and plant operating costs of
approximately $793,000 resulting from the acquisition of Able. In addition, the
Company incurred additional costs of approximately $865,000 for the use of
business consultants to develop, seek and obtain alliances for certain
 
                                       21
<PAGE>   5
 
Company products, potential products and financial development. The Company
incurred additional costs of approximately $80,000 towards patent applications
for several of its products. Legal expenses increased by approximately $106,000
primarily related to assistance with technology licensing, pending acquisitions
and corporate regulatory filings. The remainder is due to a net increase in
other operating expenses.
 
  Other Income (Expense)
 
     Investment income increased by $46,000 from $112,000 to $158,000 for the
Transition Period as compared to same period ended December 31, 1995. The
Company had greater funds available for investment during the Transition Period
compared to the six months ended December 31, 1995.
 
     The Company incurred interest expense of $74,000 and amortized debt
financing costs of $62,000 during the Transition Period, both associated with
the $2,000,000 convertible note issued in 1996.
 
  Income Taxes
 
     There were no provisions for income taxes for the Transition Period and the
six months ended December 31, 1995 due to operating losses incurred by the
Company and valuation reserves applied against deferred tax assets. As of
December 31, 1996 and December 31, 1995, for Federal and state income tax
reporting purposes, the Company had net operating loss carry forwards of
approximately $23,460,000 and $19,270,000 respectively. In addition, the Company
had Federal and state research tax credit carry forwards of approximately
$583,000 and $120,000, respectively, available to reduce future tax liabilities.
 
  Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
 
  Revenues
 
     Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000
versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase
of $58,000 is a result of an increase in license fees of $85,000 offset by a
$27,000 decrease in product sales. The increase in license fee revenue is
attributable to one-time license fees received under distribution arrangements
for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec
product sales remained consistent between Fiscal 1996 and Fiscal 1995. The
decrease in total product sales resulted from lower shipments of other products
in Fiscal 1996.
 
  Cost of Sales
 
     Cost of product sales was 44% of net product sales in Fiscal 1996 compared
to 54% in Fiscal 1995. This decrease in the cost of sales percentage is
primarily attributable to a reallocation of certain manufacturing staff to
product marketing and support roles.
 
  Research and Development Expenses
 
     Research and development expenses were $3,118,000 for Fiscal 1996 versus
$1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is
primarily due to approximately $1,200,000 in additional therapeutic product
development costs and $285,000 in compensation expense resulting from stock
grants. The increase in therapeutic development is mainly attributable to the
initiation of the first of two planned pivotal Phase 3 clinical trials for the
Company's NicErase-SL smoking cessation product.
 
     The increase in research and development expenses was partially offset by a
decrease in diagnostic product development costs of $74,000. The Company has
limited diagnostic product development primarily to NicCheck, a test to detect
the presence of nicotine.
 
  Selling, General and Administrative Expenses
 
     Selling, general and administrative expenses for Fiscal 1996 were
$2,685,000 versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling,
general and administrative expenses increased in the following areas: staffing
-- $355,000, investor relations -- $165,000, consulting -- $111,000 and legal --
$62,000. The increase in investor relations expenses is attributable to a new
program designed to inform investors on corporate developments and strategy.
Legal expenses increased primarily for assistance with certain licensing
arrange-
 
                                       22
<PAGE>   6
 
ments, 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 primarily attributable to the $985,000
beneficial conversion discount on the Company's $2,000,000 convertible note
issued in 1996.
    
 
  Income Taxes
 
     There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995
due to operating losses incurred by the Company and valuation reserves applied
against deferred tax assets.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     As of December 31, 1997, the Company had a working capital deficit of
$11,711,296, compared to working capital of $5,502,295 at December 31, 1996.
Cash and investment securities were $697,045 at December 31, 1997 compared to
$5,117,000 at December 31, 1996. Working capital decreased primarily as a result
of the Company's operating losses including approximately $2,900,000 of
operating losses of its Able subsidiary, the accrual of a current liability in
the amount of approximately $4,000,000 relating to an acquisition obligation
associated with the Superior acquisition and the classification of long-term
debt obligations as to which covenant defaults have occurred as current
liabilities. The Company expects its cash needs for the next 12 months to be
approximately $7,000,000. Of this amount, approximately $3,000,000 is expected
to be general and administrative and approximately $4,000,000 is expected to be
for working capital. The Company expects to generate the needed cash through
additional financing activities. If the Company is not able to raise the needed
financing, it may need to seek the protection of the bankruptcy courts. See
"Special Considerations -- Financial Condition of the Company" and "Risk
Factors -- Financial Condition".
 
     In June 1997, the Company completed the acquisition of Superior
Pharmaceutical Company, of Cincinnati, Ohio, for an adjusted purchase price of
$15.9 million in cash, notes and stock. The Company guaranteed that the selling
shareholders would receive at least $5,000,000 in the stock value as of June
1998. The agreement provides that the Company will make up any shortfall in this
guaranteed stock value through the issuance of additional stock and cash. The
Company is currently trying to renegotiate its obligations to the selling
shareholders of Superior. No assurance can be given that the Company will be
successful in this effort. If the Company is not able to renegotiate these
obligations, it may need to seek the protection of the bankruptcy courts. See
"Special Considerations -- Financial Condition." Superior markets and
distributes generic prescription and over-the-counter pharmaceuticals to
independent, chain and institutional pharmacies throughout the United States.
The Company financed this acquisition by issuing Series A and Series B Preferred
Shares which yielded $6,100,000 and subordinated debt of $3,000,000 obtained
from two institutional lenders. The Company also invested $1,500,000 in Superior
towards working capital as required by the secured lender. Superior has a
$9,000,000 secured revolving facility through Huntington National Bank, of
Cincinnati, Ohio.
 
     Furthermore, subsequent to the acquisition of Superior in June 1997,
Superior experienced loss of key personnel, declining revenues, erosion of
margins and an overall decline in its business. A number of key personnel at
Superior were recruited by competitors immediately after the acquisition. The
Company believes that these individuals may have felt uncertain about their
future under new management and were unwilling to accept assurances that their
positions were secure. While the Company made efforts to retain key employees,
some expressed doubt as to the Company's commitment and its financial viability
and elected to pursue other opportunities. Since several of these employees were
responsible for key functions such as purchasing products at most competitive
prices, managing the sales force and bidding on corporate and federal contracts,
their departure had a direct negative impact on Superior's sales and margins.
This caused an overall decline in the results of Superior's operations after the
acquisition, and resulted in the Company not meeting certain loan covenants
stipulated by the secured and subordinated lenders. As a result, the secured
lender has agreed to
 
                                       23
<PAGE>   7
 
   
extend the credit line that matured in April 1998 for 60 days and, upon review
of the Company's performance, may consider further extension. The Company
obtained a waiver and extension of the third quarterly payment of $515,625 to
the selling shareholders which was due on March 31, 1998. The agreement provides
that the selling shareholders of Superior may draw this payment out of its
operating cash flows provided that Superior and DynaGen meet the loan covenants.
The Company has also received an extension on the payment of the $535,000 note
which matured on February 7, 1998.
    
 
   
     The Company has begun initial discussions with the selling shareholders of
Superior to renegotiate the acquisition obligation related to the guaranteed
stock value of $5,000,000 as of June 1998. The Company, pursuant to the terms of
the purchase and sale agreement, is required to issue a certain number of shares
which at current stock prices will satisfy approximately $917,000 of this
obligation. The balance of $4,083,000 has been accrued as a current liability at
December 31, 1997. While these discussions have been positive, there is no
assurance that the parties will come to an agreement or that such an agreement,
if reached, will be on terms favorable to the Company. Failure to reach an
agreement will result in further defaults on the Company's loan covenants and
may allow the selling shareholders certain rights under the purchase and sale
agreement, including but not limited to the pledge of all of Superior's shares.
While neither the selling shareholders nor the secured lender nor the
subordinated lender have informed the Company of their intentions to exercise
their rights under various agreements, there is no assurance that the Company
will successfully renegotiate the covenants, come in compliance with the
existing or proposed covenants and reclassify its obligations as either
long-term debt or equity. In such circumstances, the Company will continue to
show substantial working capital deficit and continue to be in default of its
agreements. If the Company is not able to renegotiate the selling shareholders
of Superior or renegotiate or meet its obligations to Huntington National Bank,
the Company may need to seek the protection of the bankruptcy courts.
    
 
     The Company continues to operate its Able Laboratories, Inc. manufacturing
facility for manufacture and distribution of generic drugs. In March 1997, the
Company entered into an agreement with Kali Laboratories for development and
clinical testing of certain prescription pharmaceuticals. Under this agreement,
Kali would be reimbursed for its development efforts on a milestone basis and
receive royalties from the sale of the products. Able has a working capital
deficit and management expects Able will require approximately $4,000,000 in the
next 12 months to continue operations. No assurance can be given that such
financing will be available upon reasonable terms. If the Company cannot obtain
sufficient financing or otherwise meet Able's requirements, the Company may be
required to close that operation or seek protection of the bankruptcy courts.
 
     The Company's private placement of Series A and Series B Preferred Shares
allowed investors to convert into shares of common stock at a floating discount
to the market of approximately 25%. This investment, along with the outlicensing
of the Company's lead product, NicErase-SL, and continued losses at both DynaGen
and Able, resulted in a severe negative impact on the Company's stock price. The
stock price was further depressed due to below-market conversions and selling of
common shares by the holders of Series A and Series B Preferred Shares. As a
result, the Company reached its limit of 75,000,000 authorized shares. On March
4, 1998, the Company held a special meeting of stockholders and approved a one
for ten reverse split of its outstanding share. As a result, at the effective
date of the reverse split, March 10, 1998, 75,000,000 shares of common stock,
$0.01 par value per share, were authorized, and approximately 7,500,000 were
issued and outstanding. As of March 31, 1998, there were 14,667,951 shares of
Common Stock outstanding. This increase is due to conversions of preferred
stock.
 
   
     Management has initiated intensive reviews of its operations and is
implementing plans to cure covenant defaults, raise additional equity, and
improve the liquidity and cash resources for general working capital purposes.
Specifically, at the corporate level, the Company has discontinued all R&D
activity either through terminating the programs or outlicensing the products to
other companies. The Company's lead product to date, NicErase-SL, has been
licensed to Nastech Pharmaceutical, of Hauppauge, NY. The Company has reduced
its workforce by approximately 40 employees through termination and attrition.
The Company is also negotiating to sublease all or part of its current
facilities in Cambridge, MA to further reduce its overhead expenses. In 1998,
management expects to maintain a skeleton staff of approximately seven full-time
and four part-time employees to manage the corporate functions of the Company.
Management is also actively reviewing every cost center for further optimization
and cost reductions.
    
                                       24
<PAGE>   8
 
   
     In November 1997, the Company initiated the same measures at its Able
manufacturing facility. The Company has reduced its workforce by 50 percent
through terminations and attrition. Management has actively initiated programs
to increase sales of its products to existing customers and is seeking to bring
back customers it has lost over the past two years. The Company is also
renegotiating its development agreement with Kali Laboratories to minimize
further cash outlays for product development. The Company has also received
offers from two service contractors for clinical testing in return for deferred
compensation, warrants and royalty payments on new products. The Company has
also initiated a modest internal R&D program at Able to develop prescription
drugs which do not require FDA approval. These "grandfathered" products are
expected to generate revenues by December 1998. Management expects that given
the capital resources, the operations at Able Laboratories could increase sales
and result in marginal losses beginning in the year 1999.
    
 
   
     Management in conjunction with key personnel at Superior has implemented a
program to reverse the decline in the general business of the Company. Specific
actions taken at Superior include recruitment of key personnel; optimization of
the product line reducing the number of different items or stock keeping units
("SKUs") in its inventory, reducing the number of vendors suppling same or
similar items and updating the price list to reflect costs of inventory items;
reduction in the G&A expenses; and an aggressive program to seek competitive
business in both the government as well as corporate sectors. Superior is also
negotiating with its primary vendors' supply agreements on favorable terms which
will improve the gross margins and make Superior more competitive in the
marketplace.
    
 
   
     To date, the Company has met substantially all of its requirements for
capital through the sale of its securities. The negative impact of the events in
1997 has therefore severely limited the Company's ability to raise further
capital in a conventional sale of its securities. The Company plans to raise
capital in order to finance the working capital requirements. There can be no
assurance that the Company will be able to secure additional financing or that
such financing will be available on favorable terms. Specifically, the Company
has entered into an agreement with an investment banker to locate sources of
financing. Management believes that any financing which will create short-term
supply or additional common shares in the market would only result in further
depression of the price of the Common Stock, making it even more difficult to
raise capital. Therefore, the Company intends to seek financing primarily from
those sources who will be long-term investors. In view of the Company's current
stock price and its financial condition, it is exceedingly difficult to find
such investors. However, the Company has had limited and preliminary discussions
with investors and to date has issued $350,000 of Series H Preferred Stock
pursuant to this arrangement. The Series H Preferred Stock is convertible into
Common Stock beginning 12 months from date of issuance. The Company is
attempting to obtain additional interim short-term financing over the next
several weeks. The Company plans to use the interim financing if any is
obtained, for general working capital, partial payment to the creditors and the
limited internal research and development program at Able. If the Company cannot
raise such financing, it may be forced to seek the protection of the bankruptcy
courts. See "Special Considerations" and "Risk Factors -- Financial Condition."
    
 
     The Company is also pursuing additional sources of capital for the
long-term needs of the Company. The Company has engaged a merchant banking firm
to seek direct investments into its subsidiaries, specifically Able
Laboratories, in return for equity and royalties. There is no assurance that
such financing will be available, and if available will be on terms favorable to
the Company. Furthermore, management has evaluated proposals which may include
raising additional capital through the sale of registered securities. The
Company has filed a registration statement on Form S-3 for the sale of Series D
Convertible Preferred Shares. The registration statement has not been declared
effective. The Company expects to raise substantial additional capital through
this arrangement. If the Company cannot raise such financing, it may be forced
to seek the protection of the bankruptcy courts. See "Special Considerations"
and "Risk Factors -- Financial Condition."
 
     The Company has also been working with its trade creditors to reduce its
obligations. A substantial majority of the creditors have accepted the Company's
payments plans, which include periodic payments, discounts of amounts
outstanding, and acceptance of Company shares.
 
                                       25
<PAGE>   9
 
   
YEAR 2000 COMPLIANCE
    
 
   
     Certain computer programs and microprocessors use two digits rather than
four to define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" as the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its sales,
administration, and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's systems will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
    
 
                                  RISK FACTORS
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including but not limited to, statements
contained in "Item 1. Business" relating to the Company's strategy with respect
to the development and marketing of the Company's products and to statements
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form 10-K,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
 
     The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
 
   
     Financial Condition.  For the year ended December 31, 1997, the Company
incurred net losses of approximately $12,241,278. For the three months ended
March 31, 1998, the Company incurred net losses of approximately $1,679,062. As
of March 31, 1998, the Company had approximately $440,643 in cash and cash
equivalents and a net worth of $3,172,810. The Company's current liabilities, as
of December 31, 1997, aggregated approximately $25,644,392. The Company expects
its cash needs for the next twelve months to be approximately $7,000,000. The
Company does not presently have adequate cash from operations to meet these
needs. In order to meet its needs for cash to fund its operations, the Company
must obtain additional financing and renegotiate the terms of its current
arrangements with creditors. The Company is presently in default under a number
of its arrangements, agreements and instruments with creditors, with the result
that the Company's obligations under such agreements and instruments may be
accelerated. If the Company is unable to obtain significant additional financing
or to renegotiate its arrangements with existing creditors, it may be obliged to
seek protection from its creditors under the bankruptcy laws. See "Special
Considerations -- Company's Common Stock May Be Delisted From Nasdaq Stock
Market; "Management's Discussion and Analysis -- Liquidity and Capital
Resources"; and the financial statements and notes thereto included as part of
this Report.
    
 
                                       26
<PAGE>   10
 
     Ability to Continue As A Going Concern.  The Company's independent auditors
have issued an opinion on the financial statements of the Company, as of
December 31, 1997 and for the year then ended which includes an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern. Among the reasons cited by the independent auditors as
raising substantial doubt as to the Company's ability to continue as a going
concern are the following: the Company has incurred recurring losses from
operations resulting in an accumulated deficit and a working capital deficiency
at December 31, 1997. In addition, the Company has debt obligations which are in
default and a liability in connection with its acquisition of Superior
Pharmaceutical Company, and the equity of Superior Pharmaceutical Company is
restricted under the terms of Superior's loan agreement. These circumstance
raise substantial doubt about the Company's ability to continue as a going
concern. If the Company is unable to secure significant additional financing or
to renegotiate its agreements with its existing creditors, it may be obliged to
seek protection from its creditors under the bankruptcy laws. See "Special
Considerations -- Company's Ability to Continue As A Going Concern";
"Management's Discussion and Analysis -- Liquidity and Capital Resources"; and
the financial statements and notes thereto included as part of this Report.
 
     Common Stock Subject to Delisting From Nasdaq SmallCap Market.  The Company
has received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that it does
not meet the applicable listing requirements and that the Company's Common Stock
is therefore subject to delisting. The Company has elected to exercise its right
to a written hearing to contest the delisting of its securities in accordance
with Nasdaq's procedures. The Company does not meet the Nasdaq listing
requirements. Although Nasdaq has the discretion to grant exceptions to the
listing requirements, there is no assurance that it will do so in the Company's
case. The Company anticipates that, if its Common Stock is delisted from the
Nasdaq SmallCap Market, it will continue to trade on the Boston Stock Exchange
and may also be quoted on the OTC Bulletin Board. However, delisting of the
Company's Common Stock from the Nasdaq SmallCap Market could have a material
adverse effect on the liquidity of the Common Stock and on the Company's ability
to raise capital necessary for the Company's continued operations. See "Special
Considerations -- Company's Common Stock May Be Delisted From Nasdaq Stock
Market."
 
   
     History of Losses; Anticipation of Future Losses.  The Company has incurred
operating losses since its inception and has an accumulated deficit of
$37,541,544 as of December 31, 1997. The Company incurred a net loss of
$1,679,062 for the quarter ended March 31, 1998, a net loss of $12,241,278 for
the year ended December 31, 1997, a net loss of $4,306,140 for the six months
ended December 31, 1996, and a net loss of $1,809,816 for the six months ended
December 31, 1995. The Company incurred a net loss of $6,082,494 for the fiscal
year ended June 30, 1996, compared with a net loss of $3,042,383 for the fiscal
year ended June 30, 1995. Such losses have resulted principally from expenses
incurred in research and development and from general and administrative costs
associated with the Company's development efforts. In addition, the Company's
Able subsidiary has incurred operating losses resulting primarily from
insufficient revenues. The continued development of the Company's products will
require the commitment of substantial resources to conduct further development
and preclinical and clinical trials, and to establish manufacturing, sales,
marketing, regulatory and administrative capabilities. The Company expects to
incur substantial operating losses over the next several years as its product
programs expand, various clinical trials commence and marketing efforts are
launched. The amount of net losses and the time required by the Company to reach
sustained profitability are highly uncertain, and to achieve profitability the
Company must, among other things, successfully complete development of its
products, obtain regulatory approvals, and establish manufacturing and marketing
capabilities by itself or with third parties. There is no assurance that the
Company will ever generate substantial revenues from its proprietary and generic
products or achieve profitability.
    
 
     Future Capital Needs; Uncertainty of Additional Funding.  It is anticipated
that the Company will continue to expend significant amounts of capital to fund
its research and development, clinical trials and generic pharmaceutical
business and future acquisitions, if any. The Company's available working
capital is inadequate for completion of the Company's development programs, and
additional financing will be necessary for the continued support of the
Company's proposed products and operations, including the establishment of
manufacturing, marketing and distribution capabilities for its proposed products
and the continued operations of Able, Superior and GDI. There can be no
assurance that the Company will be able to secure additional
 
                                       27
<PAGE>   11
 
financing or that such financing will be available on favorable terms. If the
Company is unable to obtain such additional financing, the Company's ability to
maintain its current level of operations would be materially and adversely
affected and the Company will be required to reduce or eliminate its
expenditures relating to its business.
 
     Risks Associated with Subsidiary Operations.  The Company's results of
operations depend to a large degree upon the performance of its subsidiaries,
including its recently acquired subsidiaries Able, Superior and GDI. In its role
as a holding company with respect to these subsidiaries, the Company is
dependent on dividends or other intercompany transfers for funds from the
subsidiaries to meet the Company's obligations. Agreements between the Company
and certain of its creditors restrict the Company's ability to cause its
subsidiaries to make such dividends or other intercompany transfers. Claims of
creditors of the Company's subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims of
the Company and the holders of the Company's indebtedness.
 
   
     Contingent Obligations with Respect to Superior Acquisition.  The Company
used a combination of cash, a note and 166,667 shares of Common Stock (after
giving effect to a one-for-ten reverse split of the common stock outstanding) to
acquire Superior in June 1997. The Agreement and Plan of Merger for the Superior
acquisition provides that the Company is also obligated to issue to the former
stockholders of Superior up to an additional 1,666,667 shares of Common Stock if
on June 18, 1998 the Common Stock has not had an average closing bid price of at
least $30.00 per share for the 10 previous trading days. The merger agreement
provides further that DynaGen shall pay to the former Superior stockholders in
immediately available funds the difference between $5,000,000 and the then
current aggregate market value of all shares issued to the former Superior
stockholders. If the Common Stock continued to trade at its present price of
approximately $0.50 per share, the Company would become obligated to pay
approximately $4,083,000 in cash to the former stockholders of Superior. There
can be no assurance that the market value of the Common Stock issued to the
former Superior stockholders will be $5,000,000 or greater as of June 18, 1998
or that the Company will have the ability to meet any future obligation to pay
cash to the former Superior stockholders. The Company's inability to meet any
such obligation or other fixed or contingent obligations of the Company as they
become due could have a material adverse effect on the Company's ability to
continue its operations.
    
 
     Uncertainties Related to NicErase.  Under applicable law, the Company's
current or future licensees will not be permitted to sell NicErase, and thus
generate any revenue from their development of NicErase, unless they obtain the
necessary regulatory approvals from the FDA for the commercial sale of that
product. To obtain such regulatory approvals, the Company's current or future
licensees must demonstrate to the satisfaction of the FDA, through preclinical
studies and clinical trials, that NicErase is safe and effective. In light of
the Company's recently completed pivotal Phase 3 clinical trial of NicErase-SL,
which did not show statistically significant efficacy, the Company is unable to
predict whether delivery formulations of lobeline other than sublingual will
demonstrate acceptable safety and efficacy to obtain FDA approval. There can be
no assurance that the Company's current or future licensees will be able to
successfully formulate new delivery systems for lobeline, that such licensees
will have sufficient technological or financial resources to initiate and
complete the required clinical trials, or that such trials will demonstrate
sufficient safety and efficacy to obtain the required regulatory approvals or
develop marketable products. A number of companies in the pharmaceutical
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. If any future clinical trials do not
show NicErase to be safe and effective in any alternative delivery format, and
if the Company's licensees are thus unable to commercialize NicErase, the
Company will not realize any revenues from the NicErase product.
 
     Integration of Acquisitions.  In August 1996, the Company acquired
substantially all of assets of Able, in June 1997, the Company purchased all of
the outstanding shares of Superior and in March 1998, the Company acquired
substantially all of the assets of GDI. There can be no assurance that the
anticipated benefits from the acquisitions will be realized. Additionally, there
can be no assurance that the Company will be able to effectively market the
existing Able products, that it will obtain FDA approval to market additional
generic drugs or that it will be successful in managing the combined operations.
The integration of operations of the Company's subsidiaries requires substantial
attention from management, many of whom have limited experience in integrating
acquisitions. The diversion of management's attention, the process of
integrating the
                                       28
<PAGE>   12
 
businesses and any difficulties encountered in the transition process could
cause an interruption of business, and could have a material adverse effect on
the Company's operations and financial performance.
 
   
     Loss of Key Employees.  The Company and its subsidiaries have in the past
year experienced loss of key personnel due to layoffs and attrition. While the
management believes that the remaining employees have adequately performed
routine tasks, it will be necessary to fill several of these positions in the
near term. There is no assurance that the Company will be able to attract and
retain qualified employees and that the remaining employees will continue to
perform these functions satisfactorily. The Company's inability to attract and
retain qualified employees may result in further decline in the Company's
business and its financial condition.
    
 
     Risks Associated with Managing a Changing Business.  The Company has begun
to expand its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products as well as the continued development of
therapeutic and diagnostic products. In order to achieve this expansion, the
Company must undergo substantial changes in its operations, which may
significantly strain the Company's limited administrative, operational and
financial resources. The ability of the Company to achieve its business
objectives will depend in large part on its ability to build and expand its
manufacturing operations and sales and marketing capabilities, to generally
expand its operational capabilities and its financial and management information
systems, to develop the management skills of its managers and supervisors and to
train, motivate and manage both its existing employees and the additional
employees that will be required if the Company is to expand its business. There
can be no assurance that the Company will succeed in developing all or any of
these capabilities, and any failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     Limited Manufacturing Capability and Experience.  The Company's
NicCheck(R), MycoDot(R) and MycoAKT(R) products are currently made by licensed
manufacturers. The Company intends to enter into licenses, joint venture and
similar collaborative arrangements with third parties for the manufacture of
other proprietary products and proposed products. There are no other such
agreements and there can be no assurance that the Company will be successful in
securing manufacturing agreements for its products or that such agreements will
prove to be on terms favorable to the Company. In addition, the Company's
dependence upon third parties for the manufacture of its products and proposed
products could have an adverse effect on the Company's profitability and its
ability to deliver its proposed products on a timely and competitive basis. To
the extent that the Company attempts to manufacture any of its products, there
can be no assurance that the Company will be able to attract and retain
qualified manufacturing personnel, or build or rent manufacturing facilities.
 
     The Company's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. In order to maintain
compliance with FDA Good Manufacturing Practices ("GMP") standards, the Company
will have to make significant investments in its infrastructure and plant
facility. The Company will need to raise capital to finance these investments
and there can be no assurance that the Company will be able to obtain such
financing or that such financing will be available on favorable terms. There can
be no assurance that such capital expenditures and overhead costs will not have
a material adverse effect upon the Company's ability to achieve profitability.
There can be no assurance that the Company will retain the key employees it
acquired in the Able acquisition.
 
     Limited Commercialization of Proprietary Products.  The Company has
commercially introduced and is currently marketing through distributors only
three of its proprietary products, yielding limited revenues from 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
 
                                       29
<PAGE>   13
 
efforts will be successfully completed, that regulatory approvals will be
obtained, or that these products, once introduced, will be successfully
marketed.
 
     Potential Product Liability; Limited Insurance Coverage.  The testing,
marketing and sale of pharmaceutical products for human use entail inherent
risks. Liability might result from claims made directly by consumers or by
pharmaceutical companies or others selling the Company's products. The Company's
Superior and Able subsidiaries presently carry product liability insurance in
amounts that the Company believes to be adequate, but there can be no assurance
that such insurance will remain available at a reasonable cost or that any
insurance policy would offer coverage sufficient to meet any liability arising
as a result of a claim. The Company intends to seek to obtain insurance coverage
if and when its proposed products are commercialized but can give no assurance
that it will be able to obtain such insurance on reasonable terms or that, if
obtained, such insurance will be sufficient to protect the Company against such
potential liability or at a reasonable cost. The obligation to pay any product
liability claim or a recall of a product could have a material adverse affect on
the business, financial condition and future prospects of the Company.
 
     Lack of Marketing Experience.  The Company currently does not plan to
market its proprietary products directly and does not have adequate resources or
expertise to develop a substantial marketing organization and internal sales
force for these products. Since the Company does not have the financial or other
resources to undertake extensive direct marketing activities, the Company
intends to enter into marketing arrangements with third parties, including
possible joint venture, license or distribution arrangements. While the Company
intends to license its products for manufacture and sale to established health
care or pharmaceutical companies, it has had very limited success in its efforts
to enter into such agreements to date. There can be no assurance that the
Company will be able to locate collaborative partners or that these strategic
alliances, if consummated, will prove successful.
 
     With respect to the Company's generic therapeutic products, there can be no
assurance that present and potential customers of Able and Superior will
continue their recent buying patterns, and any significant delay or reduction in
orders could have a material adverse effect on the Company's near-term business
and results of operations.
 
     Regulation by Government Agencies.  The Company's research, preclinical
development, clinical trials, manufacturing and marketing of its proposed
products are subject to extensive regulation by numerous governmental
authorities in the United States (including the FDA), and other equivalent
foreign regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing or marketing of its proposed products. Further,
additional governmental regulation may be established which could prevent or
delay regulatory approval of the Company's products. The regulatory process may
delay for long periods, and ultimately prevent, marketing of new products or
impose costly procedures that would have a materially adverse effect on the
Company's business. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
 
     The Company's success in the generic drug market depends, in part, on its
ability to obtain FDA approval of ANDAs for its new products, as well as its
ability to procure a continuous supply of raw materials and to validate the
manufacturing processes used to produce consistent test batches for FDA
approval. Sources for certain materials for the Company's products must be
approved by the FDA, and in many instances only one source has been approved. If
raw materials from a specified supplier were to become unavailable, the 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.
                                       30
<PAGE>   14
 
     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
 
                                       31
<PAGE>   15
 
be obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products developed by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
 
     Early Stage of Product Development.  Several of the Company's proposed
products, including its specialty pharmaceuticals, are at an early stage of
development. The Company does not expect that its early stage products will be
available for a significant number of years, if at all. The early stage products
will require significant research and development, and potential products that
appear to be promising at early stages of development may not reach the market
for a number of reasons. Potential products may be found ineffective or cause
harmful side effects during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical to produce, fail to achieve market acceptance or be
precluded from commercialization by proprietary rights of third parties. There
can be no assurance that the Company's or its collaborative partners' product
development efforts will be successfully completed, that required regulatory
approvals will be obtained or that any products, if introduced, will be
successfully marketed or achieve customer acceptance.
 
     Uncertainty of Availability of Health Care Reimbursements.  The ability of
the Company to maintain profitability in Superior's generic distribution
business or to commercialize its product candidates depends in part on the
extent to which reimbursement for the cost of such products will be available
from government health administration authorities, private health insurers and
other organizations. Third party payors are attempting to control costs by
limiting the level of reimbursement for medical products, including
pharmaceuticals, which may adversely effect the pricing of the Company's product
candidates. Moreover, health care reform has been, and may continue to be, an
area of national and state focus, which could result in the adoption of measures
which could adversely affect the pricing of pharmaceuticals or the amount of
reimbursement available from third party payors. There can be no assurance that
health care reimbursement laws or policies will not materially adversely affect
the Company's ability to sell its products profitably or prevent the Company
from realizing an appropriate return on its investment in product development.
 
     Uncertainties Related to Product Suppliers.  Superior purchases its
products from several pharmaceutical manufacturers. If a manufacturer is unable
to supply a product or is unable to supply a product at a competitive price,
Superior may lose revenues or experience significantly reduced gross profit
margins. One or more of Superior's products could be subject to a manufacturer's
product recall due to manufacturing defects or other reasons. Such recalls would
result in lost revenues and additional costs to Superior. There can be no
assurance that Superior can maintain a continuous and uninterrupted supply of
products.
 
   
     Customer Concentration; Consolidation of Distribution Network.  The
distribution network for pharmaceutical products has in recent years been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Products sold by the Company's Superior and GDI
subsidiaries are subject to return in the case of improperly filled orders,
overstocking and expiration of items. The rate of product returns at Superior
and GDI has been minimal. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses, thereby stimulating product returns to Superior.
Consolidation or financial difficulties could cause customers to reduce their
inventory levels, or otherwise reduce purchases of Superior's products, which
could have a materially adverse effect on the Company's business, results of
operations and financial condition.
    
 
   
     Volatility of Stock Price.  The market for securities of technology
companies, including those of the Company, has been highly volatile. The market
price of the Company's Common Stock has fluctuated between $70.00 and $1.25 from
January 1, 1993 to December 31, 1997 and was approximately $0.63 on June 1,
1998, and it is likely that the price of the Common Stock will continue to
fluctuate widely in the
    
 
                                       32
<PAGE>   16
 
future. Announcements of technical innovations, new commercial products, results
of clinical trials, regulatory approvals, patent or proprietary rights or other
developments by the Company or its competitors could have a significant impact
on the Company's business and the market price of the Common Stock.
 
   
     Adverse Consequences Associated with the Obligation to Issue Substantial
Shares of Common Stock Upon Conversion of Convertible Securities.  As of June 1,
1998 the Company was obligated to issue approximately 24,101,957 shares of
Common Stock for issuance upon the conversion or exercise of its outstanding
warrants, rights, convertible preferred stock and a convertible note and
1,763,446 shares of Common Stock have been reserved for issuance to employees,
officers, directors and consultants. The price which the Company may receive for
the Common Stock issuable upon exercise of such options and warrants will, in
all likelihood, be less than the market price of the Common Stock at the time of
such exercise. Consequently, for the life of such options and warrants the
holders thereof may have been given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock.
    
 
     The exercise of all of the aforementioned securities may also adversely
affect the terms under which the Company could obtain additional equity capital.
In all likelihood, the Company would be able to obtain additional equity capital
on terms more favorable to the Company at the time the holders of such
securities choose to exercise them. In addition, should a significant number of
these securities be exercised, the resulting increase in the amount of the
Common Stock in the public market could have a substantial dilutive effect on
the Company's outstanding Common Stock.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages. The financial statements
filed in this Item 8 are as follows:
 
     Independent Auditors' Report
 
     Financial Statements:
 
          Consolidated Balance Sheets -- December 31, 1997 and 1996
 
          Consolidated Statements of Loss -- Year Ended December 31, 1997, Six
     Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996 and
     1995
 
          Consolidated Statements of Changes in Stockholders' Equity -- Year
     Ended December 31, 1997, Six Months Ended December 31, 1996 and Years Ended
     June 30, 1996 and 1995
 
          Consolidated Statements of Cash Flows -- Year Ended December 31, 1997,
     Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996
     and 1995
 
          Notes to Consolidated Financial Statements
 
   
     Consolidated Financial Statements and Financial Statement Schedules as of
December 31, 1997 and 1996 and for the year ended December 31, 1997, the six
months ended December 31, 1996 and 1995 and the years ended June 30, 1996 and
1995 are filed as exhibits hereto and listed in Items 14(a)(1) and (2), and are
incorporated herein by reference.
    
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       33
<PAGE>   17
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
  DYNAGEN, INC.
  Cambridge, Massachusetts
 
     We have audited the accompanying consolidated balance sheets of DynaGen,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of loss, changes in stockholders' equity and cash flows
for the year ended December 31, 1997, the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DynaGen, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995 in conformity with generally accepted accounting
principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred recurring
losses from operations resulting in an accumulated deficit and a working capital
deficiency at December 31, 1997. In addition, the Company has debt obligations
which are in default, a significant acquisition obligation in connection with
its acquisition of a subsidiary, Superior Pharmaceutical Company ("Superior"),
and restricted access to the cash and equity of Superior under the terms of
Superior's loan agreement. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
   
     As described in note 1, the Company restated its financial statements to
present the effect of a beneficial conversion discount on the convertible notes
issued in 1996.
    
 
                                          WOLF & COMPANY, P.C.
 
Boston, Massachusetts
April 14, 1998
 
                                       34
<PAGE>   18
 
                                 DYNAGEN, INC.
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
ASSETS
(Note 6)
Current assets:
  Cash and cash equivalents (including interest-bearing
     deposits of $1,835,000 at December 31, 1996)...........  $   697,045    $ 2,112,300
  Investment securities available for sale at fair value
     (Note 3)...............................................           --      3,004,700
  Accounts receivable, net of allowance for doubtful
     accounts of $43,118 at December 31, 1997...............    3,152,779        261,932
  Rebates...................................................      713,976             --
  Inventory (Note 4)........................................    9,111,324        451,883
  Notes receivable (Note 8).................................      110,000        185,000
  Prepaid expenses and other current assets.................      147,972        295,613
                                                              -----------    -----------
     Total current assets...................................   13,933,096      6,311,428
                                                              -----------    -----------
  Property and equipment, net (Note 5)......................    1,772,878        673,969
                                                              -----------    -----------
Other assets:
  Customer lists, net of accumulated amortization of
     $1,361,200 (Note 2)....................................   12,250,800             --
  Goodwill, net of accumulated amortization of $22,751 (Note
     2).....................................................      363,468             --
  Patents and trademarks, net of accumulated amortization of
     $89,164 and $65,639....................................      345,381        265,840
  Deferred debt financing costs, net of accumulated
     amortization (Note 6)..................................      359,621        119,039
  Deposits and other assets.................................      322,870         92,873
                                                              -----------    -----------
     Total other assets.....................................   13,642,140        477,752
                                                              -----------    -----------
                                                              $29,348,114    $ 7,463,149
                                                              ===========    ===========
</TABLE>
 
                                       35
<PAGE>   19
                                 DYNAGEN, INC.
                   CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Bank overdraft............................................  $   142,616    $         --
  Notes payable (Note 6)....................................    8,348,333              --
  Loan payable -- bank (Note 6).............................    6,584,710              --
  Accounts payable..........................................    6,390,421         712,239
  Accrued payroll and payroll taxes.........................       95,312          96,894
  Acquisition obligation (Note 2)...........................    4,083,000              --
                                                              ------------   ------------
     Total current liabilities..............................   25,644,392         809,133
  Warrant put liability (Note 6)............................      750,594              --
  Long term debt (Notes 6 and 10)...........................      328,500       1,600,000
                                                              ------------   ------------
     Total liabilities......................................   26,723,486       2,409,133
                                                              ------------   ------------
  Commitments and contingencies (Note 9)....................
Stockholders' equity (Notes 1, 2, 6, 9, 10 and 13):
  Preferred stock, $.01 par value, 10,000,000 shares
     authorized, 63,522 shares of Series A, B, C and G
     outstanding, (liquidation value $6,348,417):...........          635              --
  Common stock, $.01 par value, 75,000,000 shares
     authorized, 4,315,137, and 2,910,623 shares issued and
     outstanding............................................       43,151          29,106
  Additional paid-in capital................................   40,122,386      30,323,869
  Accumulated deficit.......................................  (37,541,544)    (25,300,266)
                                                              ------------   ------------
                                                                2,624,628       5,052,709
  Unrealized gain on investment securities available for
     sale (Note 3)..........................................           --           1,307
                                                              ------------   ------------
     Total stockholders' equity.............................    2,624,628       5,054,016
                                                              ------------   ------------
                                                              $29,348,114    $  7,463,149
                                                              ============   ============
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
                                       36
<PAGE>   20
 
                                 DYNAGEN, INC.
 
                        CONSOLIDATED STATEMENTS OF LOSS
 
   
<TABLE>
<CAPTION>
                                           YEAR ENDED        SIX MONTHS ENDED
                                          DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                          ------------   -------------------------   -------------------------
                                              1997          1996          1995          1996          1995
                                          ------------   -----------   -----------   -----------   -----------
                                                                      (UNAUDITED)
<S>                                       <C>            <C>           <C>           <C>           <C>
REVENUES (NOTE 11):
  Product sales.........................  $ 13,920,904   $   358,467   $    57,855   $   220,745   $   247,553
  Fees and royalties....................        88,826         1,441       275,000       335,000       250,000
                                          ------------   -----------   -----------   -----------   -----------
  Total revenues........................    14,009,730       359,908       332,855       555,745       497,553
                                          ------------   -----------   -----------   -----------   -----------
Costs and expenses:
  Cost of sales.........................    13,255,651       356,312        28,837        96,680       134,392
  Research and development..............     3,220,283     1,092,253     1,036,622     3,118,145     1,718,006
  Selling, general and administrative...     7,611,578     3,239,180     1,188,733     2,684,825     1,983,897
                                          ------------   -----------   -----------   -----------   -----------
  Total costs and expenses..............    24,087,512     4,687,745     2,254,192     5,899,650     3,836,295
                                          ------------   -----------   -----------   -----------   -----------
  Operating loss........................   (10,077,782)   (4,327,837)   (1,921,337)   (5,343,905)   (3,338,742)
                                          ------------   -----------   -----------   -----------   -----------
Other income (expense):
  Investment income, net................       120,359       157,788       111,521       367,715       296,555
  Interest and financing expense (Note
     6).................................    (2,283,855)     (136,091)           --    (1,106,304)         (196)
                                          ------------   -----------   -----------   -----------   -----------
  Other income (expense), net...........    (2,163,496)       21,697       111,521      (738,589)      296,359
                                          ------------   -----------   -----------   -----------   -----------
  Net loss..............................   (12,241,278)   (4,306,140)   (1,809,816)   (6,082,494)   (3,042,383)
Less returns to preferred stockholders:
  Beneficial conversion feature (Note
     10)................................     1,918,000            --            --       865,000            --
  Dividends paid and accrued............       190,000            --            --            --            --
                                          ------------   -----------   -----------   -----------   -----------
Net loss applicable to common stock.....  $(14,349,278)  $(4,306,140)  $(1,809,816)  $(6,947,494)  $(3,042,383)
                                          ============   ===========   ===========   ===========   ===========
Net loss per share-basic (Note 1).......  $      (4.48)  $     (1.50)  $     (0.81)  $     (2.84)  $     (1.44)
                                          ============   ===========   ===========   ===========   ===========
Weighted average shares outstanding.....     3,204,163     2,879,412     2,221,765     2,443,395     2,117,970
                                          ============   ===========   ===========   ===========   ===========
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
 
                                       37
<PAGE>   21
 
                                 DYNAGEN, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         (NOTES 1, 2, 6, 9, 10 AND 13)
   
<TABLE>
<CAPTION>
 
                                             PREFERRED STOCK           COMMON STOCK       ADDITIONAL
                                         -----------------------   --------------------     PAID-IN     ACCUMULATED
                                           SHARES       AMOUNT       SHARES     AMOUNT      CAPITAL       DEFICIT
                                         ----------   ----------   ----------   -------   -----------   ------------
<S>                                      <C>          <C>          <C>          <C>       <C>           <C>
Balance at June 30, 1994...............          --   $       --    2,117,454   $21,174   $19,300,479   $(11,869,249)
Exercise of stock options..............          --           --           50        1            374            --
Exercise of underwriters' warrants.....          --           --       27,345      274        128,483            --
Decrease in unrealized loss on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended June 30,
  1995.................................          --           --           --       --             --    (3,042,383)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at June 30, 1995...............          --           --    2,144,849   21,449     19,429,336   (14,911,632)
                                         ----------   ----------   ----------   -------   -----------   ------------
Exercise of underwriters' warrants.....          --           --       50,398      504         36,621            --
Exercise of public warrants............          --           --      324,449    3,244      3,851,963            --
Shares issued in private placements....   1,178,264    3,461,150      152,069    1,521      1,389,890            --
Conversion of preferred stock..........  (1,178,264)  (3,461,150)     161,283    1,613      3,459,537            --
Beneficial conversion feature of
  convertible note.....................          --           --           --       --        985,075            --
Exercise of stock options..............          --           --        9,586       96          5,479            --
Employee stock and stock option
  grants...............................          --           --       11,725      117        558,740            --
Stock options issued for future
  services.............................          --           --           --       --         55,225            --
Stock issued for interest obligation...          --           --        1,641       16         37,317            --
Change in unrealized gain (loss) on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended June 30,
  1996.................................          --           --           --       --             --    (6,082,494)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at June 30, 1996...............          --           --    2,856,000   28,560     29,809,183   (20,994,126)
                                         ----------   ----------   ----------   -------   -----------   ------------
Exercise of stock options..............          --           --        8,177       82         16,418            --
Stock issued for interest obligation...          --           --        5,005       50         79,567            --
Stock options issued for services......          --           --           --       --         55,742            --
Conversion of note payable.............          --           --       41,441      414        362,959            --
Increase in unrealized gain on
  investment securities................          --           --           --       --             --            --
Net loss for the six months ended
  December 31, 1996....................          --           --           --       --             --    (4,306,140)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at December 31, 1996                     --           --    2,910,623   29,106     30,323,869   (25,300,266)
                                         ----------   ----------   ----------   -------   -----------   ------------
Shares issued in private placements....      69,950          699      147,500    1,475      6,672,473            --
Stock issued for Superior
  acquisition..........................          --           --      166,667    1,667        915,333            --
Exercise of stock options..............          --           --          150        2          1,123            --
Issuance of common stock purchase
  warrants.............................          --           --           --       --            450            --
Delayed registration penalty...........          --           --           --       --       (328,500)           --
Stock options and warrants issued for
  service..............................          --           --           --       --        801,034            --
Stock issued for interest obligation...          --           --        6,418       64         59,774            --
 
Conversions of notes payable...........       5,015           50      113,959    1,140      1,495,163            --
Conversion of preferred stock..........     (11,443)        (114)     757,320    7,573         (7,459)           --
Stock issued for services..............          --           --      212,500    2,124        189,126            --
Decrease in unrealized gain on
  investment securities................          --           --           --       --             --            --
Net loss for the year ended December
  31, 1997.............................          --           --           --       --             --   (12,241,278)
                                         ----------   ----------   ----------   -------   -----------   ------------
Balance at December 31, 1997...........      63,522   $      635    4,315,137   $43,151   $40,122,386   $(37,541,544)
                                         ==========   ==========   ==========   =======   ===========   ============
 
<CAPTION>
                                           UNREALIZED GAIN
                                              (LOSS) ON
                                              INVESTMENT
                                         SECURITIES AVAILABLE
                                               FOR SALE            TOTAL
                                         --------------------   ------------
<S>                                      <C>                    <C>
Balance at June 30, 1994...............         $(38,662)       $  7,413,742
Exercise of stock options..............               --                 375
Exercise of underwriters' warrants.....               --             128,757
Decrease in unrealized loss on
  investment securities................           26,323              26,323
Net loss for the year ended June 30,
  1995.................................               --          (3,042,383)
                                                --------        ------------
Balance at June 30, 1995...............          (12,339)          4,526,814
                                                --------        ------------
Exercise of underwriters' warrants.....               --              37,125
Exercise of public warrants............               --           3,855,207
Shares issued in private placements....               --           4,852,561
Conversion of preferred stock..........               --                  --
Beneficial conversion feature of
  convertible note.....................               --             985,075
Exercise of stock options..............               --               5,575
Employee stock and stock option
  grants...............................               --             558,857
Stock options issued for future
  services.............................               --              55,225
Stock issued for interest obligation...               --              37,333
Change in unrealized gain (loss) on
  investment securities................           12,356              12,356
Net loss for the year ended June 30,
  1996.................................               --          (6,082,494)
                                                --------        ------------
Balance at June 30, 1996...............               17           8,843,634
                                                --------        ------------
Exercise of stock options..............               --              16,500
Stock issued for interest obligation...               --              79,617
Stock options issued for services......               --              55,742
Conversion of note payable.............               --             363,373
Increase in unrealized gain on
  investment securities................            1,290               1,290
Net loss for the six months ended
  December 31, 1996....................               --          (4,306,140)
                                                --------        ------------
Balance at December 31, 1996                       1,307           5,054,016
                                                --------        ------------
Shares issued in private placements....               --           6,674,647
Stock issued for Superior
  acquisition..........................               --             917,000
Exercise of stock options..............               --               1,125
Issuance of common stock purchase
  warrants.............................               --                 450
Delayed registration penalty...........               --            (328,500)
Stock options and warrants issued for
  service..............................               --             801,034
Stock issued for interest obligation...               --              59,838
Conversions of notes payable...........               --           1,496,353
Conversion of preferred stock..........               --                  --
Stock issued for services..............               --             191,250
Decrease in unrealized gain on
  investment securities................           (1,307)             (1,307)
Net loss for the year ended December
  31, 1997.............................               --         (12,241,278)
                                                --------        ------------
Balance at December 31, 1997...........         $     --        $  2,624,628
                                                ========        ============
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
 
                                       38
<PAGE>   22
 
                                 DYNAGEN, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
<TABLE>
<CAPTION>
                                                   YEAR ENDED        SIX MONTHS ENDED
                                                  DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                                  ------------   -------------------------   -------------------------
                                                      1997          1996          1995          1996          1995
                                                  ------------   -----------   -----------   -----------   -----------
                                                                               (UNAUDITED)
<S>                                               <C>            <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss......................................  $(12,241,278)  $(4,306,140)  $(1,809,816)  $(6,082,494)  $(3,042,383)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Beneficial conversion feature of convertible
      note......................................           --             --            --       985,075            --
    Stock and stock options issued for
      services..................................      992,284         55,742            --       558,857            --
    Depreciation and amortization...............    1,714,250        129,558        32,440       125,610        64,195
    Amortization and accretion of (discounts)
      premiums on investment securities.........      (10,152)       (31,497)      (19,539)     (134,474)      101,553
    Stock issued for interest obligation........       59,838         79,617            --        37,333            --
    Write-off of patent costs...................           --             --            --        41,852        40,893
    (Increase) decrease in operating assets:
      Accounts receivable.......................     (428,612)      (172,229)      (23,621)      (60,732)       30,518
      Rebates...................................     (215,672)            --            --            --            --
      Inventory.................................   (1,268,351)      (138,583)           --            --            --
      Prepaid expenses and other current
        assets..................................      170,149         12,543       (47,227)      (57,780)       24,121
      Deposits and other assets.................     (211,250)       (90,895)           --            --            --
    Increase (decrease) in operating
      liabilities:
      Accounts payable and accrued expenses.....    4,521,843        142,068        (3,770)      329,858       (77,933)
      Deferred revenue..........................           --        (65,967)     (150,000)     (184,033)      250,000
                                                  ------------   -----------   -----------   -----------   -----------
        Net cash used for operating
          activities............................   (6,916,951)    (4,385,783)   (2,021,533)   (4,440,928)   (2,609,036)
                                                  ------------   -----------   -----------   -----------   -----------
Cash flows from investing activities:
    Purchase of investment securities...........   (1,186,455)    (2,567,445)   (5,937,166)  (29,913,212)   (3,187,379)
    Proceeds from sales and maturities of
      investment securities.....................    4,200,000      9,683,450     5,600,000    24,174,000     5,500,000
    Purchase of wholly-owned subsidiary.........   (6,878,463)      (700,000)           --            --            --
    Purchase of property and equipment..........     (959,224)      (200,370)       (2,874)      (36,020)      (23,339)
    Patent and trademark costs..................     (103,067)            --       (32,867)      (72,611)      (69,293)
    Decrease in deposits........................           --             --            --            --         9,325
    (Increase) decrease in notes receivable.....       75,000       (110,000)           --       (75,000)           --
                                                  ------------   -----------   -----------   -----------   -----------
        Net cash provided by (used for)
          investing activities..................   (4,852,209)     6,105,635      (372,907)   (5,922,843)    2,229,314
                                                  ------------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Net proceeds from stock warrants and
    options.....................................        1,125         16,500     3,896,088     3,897,907       129,132
  Net proceeds from private stock placements....    6,775,920             --            --     4,852,561            --
  Net proceeds from debt placements.............    3,326,898             --            --     1,725,295            --
  Net repayments of loan payable -- bank........      524,013             --            --            --            --
  Increase in bank overdraft....................      142,616             --            --            --            --
  Repayment of Superior notes payable...........     (416,667)            --            --            --            --
  Principal payments on capital lease...........           --             --            --            --        (5,824)
                                                  ------------   -----------   -----------   -----------   -----------
        Net cash provided by financing
          activities............................   10,353,905         16,500     3,896,088    10,475,763       123,308
                                                  ------------   -----------   -----------   -----------   -----------
Net change in cash and cash equivalents.........   (1,415,255)     1,736,352     1,501,648       111,992      (256,414)
Cash and cash equivalents at beginning of
  period........................................    2,112,300        375,948       263,956       263,956       520,370
                                                  ------------   -----------   -----------   -----------   -----------
Cash and cash equivalents at end of period......  $   697,045    $ 2,112,300   $ 1,765,604   $   375,948   $   263,956
                                                  ============   ===========   ===========   ===========   ===========
Supplemental cash flow information:
  Interest paid.................................  $   574,300    $        --   $        --   $        --   $       196
Schedule of non cash investing and financing
  activities:
  On June 18, 1997, the Company purchased all of
  the common stock of Superior Pharmaceutical
  Company, Inc. for $15,850,000. In connection
  with the acquisition, non cash financing
  activities, liabilities assumed and goodwill
  and customer lists were as follows:
    Fair value of assets acquired...............  $10,810,660
    Cash paid for common stock..................   (6,250,000)
    Common stock issued and acquisition
      obligation................................   (5,000,000)
    Note payable issued, net of adjustment......   (4,600,000)
    Liabilities assumed.........................   (8,263,478)
                                                  ------------
    Goodwill and customer lists (exclusive of
      other acquisition costs of $694,890)......  $13,302,818
                                                  ============
Additional cash flow information is included in Notes 2 and 6.
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
                                       39
<PAGE>   23
 
                                 DYNAGEN, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business and Basis of Presentation
 
     The consolidated financial statements include the accounts of DynaGen, Inc.
(the "Company") and its wholly-owned subsidiaries, Able Laboratories, Inc.
("Able"), which is engaged in the manufacture of generic pharmaceuticals,
Superior Pharmaceutical Company ("Superior"), which is engaged in the
distribution of generic pharmaceuticals BioTrack, Inc. and Apex Pharmaceuticals,
Inc. which are developing diagnostic and therapeutic products. All significant
intercompany balances and transactions have been eliminated in consolidation. In
March 1998, the Company acquired Generic Distributors Limited Partnership which
is engaged in the distribution of generic pharmaceuticals. (See Note 13)
 
   
  Financial Statement Restatement
    
 
   
     The accompanying financial statements have been restated from those
originally issued to reflect a change in accounting for the February 1996
issuance of a convertible note, as described in note 6 to the financial
statements. The convertible note could be converted at a discount to the traded
market price of the common stock into which the securities are convertible. At
the date of issuance, the company did not allocate any portion of the proceeds
received to the beneficial discount.
    
 
   
     Subsequently,, the Securities and Exchange Commission announced its
position that a beneficial conversion discount on convertible notes should be
computed based the quoted market value of the Company's Common Stock and this
amount should be recognized as additional interest expense and an addition to
paid-in capital.
    
 
   
     The company estimated the amount of the beneficial conversion discount at
the date of issuance to be $985,000 and the financial statements have been
restated to comply with the accounting treatment described above. A summary of
the impact of the restatement on the company's financial statements follows:
    
 
   
<TABLE>
<CAPTION>
PERIOD                                                        AS REPORTED     AS RESTATED
------                                                        ------------    ------------
<S>                                                           <C>             <C>
June 30, 1996:
  Net Loss..................................................  $ (5,097,419)   $ (6,082,494)
                                                              ============    ============
December 31, 1996:
  Additional paid-in capital................................  $ 29,338,794    $ 30,323,869
                                                              ============    ============
  Accumulated deficit.......................................  $(24,315,191)   $(25,300,266)
                                                              ============    ============
December 31, 1997:
  Additional paid-in capital................................  $ 39,137,311    $ 40,122,386
                                                              ============    ============
  Accumulated deficit.......................................  $(36,556,469)   $(37,541,544)
                                                              ============    ============
</TABLE>
    
 
  Going Concern
 
   
     The Company has incurred recurring losses from operations resulting in an
accumulated deficit of $37,541,544 and a working capital deficiency of
$11,711,296 at December 31, 1997. In addition, the Company is in default with
respect to certain covenants in its debt agreements and obligated to make
payments as follows:
    
 
          GFL Performance Fund Limited -- The Company issued a 8% Convertible
     Note to GFL Performance Fund in the amount of $2,000,000 in February, 1996.
     The balance of this note, $535,000 was due on February 7, 1998, however
     ,the lender granted an extension on the payment of this note. In connection
     with this extension the Company agreed to increase the principal amount due
     to $798,755. The note and
 
                                       40
<PAGE>   24
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     the increased principal amount are reflected as current liabilities in the
     balance sheet at December 31, 1997. (See Note 6).
 
          Sirrom Capital Corporation ("Sirrom") and Odyssey Investment Partners,
     L.P. ("Odyssey") -- The Company issued secured promissory notes in the
     aggregate principal amount of $3,000,000 on June 18, 1997 and were due June
     17, 2002. In addition, the Company issued stock warrants to purchase in the
     aggregate 40,000 shares of the Company's common stock and granted Sirrom
     and Odyssey the right to sell to the Company the warrants (put warrants)
     under a put and substitution agreement. At the time of issuance, $702,000
     of the proceeds was allocated to the put warrants, resulting in a discount
     on the promissory notes.
 
          The discount on the notes was being amortized to expense over the term
     of the promissory notes. The Company is in default of certain covenants in
     the loan agreement and has not obtained a waiver of the defaults from the
     lender. Accordingly, the total principal amount of the loan, $3,000,000,
     has been classified as a current liability and the unamortized discount on
     the loan has been charged to expense at December 31, 1997. (See Note 6).
 
          Superior Pharmaceutical Company -- The Company acquired Superior on
     June 18, 1997 for an adjusted purchase price of $15,850,000. The purchase
     price was paid as follows: $6,250,000 in cash, $5,000,000 ($4,600,000 as
     adjusted) of 9.5% secured promissory notes to the former Superior
     stockholders due in quarterly installments through June 30, 2000 and common
     stock of the Company with a guaranteed value of $5,000,000.
 
          A quarterly payment on the secured promissory notes was due on March
     31, 1998 and the Company received a waiver and extension from the former
     stockholders of Superior. The quarterly payment of principal and interest
     was extended to May 16, 1998. The total unpaid amount of the secured
     promissory notes $4,183,333 has been classified as a current liability.
 
          The Company issued 166,667 shares of common stock to the former
     Superior stockholders on the closing date. The Agreement and plan of merger
     with the Superior stockholders provided that at the first anniversary of
     the closing, June 18, 1998, the Superior stockholders would receive up to
     an additional 1,666,667 shares of common stock, if the Company's stock
     price was less than $30.00. Any difference between the value of the stock
     received and the $5,000,000 guaranteed value is to be paid in cash. The
     Company does not anticipate that the value of the common stock issued and
     issuable will reach the specified level of $5,000,000 by June 18, 1998.
     Accordingly, the Company has accrued a current liability to the former
     Superior stockholders in the amount of $4,083,000 at December 31, 1997 and
     reduced the amount originally added to additional paid-in capital at the
     time of acquisition.
 
          The Huntington National Bank -- The Company's subsidiary, Superior has
     a line of credit with the Huntington National Bank in the amount of
     $9,000,000. At December 31, 1997, Superior is in default of certain loan
     covenants in the loan and security agreement with the bank. Superior is in
     negotiations with the bank with respect to the defaults, but has not
     received a waiver of the defaults at the present time.
 
          The Company has guaranteed the loan to the bank. The loan and security
     agreement with the bank requires the Company to achieve a tangible net
     worth, exclusive of the tangible net worth of Superior, of $4,000,000,
     which the Company has not achieved at December 31, 1997.
 
          The loan and security agreement with the bank allowed Superior to make
     distributions to the Company in amounts sufficient to enable the Company to
     pay the debt service due to the former stockholders of Superior, provided,
     however, that such permitted payments cannot be made by Superior in the
     event of a default.
 
                                       41
<PAGE>   25
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
Management Plans
 
     The following represents management's plans to improve the financial
condition of the Company including curing defaults and obtaining waivers
wherever applicable. These plans are targeted to the specific areas listed
below.
 
     GFL Performance Fund Limited -- The Company has received an extension of
the Company's payment obligation on February 7, 1998 (the maturity date). The
Company is negotiating with GFL to retire this debt through conversion into
common stock over the next several months. This would reduce or eliminate the
cash payment obligation and reduce the total liabilities of the Company.
 
     Sirrom and Odyssey -- The Company continues to make monthly interest
payments on its obligations to Sirrom and Odyssey. The defaults under the loan
agreements include the late filing of the Form 10-K and certain other financial
covenants.
 
     Management plans to improve upon its filing requirements by dedicating
additional personnel to meet the reporting requirements. In addition, the
Company is negotiating with the former stockholders of Superior to extend the
guaranteed stock payment due on June 17, 1998 which would require approximately
$4,000,000 in cash. The Company has had preliminary discussions with Sirrom and
Odyssey regarding the overall decline in Company's stock price and the effect on
their warrants. Management intends to discuss and negotiate with its lenders
opportunities for participation in the Company's overall plan which could
restore the economic benefits and obtain continued cooperation of Sirrom and
Odyssey.
 
     Superior Pharmaceutical Company -- The Company has obtained a waiver from
the former stockholders of Superior, waiving and extending the payment
obligation on the note due on March 31, 1998. The Company is negotiating with
the former stockholders, alternate ways in which it can meet its obligation of a
guaranteed stock payment on June 17, 1998. These proposed alternatives include
extension of the obligation, reduction or elimination of the cash payment in
exchange for additional stock payments and converting the common stock payment
to convertible Preferred Stock. The former stockholders have indicated their
willingness to entertain the alternative offers and work with the management to
come up with a comprehensive solution to the payment obligations which secures
their benefits while allowing the Company to expand.
 
The Huntington National Bank
 
     The Company is in discussions with investment bankers to raise additional
equity for its ongoing operations. The net worth of the Company is less than
$4,000,000 as required in the loan agreement with the bank. However, in the past
the bank has considered subordinated debt, selling stockholder debt and the
equity line available to the Company under its Series D preferred shares as
equity capital and therefore applicable towards the net worth calculations.
Assuming that the bank continues to allow for this calculation and that the
Company is successful in obtaining additional financing, the net worth
deficiency will be corrected. In addition, the waiver of the former Superior
stockholders will, in managements view, eliminate the defaults of the covenants.
 
  Other
 
     Management also plans to implement programs to reverse the decline in
business at Superior, increase sales at Able and review every cost center for
further optimization and cost reductions.
 
                                       42
<PAGE>   26
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Change in Year End
 
     On January 30, 1997, the Company adopted December 31 as its fiscal year
end. The accompanying consolidated financial statements include audited
financial statements for the year ended December 31, 1997, the six month
transition period ended December 31, 1996 the years ended June 30, 1996 and
1995. Unaudited financial statements and the related notes thereto are presented
for the six months ended December 31, 1995 for comparative purposes only. All
adjustments, consisting of only normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the unaudited
financial information, have been made.
 
  Reverse Stock Split
 
     On March 4, 1998 the Company's Stockholders approved a 1 for 10 a reverse
stock split of the common shares. All common stock information presented herein
has been retroactively adjusted to reflect the reverse stock split.
 
  Use of Estimates
 
     In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and reported amounts of revenues and expenses during the
reporting period. Material estimates that are particularly susceptible to
significant change in the near term relate to the carrying values of rebates
receivable and intangible assets, the valuation of equity instruments issued by
the Company and the amount of obligations due as a result of defaults on certain
debt obligations. Actual results could differ from those estimates.
 
  Cash Equivalents
 
     Cash equivalents include interest-bearing deposits with original maturities
of three months or less.
 
  Investment Securities
 
     Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and carried at
amortized cost. Investments that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and carried at fair value, with unrealized gains and losses included in
earnings. Investments not classified as either of the above are classified as
"available for sale" and carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Gains and losses on
disposition of investment securities are computed by the specific identification
method.
 
  Rebates
 
     Rebates represent incentives provided by pharmaceutical suppliers based on
purchases. Management has estimated its rebates based upon agreements and
purchases during the year. Actual rebates could be different due to market
volatility and whether the Company continues to use these suppliers.
 
  Inventory
 
     Inventory is valued at the lower of average cost or market on a first-in
first-out (FIFO) method.
 
                                       43
<PAGE>   27
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation expense is provided
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful life of the asset or the life of the related
lease term.
 
  Customer Lists and Goodwill
 
     Customer lists and goodwill are being amortized over estimated lives of
five and fifteen years, respectively. (See Note 2.)
 
  Patents, Trademarks and Deferred Debt Financing Costs
 
     Patent and trademark costs are amortized over a five-year period on a
straight-line basis commencing on the earlier of the date placed in service or
the date the patent or trademark is granted. Deferred debt financing costs are
being amortized on a straight-line basis over the two-year term of the
convertible note payable. The related amortization expense for the year ended
December 31, 1997 was $99,888. The related amortization expense for the six
months ended December 31, 1996 and 1995 was $73,107 and $10,792, respectively,
and for the years ended June 30, 1996 and 1995 was $79,660 and $11,385,
respectively.
 
  Revenue Recognition
 
     Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met.
 
  Advertising Costs
 
     Advertising costs are charged to expense when incurred.
 
  Income Taxes
 
     Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss, capital loss and tax credit carry forwards to the extent their
realization is more likely than not. The deferred tax expense for the period
represents the change in the deferred tax asset or liability from the beginning
to the end of the period.
 
  Stock-Based Compensation
 
     In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." This Statement encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plans generally have no intrinsic value at the grant
date, and under Opinion No. 25 no compensation cost is recognized for them. The
Company has elected to remain with the accounting in Opinion No. 25 and, as a
result, must make pro forma disclosures of net income and earnings per share and
other disclosures, as if the fair value based method of accounting had been
applied. The disclosure requirements of this Statement are effective for the
Company's consolidated financial statements for the six months ended December
31,
                                       44
<PAGE>   28
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
1996. The pro forma disclosures include the effects of all awards granted on or
after July 1, 1995. (See Note 10.)
 
  Earnings Per Share
 
     In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which
requires that earnings per share be calculated on a basic and a dilutive basis.
Basic earnings per share represents income available to common stock divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed conversion. The
Statement is effective for interim and annual periods ending after December 15,
1997, and requires the restatement of all prior-period earnings per share data
presented. Accordingly, the Company has restated all earnings per share data
presented herein.
 
     For the year ended December 31, 1997, the six months ended December 31,
1996 and 1995, and the years ended June 30, 1996 and 1995, options, warrants and
put warrants, were anti-dilutive and excluded from the diluted earnings per
share computations.
 
     The loss applicable to common stockholders has been increased by the stated
dividends on the convertible preferred stock and the amortization of discounts
on the convertible preferred stock due to the beneficial conversion feature.
Shares of common stock contingently issuable to the former stockholders of
Superior have not been included in diluted EPS because to do so would have been
anti-dilutive.
 
  Recent Accounting Pronouncements
 
     In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company will adopt these disclosure
requirements beginning in the first quarter of 1998.
 
     In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
 
                                       45
<PAGE>   29
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
2.  BUSINESS ACQUISITIONS
 
     On August 19, 1996, the Company acquired certain assets of Able
Laboratories, Inc. ("Able"). The purchase price consisted of $550,000 in cash
and acquisition costs of $150,000. The acquisition has been accounted for as a
purchase. The Company allocated $313,300 of the purchase price to inventory and
$386,700 to property and equipment. The results of operations related to Able
have been included with those of the Company since August 19, 1996.
 
     On June 18, 1997, the Company acquired all of the outstanding stock of
Superior Pharmaceutical Company ("Superior"), a distributor of generic
pharmaceutical products. The Company paid the shareholders of Superior
$6,250,000 in cash, $5,000,000 in three year secured promissory notes and
166,667 shares of DynaGen's common stock with a guaranteed value of $5,000,000.
The secured promissory notes were subsequently reduced by $400,000 due to a
deficiency in the required net worth of Superior as of the acquisition date.
DynaGen is obligated to issue to the shareholders up to an additional 1,666,667
shares of its common stock after twelve months if its common stock is not
trading at an average of at least $30.00 per share for 10 consecutive trading
days. The merger agreement provides further that DynaGen shall pay to the former
Superior stockholders the difference between $5,000,000 and the current
aggregate market value of the shares issued to the former Superior stockholders.
DynaGen is obligated to register the shares within eleven months after the
closing of the acquisition. The Company recorded a $4,083,000 acquisition
obligation at December 31, 1997 based on the difference between the current
estimated fair value of the 1,833,334 shares of common stock issued and issuable
and the guaranteed value of $5,000,000. The former shareholders of Superior, who
remain as senior management at Superior, may also receive certain incentive
payments based on Superior's performance during the three years following the
closing of the acquisition. Any such payments will be charged to expense when
incurred. DynaGen contributed $1,750,000 in additional capital to Superior
immediately following the closing.
 
     The Superior acquisition has been accounted for as a purchase. The results
of operations of Superior have been included in the Company's consolidated
financial statements since the date of acquisition. The purchase price
allocation was based on the estimated fair values at the date of acquisition.
The Company allocated $13,612,000 of the purchase price to customer lists, which
is being amortized on a straight-line basis over five years. Amortization of
customer lists amounted to $1,361,200 for the year ended December 31, 1997. In
addition, the Company recorded goodwill of $386,219, which is being amortized on
a straight-line basis over 15 years. Amortization expense for the year ended
December 31, 1997 was $22,751.
 
     Unaudited proforma consolidated operating results for the Company, assuming
the acquisitions of Able and Superior had been made as of the beginning of the
most recent fiscal year for each of the periods presented, are as follows:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED        SIX MONTHS ENDED
                                                     DECEMBER 31, 1997    DECEMBER 31, 1996
                                                     -----------------    -----------------
<S>                                                  <C>                  <C>
Revenues...........................................  $      26,019,467    $      17,412,594
                                                     =================    =================
Net loss...........................................  $     (12,085,635)   $      (4,349,129)
                                                     =================    =================
Net loss per share.................................  $           (4.43)   $           (1.43)
                                                     =================    =================
</TABLE>
 
     The unaudited proforma information is not necessarily indicative either of
the actual results of operations that would have occurred had the purchases been
made as of the beginning of each of the fiscal periods presented or of future
results of operations of the combined companies.
 
                                       46
<PAGE>   30
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
3.  INVESTMENT SECURITIES
 
     The amortized cost and fair value of investment securities available for
sale is as follows:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996
                                            ---------------------------------------------------
                                                            GROSS        GROSS
                                             AMORTIZED    UNREALIZED   UNREALIZED      FAIR
                                               COST         GAINS        LOSSES        VALUE
                                            -----------   ----------   ----------   -----------
    <S>                                     <C>           <C>          <C>          <C>
    U.S. Government agency obligations....  $1,499,696      $1,000      $    (71)   $ 1,500,625
    Corporate obligations.................   1,503,697         378            --      1,504,075
                                            -----------     ------      --------    -----------
                                            $3,003,393      $1,378      $    (71)   $ 3,004,700
                                            ===========     ======      ========    ===========
</TABLE>
 
     All debt securities matured during the year ended December 31, 1997 and
there were no sales of securities available for sale during the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995.
 
4.  INVENTORY
 
     Inventory consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                 1997         1996
                                                              ----------    --------
<S>                                                           <C>           <C>
Raw materials...............................................  $  311,166    $259,330
Work-in-progress............................................     136,240     163,847
Finished goods..............................................   8,663,918      28,706
                                                              ----------    --------
                                                              $9,111,324    $451,883
                                                              ==========    ========
</TABLE>
 
5.  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                         ------------------------     ESTIMATED
                                                            1997          1996       USEFUL LIVES
                                                         ----------    ----------    ------------
<S>                                                      <C>           <C>           <C>
     Machinery and equipment...........................  $1,347,683    $  702,141       7 years
     Furniture, fixtures and computers.................   1,027,228       270,353     3-7 years
     Leasehold improvements............................     235,904        39,288     1-2 years
                                                         ----------    ----------
                                                          2,610,815     1,011,782
     Less accumulated depreciation and amortization....    (837,937)     (337,813)
                                                         ----------    ----------
                                                         $1,772,878    $  673,969
                                                         ==========    ==========
</TABLE>
 
     Depreciation and amortization expense for the year ended December 31, 1997
was $230,411. Depreciation and amortization expense for the six months ended
December 1996 and 1995 was $56,451 and $21,648, respectively and for the years
ended June 30, 1996 and 1995 was $45,950 and $52,810 respectively.
 
                                       47
<PAGE>   31
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
6.  DEBT
 
     Notes payable consist of the following:
 
<TABLE>
<S>                                                           <C>
Convertible note payable....................................  $  535,000
Bridge loans................................................     630,000
Notes payable -- Superior Acquisition.......................   4,183,333
Senior subordinated debt....................................   3,000,000
                                                              ----------
                                                              $8,348,333
                                                              ==========
</TABLE>
 
  Convertible Note Payable
 
   
     On February 7, 1996, the Company issued a $2,000,000 convertible note
payable in connection with a private placement. The note matured on February 7,
1998 and bears interest at 8% per annum, with interest payable quarterly in cash
or the Company's common stock. The note is convertible into shares of common
stock at any time at the option of the investor at a rate of 67% of the five-day
average of the closing bid price per share of the Company's common stock one
trading day prior to the date the notice of conversion is received by the
Company. The value of the beneficial conversion feature at the date of issuance,
based on the market value of the Company's common stock was approximately,
$985,000. This discount has been charged as additional interest expense and
added to paid-in capital in the year ended June 30, 1998. The Company may
require conversion of the note provided that no event of default shall have
occurred and the Registration Statement required to be filed shall be effective.
During the six months ended December 31, 1996, $400,000 of the note payable was
converted for 41,441 shares of the Company's common stock and $36,627 of related
deferred debt financing costs were charged to additional paid-in capital. During
the year ended December 31, 1997, $1,065,000 of the note payable was converted
for 98,959 shares of the Company's common stock and $79,235 of related deferred
debt financing costs were charged to additional paid-in capital.
    
 
   
     Interest expense on the convertible note payable for the year ended
December 31, 1997 was $45,640, for the six months ended December 31, 1996 was
$74,282 and for the year ended June 30, 1996 was $1,049,074. Amortization
expense on deferred debt financing costs for the year ended December 31, 1997
was $36,744, for the six months ended December 31, 1996 was $61,809, and for the
year ended June 30, 1996 was $57,230.
    
 
  Bridge Loans
 
     On December 19,1997 DynaGen sold a subordinated note in the principal
amount of $155,000 to a lender with an interest rate of 7% per annum. This
unsecured note was payable in full with interest on January 18, 1998. In
connection with this bridge loan, DynaGen agreed to issue 15,000 shares of
common stock to the investor as additional consideration for the loan. This note
was converted into common stock on March 25, 1998.
 
     On October 3, 1997, BioTrack, Inc. received $250,000 in a subordinated note
from an employee of Superior at an interest rate of 18% per annum due on
November 30, 1997. The due date on this note was extended to June 30, 1998. The
proceeds were used as bridge-financing for BioTrack, Inc. and the investor has
the option of extending the note or to be paid in full from subsequent
financings. This investor also received 10,000 shares of BioTrack common stock
valued at $500 as additional consideration for the loan.
 
     In addition, four investors invested $175,000 in BioTrack in December 1997
at 10% interest due on February 12, 1998. In February 1998, $75,000 of these
short-term loans were repaid in full with interest. These investors purchased
35,000 shares of BioTrack common stock for $1,750.
 
                                       48
<PAGE>   32
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     In October 1997, Apex Pharmaceuticals Inc., received a $50,000 bridge loan
at an interest rate of 12% per annum from a consultant, this loan is to be
repaid by December 31, 1998, with interest.
 
     DynaGen obtained debt financing in the form of a bridge loan of $500,000,
from a private investor at an interest rate of 7% per annum and due September
30, 1997 related to its Superior acquisition. In connection with this bridge
loan, the Company has issued 15,000 shares of its unregistered common stock to
the investor as additional consideration for the loan. Proceeds of $150,000 from
the debt financing were allocated to the common stock based on the fair value of
the common stock at June 18, 1997. The balance of the proceeds was allocated to
the bridge loan. The debt discount of $150,000 on the bridge loan was fully
amortized through December 31, 1997. On October 10, 1997, the bridge loan and
all accrued interest was converted into 5,015 shares of Series B Preferred Stock
and 15,000 shares of common stock in full satisfaction of the debt.
 
  Notes Payable -- Superior Acquisition
 
     In connection with the acquisition of Superior, the Company issued
$5,000,000 in secured promissory notes payable to the former Superior
stockholders. The notes are payable in quarterly installments of principal and
interest over three years at an interest rate of 9.5% and are secured by a
pledge of the Superior common stock. During the year ended December 31, 1997,
the Company made principal payments of $416,667 on the notes. In addition, the
notes were reduced by $400,000, due to a shortfall in the required net worth of
Superior as of the acquisition date. The Company has classified the notes
payable as a current liability on December 31, 1997 as it is currently in
default under certain loan covenants.
 
     As of December 31, 1997, amounts payable on the notes over the next three
fiscal years are as follows:
 
<TABLE>
<CAPTION>
                  YEAR ENDED DECEMBER 31,                       AMOUNT
                  -----------------------                     ----------
<S>                                                           <C>
1997........................................................  $  433,333
1998........................................................   1,666,667
1999........................................................   1,666,667
2000........................................................     416,666
                                                              ----------
                                                              $4,183,333
                                                              ==========
</TABLE>
 
  Senior Subordinated Debt
 
     In June 1997, DynaGen obtained senior subordinated debt financing of
$3,000,000 from two private investors bearing interest at 13.5% payable in
monthly installments. The principal is payable upon maturity at the end of five
years. The loan is secured by a first-lien security interest on the assets of
DynaGen, a second-lien security interest on the assets of Superior and a
second-lien interest in the pledge of the Superior common stock and a guarantee
of payment by Superior.
 
   
     DynaGen also issued to the investors warrants to purchase 40,000 shares of
common stock of DynaGen at an exercise price of $.10 per share exercisable for
five years. In addition, these warrants are subject to put features under
certain circumstances. Proceeds of $702,000 from this financing were allocated
to the DynaGen stock warrants, based on their estimated fair value. This amount
is reflected in the accompanying financial statements as a warrant put liability
because the warrants give the holders the choice of a cash settlement under
certain conditions. The put allows the holders to sell two-thirds of the
warrants to the Company after three years for $667,000, and all of the warrants
after five years for $1,500,000 unless the market value of the shares issuable
pursuant to the warrant is equal to or greater than the put value. The Company
is accruing the put value of the warrants to their redemption amounts over their
respective terms. The stock purchase warrants contain a provision which allows
the warrant holder to substitute their warrants for stock purchase
    
 
                                       49
<PAGE>   33
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
   
warrant, issued by Superior, unless the market value of the shares issuable
pursuant to the warrant is equal to or greater than the put value. The
substitute warrants allow the warrant holders to purchase 15% of Superior's
common stock at an exercise price of $.01 per share.
    
 
     The remaining proceeds from this offering of $2,298,000 were allocated to
the subordinated debt. The debt discount of $702,000 was being amortized, using
the interest method, over the term of the debt. At December 31, 1997, the
Company amortized the entire debt discount as the Company is in default under
the terms of the debt agreement and the debt has been classified as a current
liability.
 
  Loan Payable -- Bank
 
     Superior obtained a secured revolving line of credit of up to $9,000,000
from a bank to provide working capital for its general operations. Advances
under the line of credit are subject to a borrowing base consisting of the sum
of (i) 80% of Superior's eligible accounts receivable, plus (ii) 60% of
Superior's eligible inventory.
 
     The advances under the line are secured by a first-lien security interest
in all of the assets of Superior and are guaranteed by DynaGen. Superior may not
make distributions to the Company, other than distributions to pay principal and
interest on the notes payable to the former Superior stockholders, without the
prior written consent of the bank. In the event of a default Superior may not
make any distributions to the Company. Superior may draw on the line of credit
until April 5, 1998. Interest on the line of credit is based on the lower of the
prime lending rate or LIBOR plus 2% (7.625% at December 31, 1997).
 
7.  INCOME TAXES
 
     There was no provision for income taxes for the year ended December 31,
1997, for the six months ended December 31, 1996 and 1995 and for the years
ended June 30, 1996 and 1995 due to the Company's net operating losses. The
difference between the statutory Federal income tax rate of 34% and the
Company's effective tax rate is primarily due to net operating losses incurred
by the Company and the valuation reserve against the Company's deferred tax
asset.
 
     The components of the net deferred tax asset are as follows:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                   ---------------------------
                                                                       1997           1996
                                                                   ------------    -----------
    <S>                                                            <C>             <C>
    Deferred tax asset:
    Federal....................................................      11,477,000    $ 8,008,000
    State......................................................       2,634,000      1,986,000
                                                                   ------------    -----------
                                                                     14,111,000      9,994,000
    Valuation reserve..........................................     (14,111,000)    (9,994,000)
                                                                   ------------    -----------
    Net deferred tax asset.....................................    $         --    $        --
                                                                   ============    ===========
</TABLE>
 
     The following differences give rise to deferred income taxes:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                   ---------------------------
                                                                       1997           1996
                                                                   ------------    -----------
    <S>                                                            <C>             <C>
    Net operating loss carry forward...........................    $ 12,714,000    $ 9,185,000
    Research tax credit carryforward...........................         620,000        662,000
    Other......................................................         777,000        147,000
                                                                   ------------    -----------
                                                                     14,111,000      9,994,000
    Valuation reserve..........................................     (14,111,000)    (9,994,000)
                                                                   ------------    -----------
    Net deferred tax asset.....................................    $         --    $        --
                                                                   ============    ===========
</TABLE>
 
                                       50
<PAGE>   34
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The increases in the valuation reserve are due to the Company's net
operating losses.
 
     As of December 31, 1997, the Company has Federal and state net operating
loss carryforwards of approximately $32,750,000 and $25,200,000, respectively.
The Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1998, respectively. In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$56,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2003 and 2006, respectively.
 
     Use of net operating loss and tax credit carryforwards is subject to annual
limitations based on ownership changes in the Company's common stock as defined
by the Internal Revenue Code.
 
8.  RELATED PARTY TRANSACTIONS
 
  Notes Receivable
 
     During the year ended June 30, 1996, the Company loaned $75,000 in the
aggregate to an officer/director and an officer under notes which bear interest
at 5.05% per annum. These notes were secured by common stock of the Company
issuable on exercise of stock options held by the officers. In December 1997,
the entire amount, including accrued interest of $6,676, was forgiven and the
stock options were returned to the Company.
 
     In October 1996, the Company granted a $250,000 line-of-credit to each of
two officer/directors which bear interest at 6.07% per annum and mature on
October 4, 1998. These lines-of-credit are secured by common stock of the
Company held by the officer/directors. At December 31, 1997 and 1996, borrowings
of $110,000 were outstanding under the lines-of-credit.
 
     The Company recognized interest income on notes receivable of $10,464
during the year ended December 31, 1997 and $4,562 during the six months ended
December 31, 1996. At December 31, 1997 and 1996, accrued interest receivable of
$8,346 and $4,562, respectively, is included in the consolidated balance sheet.
 
  Accounts Payable
 
     In 1997, these officers/directors advanced an aggregate of $62,000 to the
Company, towards working capital requirements. These advances do not bear any
interest.
 
  Consulting Fees
 
     During 1996, the Company retained a consulting company for strategic
marketing and business development. The chief executive officer of the
consulting firm was also a director of the Company. During the six months ended
December 31, 1996 the Company paid the consulting firm $56,800 in fees. The
consulting fees for the year ended December 31, 1997 were $15,678.
 
     The Company paid $495,000 towards finder's fees to a consulting firm
relating to the acquisition of Superior. A former director of the Company was
also a minority shareholder of this consulting firm at the time of the
acquisition.
 
     The Company also entered into a marketing and business development
agreement for some of its technologies with another consulting firm. A principal
of this consulting firm is a director of the Company. During the year ended
December 31, 1997, fees of $20,833 were paid to this consulting firm and during
the six months ended December 31, 1996 the fees paid were $12,500.
                                       51
<PAGE>   35
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The Company retained a director as a consultant to assist with certain
public and investor relations matters. During the years ended June 30, 1996 and
1995, the director was paid fees of $31,000 and $49,000, respectively.
 
     In the year ended December 31, 1997, the Company paid fees of $20,050 and
for the years ended June 30, 1996 and 1995, $11,550 and $18,188, respectively to
the spouse of an officer/director for research and development services.
 
9.  COMMITMENTS AND CONTINGENCIES
 
  Lease Agreements
 
     The Company leases offices and warehouse facilities under operating leases
expiring in various years through 2014 that require the Company to pay certain
costs such as maintenance and insurance. The main facility at Superior is rented
from a related party. The related party rent was $162,000 for 1997.
 
     The following is a schedule of future minimum lease payments for all
operating leases (with initial or remaining terms in excess of one year) as of
December 31, 1997:
 
<TABLE>
<CAPTION>
                            YEAR                                AMOUNT
                            ----                              -----------
<S>                                                           <C>
1998........................................................  $   996,000
1999........................................................    1,003,000
2000........................................................    1,052,000
2001........................................................    1,054,000
2002........................................................      986,000
Thereafter..................................................    5,608,000
                                                              -----------
          Total minimum future lease payments...............  $10,699,000
                                                              ===========
</TABLE>
 
     Rent expense, net of subleases for the year ended December 31, 1997 was
$643,564 and for the six months ended December 31, 1996 and 1995 was $130,463
and $31,000 respectively. Rent expense for the years ended June 30, 1996 and
1995 was $61,366 and $71,031, respectively.
 
  Employment Agreements
 
     As of December 31, 1997, the Company has employment agreements with six
officers that provide for minimum annual salaries, reimbursement of business
related expenses and participation in other employee benefit programs. The
agreements also include confidentiality, non-disclosure, severance, automatic
renewal and non-competition provisions. Salary levels are subject to periodic
review by the Board of Directors.
 
  Consulting Agreements
 
     In February 1996, the Company entered into a six-month public and investor
relations services agreement with a public relations firm. As compensation for
these services, the firm was granted an option under the 1991 Stock Plan (see
Note 10) to purchase 2,000 shares of the Company's common stock at $.10 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.
 
                                       52
<PAGE>   36
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  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
 
  Preferred Stock
 
     A summary of preferred stock outstanding at December 31, 1997 is as
follows:
 
<TABLE>
<CAPTION>
                                                               PAR     LIQUIDATION
                                                              VALUE       VALUE
                                                              -----    -----------
<S>                                                           <C>      <C>
Preferred stock, $.01 par value, 10,000,000 shares
  authorized:
  Series A convertible, 50,000 shares authorized, 37,007
     shares issued and outstanding..........................  $370     $3,700,672
  Series B convertible, 12,515 shares authorized, 12,515
     shares issued and outstanding..........................   125      1,247,745
  Series C convertible, 7,500 shares authorized, 7,500
     shares issued and outstanding..........................    75        750,000
  Series D convertible, 60,000 shares authorized, no shares
     issued and outstanding.................................    --             --
  Series E convertible, 10,500 shares authorized, no shares
     issued and outstanding.................................    --             --
  Series F convertible 5,000 shares authorized, no shares
     issued and outstanding.................................    --             --
  Series G convertible, 10,000 shares authorized, 6,500
     shares issued and outstanding..........................    65        650,000
                                                              ----     ----------
                                                              $635     $6,348,417
                                                              ====     ==========
</TABLE>
 
  1992 Public Offering Warrants
 
     In October 1992, the Company completed a public offering which included
redeemable common stock purchase warrants. Each warrant originally allowed the
holder to purchase one share of common stock at a price of $65, subject to
adjustment in certain instances, through September 24, 1995. The terms of the
warrants provide that in the event that the Company, at any time or from time to
time after their issuance, sells any shares of Common Stock for consideration of
less than $65.00 per share, the exercise price will be decreased, and the number
of shares for which the warrants is exercisable increased, such that the
warrants will remain exercisable for the same percentage of the outstanding
Common Stock for the same aggregate exercise price. The terms of the warrants
further provide, however, that no such adjustment is to be made on account of
any exercise of options to purchase Common Stock under any employee stock option
plan, exercise of the warrants issued in the Company's 1992 public offering or
the issuance of shares of Common Stock in an amount of up to 10% of the shares
issued and outstanding as of the closing of the 1992 public offering. The
warrant exercise price is also subject to adjustment in the event that the
Company issues any Common Stock
 
                                       53
<PAGE>   37
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
as a stock dividend to stockholders, or subdivides or combines the outstanding
shares of Common Stock into a greater or lesser number. As a result of
subsequent debt and equity financings, the 91,780 warrants that remain
outstanding have been adjusted to allow the holder to purchase 1.7 shares with
each warrant at an exercise price of $39 per warrant. The Company has extended
the expiration date of the warrants to September 24, 1998. During the year ended
June 30, 1996, 220 warrants were exercised to purchase 330 shares of common
stock. Net proceeds were $9,438.
 
  1994 Public Offering
 
     On March 23, 1994, the Company completed a public offering of 160,000 units
at $45 per unit. Each unit consisted of four shares of common stock and two
Class A redeemable common stock purchase warrants. Each warrant allowed the
holder to purchase one share of common stock at a price of $12, subject to
adjustment in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation or merger, through March 16, 1999. Net proceeds of
the offering after deduction of all expenses were $5,617,729.
 
     The underwriting agreement granted the underwriters warrants to purchase
16,000 units at $74.25 per unit, subject to adjustment in the event of a stock
dividend, stock split, reclassification, reorganization, consolidation or
merger, during the period March 16, 1995 to March 16, 1999. The warrants
contain, among other things, a net exercise feature. The net exercise feature of
the underwriter's warrant allows the holder of the warrant to exercise the
warrant in full or in part by surrendering the certificate for a number of
shares of Common Stock equal in value to the difference between (i) the market
price of the aggregate number of shares of Common Stock for which the warrant,
or the part thereof, is being exercised, and (ii) the exercise price.
 
  Public Offering Warrants
 
     In May 1995, the Company filed a registration statement to register the
shares issuable upon the exercise of the warrants issued in the 1992 and 1994
public offerings and the shares issuable upon the exercise of the warrants
issued to the underwriters of the 1994 public offering. Registration costs of
$34,593 were deducted from net proceeds of warrant exercises during the year
ended June 30, 1995.
 
  1994 Public Offering Warrants
 
     In June 1995, 2,200 warrants issued to the underwriters of the 1994 public
offerings were exercised at $74.25 per warrant. The Company received proceeds of
$163,350 and issued the warrant holder 8,800 shares of common stock and 4,400
Class A redeemable common stock purchase warrants. In addition, in June 1995,
3,500 warrants issued to the underwriters of the 1994 public offering were
exercised, using their net exercise feature, in exchange for 18,545 shares of
common stock.
 
     During the period from July 1995 to November 1995, 10,300 warrants issued
to the underwriters of the 1994 public offering were exercised to acquire 50,398
shares of common stock and 1,000 Class A redeemable common stock purchase
warrants using their net exercise feature and payment to the Company of $37,125.
 
     In December 1995, the Company completed the redemption of the Class A
redeemable common stock purchase warrants resulting in the purchase of 324,119
shares of common stock yielding net proceeds of $3,845,769 after deducting
expenses. The remaining 1,280 unexercised warrants were redeemed by the Company
for $.10 per warrant.
 
                                       54
<PAGE>   38
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Private Placements
 
     During the year ended June 30, 1993, the Company entered into two common
stock private placement agreements and issued warrants to the placement agents
to purchase 6,833 shares of common stock. The agents' warrants are exercisable
over a four-year period commencing one year from the closing date and carry
certain demand registration rights. The exercise price is subject to adjustment
in certain instances. As a result of subsequent debt and equity financings, the
warrant exercise price has been adjusted to $43.70 per share.
 
     On February 7, 1996, the Company raised $3 million in a private placement,
from the sale to a single investor of 57,963 shares of common stock for
$1,000,000 (approximately $17.30 per share) and the issuance of a $2 million
convertible note. (See Note 6).
 
     Placement costs for this transaction were $421,157 of which $146,452 was
charged to additional paid-in capital and $274,705 was capitalized as deferred
debt financing costs. During the year ended December 31, 1997, $1,065,000 of
this note was converted for 98,959 shares of common stock and $79,235 of related
debt financing costs charged to additional paid-in-capital. During the six
months ended December 31, 1996, $400,000 of the note was converted for 41,441
shares of common stock and $36,627 of related deferred debt financing costs were
charged to additional paid-in capital.
 
     On February 21, 1996 and March 4, 1996, the Company issued, in private
placements, an aggregate of 38,850 shares of common stock for $38,850 and
1,178,264 shares of Series A preferred stock for $3,461,150 for aggregate
consideration of $3,500,000. The common stock was sold at a discount of
approximately $1,194,000 from market. This discount has not been recorded
because it would result in an increase and an offsetting decrease in the
Company's additional paid-in capital. 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.
The discount on the Series A convertible preferred was approximately $865,000.
This discount was not recorded at the time of issuance of the Series A preferred
Stock. Had the discount been recorded, an equal amount would have been added to
the Company's additional paid-in capital at the date of issuance. The discount
would have been amortized by a charge to additional paid-in capital from the
issuance date to the first conversion date. This discount would have been fully
amortized by June 30, 1996. The net loss per share for the year ended June 30,
1996 has been restated to reflect the discount as a return to the preferred
shareholders in the calculation of basic earnings per share. Each share of
preferred stock had a liquidation value equal to $2.9375, the consideration paid
per share. In June 1996, the 1,178,264 shares of Series A preferred stock were
converted into 161,283 shares of common stock based on the above formula.
 
     In February 1996, the Company issued, in a private placement, 55,256 shares
of common stock for aggregate consideration of $1,000,000. Placement costs of
$13,526 were charged to additional paid-in capital.
 
     During 1997, the Company sold 48,450 shares of Series A Preferred Stock for
$4,845,000 and issued warrants to purchase 38,760 shares of Common Stock. No
value was assigned to the warrants. The Series A Preferred Stock has a stated
dividend of $5.00 per share per annum. DynaGen is obligated to register the
shares of common stock issuable upon conversion of the Series A Preferred Stock
and exercise of the warrants within 90 days after the issuance of the Preferred
Stock. The exercise price of the warrants will be $3.87 per share based on the
five trading days immediately preceding December 4, 1997 on which date the
registration statement was declared effective. The holders of Series A Preferred
Stock have certain rights of first refusal on future equity financings.
 
                                       55
<PAGE>   39
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     The Series A preferred stock may be converted into common stock at a
conversion price equal to the lesser of 120% of the average closing bid price,
as defined (the Series A Effective Price) or discounted percentages of the
Series A Effective Price decreasing from 80% to 74% over time. During 1997,
11,443 shares of Series A Preferred Stock with accumulated dividends was
converted into 757,320 shares of common stock. Any outstanding shares of the
Series A Preferred Stock will be automatically converted to common stock two
years from the issue date. The Company issued 100,000 shares to a placement
agent in connection with placement fees for Series A Preferred Stock.
 
     In June 1997, the Company sold 7,500 shares of Series B Preferred Stock for
$747,750 and 22,500 shares of common stock for $2,250 for aggregate proceeds of
$750,000 to a private investor. The common stock was sold at a discount of
approximately $230,000 from the market price. The discount has not been recorded
because it would result in an increase and offsetting decrease in additional
paid-in capital. The Series B Preferred Stock has a stated dividend of $7.00 per
share per annum. Additionally, a $500,000 bridge loan provided in June 1997 and
accrued interest was converted to 5,015 shares of Series B Preferred Stock and
15,000 shares of common stock in October 1997 per the terms of the bridge loan.
Upon liquidation, the Series B Preferred Stock ranks junior to the Series A
Preferred Stock. DynaGen is obligated to register the 22,500 shares of common
stock issued and the shares of common stock issuable upon conversion of the
series B Preferred Stock within 150 days after the closing of the acquisition.
 
     The Series B preferred stock may be converted into Common Stock at a
conversion price equal to the lesser of 125% of the average closing bid price,
as defined (the "Series B Effective Price") or discounted percentages of the
Series B Effective Price decreasing from 80% to 75% over time. Any outstanding
shares of the Series B Preferred Stock will be automatically converted to common
stock two years from the issue date.
 
     On August 21, 1997, the Company sold 7,500 shares of Series C Preferred
Stock for $750,000 and issued a Common Stock Purchase Warrant to purchase 25,000
shares of common stock to a private investor. No value was assigned to the
warrants. The exercise price of the warrants is $7.4609 per share based on 125%
of the ten day average of the closing bid price of the common stock. The Series
C Preferred Stock may be converted into common stock at a conversion price equal
to the lesser of 125% of the five day average of the closing bid price of the
common stock or discounted percentages, ranging from 80% to 74% over time, of
the current five day average closing bid price of the common stock. The Series C
Preferred Stock has a stated dividend of $7.00 per share per annum.
 
     Effective December 31, 1997, the Company issued an 8% Debenture due April
19, 2009 for $328,500 to settle certain penalties related to delayed
registration of the Series C Preferred Stock. The Debenture is repayable solely
in common stock and may be converted at the trading value of company's stock,
for five trading days preceding the Conversion date.
 
     The Company issued 6,500 shares, $.01 par value, of Series C Preferred
Stock in settlement of $650,000 of accrued expenses. These shares may be
converted into common stock at market prices beginning in 90 days from issue
date.
 
     The Series A, B and C Convertible Preferred Stock have conversion features
that were "in the money" at the date of issue ("beneficial conversion feature").
These securities may be convertible into common stock at the discount
percentages specified above. The beneficial conversion features were recognized
and measured in the 1997 financial statements by allocating a portion of the
proceeds equal to the intrinsic value of the conversion feature to additional
paid-in capital. The intrinsic value was calculated at the date of issue of the
Convertible Preferred Stock as the difference between the conversion price and
the face value of the Common
 
                                       56
<PAGE>   40
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
Stock into which the securities are convertible, multiplied by the number of
shares into which the security is convertible. A summary of the amounts
allocated to the beneficial conversion feature is as follows:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                CONVERTIBLE PREFERRED STOCK                       1997
                ---------------------------                   ------------
<S>                                                           <C>
Series A....................................................   $1,366,000
Series B....................................................      374,000
Series C....................................................      178,000
                                                               ----------
                                                               $1,918,000
                                                               ==========
</TABLE>
 
     The discount resulting from the allocation of proceeds to the beneficial
conversion feature is analogous to a dividend and has been recognized as a
return to the preferred shareholders from the date of issuance through the date
the security is first convertible. The discount of $1,918,000 was fully
amortized at December 31, 1997 by a charge against additional paid-in capital
because the company had no accumulated earnings at those dates.
 
     The amortization of the discount has been reflected as a return to the
preferred shareholders in the calculation of basic earnings per share.
 
  Bonus Compensation
 
     In February 1996, the Company granted to certain employees and a
consultant, bonus compensation paid in the form of (1) 11,725 shares of common
stock outside of the 1991 Stock Plan and the 1989 Stock Option Plan and (2)
stock options under the 1991 Stock Plan for 6,500 shares of common stock at an
exercise price of $.10 per share. The Company recognized $558,857 in
compensation expense associated with the grants.
 
  Stock Option Plans
 
     The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and
reserved 60,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1989 Plan, the Board of Directors will
grant options and establish the terms of the options in accordance with plan
provisions. The 1989 Plan options are exercisable for a period of ten years from
the date of issuance. The following table summarizes the activity of options
granted under the 1989 plan:
 
<TABLE>
<CAPTION>
                                                                              YEARS ENDED JUNE 30,
                                 YEAR ENDED       SIX MONTHS ENDED    -------------------------------------
                              DECEMBER 31, 1997   DECEMBER 31, 1996         1996                1995
                              -----------------   -----------------   -----------------   -----------------
                                       WEIGHTED            WEIGHTED            WEIGHTED            WEIGHTED
                                       AVERAGE             AVERAGE             AVERAGE             AVERAGE
                                       EXERCISE            EXERCISE            EXERCISE            EXERCISE
                              SHARES    PRICE     SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                              ------   --------   ------   --------   ------   --------   ------   --------
<S>                           <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of
  period....................  20,800    $8.80     22,000    $8.70     27,000    $7.10     27,000    $7.10
Granted.....................      --       --         --       --         --       --         --       --
Canceled....................      --       --         --       --         --       --         --       --
Exercised...................      --       --     (1,200)    7.50     (5,000)     .50         --       --
                              ------              ------              ------              ------
Outstanding at end of
  period....................  20,800     8.80     20,800     8.80     22,000     8.70     27,000     7.10
                              ======              ======              ======              ======
Exercisable at end of
  period....................  20,800     8.80     20,050     8.90     19,750     8.90     22,850     7.20
                              ======              ======              ======              ======
Reserved for future grants
  at end of period..........      --                  --                  --                  --
                              ======              ======              ======              ======
</TABLE>
 
                                       57
<PAGE>   41
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     Information pertaining to options outstanding under the 1989 Plan at
December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                                          OPTIONS EXERCISABLE
                                  OPTIONS OUTSTANDING                    ----------------------
                             ------------------------------   WEIGHTED                 WEIGHTED
                                           WEIGHTED AVERAGE   AVERAGE                  AVERAGE
                               NUMBER         REMAINING       EXERCISE     NUMBER      EXERCISE
        EXERCISE PRICES      OUTSTANDING   CONTRACTUAL LIFE    PRICE     EXERCISABLE    PRICE
        ---------------      -----------   ----------------   --------   -----------   --------
    <S>                      <C>           <C>                <C>        <C>           <C>
    $7.50-$8.80............    20,600         4.0 Years        $ 8.30      20,600       $ 8.30
    $58.70.................       200         3.6 Years         58.70         200        58.70
                               ------                                      ------
                               20,800         4.0 Years          8.80      20,800         8.80
                               ======                                      ======
</TABLE>
 
     The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved
260,000 shares of common stock for issuance to employees, officers, directors
and consultants. Under the 1991 Plan, the Board of Directors may grant options,
stock awards and purchase rights, and establish the terms of the grant in
accordance with the provisions of the plan. The 1991 Plan options are
exercisable for a period of seven years from the date of issuance and certain
options contain a net exercise provision. As of December 31, 1997, no stock
awards or purchase rights have been granted under the 1991 Plan. The following
table summarizes the activity of options granted under the 1991 Plan:
 
<TABLE>
<CAPTION>
                                                                                            YEARS ENDED JUNE 30,
                                              YEAR ENDED        SIX MONTHS ENDED    -------------------------------------
                                          DECEMBER 31, 1997    DECEMBER 31, 1996          1996                1995
                                          ------------------   ------------------   -----------------   -----------------
                                                    WEIGHTED             WEIGHTED            WEIGHTED            WEIGHTED
                                                    AVERAGE              AVERAGE             AVERAGE             AVERAGE
                                                    EXERCISE             EXERCISE            EXERCISE            EXERCISE
                                          SHARES     PRICE     SHARES     PRICE     SHARES    PRICE     SHARES    PRICE
                                          -------   --------   -------   --------   ------   --------   ------   --------
<S>                                       <C>       <C>        <C>       <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period......   79,790    $10.20     64,090    $10.40    60,910    $12.60    58,660    $11.80
Granted.................................   21,000      2.31     32,600     10.10    10,500      2.90    5,000      19.40
Canceled................................  (22,394)    10.00     (5,600)    18.10    (2,150)    52.90    (2,700)     8.50
                                                                                                        ------    ------
Exercised...............................     (150)     7.50    (11,300)     7.50    (5,170)     3.20      (50)      7.50
                                          -------              -------              ------              ------
Outstanding at end of period............   78,246      5.80     79,790     10.20    64,090     10.40    60,910     12.60
                                          =======              =======              ======              ======
Exercisable at end of period............   52,800      8.70     34,399     11.80    41,830     10.90    20,183     18.70
                                          =======              =======              ======              ======
Reserved for future grants at end of
  period................................  165,084               23,690              50,690              59,040
                                          =======              =======              ======              ======
Weighted average fair value of options
  granted during the period.............             $ 2.30               $12.30              $29.40                 N/A
</TABLE>
 
                                       58
<PAGE>   42
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     Information pertaining to options outstanding under the 1991 Plan at
December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                             -------------------------              ----------------------
                                            WEIGHTED
                                             AVERAGE     WEIGHTED                 WEIGHTED
                                            REMAINING    AVERAGE                  AVERAGE
           EXERCISE            NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
            PRICES           OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
           --------          -----------   -----------   --------   -----------   --------
    <S>                      <C>           <C>           <C>        <C>           <C>
    $.01-$.75..............    40,000       4.0 Years     $ 3.25      27,200       $ 2.80
    $1.31-$1.94............    18,246       5.3 Years       6.20       5,600         6.95
    $5.25-$6.25............    20,000         1 Years      25.60      20,000        25.60
                               ------                                 ------
                               78,246       3.8 Years       5.80      52,800         8.70
                               ======                                 ======
</TABLE>
 
  Other Stock Options and Warrants
 
     On September 6, 1990, the Company's Board of Directors granted
non-qualified stock options to purchase 45,000 shares of common stock at a price
of $8.75 per share through September 2000, all of which are currently
exercisable by a former director of the Company. In January 1993, the Company
granted an option to purchase 2,000 shares of common stock at a price of $52.50
per share exercisable through January 15, 1999.
 
     On November 20, 1995, the Company entered into a one-year investment
banking agreement with the underwriter of the Company's prior public offerings.
As compensation for services, the Company granted a warrant to purchase 40,000
shares of common stock at an exercise price of $25 per share. The warrant is
exercisable through November 20, 2000. The shares underlying the warrant were
registered on a Form S-3 registration statement declared effective on March 29,
1996. In September 1996, the Company and the underwriter amended the agreement,
and the Company paid the underwriter $500,000 in consulting fees for services
rendered.
 
     On July 24, 1996, the Company's Board of Directors granted non-qualified
stock options to two directors of the Company to purchase an aggregate of 66,000
shares of common stock at an exercise price of $19.40 per share. These options
are exercisable by the directors until July 24, 2003. On October 28, 1996, the
Company's Board of Directors granted a non-qualified stock option to a director
of the Company to purchase 33,000 shares of common stock at an exercise price of
$13.10 per share. This option is exercisable by the director until October 28,
2003. The weighted average fair value of these options, estimated using the
Black-Scholes option-pricing model, on the date of grant was $12 per share.
 
     On December 10, 1996, the Company granted warrants to purchase an aggregate
of 10,000 shares of common stock at an exercise price of $14.40 per share. These
warrants are exercisable through December 31, 2003. The Company valued the
warrants at $99,000 and is expensing the warrants over their vesting period.
Expense for the year ended December 31, 1997 and the six months ended December
31, 1996 was $39,598 and $19,800, respectively.
 
   
     On August 28, 1997, the Company issued a warrant to purchase 100,000 shares
of Common Stock at an exercise price of $1.50 per share as consideration of
investment banking services rendered to the Company by an investment banker. The
Company recognized compensation expense of $452,000 in the third quarter of
Fiscal 1997 based on the fair value of the warrant.
    
 
                                       59
<PAGE>   43
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Stock-Based Compensation
 
     At December 31, 1997, the Company has two stock-based compensation plans
and stock options issued outside of the plans, which are described above. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
stock options issued to employees and directors. Had compensation cost for the
Company's stock options issued to employees and directors been determined based
on the fair value at the grant dates consistent with SFAS No. 123, the Company's
net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
 
   
<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                       YEAR ENDED         DECEMBER 31,      YEAR ENDED
                                                    DECEMBER 31, 1997         1996         JUNE 30, 1996
                                                    -----------------   ----------------   -------------
    <S>                                             <C>                 <C>                <C>
    Net loss:
      As reported.................................    $(12,241,278)       $(4,306,140)      $(6,082,494)
      Pro forma...................................     (12,555,111)       $(4,489,433)      $(6,131,944)
    Net loss per share:
      As reported.................................    $      (4.48)       $     (1.50)      $     (2.84)
      Pro forma...................................    $      (4.58)       $     (1.66)      $     (2.86)
</TABLE>
    
 
     Common stock equivalents and contingently issuable shares have been
excluded from all calculations of net loss per share because the effect of
including them would be anti-dilutive.
 
     The fair value of each option grant under the 1991 Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants during the year ended December 31,
1997, the six months ended December 31, 1996 and the year ended June 30, 1996,
respectively; dividend yield of 0%; risk-free interest rates of 6.5%, 6.5% and
6.4%; expected volatility of 80%, 80% and 80% and expected lives of 1.0, 3.8 and
3.9 years.
 
     Weighted average assumptions used in valuing stock options issued outside
of the plans during the six months ended December 31, 1996 were dividend yield
of 0%; risk free interest rate of 6.8%; expected volatility of 81% and an
expected life of 5 years.
 
Common Stock Reserved
 
     The Company has reserved common stock at December 31, 1997 as follows:
 
<TABLE>
<CAPTION>
                                                                NUMBER OF SHARES
                                                                ----------------
<S>                                                             <C>
Convertible note payable....................................          555,677
1992 public offering warrants...............................          256,984
Private placement agents' warrants..........................            6,833
Stock option plans..........................................          258,446
Superior acquisition........................................        1,666,667
Preferred stock conversion..................................        4,848,913
Other stock options and warrants............................        1,684,999
                                                                   ----------
  Total.....................................................        9,278,519
                                                                   ==========
</TABLE>
 
     The number of shares of common stock reserved in connection with the
convertible note payable and convertible preferred stock is subject to
adjustment (see Notes 6 and 14.)
 
                                       60
<PAGE>   44
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
11.  REVENUES AND SEGMENT INFORMATION
 
  Product Sales
 
     During the six months ended December 31, 1996 and 1995, the Company's sales
to foreign customers amounted to 21% and 16% of total revenues, respectively.
During the years ended June 30, 1996 and 1995, the Company's sales to foreign
customers amounted to 36% and 42% of total revenues, respectively. Sales to two
domestic customers amounted to 53% and 14% of total revenues, and sales to one
foreign customer amounted to 18% of total revenues during the six months ended
December 31, 1996. Sales to one foreign customer amounted to 23% of total
revenues during the year ended June 30, 1996 and sales to a different foreign
customer amounted to 27% of total revenues during the year ended June 30, 1995.
A summary of sales by geographic area is as follows:
 
<TABLE>
<CAPTION>
                                   YEAR ENDED        SIX MONTHS ENDED
                                  DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                  ------------   -------------------------   -------------------------
                                      1997          1996          1995          1996          1995
                                  ------------   -----------   -----------   -----------   -----------
<S>                               <C>            <C>           <C>           <C>           <C>
Far East and Asia...............  $    31,970    $    68,815   $    39,812   $   183,706   $   185,997
United States...................   13,747,429        281,934         4,693        18,877        39,860
Europe..........................       11,542          7,403         5,622         8,466        16,462
Other...........................      129,963            315         7,728         9,696         5,234
                                  -----------    -----------   -----------   -----------   -----------
                                  $13,920,904    $   358,467   $    57,855   $   220,745   $   247,553
                                  ===========    ===========   ===========   ===========   ===========
</TABLE>
 
     A summary of sales by product is as follows:
 
<TABLE>
<CAPTION>
                                   YEAR ENDED        SIX MONTHS ENDED
                                  DECEMBER 31,         DECEMBER 31,            YEARS ENDED JUNE 30,
                                  ------------   -------------------------   -------------------------
                                      1997          1996          1995          1996          1995
                                  ------------   -----------   -----------   -----------   -----------
<S>                               <C>            <C>           <C>           <C>           <C>
Diagnostic tests................  $   110,395    $    86,781   $    57,855   $   220,745   $   247,553
Generic pharmaceuticals.........   13,810,509        271,686            --            --            --
                                  -----------    -----------   -----------   -----------   -----------
                                  $13,920,904    $   358,467   $    57,855   $   220,745   $   247,553
                                  ===========    ===========   ===========   ===========   ===========
</TABLE>
 
  License Fees and Royalties
 
     During the year ended June 30, 1995, the Company entered into an agreement
where it granted a third party the right to evaluate licensing the Company's
smoking cessation technology for a $500,000 fee, $250,000 of which was
refundable should the Company license its smoking cessation technology to a
different party prior to October 15, 1995. On July 13, 1995, the third party
informed the Company that it would not exercise its right to license the
technology at this time. Revenues earned under this agreement were approximately
45% and 50% of total revenues for the years ended June 30, 1996 and 1995,
respectively.
 
     License fee revenue for the year ended June 30, 1996 includes $250,000
related to the smoking cessation technology mentioned above, $60,000 for certain
rights to manufacture and sell the Company's MycoAKT latex agglutination
products, and $25,000 for exclusive MycoDot distribution rights in Japan.
 
                                       61
<PAGE>   45
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
  Segment Information
 
     The Company has two principal operating segments: the development and
marketing of therapeutic and diagnostic products for the human health care
market and the manufacture and distribution of generic pharmaceuticals through
its recently acquired subsidiaries, Able Laboratories, Inc. and Superior
Pharmaceutical Company. During the years ended June 30, 1996 and 1995, the
Company's continuing operations consisted of the development and marketing of
therapeutic and diagnostic products for the human health care market. Segment
information is as follows:
 
   
<TABLE>
<CAPTION>
                                    THERAPEUTICS
                                   AND DIAGNOSTIC       GENERIC         GENERAL
                                      PRODUCTS      PHARMACEUTICALS    CORPORATE    CONSOLIDATED
                                   --------------   ---------------   -----------   ------------
<S>                                <C>              <C>               <C>           <C>
YEAR ENDED DECEMBER 31, 1997
Operating revenues...............   $   199,221       $13,810,509     $        --   $ 14,009,730
Operating loss...................    (5,964,823)       (2,658,370)     (1,454,589)   (10,077,782)
Interest and other expense.......            --                --              --     (2,163,496)
Net loss.........................            --                --              --    (12,241,278)
Identifiable assets..............       435,570        28,207,542         705,002     29,348,114
Depreciation and amortization....        99,957         1,576,823          37,740      1,714,520
Capital expenditures.............        41,765           917,459              --        959,224
SIX MONTHS ENDED DECEMBER 31,
  1996
Operating revenues...............   $    88,222       $   271,686     $        --   $    359,908
Operating loss...................    (1,867,120)         (842,877)     (1,617,840)    (4,327,837)
Interest and other expense.......            --                --              --         21,697
Net loss.........................            --                --              --     (4,306,140)
Identifiable assets..............       509,885         1,410,679       5,542,585      7,463,149
Depreciation and amortization....        94,626            34,932              --        129,558
Capital expenditures.............        10,449           576,621              --        587,070
</TABLE>
    
 
     Operating loss represents net sales less operating expenses for each
segment, and excludes general corporate expenses and other income and expenses
of a general corporate nature. Identifiable assets by segment are those assets
that are used in the Company's operations within that segment. General corporate
assets consist principally of cash, investment securities, notes receivables,
accrued interest receivable, certain office furniture and equipment, certain
intangible assets and deferred debt financing costs.
 
12.  EMPLOYEE BENEFIT PLAN
 
     The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan")
for the DynaGen and Able employees. Employees who have attained the age of 21
may elect to reduce their current compensation, subject to certain limitations,
and have that amount contributed to the 401(k) Plan. The Company may make
discretionary contributions to the 401(k) Plan up to 25% of employee
compensation, subject to certain limitations. Employee contributions to the
401(k) Plan are fully vested at all times and all Company contributions become
vested over a period of six years. The Company has made no contributions to the
401(k) Plan as of December 31, 1997.
 
                                       62
<PAGE>   46
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
     Superior provides its employees with a Section 401(k) profit sharing plan.
Eligible participants must be twenty-one years old and have worked for one year.
Employer matching and profit sharing contributions are discretionary. At
December 30, 1997, Superior matched $5,919 and contributed $18,208 in profit
sharing.
 
13.  SUBSEQUENT EVENTS
 
     On August 20, 1997, the Company completed a placement of Series C and
Series D Convertible Preferred Shares with an investor. At the time of the
closing, the investor purchased 7,500 shares of Series C Preferred for $750,000.
The purchase agreement provided that the Company may require the investor to
purchase on a monthly basis tranches of Series D Preferred Shares in the amount
of no less than $200,000 per month and on an optional basis no more than an
additional $200,000 per month with certain exceptions. The Company is obligated
to register for resale the shares of common stock issuable upon conversion of
the Series C and D Preferred Stock. The Company also issued a stock purchase
warrant to purchase 25,000 shares of its common stock in connection with this
offering.
 
     Under the registration rights agreement, the Company was required to file
registration of both Series C and D Preferred Shares within 45 days of the
completion of the placement. The Company filed the registration statement in
March 1998, but it has not been declared effective. In March 1998 the Company
issued a warrant to the investor to purchase at any time in the next three (3)
years 1% of the fully diluted issued and outstanding shares at the time of the
exercise for $150,000.
 
     On March 19, 1998, the investor purchased an additional $500,000 of Series
D Preferred Shares from the Company and waived certain restrictions which
limited the drawdown to $400,000 per month.
 
     On February 26, 1998, the Company received $500,000 from the placement of a
7% convertible debenture from another investor. On March 30, 1998, the investor
exchanged this debenture for a $500,000 tranche of Series D Preferred Shares and
also received an 8% convertible debentures in the amount of $87,500. This
debenture is convertible into common stock at the market price of the common
stock on the date of the conversion.
 
     On March 31, 1998, the Company sold another tranche of $500,000 of Series D
Preferred Stock, along with an 8% convertible debenture in the amount of $87,500
convertible into common stock at the market price, to another investor.
 
     During the months of February and March of 1998, the Chairman and Executive
Vice President and the President and Chief Executive Officer of the Company and
their family members advanced the Company $265,000 towards general working
capital purposes. The loans carry no interest, are unsecured, and subordinated
and can only be repaid through conversion into equity.
 
   
     On March 2, 1998, the Company through its subsidiary, Generic
Distributions, Incorporated ("GDI"), completed the acquisition of Generic
Distributors Limited Partnership ("GDLP"), of Monroe, LA. In connection with the
acquisition, the Company paid the limited partnership $1,200,000 in cash, 10,500
shares of Series E Convertible Preferred Stock valued at $1,050,000 and 1,500
shares of Series F Convertible Preferred Stock valued at $100,000, for a total
purchase price of $2,350,000. The Series E Preferred Stock is convertible
beginning 12 months from the closing into shares of the Company's Common Stock
at the then-prevailing market prices. The Series F Preferred Stock is
convertible into $100,000 in value of the Company's Common Stock commencing 120
days after the closing at then-prevailing market prices. In connection with this
transaction, GDI received $1,200,000 in a five-year term loan from Fleet Bank.
The loan carries an interest of LIBOR plus 3%, is payable in quarterly
installments of principal and interest and matures on April 26, 2003. Fleet Bank
also established a revolving line of credit for general working capital in the
amount of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are
secured by all of the assets of GDI and
    
                                       63
<PAGE>   47
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
Able and a pledge of all of the common stock of GDI, and are guaranteed by the
Company. In addition, the Company entered into employment and consulting
agreements with the sellers which provide, among other things, for annual
compensation and a signing bonus of 1400 shares of Series F Preferred Stock,
convertible into $100,000 of the Company's Common Stock commencing 120 days
after the closing.
 
     On March 24, 1998, the Company suspended conversions of its Series A and B
Preferred Shares into the Company's common stock. The purpose of this suspension
is to give the Company time to coordinate its efforts to negotiate orderly
settlements of these outstanding convertible preferred shares. This action was
not specifically provided for in the terms of the Series A Preferred Stock or
Series B Preferred Stock. There has been no adverse effect on the Company.
 
     On March 30, 1998, the Board of Directors unanimously voted to issue
options, warrants and the Company's common stock to several individuals and
entities for services rendered to date and for future considerations. The Board
also authorized the issuance of 800,000 shares for product development and FDA
related consulting services to various entities. The Company granted warrants to
purchase 650,000 shares to two consulting firms in connection with the Company's
investor relations program. All of the above grants of shares, options and
warrants are subject to vesting and may be canceled by the Board at its option.
 
     In March 1998, the Company received a letter from NASDAQ advising that the
Company did not meet the minimum listing criteria and will be subject to
delisting. The Company has responded to NASDAQ. To date, the Company has not
been informed of a decision from NASDAQ concerning its continued listing.
 
     In January 1998, Biotrack, Inc. received $277,750 in bridge financing and
in March, 1998, the Company sold a portion of its shares of Biotrack, Inc. to
three investors for $125,000.
 
14.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     At December 31, 1997 and 1996, the Company's financial instruments include
investment securities which are carried at fair value (see Note 3), notes
receivable (see Note 8) and debt obligations (see Note 6). The carrying value of
the notes receivable approximate their fair value as these instruments bear
interest and mature in less than one year. The fair value of the outstanding
balance of the convertible note payable is approximately $799,000 and $2,786,000
at December 31, 1997 and 1996, respectively, based on the fair value of the
common stock issuable on conversion of the note. The carrying value of other
debt obligations approximate fair values based on their maturities and interest
rates.
 
                                       64
<PAGE>   48
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
15.  QUARTERLY DATA (UNAUDITED)
 
     Summaries of operating results on a quarterly basis are as follows:
 
   
<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                         DECEMBER 31,               YEAR ENDED JUNE 30,
                                            YEAR ENDED                 -----------------   -------------------------------------
                                         DECEMBER 31, 1997                   1996                          1996
                               -------------------------------------   -----------------   -------------------------------------
                               FOURTH     THIRD    SECOND     FIRST    SECOND     FIRST    FOURTH     THIRD    SECOND     FIRST
                               QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net product sales............  $6,662     5,572    $1,230    $  457    $  299    $   59    $   70    $   93    $   39    $    19
License fees and royalties...      --        38        50         1         1        --        25        35        25        250
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Total revenues...........   6,662     5,610     1,280       458       300        59        95       128        64        269
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Cost of sales................   6,402     4,645     1,255       454       331        25        22        46        21          8
Research and development.....     851       723     1,159       487       332       760     1,230       852       566        470
Selling, general and
  administrative.............   2,525     2,546     1,066     1,475     2,166     1,073       616       880       618        571
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Total costs and
      expenses...............   9,778     7,914     3,980     2,416     2,829     1,858     1,868     1,778     1,205      1,049
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Operating loss...............  (3,116)   (2,304)   (2,700)   (1,958)   (2,529)   (1,799)   (1,773)   (1,650)   (1,141)      (780)
Other income, net............  (1,623)     (514)      (95)       69         1        21        74      (923)       57         54
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
    Net loss.................  (4,739)   (2,818)   (2,795)   (1,889)   (2,528)   (1,778)   (1,699)   (2,573)   (1,084)      (726)
Less returns to preferred
  stockholders:
  Beneficial conversion
    feature..................    (486)   (1,229)     (203)       --        --        --      (552)     (313)       --         --
  Dividends paid and
    accrued..................     (96)      (73)      (21)       --        --        --        --        --        --         --
                               -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Net loss applicable to common
  stock......................  $(5,321)  $(4,120)  $(3,019)  $(1,889)  $(2,528)  $(1,778)  $(2,251)  $(2,886)  $(1,084)  $  (726)
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
Net loss per share --Basic...  $(1.51)   $(1.27)   $ (.99)   $ (.63)   $ (.88)   $ (.62)   $ (.82)   $(1.11)   $ (.48)   $  (.34)
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
Weighted average shares
  outstanding................   3,525     3,246     3,041     2,998     2,897     2,862     2,729     2,606     2,263      2,180
                               =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>
    
 
                                       65
<PAGE>   49
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
16.  PARENT COMPANY ONLY
 
     Financial information pertaining only to Dynagen, Inc. has been included as
of and for the year ended December 31, 1997 due to the restrictions placed on
distribution of the net assets of Superior Pharmaceutical Company under the
"loan payable-bank". (See Note 6.) The restricted net assets of Superior were
approximately $3,600,000 at December 31, 1997.
 
                            CONDENSED BALANCE SHEET
                               DECEMBER 31, 1997
 
<TABLE>
<S>                                                           <C>
Current assets:
  Accounts receivable.......................................  $    14,981
  Notes receivable..........................................      110,000
  Prepaid expenses and other current assets.................      127,270
                                                              -----------
          Total current assets..............................      252,251
                                                              -----------
Property and equipment, net.................................      124,001
                                                              -----------
Other assets:
  Investment in and advances to subsidiaries................   16,869,157
  Patents and trademarks, net of accumulated amortization...      242,315
  Deferred debt financing costs, net of accumulated
     amortization...........................................      359,621
  Deposits and other assets.................................      245,725
                                                              -----------
          Total other assets................................   17,716,818
                                                              -----------
                                                              $18,093,070
                                                              ===========
</TABLE>
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
   
<TABLE>
<S>                                                           <C>
Current liabilities:
  Bank overdraft............................................  $    142,616
  Notes payable.............................................     7,873,333
  Accounts payable..........................................     2,248,184
  Accrued payroll and payroll taxes.........................        42,215
  Acquisition obligation....................................     4,083,000
                                                              ------------
          Total current liabilities.........................    14,389,348
  Warrant put liability.....................................       750,594
  Long term debt............................................       328,500
                                                              ------------
          Total liabilities.................................    15,468,442
                                                              ------------
Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares
     authorized, 63,522 shares of Series A, B, C and G
     outstanding, (liquidation value $6,348,417): ..........           635
  Common stock, $.01 par value, 75,000,000 shares
     authorized, 4,315,137 shares issued and outstanding....        43,151
  Additional paid-in capital................................    40,122,386
  Accumulated deficit.......................................   (37,541,544)
                                                              ------------
          Total stockholders' equity........................     2,624,628
                                                              ------------
                                                              $ 18,093,070
                                                              ============
</TABLE>
    
 
                                       66
<PAGE>   50
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
   
                          CONDENSED STATEMENT OF LOSS
    
   
                          YEAR ENDED DECEMBER 31, 1997
    
 
   
<TABLE>
<S>                                                           <C>
Revenues:
  Product sales.............................................  $    110,395
  Fees and royalties........................................        88,826
                                                              ------------
          Total revenues....................................       199,221
                                                              ------------
 
Costs and expenses:
  Cost of sales.............................................        41,338
  Research and development..................................     1,813,390
  Selling, general and administrative.......................     4,541,054
                                                              ------------
          Total costs and expenses..........................     6,395,782
                                                              ------------
          Operating loss....................................    (6,196,561)
                                                              ------------
 
Other income (expense):
  Investment income, net....................................       120,359
  Interest and financing expense............................    (1,910,006)
                                                              ------------
          Other income (expense), net.......................    (1,789,647)
                                                              ------------
Loss before losses of unconsolidated subsidiaries...........    (7,986,208)
Losses of unconsolidated subsidiaries.......................    (4,255,070)
                                                              ------------
          Net loss..........................................  $(12,241,278)
                                                              ============
</TABLE>
    
 
                                       67
<PAGE>   51
                                 DYNAGEN, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (INFORMATION FOR THE SIX MONTHS ENDED
                        DECEMBER 31, 1995 IS UNAUDITED.)
 
                       CONDENSED STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1997
 
<TABLE>
<S>                                                           <C>
Cash flows from operating activities:
  Net loss..................................................  $(12,241,278)
  Adjustments to reconcile net loss to net cash used for
     operating activities:
     Stock and stock options issued for services............       992,284
     Depreciation and amortization..........................     1,582,475
     Accretion of discounts on investment securities........       (10,152)
     Stock issued for interest obligation...................        59,838
     Losses of unconsolidated subsidiaries..................     4,255,070
  (Increase) decrease in operating assets:
     Accounts receivable....................................           (88)
     Prepaid expenses and other current assets..............       146,783
     Deposits and other assets..............................      (218,747)
  Increase in accounts payable and accrued expenses.........     2,612,725
                                                              ------------
          Net cash used for operating activities............    (2,821,090)
                                                              ------------
Cash flows from investing activities:
     Purchase of investment securities......................    (1,186,455)
     Proceeds from maturities of investment securities......     4,200,000
     Investment in and advances to subsidiaries.............   (11,610,269)
     Purchase of property and equipment.....................       (41,765)
     Decrease in notes receivable...........................        75,000
                                                              ------------
          Net cash used for investing activities............    (8,563,489)
                                                              ------------
Cash flows from financing activities
     Net proceeds from stock warrants and options...........         1,125
     Net proceeds from private stock placements.............     6,775,920
     Net proceeds from debt placements......................     2,851,898
     Increase in bank overdraft.............................       142,616
     Repayment of superior notes payable....................      (416,667)
                                                              ------------
          Net cash provided by financing activities.........     9,354,892
                                                              ------------
Net decrease in cash and cash equivalents...................    (2,029,687)
Cash and cash equivalents at beginning of year..............     2,029,687
                                                              ------------
Cash and cash equivalents at end of year....................  $         --
                                                              ============
</TABLE>
 
                                       68
<PAGE>   52
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3 to
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Cambridge, Commonwealth of Massachusetts on
September 11, 1998.
    
 
                                          DYNAGEN, INC.
 
   
                                          By:   /s/ DHANANJAY G. WADEKAR
    
                                            ------------------------------------
   
                                                    Dhananjay G. Wadekar
    
 
   
                                                  Executive Vice President
    
 
                                       83