EXOGEN INC, 10-Q, 1997-05-13

EXOGEN INC
10-Q, 1997-05-13
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 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 0-26154

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

Delaware 22-3208468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10 Constitution Avenue
P.O. Box 6860, Piscataway, NJ 08855
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (908) 981-0990

N/A
Former name, former address and former fiscal year,
if changed since last report.

Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Sections 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date Common Stock, par
value $0.0001 per share: 9,954,768 shares outstanding at April 30, 1997.
<PAGE>
EXOGEN, INC.
Quarterly Report on Form 10-Q
March 31, 1997

Table of Contents

PART I--Financial Information . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1--Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . .
` Notes to Consolidated Financial Statements . . . . . . . . .

Item 2--Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . .

PART II--Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .

Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . .

Item 4. Submission of Matters to a Vote of Security Holders . . . . . .

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

March 31, September 30,
1997 1996
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 3,577 $ 8,115
Short-term investments ..................................................... 8,191 6,824
Accounts receivable, net ................................................... 3,447 2,943
Inventories ................................................................ 1,403 1,239
Interest receivable ........................................................ 138 202
Other current assets ....................................................... 474 344
-------- --------
Total current assets .......................................... 17,230 19,667
Furniture, fixtures and equipment, net ......................................... 876 979
Long-term investments .......................................................... 1,013 4,595
Other assets ................................................................... 265 270
-------- --------
Total assets .................................................. $ 19,384 $ 25,511
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ........................................................... $ 534 $ 685
Accrued liabilities ........................................................ 1,972 1,625
Capital lease obligations .................................................. 8 15
Other current liabilities .................................................. 46 107
-------- --------
Total current liabilities ..................................... 2,560 2,432
Capital lease obligations ...................................................... -- 2
-------- --------
Total liabilities ............................................. 2,560 2,434

Commitments and contingencies (Note 2)
<PAGE>
<CAPTION>
EXOGEN, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(continued)

March 31, September 30,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>

Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares authorized at March 31,
1997 and September 30,1996;
no shares issued or outstanding ....................................... -- --
Common Stock, $0.0001 par value; 27,000,000 shares authorized at March 31,
1997 and September 30, 1996; 9,953,518 shares issued and outstanding at
March 31, 1997 and 9,909,192 shares issued and outstanding at
September 30, 1996 .................................................... 1 1
Additional paid-in capital ................................................. 46,461 46,272
Cumulative translation adjustment .......................................... (166) (22)
Accumulated deficit ........................................................ (29,472) (23,174)
-------- --------
Total stockholders' equity .................................... 16,824 23,077
-------- --------
Total liabilities and stockholders' equity .................... $ 19,384 $ 25,511
======== ========

The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

Three Months Ended Six Months Ended
March 31, March 31,

1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales .......................... $ 1,685 $ 1,337 $ 3,476 $ 2,348
Revenues from development agreements ... -- 300 -- 800
-------- -------- -------- --------
Total revenues ................... 1,685 1,637 3,476 3,148
-------- -------- -------- --------

Operating costs and expenses:
Cost of product sales .................. 955 781 2,088 1,372
Research and development ............... 672 1,108 1,684 2,001
Selling, general, and administrative ... 3,150 2,599 6,401 4,855
-------- -------- -------- --------
Total operating costs and expenses 4,777 4,488 10,173 8,228
-------- -------- -------- --------

Operating loss ......................... (3,092) (2,851) (6,697) (5,080)

Other income (expense):
Interest income, net ................... 198 380 439 812
Other expense, net ..................... (16) (144) (40) (156)
-------- -------- -------- --------
Total other income, net .......... 182 236 399 656
-------- -------- -------- --------

Net loss ............................... $ (2,910) $ (2,615) $ (6,298) $ (4,424)
======== ======== ======== ========

Net loss per share .......................... $ (0.29) $ (0.26) $ (0.63) $ (0.45)
======== ======== ======== ========

Weighted average shares outstanding ......... 9,938 9,868 9,924 9,859

The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Six Months Ended
March 31,
----------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (6,298) $ (4,424)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 242 186
Amortization of net premium (discount) on short- and long-term
investments ................................................ 34 (202)
Amortization of nonemployee stock
option compensation ........................................ 60 --
Other adjustments ............................................ 51 16
Decrease (increase) in assets:
Accounts receivable, net ..................................... (683) (1,031)
Interest receivable .......................................... 64 (203)
Inventories .................................................. (190) (48)
Other current assets ......................................... (131) (68)
Other assets ................................................. -- 28
Increase (decrease) in liabilities:
Accounts payable ............................................. (142) (169)
Accrued liabilities .......................................... 362 185
Other current liabilities .................................... (61) --
-------- --------
Net cash used in operating activities ................... (6,692) (5,730)
-------- --------

Cash flows from investing activities:
Purchase of short- and long-term investments ...................... (1,392) (18,130)
Proceeds from sale of short- and long-term
investments ..................................................... 3,573 5,324
Purchase of furniture, fixtures and equipment ..................... (135) (264)
-------- --------
Net cash provided by (used in) investing activities ..... 2,046 (13,070)
-------- --------
<PAGE>
<CAPTION>
EXOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)

Six Months Ended
March 31,
----------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options ........................... 4 35
Proceeds from sale of Common Stock ................................ 125 104
Principal payments under capital leases ........................... (9) (7)
-------- --------
Net cash provided by financing activities ............... 120 132
-------- --------

Effect of exchange rate changes on cash and cash
equivalents .......................................................... (12) 1
-------- --------

Net decrease in cash and cash equivalents .............................. (4,538) (18,667)
Cash and cash equivalents, beginning of period ......................... 8,115 22,176
-------- --------
Cash and cash equivalents, end of period ............................... $ 3,577 $ 3,509
======== ========

The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (including normal recurring adjustments) that
management considers necessary to present fairly the financial position
of Exogen, Inc. ("the Company") as of March 31, 1997; the results of
operations for the three and six months ended March 31, 1997 and 1996;
and the cash flows for the six months then ended. The results of
operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The
unaudited condensed consolidated financial statements, which include
the financial position, results of operations, and cash flows for
Exogen, Inc. and its wholly owned subsidiary, Exogen (Europe) GmbH,
should be read in conjunction with the audited consolidated financial
statements for the year ended September 30, 1996 included in the
Company's Annual Report on Form 10-K.

2. COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and litigation in the ordinary course
of business. In management's opinion, such claims are not material to
the Company's financial position, its results of operations, or its
cash flows.

3. NET LOSS PER COMMON SHARE

Net loss per share for the three and six months ended March 31, 1997
and 1996 is calculated according to Accounting Principles Board Opinion
No. 15, "Earnings per Share," and is based on the weighted average
number of shares of Common Stock outstanding during the periods
presented. Options have been excluded because they are antidilutive.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS"), replacing the
presentation of currently required primary EPS with a presentation of
Basic EPS. For entities with complex capital structures, SFAS 128
requires the dual presentation of both Basic EPS and Diluted EPS on the
face of the statement of operations. Under this new standard, Basic EPS
is computed based on weighted average shares outstanding and excludes
any potential dilution; Diluted EPS reflects potential dilution from
the exercise or conversion of securities into common stock or from
other contracts to issue common stock, and is similar to the currently
required fully diluted EPS. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS for all prior
periods presented. The Company does not expect the impact of the
adoption of SFAS 128 to be material to previously reported EPS.
<PAGE>
4. INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>

March 31, September 30,
1997 1996
---- ----
(in thousands)
<S> <C> <C>

Finished goods ........................... $1,014 $ 768
Parts and components ..................... 389 471
------ ------
$1,403 $1,239
====== ======
</TABLE>

5. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Interest paid........................... $ 7 $ 5
</TABLE>
<PAGE>
EXOGEN, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion of significant factors that affected
the Company's interim financial condition and results of operations. This should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1996.

This Report on Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Such statements are only predictions, and the actual events or results may
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below under "Business Considerations" as well as those discussed in
other filings made by the Company with the Securities and Exchange Commission.

Results of Operations

Six Months Ended March 31, 1997 and March 31, 1996

Through March 31, 1997, essentially all of the Company's product revenues were
generated from sales of the Company's Sonic Accelerated Fracture Healing System
("SAFHS") Model 2A device. For the six months ended March 31, 1997, product
sales were $3.5 million compared with $2.3 million for the six months ended
March 31, 1996. International product sales were 30% of total product sales for
the six months ended March 31, 1997, and 2% for the six months ended March 31,
1996.

For the six months ended March 31, 1997, the Company recorded no revenues
related to development agreements with Teijin Limited, a Japanese corporation,
compared with $800,000 of such revenues reported for the six months ended March
31, 1996. These development agreements cover two of the Company's technologies:
(a) the SAFHS device and (b) the mechanical-stress device under development. The
SAFHS agreement provides for milestone payments to the Company for Teijin's
development of the product for launch in Japan. The Company will manufacture and
supply SAFHS devices to Teijin for clinical trials and subsequent sales in
Japan. Teijin is responsible for complying with regulatory requirements and for
marketing and distributing the SAFHS device in Japan. The mechanical-stress
agreement provides for milestone payments to the Company that will support, in
part, the Company's clinical trials in the United States in exchange for a first
option in favor of Teijin to negotiate a development and distribution agreement
for this device for the Japanese market.

Cost of product sales was $2.1 million for the six months ended March 31, 1997,
compared with $1.4 million for the six months ended March 31, 1996. Excluding
revenues related to development agreements, gross profit for the six months
ended March 31, 1997 was $1.4 million (or 39.9% as a percentage of product
sales), compared with $976,000 (or 41.6%) for the six months ended March 31,
1996. The $412,000 increase (or 42%) in gross profit was principally due to the
increase in product volume and reduced per-unit product costs, while the
decrease in gross profit percentage was due to a decrease in the average
realized selling price of a SAFHS, which was approximately $2,025 for the six
months ended March 31, 1997 compared with approximately $2,405 for the six
months ended March 31, 1996.
<PAGE>
Research and development expenses for the six months ended March 31, 1997
decreased to $1.7 million from $2.0 million for the six months ended March 31,
1996. The decrease of $317,000 (or 16%) was primarily due to (1) reduced
expenditures for designing and building the mechanical-stress device for
clinical studies, (2) the discontinuation of shipments of SAFHS devices in
connection with certain clinical prescriptions for which reimbursement is
currently not available, and (3) reduced costs associated with analyses of
clinical data for the SAFHS therapy. These decreases were partially offset by
increased expenses associated with additional research projects.

Selling, general, and administrative expenses for the six months ended March 31,
1997 increased to $6.4 million from $4.9 million for the six months ended March
31, 1996. The $1.5 million (or 32%) increase resulted from expanded selling and
marketing efforts related to the SAFHS Model 2A, both in the United States and
in Europe, and from expansion of the administrative staff and increased
activities relating to reimbursement efforts.

Net interest income for the six months ended March 31, 1997 decreased to
$439,000 from $812,000 for the six months ended March 31, 1996, consistent with
the level of funds available for investment.

The Company incurred a net loss of $6.3 million, or $0.63 per share (per share
data based upon weighted average shares outstanding of 9,924,000), for the six
months ended March 31, 1997, compared with a net loss of $4.4 million, or $0.45
per share (per share data based upon weighted average shares outstanding of
9,859,000), for the six months ended March 31, 1996 (see Note 3 to the
Consolidated Financial Statements for a discussion of the calculation of per
share data). The increase of $1.9 million (or 42%) in net loss was caused
principally by the factors discussed above.

Three Months Ended March 31, 1997 and March 31, 1996

For the three months ended March 31, 1997, product sales were $1.7 million
compared with $1.3 million for the three months ended March 31, 1996.
International product sales were 30% of total product sales for the three months
ended March 31, 1997, and 3% for the three months ended March 31, 1996.

For the three months ended March 31, 1997, the Company recorded no revenues
related to development agreements with Teijin Limited, a Japanese corporation,
compared with $300,000 of such revenues reported for the three months ended
March 31, 1996. (See the six-month discussion above for a description of the
development agreements.)

Cost of product sales was $955,000 for the three months ended March 31, 1997,
compared with $781,000 for the three months ended March 31, 1996. Excluding
revenues related to development agreements, gross profit for the three months
ended March 31, 1997 was $730,000 (or 43.3% as a percentage of product sales),
compared with $556,000 (or 41.6%) for the three months ended March 31, 1996. The
$174,000 increase (or 31%) in gross profit was principally due to the increase
in product volume and reduced per-unit product costs, partially offset by a
decrease in the average realized selling price of a SAFHS, which was
approximately $2,005 for the three months ended March 31, 1997 compared with
approximately $2,410 for the three months ended March 31, 1996.

Research and development expenses for the three months ended March 31, 1997
decreased to $672,000 from $1.1 million for the three months ended March 31,
1996. The decrease of $436,000 (or 39%) was primarily due to (1) the completion
<PAGE>
of expenditures associated with several studies, (2) reduced expenditures for
designing and building the mechanical-stress device for clinical studies, (3)
reduced costs associated with analyses of clinical data for the SAFHS therapy,
and (4) the discontinuation of shipments of SAFHS devices in connection with
certain clinical prescriptions for which reimbursement is currently not
available.

Selling, general, and administrative expenses for the three months ended March
31, 1997 increased to $3.2 million from $2.6 million for the three months ended
March 31, 1996. The $551,000 (or 21%) increase resulted from expanded selling
and marketing efforts related to the SAFHS Model 2A, both in the United States
and in Europe, and from expansion of the administrative staff and increased
activities relating to reimbursement efforts.

Net interest income for the three months ended March 31, 1997 decreased to
$198,000 from $380,000 for the three months ended March 31, 1996, consistent
with the level of funds available for investment.

The Company incurred a net loss of $2.9 million, or $0.29 per share (per share
data based upon weighted average shares outstanding of 9,938,000), for the three
months ended March 31, 1997, compared with a net loss of $2.6 million, or $0.26
per share (per share data based upon weighted average shares outstanding of
9,868,000), for the three months ended March 31, 1996 (see Note 3 to the
Consolidated Financial Statements for a discussion of the calculation of per
share data). The increase of $295,000 (or 11%) in net loss was caused
principally by the factors discussed above.

Liquidity and Capital Resources

Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $29.5 million at March 31,
1997. The Company has funded its operations primarily through the private
placement of equity securities (aggregating $17.6 million) and a public offering
of Common Stock in mid-1995 (aggregating $28.5 million).

For the six months ended March 31, 1997, the Company used net cash of $6.7
million for operating activities, primarily to fund continuing selling and
marketing activities of the SAFHS Model 2A and the effect of an increase in the
international accounts receivable days outstanding from 240 days at September
30, 1996 to 300 days at March 31, 1997, while domestic accounts receivable
remained unchanged at approximately 145 days. (For a further discussion of
international accounts receivable, see below, "Business Considerations--Risks
Associated With International Operations.") The Company's capital expenditures
for the six months ended March 31, 1997 were $135,000. The Company estimates
that equipment and furnishings to expand in-house manufacturing and
administrative support activities will require capital expenditures of
approximately $400,000 during each of fiscal 1997 and 1998.

The Company plans to finance its capital needs principally from existing capital
resources, which the Company believes will be sufficient to fund its operations
into fiscal 1998, at which time additional funding may be required. Additional
funding may not be available when needed or on terms acceptable to the Company,
which would have a material adverse effect on the Company's business, financial
condition, results of operations, and cash flows.
<PAGE>
Additional Information

SAFHS 2000(R)

In December 1995, the Company filed with the U. S. Food and Drug Administration
("FDA") for a Pre-Market Approval ("PMA") Supplement for the Company's
second-generation SAFHS, SAFHS 2000(R). In March 1997, the Company received
approval of this PMA Supplement. The SAFHS 2000 is smaller and lighter than the
first-generation SAFHS Model 2A, and is entirely battery operated. Additionally,
the SAFHS 2000 is easier for the patient to use, is less costly to manufacture,
and provides physicians with the capability to monitor patient compliance.

Clinitex(R) Fracture Management Products

On January 17, 1997, the Company signed a sales and distribution agreement with
FLA Orthopedics, Inc. ("FLA") and Clinitex Medical Corporation, a wholly owned
subsidiary of FLA, to market and sell Clinitex(R) Fracture Management products
in the United States. The agreement also provides for sales and marketing
support by FLA for these Clinitex products. The term of the agreement expires on
January 17, 2000, provided that the Company pays FLA $200,000 upon execution of
the agreement and $150,000 in each of the second and third years. The Company
may extend the agreement for a fourth and fifth year by paying FLA a minimum of
$300,000 in each of those years. In January 1997, the Company made the initial
payment of $200,000.

The Clinitex products consist of nonfiberglass synthetic casting materials used
in fracture immobilization by casting. Clinitex's cast-padding material contains
Microban(R); FLA, through its Clinitex subsidiary, is the exclusive licensee of
Microban Products Company for orthopaedic products. Microban is an antimicrobial
agent that can help prevent under-cast materials, such as padding, from serving
as a breeding ground for bacteria, yeast, and fungi.

In March 1997, the Company began marketing the Clinitex products.

Business Considerations

Limited Operating History

The Company has a limited history of operations that, to date, has consisted
primarily of research and development, product engineering, obtaining approval
from the FDA for the Company's SAFHS device, developing the Company's sales and
marketing organization, supervising the manufacture of the SAFHS device by a
contract manufacturer, and commencing sales of its SAFHS device domestically and
internationally. The Company was formed for the purpose of acquiring the SAFHS
technology and related clinical data, as well as the mechanical-stress
technology. The Company has limited direct clinical trial experience. The
Company received approval of its PMA Application and began marketing its SAFHS
device in October 1994, and therefore has limited experience in marketing and
selling its products in commercial quantities. The Company had no previous
direct manufacturing experience prior to commencing in-house refurbishing of its
SAFHS device in fiscal 1996. Whether the Company can successfully manage the
transition to a larger-scale commercial enterprise will depend, in part, upon
further developing its distribution network; successfully developing its
manufacturing capability; and strengthening its financial and management
systems, procedures, and controls. Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
<PAGE>
Uncertainty of Market Potential and Market Acceptance

The Company's SAFHS device has been approved by the FDA to treat closed,
cast-immobilized, fresh fractures of the tibia and distal radius within approved
indications. The market potential of the Company's SAFHS device depends on the
acceptance by the medical community of the use of ultrasound technology as a
safe and effective method of treating fresh fractures and the use of the
Company's SAFHS device by physicians for treatment of these fractures. The SAFHS
device is based upon new technology that had not been used previously to treat
bone fractures. In addition, the proper placement of the device at the fracture
site is important for the proper delivery of the therapy, and acceptance of the
therapy will depend, in part, on whether the Company can continue to instruct
physicians and patients in the proper use of the device. There can be no
assurance that physicians will prescribe treatment using the SAFHS device. In
addition, use of the SAFHS device depends significantly on the availability and
extent of third-party reimbursement, increased awareness of the effectiveness of
the SAFHS technology, and focused sales efforts by the Company. Electrical
stimulation devices, the only other non-invasive devices commercially available
for the treatment of bone fractures, have gained only limited physician
acceptance to date. Failure of the Company's SAFHS device to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.

Dependence on Third-Party Reimbursement

The Company has not secured general reimbursement approval for its SAFHS device
from any large third-party payor, and to date has received reimbursement
approval from third-party payors only on a case-by-case basis. Successful sales
of SAFHS devices in the United States, Germany, and other markets depend on the
availability of adequate reimbursement from third-party payors such as managed
care organizations, workers' compensation insurers, private insurance plans, and
government entities. There is significant uncertainty concerning third-party
reimbursement for the use of any medical device incorporating new technology,
such as the SAFHS device. Reimbursement by a third-party payor may depend on a
number of factors, including the payor's determination that the use of the SAFHS
device is safe and effective, not experimental or investigational, medically
necessary, appropriate for the specific patient, and cost-effective. In
addition, devices incorporating a new technology are often prescribed by
physicians for indications other than those approved by the FDA (off-label).
Reimbursement for such off-label uses may not be available or permitted by
government regulations. Since reimbursement approval is required from each payor
individually, seeking such approvals is a time-consuming and costly process that
requires the Company to provide scientific and clinical support for the use of
the SAFHS device to each payor separately. There can be no assurance that
third-party reimbursement will be consistently available for the SAFHS device or
any of the Company's other products that may be developed or that such
third-party reimbursement will be adequate. The United States Congress is
currently considering various proposals to significantly reduce Medicare and
Medicaid expenditures. Such proposals, if enacted, could have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows. Currently, the SAFHS device is not covered under the Medicare
program. In addition, third-party payors are increasingly limiting reimbursement
coverage for medical devices, and in many instances have put pressure on medical
suppliers to lower their prices. The Company currently has limited experience in
obtaining reimbursement for its products in countries other than the United
States. Lack of or inadequate reimbursement by governmental and other
third-party payors for the Company's products would have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.
<PAGE>
History of Losses; Profitability Uncertain; Fluctuations in Operating Results

The Company has incurred substantial losses since inception and, as of March 31,
1997, has an accumulated deficit of approximately $29.5 million. Such losses
have resulted principally from expenses associated with obtaining FDA approval
for the Company's SAFHS device, engineering and developing the SAFHS and
mechanical-stress devices, and establishing and expanding the sales and
marketing organization in the United States and in Europe. The Company expects
to generate substantial additional losses in the future primarily attributable
to development of, and clinical trials for, the mechanical-stress device,
clinical trials for expanded indications of the SAFHS technology, the continued
expansion of domestic and international sales and marketing activities, and the
expansion of manufacturing capability. In addition, the Company expects its
operating expenses to increase significantly over the next several years due to
increased costs of research and development, primarily in connection with the
mechanical-stress device and clinical trials for expanded applications of the
SAFHS technology, expansion of direct sales and marketing activities, increase
of in-house manufacturing capability, and expansion of administrative functions.
Results of operations may fluctuate significantly from quarter to quarter based
on such factors, and will also depend upon reimbursement by third-party payors,
new product introductions by the Company or its competitors, timing of
regulatory actions, expenditures incurred in the research and development of new
products, and the mix of product sales between the United States and abroad. The
Company's future revenues and profitability are critically dependent on whether
it can successfully market and sell its SAFHS device. There can be no assurance
that significant revenues or profitability will ever be achieved.

Dependence on Principal Product

Essentially all of the Company's product revenues to date have been derived from
sales of its SAFHS device. The SAFHS device is expected to continue to account
for substantially all of the Company's revenues for the foreseeable future. The
Company's long-term success will depend in part on the successful
commercialization of the SAFHS device for its approved indications, the
development and regulatory approval of SAFHS devices to treat additional
indications, and the acceptance of the SAFHS treatment by the medical community
and third-party payors. Failure to gain market acceptance for the SAFHS device
or to obtain adequate reimbursement coverage, among other factors, would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.

Limited Sales and Marketing Experience

The Company began marketing the SAFHS device in the United States in October
1994. Because of limited market awareness of SAFHS therapy, the sales effort is
a lengthy process, requiring the Company to educate physicians and third-party
payors regarding the clinical benefits and cost-effectiveness of the SAFHS
technology, to assist patients in the reimbursement process, and to provide
product support to patients. The Company uses a combination of direct sales
representatives and a network of independent sales representatives to market and
distribute its products. Independent sales representatives typically market
orthopaedic and other devices for a variety of manufacturers. These
representatives do not have prior experience in the sale or use of devices to
accelerate fresh-fracture healing. There can be no assurance that these
independent sales representatives will commit the necessary resources to market
the SAFHS device effectively or that the Company's direct sales staff will
succeed in its efforts to promote the SAFHS technology to physicians and
third-party payors.
<PAGE>
The Company markets the SAFHS device in several European countries through
independent distributors and sales agents, and has recorded sales in Germany,
Austria, the Netherlands, Denmark, Switzerland, Belgium, and Israel. The Company
also will collaborate with marketing partners in the Pacific Rim to assist with
regulatory requirements and to market and distribute the Company's products. The
Company has entered into one such agreement covering Japan with Teijin Limited,
a Japanese corporation. Each of the foreign markets in which the Company sells,
or plans to sell, its products has its own regulatory requirements and
approvals, and the distribution, price, and market structure to be established
by the Company might vary from country to country. No assurance can be given
that the Company can successfully market the SAFHS device in Europe or that it
can secure additional marketing partners in the Pacific Rim on terms acceptable
to the Company, or at all.

The Company's marketing success in the United States and abroad will depend on
whether it can gain further regulatory approvals, successfully demonstrate the
cost-effectiveness of its products, further develop direct sales capability to
augment its existing distribution network, and establish arrangements with
distributors and marketing partners. Failure by the Company to successfully
market its products domestically and internationally would have a material
adverse effect on the Company's business, financial condition, results of
operations, and cash flows.

Risks Associated with International Operations

The Company established a subsidiary in Germany during fiscal 1995 as part of
its strategy to introduce the SAFHS device in Europe, and commenced commercial
distribution of the device in certain European countries during fiscal 1996.
International product sales were 14% of total product sales in fiscal 1996 and
30% for the six months ended March 31, 1997, and such revenues are expected to
continue to represent a significant percentage of total revenues. The Company
believes that its profitability and continued growth will require expansion of
sales in foreign markets, and so it intends to continue to expand its operations
outside the United States and enter additional international markets, which will
require significant management attention and financial resources. There can be
no assurance that the Company will be able to achieve market acceptance of its
products in international markets or maintain or increase international market
demand for its products.

The international accounts receivable is primarily derived from sales in
Germany, where the Company has obtained limited regional reimbursement on a
case-by-case basis. The Company has submitted a formal application to the
National Krankenkasse requesting approval of reimbursement nationwide. The
Company believes that approval nationwide could expedite the reimbursement
process on future claims. There can be no assurance that the Company will obtain
a favorable ruling on its request.

The Company's international product sales are denominated in foreign currencies.
Management can give no assurances that changes in currency and exchange rates
will not materially affect the Company's revenues, costs, cash flows, and
business practices and plans. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, extended accounts
receivable payment cycles, reimbursement approvals (both government and
private), difficulties in managing international operations, potentially adverse
tax consequences, restrictions on repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. There can be no assurances that
such factors will not have a material adverse effect on the Company's future
international revenues and, consequently, on the Company's business, financial
condition, results of operations, and cash flows.
<PAGE>
Dependence on Single Sources of Manufacture and Supply

The Company's SAFHS device is currently manufactured by a contract manufacturer.
The purchase orders between the Company and the contract manufacturer require
the Company to purchase a minimum number of SAFHS devices from the contract
manufacturer for the term of the agreement, effective to 1998. The contract
manufacturer's facility has been inspected by the FDA and is currently the only
facility approved for the production of the SAFHS device under the FDA's Good
Manufacturing Practices ("GMP") requirements. Any failure by the contract
manufacturer to maintain its manufacturing facility in accordance with GMP
requirements could result in the inability of such contract manufacturer to
manufacture the SAFHS device and may limit the Company's ability to deliver the
SAFHS device to physicians or patients, which would have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.

Several components incorporated in the SAFHS device currently are, and will
continue to be, manufactured by single-source vendors. For certain of these
components, there are relatively few alternative sources of supply, and
establishing additional or replacement suppliers for such components cannot be
accomplished quickly. Any supply interruption from single-source vendors would
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows.

No Manufacturing Experience

The Company has developed in-house refurbishing capability for the SAFHS device,
and is developing in-house manufacturing capability, although the Company
intends to continue to use its current manufacturer as the primary supplier of
its products for the foreseeable future. Before manufacturing the SAFHS devices
for commercial use, the Company's facility will require FDA determination of
compliance with GMP requirements. There can be no assurance that the Company
will be able to establish manufacturing capability, obtain GMP approval, make
the transition to commercial manufacturing successfully, or manufacture its
products cost-effectively, or at all.

Intense Competition and Risks Associated with Rapid Technological Change

The medical device industry is characterized by intense competition. Many of the
Company's existing and potential competitors have substantially greater
financial, marketing, sales, distribution, and technical resources than the
Company and more experience in research and development, clinical trials,
regulatory matters, manufacturing, and marketing. In addition, most of these
companies have established third-party reimbursement for their products.
Furthermore, the medical device industry is characterized by rapid product
development and technological change. The Company's products could be rendered
obsolete or uneconomical by technological advances by one or more of the
Company's competitors or by other therapies such as drugs to treat conditions
addressed by the Company's products. The Company's business, financial
condition, results of operations, and cash flows will depend upon whether the
Company can compete effectively with other developers of such medical devices
and therapies.

The SAFHS device competes with non-invasive bone-growth electrical-stimulation
devices and with various surgical treatments. The Company's mechanical-stress
device to prevent bone loss related to osteoporosis, if developed and marketed,
will compete with drug therapies and exercise regimens. There can be no
<PAGE>
assurance that such device will ever be developed, approved by the FDA, or
become commercially available. Four companies currently market
electrical-stimulation devices for the treatment of non-union fractures
(fractures that remain unhealed after nine months). The Company believes that at
least one of these companies is conducting clinical trials for the use of
electrical stimulation for the treatment of fresh fractures. In addition, other
companies are developing a variety of products and technologies to be used in
the treatment of fractures and osteoporosis, including growth factors,
bone-graft substitutes, and exercise/physical therapy equipment. There can be no
assurance that competitors will not develop products that are superior to the
Company's products, achieve greater market acceptance, or render the Company's
technology and products obsolete or noncompetitive. As a result, the Company's
long-term viability may depend on whether it can continue to develop new
products. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competition will not
have a material adverse effect on the Company's business, financial condition,
results of operations, or cash flows.

Extensive Government Regulation

The manufacture and sale of medical devices are subject to extensive government
regulation in the United States and in other countries. The process of obtaining
FDA and other required regulatory approvals can be time-consuming, expensive,
and uncertain, frequently requiring several years from commencing clinical
trials to receiving regulatory approval. For example, the process of conducting
clinical trials and obtaining the PMA for the SAFHS Model 2A took nine years.
The Company will be required to file PMA supplements for new indications for its
SAFHS technology. In addition, modifications to its SAFHS devices may require
PMA supplements. These supplements may not be accepted by the FDA, in which case
the Company would be required to undertake and complete the entire PMA process
in order to use future SAFHS devices to treat those additional indications or
commercialize a modified device. Furthermore, there can be no assurance that the
Company will obtain any such approvals on a timely basis, or at all, which could
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows. The Company filed for a PMA Supplement
for its second-generation SAFHS, SAFHS 2000(R), in December 1995, and in March
1997, the FDA approved this PMA Supplement, which allows the Company to
commercially distribute the SAFHS 2000. The Company will also be required to
file a PMA application for its mechanical-stress device, if and when development
is completed. No assurance can be given that such application will be made, and
if made, that a PMA will be granted on a timely basis, or at all. In order for
the Company to market the SAFHS device or any future products in foreign
jurisdictions, it will be required to seek regulatory approvals in those
jurisdictions. No assurance can be given that the Company can obtain required
regulatory approvals in foreign countries on a timely basis, or at all.

Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the promotion by the Company and any of its distributors of
approved medical devices for off-label uses. There can be no assurance that the
Company will not become subject to FDA actions as a result of physicians'
prescribing the SAFHS device for off-label uses. In addition, product approvals
may be withdrawn for failure to comply with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company is
required to adhere to FDA regulations setting forth GMP requirements relating to
tests, control, and documentation. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
<PAGE>
other countries. Failure to comply with applicable United States and
international regulatory requirements can result in failure of the relevant
government agency to grant pre-market approval for devices, withdrawal of
approval, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution. Furthermore,
changes in existing regulations or adoption of new regulations or policies could
prevent the Company from obtaining, or affect the timing of, future regulatory
approvals or clearances.

During 1996, the Company received regulatory approval of the SAFHS Model 2A in
Germany. Under German law, medical devices must have a "GS" mark affixed to the
product labeling. The GS mark, which the Company received in December 1995,
denotes that the product meets certain safety standards. In 1996, the Company
also received the "CE" (Medical Device Directive) mark for the SAFHS Model 2A.
The CE mark is recognized by countries that are members of the European Union
and the European Free Trade Association, and effective June 1998, will be
required to be affixed to all medical devices sold in the European Union.

There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances in the United States, Europe, the Pacific
Rim, or elsewhere on a timely basis, or at all. Delays in receipt of or failure
to receive such approvals or clearances, the loss of previously received
approvals or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.

Limited Protection of Patents, Copyrights and Proprietary Rights; Risk of Patent
Infringement

The Company relies on a combination of patents, trade secrets, copyrights, and
confidentiality agreements to protect its proprietary technology, rights, and
know-how. No assurance can be given that the Company's patent applications will
issue as patents or that any issued patents owned by the Company will provide
competitive advantages for the Company's products or will not be successfully
challenged or circumvented by competitors. Under current law, patent
applications in the United States are maintained in secrecy until patents are
issued, and patent applications in foreign countries are maintained in secrecy
for a period after filing. The right to a device patent in the United States is
attributable to the first to invent the device, not the first to file a patent
application. Accordingly, the Company cannot be sure that its products or
technologies do not infringe patents that may be granted in the future pursuant
to pending patent applications or that its products do not infringe any patents
or proprietary rights of third parties. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from selling its products or could be required to obtain licenses from
the owners of such patents or be required to redesign its products to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be on terms acceptable to the Company, or that the
Company would be successful in any attempt to redesign its products or processes
to avoid infringement. The Company's failure to obtain these licenses or to
redesign its products would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows. The
Company also relies on trade secrets and proprietary information, and enters
into confidentiality agreements with its employees, consultants, and advisors.
There can be no assurance that the obligations to maintain the confidentiality
of such trade secrets and proprietary information will effectively prevent
<PAGE>
disclosure of the Company's confidential information or provide meaningful
protection for the Company's confidential information if there is unauthorized
use or disclosure, or that the Company's trade secrets or proprietary
information will not be independently developed by the Company's competitors.
The Company also holds rights to copyrights on text and on software developed by
or for itself for use in its SAFHS device. There can be no assurance that any
copyrights owned by the Company will provide competitive advantages for the
Company's products or will not be challenged or circumvented by its competitors.
Litigation may be necessary to defend against claims of infringement, to enforce
patents and copyrights issued or licensed to the Company, or to protect trade
secrets, and could result in substantial cost to, and diversion of effort by,
the Company. There can be no assurance that the Company would prevail in any
such litigation.

Uncertainty of New Product Development

The Company plans to seek FDA approval to commence clinical trials in the near
future to expand the approved indications for the SAFHS technology to include
other fractures, spine fusion, and cartilage repair. In addition, the Company
has developed a mechanical-stress device to prevent bone loss related to
osteoporosis. The Company has commenced a pilot clinical trial in the United
States, and anticipates that it will be required to undertake additional
development activities and human clinical trials before seeking regulatory
approval for this device. There can be no assurance that the mechanical-stress
device will prove to be safe and efficacious, that product development will ever
be successfully completed, that a PMA, if applied for, will be granted by the
FDA on a timely basis, or at all, that adequate levels of third-party
reimbursement will be available, or that the mechanical-stress device will ever
achieve commercial acceptance. The Company's inability to show efficacy in
additional applications of its SAFHS technology, to successfully develop the
mechanical-stress device, or to achieve market acceptance of such new
applications and products would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.

Royalty Payment Obligations; Potential Loss of Exclusive License

The Company is required to pay a royalty on any net revenues from sales of the
mechanical-stress device, if such device is successfully developed. In the event
that the Company does not commercially exploit the underlying technology as
required by the license agreement for such technology, the Company will forfeit
its exclusive license to the mechanical-stress technology. There can be no
assurance that the Company will commercially exploit such technology within the
meaning of such license, and forfeiture of such exclusive license could have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.

Product Liability and Insurance

The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects. There can be no assurance that liability claims will not exceed
the coverage limits of the Company's insurance policies or that such insurance
will continue to be available on commercially reasonable terms, or at all.
Consequently, product liability claims could have a material adverse effect on
the Company's business, financial condition, results of operations, and cash
flows.
<PAGE>
Reliance on Key Personnel

The Company's success depends to a significant extent upon a number of key
management and technical personnel. The loss of the services of one or more key
employees could have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows. The Company also
believes that its future success will depend in large part on whether it can
attract and retain highly skilled technical, management, sales and marketing,
and reimbursement personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company's failure to attract, hire, and retain
these personnel would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.

Possible Volatility of Stock Price

The trading price of the Company's Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in earning estimates by analysts, general conditions in the
medical device industry, and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price for many companies in industries similar or
related to that of the Company and that have been unrelated to the operating
performance of these companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.

Certain Anti-Takeover Provisions

The Company's Second Amended and Restated Certificate of Incorporation grants
the Board of Directors the authority to issue up to 3,000,000 shares of
preferred stock of the Company, $0.0001 par value per share (the "Preferred
Stock"), in one or more series and to fix the rights, preferences, privileges,
and restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences, and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. Effective
December 6, 1996, pursuant to the Rights Agreement, the Company's Board of
Directors declared a dividend of one Right to purchase, under certain
circumstances, one one-hundredth share of the Company's Series A Preferred Stock
for each outstanding share of Common Stock of the Company. Although the Company
has no present plans to issue any additional shares of Preferred Stock, it may
do so in the future. See Part II, Item 5, "Market for Registrant's Common Equity
and Related Stockholder Matters--The Stockholder Rights Plan," of the Company's
Form 10-K for the year ended September 30, 1996 and the copy of the Rights
Agreement attached as Exhibit 99.1 to that Form 10-K for more information
relating to the Stockholder Rights Plan.

The Company's By-Laws specify procedures for director nominations by
stockholders and the submission of other proposals for consideration at
stockholder meetings. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer, or proxy
contest involving the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of Preferred Stock (including pursuant to the Rights Plan),
the procedures required for director nominations and stockholder proposals, and
<PAGE>
Delaware law could have the effect of delaying, deferring, or preventing a
change in control of the Company, including without limitation, discouraging a
proxy contest, making more difficult the acquisition of a substantial block of
the Company's Common Stock, or limiting the price that investors might be
willing to pay in the future for shares of the Company's Common Stock.
<PAGE>
PART II
OTHER INFORMATION

ITEM 1. Legal Proceedings

On April 4, 1995, a former consultant to Interpore
Orthopaedics, Inc. ("Interpore"), the company from which
Exogen purchased certain SAFHS ultrasound assets, filed a
complaint against Interpore and Exogen in the United States
District Court for the Southern District of New York, claiming
the right, pursuant to the terms of a consulting agreement
between such consultant and the predecessor company to
Interpore, to certain royalties, not exceeding 1.25% of the
net revenues generated from the sale of SAFHS devices. On June
5, 1995, Exogen answered the complaint, denied that it has any
liability to the consultant, and asserted a number of specific
defenses. On the same day, Interpore did the same, and also
asserted cross-claims against Exogen, claiming that any
royalties found to be due to the consultant should be paid by
Exogen and that Exogen should be liable for Interpore's
attorneys' fees and other costs incurred in the litigation. On
July 7, 1995, Exogen answered Interpore's cross-claims, denied
that it has any liability to the consultant or to Interpore,
asserted a number of specific defenses to Interpore's claims,
and asserted cross-claims against Interpore that any royalties
found to be due to the consultant should be paid by Interpore
and that Interpore be liable for Exogen's attorneys' fees and
other costs incurred in the litigation. Exogen and Interpore
since have agreed that (a) Exogen's counsel will assume the
status of lead defense counsel in the litigation; (b) any
adverse judgment entered in the litigation will be entered
against Exogen and Interpore jointly and severally; and (c)
Exogen will indemnify Interpore for any payments that are
required to be made to the consultant as a result of the
litigation, and Exogen and Interpore thereafter will resolve
separately their respective liabilities. As a result of the
foregoing, in March 1996 Exogen and Interpore dismissed their
claims against each other in this litigation, without
prejudice to their right to resolve them, if necessary, as
described above. The Company does not believe that the
consultant's claims have merit, and together with Interpore,
is vigorously defending this action. All parties are currently
engaged in the discovery process. There can be no assurance,
however, that the consultant's claims will not be upheld.

In early March 1997, the Company received a demand from Pilla
Consulting, Inc. and Arthur A. Pilla (collectively, "Pilla")
for royalties allegedly due pursuant to a consulting agreement
between Pilla Consulting and the predecessor company to
Interpore. Pilla claims entitlement to royalties of 1.25% of
the net revenues generated from the sale of SAFHS devices. The
Company does not believe that Pilla's claim has any merit. For
that reason, on April 2, 1997, the Company filed a complaint
against Pilla in the Supreme Court for the State of New York
<PAGE>
seeking a judicial declaration that the Company is not liable
to Pilla for any royalties. The Company intends to
aggressively pursue the action against Pilla and to vigorously
defend against any counterclaim(s) by Pilla seeking said
royalties or equivalent payments under any legal theory. There
can be no assurance, however, that Pilla's claim will not be
upheld.

ITEM 2. Changes in Securities

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

(a) The Company's Annual Meeting of Stockholders was held
on February 7, 1997.

(1) To elect six Directors.

<TABLE>
<CAPTION>
Votes Votes Votes Broker
Name of Director For Against Withheld Abstentions Nonvotes
---------------- --- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
John P. Ryaby 7,675,513 - 6,400 - -
Patrick A. McBrayer 7,675,513 - 6,400 - -
Buzz Benson 7,675,513 - 6,400 - -
Donald J. Lothrop 7,675,513 - 6,400 - -
David J. Ottensmeyer, M.D. 7,675,513 - 6,400 - -
Terence D. Wall 7,675,513 - 6,400 - -
</TABLE>
(2) To ratify the selection of Arthur Andersen
LLP, independent public accountants, as
auditors of the Company for the fiscal year
ending September 30, 1997.

Votes For 7,666,136
Votes Against 12,000
Votes Withheld -
Abstentions 3,777
Broker Nonvotes -

ITEM 5. Other Information

None.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1 Second Amended and Restated Certificate of
Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Form
10-Q for the third quarter ended June 30, 1995.
3.2 Amended and Restated Bylaws of the Company.
Incorporated by reference to Exhibit 3.3 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the
Company defining rights of holders of Common Stock
of the Company.
10.1 Amended and Restated Investors' Rights Agreement
dated as of November 14, 1994 among the Company,
the investors listed on Schedule A thereto, and
the individuals listed on Schedule B thereto.
Incorporated by reference to Exhibit 10.1 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.2 Asset Purchase Agreement dated as of March 1, 1993
among Applied Epigenetics, Inc. ("AEI"), Interpore
International, Inc., and Interpore Orthopaedics,
Inc. Incorporated by reference to Exhibit 10.2 to
the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.3 [RESERVED]
10.4 Employment Agreement dated February 3, 1994
between the Company and John Bohan. Incorporated
by reference to Exhibit 10.4 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.5 Form of Consulting Agreements between the Company
and each of Drs. McLeod and Rubin, as amended.
Incorporated by reference to Exhibit 10.5 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.6 Form of Stock Restriction Agreement between the
Company and each of Drs. McLeod and Rubin and
Messrs. Reisner, Ryaby, Talish, McBrayer, and
Bohan. Incorporated by reference to Exhibit 10.6
to the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.7 Form of Stock Purchase Agreement between the
Company and each of Messrs. Reisner, Ryaby, and
Talish. Incorporated by reference to Exhibit 10.7
to the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.8+ Manufacturing Agreement dated January 20, 1994
between the Company and Hi-Tronics Designs, Inc.
Incorporated by reference to Exhibit 10.8 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
<PAGE>
10.9 Form of 1993 Stock Option Plan Option Agreement.
Incorporated by reference to Exhibit 10.9 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.10 1995 Stock Option / Stock Issuance Plan.
Incorporated by reference to Exhibit 10.10 to the
Company's Form S-1 Registration Statement
(Registration No. 33- 92740).
10.11 Employee Stock Purchase Plan. Incorporated by
reference to Exhibit 10.12 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.12 Lease Agreement dated December 13, 1994 by and
between the Company and Siemens Medical Systems,
Inc. Incorporated by reference to Exhibit 10.13 to
the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.13 License Agreement dated March 26, 1992 between AEI
and Drs. McLeod and Rubin. Incorporated by
reference to Exhibit 10.14 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.14 SAFHS Agreement dated November 30, 1995 between
the Company and Teijin Limited. Incorporated by
reference to Exhibit 10.14 to the Company's Form
10-K for the year ended September 30, 1995.
10.15+ Mechanical-Stress Agreement dated November 30,
1995 between the Company and Teijin Limited.
Incorporated by reference to Exhibit 10.15 to the
Company's Form 10-K for the year ended September
30, 1995.
10.16* Employment Agreement dated March 1, 1997 between
the Company and Patrick A. McBrayer.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to the Company's Form 10-K for the
year ended September 30, 1995.
27* Financial Data Schedule.
99.1 Preferred Shares Rights Agreement, dated December
6, 1996, between the Company and Registrar and
Transfer Company, including the Certificate of
Determination, the Form of Rights Certificate, and
the summary of Rights attached thereto as Exhibits
A, B, and C, respectively. Incorporated by
reference to Exhibit 99.1 to the Company's Form
10-K for the year ended September 30, 1996.
------------
* Filed herewith.
+ Confidential treatment granted.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter
for which this report is filed.
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EXOGEN, INC.
(Registrant)

May 13, 1997 By: /s/ Patrick A. McBrayer
-------------------------
Patrick A. McBrayer, President and
Chief Executive Officer

May 13, 1997 By: /s/ Richard H. Reisner
------------------------
Richard H. Reisner, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)

<PAGE>
EXOGEN, INC.

EXHIBIT INDEX

Number Description
------ -----------

EXHIBIT INDEX (continued)

Number Description
------ -----------

10.9 Form of 1993 Stock Option Plan Option Agreement.
Incorporated by reference to Exhibit 10.9 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.10 1995 Stock Option / Stock Issuance Plan. Incorporated
by reference to Exhibit 10.10 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.11 Employee Stock Purchase Plan. Incorporated by reference
to Exhibit 10.12 to the Company's Form S-1 Registration
Statement (Registration No. 33-92740).
10.12 Lease Agreement dated December 13, 1994 by and between
the Company and Siemens Medical Systems, Inc.
Incorporated by reference to Exhibit 10.13 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.13 License Agreement dated March 26, 1992 between AEI and
Drs. McLeod and Rubin. Incorporated by reference to
Exhibit 10.14 to the Company's Form S-1 Registration
Statement (Registration No. 33-92740).
10.14 SAFHS Agreement dated November 30, 1995 between the
Company and Teijin Limited. Incorporated by reference
to Exhibit 10.14 to the Company's Form 10-K for the
year ended September 30, 1995.
10.15+ Mechanical-Stress Agreement dated November 30, 1995
between the Company and Teijin Limited. Incorporated by
reference to Exhibit 10.15 to the Company's Form 10-K
for the year ended September 30, 1995.
10.16* Employment Agreement dated March 1, 1997 between the
Company and Patrick A. McBrayer.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to the Company's Form 10-K for the year
ended September 30, 1995.
27* Financial Data Schedule.
99.1 Preferred Shares Rights Agreement, dated December 6,
1996, between the Company and Registrar and Transfer
Company, including the Certificate of Determination,
the Form of Rights Certificate, and the summary of
Rights attached thereto as Exhibits A, B, and C,
respectively. Incorporated by reference to Exhibit 99.1
to the Company's Form 10-K for the year ended September
30, 1996.
-------------------
* Filed herewith.
+ Confidential treatment granted.

Exhibit 10.16

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is entered into as of
March 1, 1997 by and between Exogen, Inc., a Delaware corporation (the
"Company"), and Patrick A. McBrayer ("Executive").

WHEREAS, the Company and the Executive entered into that certain
Employment Agreement dated as of January 15, 1994; and

WHEREAS, the Company and the Executive desire that the Executive
be employed by the Company for a second three-year term and that the terms and
conditions of such employment be defined;

NOW, THEREFORE, in consideration of the employment of the
Executive by the Company, the Company and Executive agree as follows:

1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment with the Company for a three (3) year period
commencing on March 1, 1997 (the "Commencement Date") and continuing until the
third anniversary of the Commencement Date, subject, however, to prior
termination as hereinafter provided in Section 5.

2. Executive's Duties and Obligations.

a. Duties. Executive shall serve as President and Chief
Executive Officer of the Company. Executive shall be responsible for all
segments of the Company's business and all other officers of the Company shall
report to Executive. Executive shall at all times report to, and shall be
subject to the policies established by, the Company's Board of Directors.

b. Performance. Executive agrees that to the best of his
ability and experience he will at all times loyally and conscientiously perform
all of his duties and obligations under this Agreement.

c. Proprietary Information and Inventions Agreement. Executive
has executed the form of Proprietary Information and Inventions Agreement
attached to this Agreement as Exhibit A.

3. Devotion of Time to Company's Business; Noncompetition
Agreement.

a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the business of the Company.

b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Board of Directors.

c. Non-Competition During Employment. During his employment
with the Company, Executive shall not, directly or indirectly, either as an
employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity, engage or participate in any business that is competitive with the
business or proposed business (as defined below) of the Company.
<PAGE>
d. Non-Solicitation of Employees. Executive agrees that during
his employment with the Company and for one (1) year thereafter, he will not
encourage or solicit any employee of the Company to leave the Company for any
reason; provided, however, that this obligation shall not affect any
responsibility he may have as an employee of the Company with respect to the
bona fide hiring and firing of Company personnel; and provided, further, that
this obligation shall not prohibit Executive from soliciting his administrative
assistant if Executive leaves the employ of the Company.

e. Non-Competition After Employment. Executive agrees that for
one (1) year following the termination of his employment with the Company, he
will not (i) engage in any employment, business or activity that is competitive
with the business or proposed business (as defined below) of the Company, and
will not assist any other person or organization in competing with the Company
or in preparing to engage in competition with such business or proposed business
of the Company, or (ii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers or
accounts which were contacted, solicited or served by Executive while employed
by the Company (provided, however, that Executive may solicit clients, customers
or accounts of the Company on behalf of a business totally unrelated to the
business or proposed business of the Company). Notwithstanding the foregoing, in
the event Executive is terminated by the Company without "Good Cause" (as
hereafter defined in paragraph 5.c), prior to March 1, 2000, the noncompete
provision set forth in this paragraph 3.e. shall be null and void.

f. Definitions; Exceptions. For the purpose of this paragraph
3, "proposed business" of the Company shall mean a business proposal which has
been the subject of material discussions by the Board of Directors of the
Company or a product or service under design or development by the Company.
Notwithstanding the provisions of this paragraph 3, nothing herein shall
prohibit Executive from (i) holding less than three percent (3%) of the
outstanding capital stock of a publicly-held corporation engaged in a business
that competes with the business or proposed business of the Company; (ii)
serving on one or more Boards of Directors of non-profit corporations (so long
as, in the aggregate, such commitments do not interfere with the performance of
Executive's duties for the Company); or (iii) being employed by a multi-division
company so long as Executive's responsibilities do not extend to the specific
division which competes with the Company.

g. Interpretation. If any restriction set forth in paragraphs
3.d. and 3.e. is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too great
a range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which it may be enforceable.

h. Equitable Remedies. The restrictions contained in
paragraphs 3.d. and 3.e. are necessary for the protection of the business and
goodwill of the Company and are considered by Executive to be reasonable for
such purpose. Executive agrees that any breach of paragraph 3.d. or 3.e. of this
Agreement is likely to cause the Company substantial and irrevocable damage and
therefore, in the event of any such breach, Executive agrees that the Company,
in addition to any other remedies which may be available, shall be entitled to
specific performance and other injunctive relief.
<PAGE>
4. Compensation and Benefits.

a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base monthly compensation of Sixteen Thousand Six
Hundred Sixty Seven ($16,667.00), less all required withholdings. Base
compensation shall be subject to review by the Compensation Committee of the
Board of Directors during the second and third years of the term of this
Agreement; provided that base compensation shall never be reduced below the base
compensation applicable to the first year.

b. Bonuses. In addition to base compensation, Executive shall
be entitled to participate in an executive performance bonus program to be
developed by Executive and approved by the Board of Directors of the Company.

c. Benefits. During his employment with the Company, Executive
will be entitled to (i) all such family health and medical benefits (including
dental) and all life insurance and disability insurance as are provided to other
officers of the Company, and (ii) a monthly car allowance of $600, a car phone,
and a computer and fax machine for use at Executive's home. The Company reserves
the right to modify, amend or terminate any benefits listed under clause (i)
above at any time for any reason (provided such modification, amendment or
termination is applicable to all executives receiving such benefits) but shall
in any case, provide reasonable health, life and disability benefits to
Executive while Executive is a full-time employee of the Company.

d. Administrative Assistant. Executive shall be entitled to
select and hire an administrative assistant.

5. Termination of Employment.

a. Termination After Term. After the third anniversary of the
Commencement Date, Executive's employment with the Company shall be "at will"
and may be terminated by either Executive or the Company at any time for any
reason, with or without cause by giving at least two (2) weeks' written notice
to the other party. No severance or other benefits, aside from unpaid
compensation accrued through the last day of Executive's employment, shall be
due upon such termination.

b. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled," shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this paragraph 5.b, Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefit.

c. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Proprietary Information and
Inventions Agreement not cured within ten (10) business days after notice from
the Company (unless such breach is not capable of being cured within that time
period, in which case Executive shall have proposed a plan to cure such default
<PAGE>
which plan is reasonably acceptable to the Board of Directors of the Company and
which Executive is diligently pursuing, and provided that no cure period shall
apply to a breach of the nondisclosure provisions of the Proprietary Information
and Inventions Agreement), or any act or omission involving fraud, embezzlement,
or misappropriation of any property or proprietary information of the Company by
Executive.

d. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause prior to the third anniversary
of the Commencement Date, the following provisions shall apply:

i) Executive shall be entitled to any unpaid compensation
accrued through the last day of Executive's employment;

ii) Executive shall be entitled to receive severance
payments, until the first to expire of (A) the twelve (12) month period
following such termination, and (B) the third anniversary of the Commencement
Date. Such severance shall be paid monthly in an amount equal to the monthly
base compensation in effect at the time of termination.

e. Termination by Executive. Executive may terminate this
Agreement by giving sixty (60) days' written notice to the Company. If Executive
terminates this Agreement under this paragraph 5.e., Executive shall only be
entitled to any unpaid compensation accrued through the last day of Executive's
employment, but in no event shall Executive be entitled to any severance
benefit.

6. Prior Agreements. Executive has delivered to the Company
true and complete copies of all agreements regarding employment,
non-competition, confidentiality or other matters related to employment to which
Executive is a party and which are still in effect (collectively, the "Prior
Agreements"). The Company will indemnify and hold harmless Executive from and
against any liability for reasonable legal fees and expenses and for reasonable
costs (but not for any judgment, settlement or other damages) that Executive may
incur in connection with the defense of any claim or suit made by or brought
against Executive for breach of any provision of the Prior Agreements.

7. Miscellaneous.

a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the State of New
Jersey.

b. Arbitration. Any controversy between the parties hereto
involving the construction or application of any terms, covenants or conditions
of this Agreement or any other agreement executed in connection herewith, or any
claim arising out of or relating to this Agreement, except with respect to
prejudgment remedies, will be submitted to and be settled by final and binding
arbitration in New York, New York or such other place as the parties may agree,
in accordance with the rules of the American Arbitration Association then in
effect, and judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.

c. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
<PAGE>
d. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

e. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

f. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
paragraph 7.f.

g. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date set forth above.

EXOGEN, INC.

By: /s/John P. Ryaby
----------------
John P. Ryaby,
Chairman of the Board

Address: 10 Constitution Avenue
P.O. Box 6860
Piscataway, NJ 08855

EXECUTIVE:

/s/Patrick A. McBrayer
----------------------
Patrick A. McBrayer

Address: 1522 Stapler Drive
Yardley, PA 19067

<ARTICLE> 5
<LEGEND>
IN THOUSANDS, EXCEPT SHARE DATA AT 3/31/97, OR 6 MONTHS ENDED 3/31/97.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,577
<SECURITIES> 8,191
<RECEIVABLES> 4,080
<ALLOWANCES> 633
<INVENTORY> 1,403
<CURRENT-ASSETS> 17,230
<PP&E> 1,624
<DEPRECIATION> 748
<TOTAL-ASSETS> 19,384
<CURRENT-LIABILITIES> 2,560
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 16,823
<TOTAL-LIABILITY-AND-EQUITY> 19,384
<SALES> 3,476
<TOTAL-REVENUES> 3,476
<CGS> 2,088
<TOTAL-COSTS> 2,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (6,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,298)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> 0

</TABLE>