EXOGEN INC, 10-Q, 1997-08-11

EXOGEN INC
10-Q, 1997-08-11
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 June 30, 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: 9,984,252 shares outstanding at July 31, 1997.
<PAGE>
EXOGEN, INC.
Quarterly Report on Form 10-Q
June 30, 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)

June 30, September 30,
1997 1996
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 4,338 $ 8,115
Short-term investments ..................................................... 4,532 6,824
Accounts receivable, net ................................................... 3,576 2,943
Inventories ................................................................ 1,465 1,239
Interest receivable ........................................................ 128 202
Other current assets ....................................................... 362 344
-------- --------
Total current assets .......................................... 14,401 19,667
Furniture, fixtures and equipment, net ......................................... 788 979
Long-term investments .......................................................... 1,010 4,595
Other assets ................................................................... 263 270
-------- --------
Total assets .................................................. $ 16,462 $ 25,511
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ........................................................... $ 394 $ 685
Accrued liabilities ........................................................ 2,188 1,625
Capital lease obligations .................................................. 4 15
Other current liabilities .................................................. 7 107
-------- --------
Total current liabilities ..................................... 2,593 2,432
Capital lease obligations ...................................................... -- 2
-------- --------
Total liabilities ............................................. 2,593 2,434

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

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

June 30, September 30,
1997 1996
-------- --------
(Unaudited)

<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares authorized at June 30,
1997 and September 30,1996;
no shares issued or outstanding ....................................... -- --
Common Stock, $0.0001 par value; 27,000,000 shares authorized at June 30,
1997 and September 30, 1996; 9,954,768 shares issued and outstanding at
June 30, 1997 and 9,909,192 shares issued and outstanding at
September 30, 1996 .................................................... 1 1
Additional paid-in capital ................................................. 46,492 46,272
Cumulative translation adjustment .......................................... (248) (22)
Accumulated deficit ........................................................ (32,376) (23,174)
-------- --------
Total stockholders' equity .................................... 13,869 23,077
-------- --------
Total liabilities and stockholders' equity .................... $ 16,462 $ 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 Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales .......................... $ 1,764 $ 1,816 $ 5,240 $ 4,164
Revenues from development agreements ... -- -- -- 800
-------- -------- -------- --------
Total revenues ................... 1,764 1,816 5,240 4,964
-------- -------- -------- --------

Operating costs and expenses:
Cost of product sales .................. 961 1,071 3,049 2,443
Research and development ............... 806 998 2,490 2,999
Selling, general, and administrative ... 3,053 2,859 9,454 7,714
-------- -------- -------- --------
Total operating costs and expenses 4,820 4,928 14,993 13,156
-------- -------- -------- --------

Operating loss ......................... (3,056) (3,112) (9,753) (8,192)

Other income (expense):
Interest income, net ................... 160 334 599 1,146
Other expense, net ..................... (8) (19) (48) (175)
-------- -------- -------- --------
Total other income, net .......... 152 315 551 971
-------- -------- -------- --------

Net loss ............................... $ (2,904) $ (2,797) $ (9,202) $ (7,221)
======== ======== ======== ========

Net loss per share .......................... $ (0.29) $ (0.28) $ (0.93) $ (0.73)
======== ======== ======== ========

Weighted average shares outstanding ......... 9,955 9,881 9,934 9,866

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)

Nine Months Ended
June 30,
---------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (9,202) $ (7,221)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 364 271
Amortization of net premium (discount) on short- and long-term
investments ................................................ 56 (219)
Amortization of nonemployee stock
option compensation ........................................ 90 --
Provision for losses on accounts receivable .................. 100 --
Other adjustments ............................................ 2 15
Decrease (increase) in assets:
Accounts receivable, net ..................................... (929) (1,724)
Interest receivable .......................................... 74 (223)
Inventories .................................................. (265) 35
Other current assets ......................................... (21) 22
Other assets ................................................. -- 28
Increase (decrease) in liabilities:
Accounts payable ............................................. (277) 263
Accrued liabilities .......................................... 585 255
Other current liabilities .................................... (99) --
-------- --------
Net cash used in operating activities ................... (9,522) (8,498)
-------- --------

Cash flows from investing activities:
Purchase of short- and long-term investments ...................... (1,392) (19,673)
Proceeds from sale of short- and long-term
investments ..................................................... 7,212 14,976
Purchase of furniture, fixtures and equipment ..................... (168) (381)
-------- --------
Net cash provided by (used in) investing activities ..... 5,652 (5,078)
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.

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

Nine Months Ended
June 30,
---------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options ........................... 5 37
Proceeds from sale of Common Stock ................................ 125 104
Principal payments under capital leases ........................... (13) (11)
-------- --------
Net cash provided by financing activities ............... 117 130
-------- --------

Effect of exchange rate changes on cash and cash
equivalents .......................................................... (24) 3
-------- --------

Net decrease in cash and cash equivalents .............................. (3,777) (13,443)
Cash and cash equivalents, beginning of period ......................... 8,115 22,176
-------- --------
Cash and cash equivalents, end of period ............................... $ 4,338 $ 8,733
======== ========

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 June 30, 1997; the results of
operations for the three and nine months ended June 30, 1997 and 1996;
and the cash flows for the nine 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 nine months ended June 30, 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. NONRECURRING CHARGE

The operating loss for the three months and nine months ended June 30,
1997, includes a nonrecurring charge of approximately $150,000, related
to a workforce reduction in the quarter ended June 30, 1997.

5. INVENTORIES

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

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

Finished goods ......................... $1,069 $ 768
Parts and components ................... 396 471
------ ------
$1,465 $1,239
====== ======
</TABLE>

6. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

<TABLE>
<CAPTION>
Nine Months Ended June 30,
1997 1996
---- ----
(in thousands)
<S> <C> <C>

Interest paid........................... $ 10 $ 6
</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 fiscal 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

Nine Months Ended June 30, 1997, and June 30, 1996

Through June 30, 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 and the second-generation SAFHS 2000(R). (For a
further discussion of the second-generation SAFHS, see "Additional
Information--SAFHS 2000(R)" below.) For the nine months ended June 30, 1997,
product sales were $5.2 million compared with $4.2 million for the nine months
ended June 30, 1996, an increase of $1.1 million (or 26%). International product
sales were 27% of total product sales for the nine months ended June 30, 1997,
compared with 8% for the nine months ended June 30, 1996.

For the nine months ended June 30, 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 nine months ended June
30, 1996. These development agreements cover two of the Company's technologies:
(1) the SAFHS device and (2) 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 $3.0 million for the nine months ended June 30, 1997,
compared with $2.4 million for the nine months ended June 30, 1996. Excluding
revenues related to development agreements, gross profit for the nine months
ended June 30, 1997, was $2.2 million (or 41.8% as a percentage of product
sales), compared with $1.7 million (or 41.3%) for the nine months ended June 30,
1996. The $470,000 increase (or 27%) in gross profit was principally due to the
<PAGE>
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 nine months ended June 30, 1997, compared with
approximately $2,350 for the nine months ended June 30, 1996. The decrease in
average realized selling price was primarily due to an increase in the
allowances for returns and for amounts that might not be reimbursed by
third-party payors.

Research and development expenses for the nine months ended June 30, 1997,
decreased to $2.5 million from $3.0 million for the nine months ended June 30,
1996. The decrease of $509,000 (or 17%) 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 nine months ended June 30,
1997, increased to $9.5 million from $7.7 million for the nine months ended June
30, 1996. The $1.7 million (or 23%) increase resulted from (1) expanded selling
and marketing efforts related to the SAFHS Model 2A, both in the United States
and in Europe, and the second- generation SAFHS 2000, in the United States, (2)
increased activities relating to reimbursement efforts, and (3) a nonrecurring
charge of approximately $150,000, related to a workforce reduction in the
quarter ended June 30, 1997.

Net interest income for the nine months ended June 30, 1997, decreased to
$599,000 from $1.1 million for the nine months ended June 30, 1996, consistent
with the level of funds available for investment.

The Company incurred a net loss of $9.2 million, or $0.93 per share, for the
nine months ended June 30, 1997, compared with a net loss of $7.2 million, or
$0.73 per share, for the nine months ended June 30, 1996. The increase of $2.0
million (or 27%) in net loss was caused principally by the factors discussed
above.

Three Months Ended June 30, 1997, and June 30, 1996

For the three months ended June 30, 1997, product sales remained constant at
$1.8 million compared with product sales for the three months ended June 30,
1996. International product sales were 22% of total product sales for the three
months ended June 30, 1997, compared with 17% for the three months ended June
30, 1996.

The Company recorded no revenues related to development agreements with Teijin
Limited, a Japanese corporation, for either the three months ended June 30,
1997, or the three months ended June 30, 1996. (See the nine-month discussion
above for a description of the development agreements.)

Cost of product sales was $961,000 for the three months ended June 30, 1997,
compared with $1.1 million for the three months ended June 30, 1996. Gross
profit for the three months ended June 30, 1997, was $803,000 (or 45.5% as a
percentage of product sales), compared with $745,000 (or 41.0%) for the three
months ended June 30, 1996. The $58,000 increase (or 8%) in gross profit was
principally due to the increase in product volume and reduced per-unit product
<PAGE>
costs, partially offset by a decrease in the average realized selling price of a
SAFHS, which was approximately $1,970 for the three months ended June 30, 1997,
compared with approximately $2,285 for the three months ended June 30, 1996. The
decrease in average realized selling price was primarily due to an increase in
the allowances for returns and for amounts that might not be reimbursed by
third-party payors.

Research and development expenses for the three months ended June 30, 1997,
decreased to $806,000 from $998,000 for the three months ended June 30, 1996.
The decrease of $192,000 (or 19%) was primarily due to (1) the completion of
expenditures associated with several 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 expenditures for
designing and building the mechanical-stress device for clinical studies.

Selling, general, and administrative expenses for the three months ended June
30, 1997, increased to $3.1 million from $2.9 million for the three months ended
June 30, 1996. The $194,000 (or 7%) increase resulted from (1) a nonrecurring
charge of approximately $150,000, related to a workforce reduction in the
quarter ended June 30, 1997, and (2) increased activities relating to
reimbursement efforts.

Net interest income for the three months ended June 30, 1997, decreased to
$160,000 from $334,000 for the three months ended June 30, 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, for the
three months ended June 30, 1997, compared with a net loss of $2.8 million, or
$0.28 per share, for the three months ended June 30, 1996. The increase of
$107,000 (or 4%) 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 $32.4 million at June 30, 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 nine months ended June 30, 1997, the Company used net cash of $9.5
million for operating activities, primarily to fund (1) selling and marketing of
the SAFHS Model 2A and, in the third quarter of fiscal 1997, the SAFHS 2000 and
(2) an increase in the international accounts receivable days outstanding from
240 days at September 30, 1996, to 340 days at June 30, 1997. The increase
reflects a protracted reimbursement process at the local level due to the
absence of nationwide approval of the SAFHS technology in Germany. (For a
further discussion of international accounts receivable, see below, "Business
Considerations--Risks Associated With International Operations.") The Company's
capital expenditures for the nine months ended June 30, 1997, were $168,000. The
Company estimates that equipment and furnishings to expand in-house
manufacturing and administrative support activities will require essentially no
further capital expenditures during fiscal 1997 and approximately $400,000
during fiscal 1998.

To help conserve its capital resources, the Company reduced its workforce in the
quarter ended June 30, 1997. Through the reduction, the Company expects to
realize approximately $750,000 of annual pretax savings; approximately $221,000
will be saved in fiscal 1997.
<PAGE>
The Company plans to finance its capital needs principally from existing capital
resources, which the Company believes will be sufficient to fund its operations
through 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.

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, and in May 1997 the Company began marketing the
SAFHS 2000 in the United States. 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.

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, developing in-house manufacturing capability, and selling
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 for the
SAFHS Model 2A device and began marketing it in October 1994, and further
received approval of the SAFHS 2000 device and began marketing the SAFHS 2000 in
May 1997, 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.

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
<PAGE>
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.

History of Losses; Profitability Uncertain; Fluctuations in Operating Results

The Company has incurred substantial losses since inception and, as of June 30,
1997, has an accumulated deficit of approximately $32.4 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
<PAGE>
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 in-house manufacturing capability. 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.

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.
<PAGE>
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, which were principally in Germany, were 14% of
total product sales in fiscal 1996 and 27% for the nine months ended June 30,
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.

As of June 30, 1997, the balance in international accounts receivable, net of
allowances for returns and bad debt, was $1.8 million, with a days outstanding
of approximately 340 days. The international accounts receivable is primarily
derived from sales in Germany, where the Company has received limited local
reimbursement on a case-by-case basis. To assist the collection of outstanding
claims and to expedite the reimbursement process on future claims, the Company
is seeking nationwide approval by the National Krankenkasse, the German
governing organization that establishes medical reimbursement policy for
health-care providers. To this end, the Company has submitted a formal
application to the National Krankenkasse. The application process includes a
scientific assessment and a reimbursement assessment; the Company is currently
in the scientific-assessment phase. There can be no assurance that the Company
will obtain a favorable ruling on its request for nationwide approval on a
timely basis, if at all. Lack of approval by the National Krankenkasse for the
Company's products could have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.

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>
Manufacturing and Related Risks

The Company has developed in-house refurbishing capability for the SAFHS Model
2A device, and has also developed in-house manufacturing capability for the
SAFHS 2000 device. In addition, the Company uses a contract manufacturer to
manufacture a portion of the Company's SAFHS 2000 production. Both the Company's
and the contract manufacturer's respective facilities have been inspected by the
FDA, and have been approved for the production of the SAFHS 2000 under the FDA's
Good Manufacturing Practices ("GMP") requirements. Any failure by either the
Company or the contract manufacturer to maintain its respective facility in
accordance with GMP requirements could result in the inability to manufacture
the SAFHS device on a commercial scale, and could 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.

The Company's arrangement with the contract manufacturer requires the Company to
purchase a minimum number of SAFHS devices from the contract manufacturer for
the term of the agreement, effective to 1998. Although the Company and the
contract manufacturer are discussing amending these terms related to the SAFHS
2000, there can be no assurance that agreement on such amendment will be
reached.

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.

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
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
<PAGE>
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 is required to file PMA supplements for new or expanded indications
for its SAFHS technology. In addition, modifications to its SAFHS devices may
require PMA supplements. If a supplement were not accepted by the FDA, 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. 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 a PMA Supplement for its second-generation SAFHS, SAFHS 2000,
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
recently filed a PMA Supplement seeking approval of an expanded indication for
the SAFHS 2000, but withdrew that application in July 1997 to revise and
resubmit it for both expanded and new applications. The Company expects to
refile this Supplement during the fourth quarter of fiscal 1997. 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 or a supplement to an
existing 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
<PAGE>
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
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
<PAGE>
of such trade secrets and proprietary information will effectively prevent
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.
<PAGE>
The Company's Bylaws 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 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 (1) Exogen's counsel will assume the
status of lead defense counsel in the litigation; (2) any
adverse judgment entered in the litigation will be entered
against Exogen and Interpore jointly and severally; and (3)
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
<PAGE>
against Pilla in the Supreme Court for the State of New York
seeking a judicial declaration that the Company is not liable
to Pilla for any royalties. Pilla asserted a counterclaim
against the Company, seeking to be awarded the demanded
royalties, that the Company asked the Court to dismiss on the
grounds that Pilla failed to state a claim against Exogen.
Pilla subsequently asked the Court for permission to replead
the counterclaim, and Exogen has opposed this motion on the
grounds that the amended claim also fails to state a claim
against Exogen. These motions are pending. 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

None.

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).
<PAGE>
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).
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. Incorporated by reference to
Exhibit 10.16 to the Company's Form 10-Q
for the second quarter ended March 31,
1997.
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.
<PAGE>

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)

August 5, 1997 By: /s/Patrick A. McBrayer
----------------------
Patrick A. McBrayer, President and
Chief Executive Officer

August 5, 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

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

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. Incorporated by reference to Exhibit 10.16 to
the Company's Form 10-Q for the second quarter ended March 31, 1997.
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.

<ARTICLE> 5
<LEGEND>
In thousands except share data at 6/30/97, or 9 months ended 6/30/97.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,338
<SECURITIES> 4,532
<RECEIVABLES> 4,700
<ALLOWANCES> 1,124
<INVENTORY> 1,465
<CURRENT-ASSETS> 14,401
<PP&E> 1,656
<DEPRECIATION> 868
<TOTAL-ASSETS> 16,462
<CURRENT-LIABILITIES> 2,593
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 13,868
<TOTAL-LIABILITY-AND-EQUITY> 16,462
<SALES> 5,240
<TOTAL-REVENUES> 5,240
<CGS> 3,049
<TOTAL-COSTS> 3,049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (9,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,202)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> 0

</TABLE>