EXOGEN INC, 10-K/A, 1999-05-28

EXOGEN INC
10-K/A, 1999-05-28
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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

FORM 10-K/A
AMENDMENT NO. 1

(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended September 30, 1998
------------------

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)

(732) 981-0990
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------

None None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.0001 par value
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The registrant has only one class of voting securities, its common
stock, par value $0.0001 per share, and no classes of nonvoting securities.
While it is difficult to determine the number of shares of common stock owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding common stock on November 30, 1998, (based upon the closing selling
price of such common stock on the Nasdaq National Market on November 30, 1998)
held by non-affiliates was approximately $20.4 million. For this computation,
the registrant has excluded the market value of all shares of its common stock
reported as beneficially owned by officers, directors and certain significant
stockholders of the registrant. Such exclusion shall not be deemed to constitute
an admission that any such stockholder is an affiliate of the registrant.

As of November 30, 1998, there were outstanding 12,709,343 shares of
the registrant's common stock, par value $0.0001.

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement of Exogen, Inc. in connection with the Annual
Meeting of Stockholders scheduled on or about February 25, 1999, is incorporated
by reference into Part III of this Form 10-K.
<PAGE>
EXOGEN, INC.

1998 Form 10-K Annual Report

TABLE OF CONTENTS

PART I
Item 1. Business..............................................................
Item 2. Properties............................................................
Item 3. Legal Proceedings.....................................................
Item 4. Submission of Matters to a Vote of Security Holders...................
Item 4a. Executive Officers of the Registrant..................................

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data...............................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............
Item 8. Financial Statements and Supplementary Data...........................
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................

PART III

Item 10. Directors and Executive Officers of the Registrant....................
Item 11. Executive Compensation................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management........
Item 13. Certain Relationships and Related Transactions........................

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......
<PAGE>
PART I

Item 1. Business

Exogen, Inc. ("Exogen") designs, develops, manufactures, and markets
medical devices for the non-invasive treatment of musculoskeletal injury and
disease. Exogen's proprietary ultrasound and mechanical-stress technologies
deliver energy that promotes the growth, repair, and maintenance of bone. These
technologies are based on the principle that bone growth is stimulated by
mechanical force.

Exogen's Sonic Accelerated Fracture Healing System ("SAFHS(R)") device
utilizes mechanical force, produced by low-intensity ultrasound, to accelerate
fracture healing for closed, cast-immobilized, fresh fractures of the lower leg
and lower arm within the device's approved uses. The SAFHS device is small and
portable, and is used by the patient once daily for 20 minutes. Exogen's
Pre-Market Approval ("PMA") application for its first model, the SAFHS Model 2A,
was approved by the U. S. Food and Drug Administration ("FDA") in October 1994.
In May 1997, Exogen began commercial distribution of the second-generation SAFHS
2000(R) in the United States. The SAFHS 2000, which utilizes the same
low-intensity ultrasound signal as does the SAFHS Model 2A, is entirely battery
operated and is smaller and lighter than the SAFHS Model 2A for enhanced
portability. The SAFHS device is the only medical device approved by the FDA for
the acceleration of fresh-fracture healing of the lower leg and lower arm.

Exogen markets and sells SAFHS devices in the United States and Europe
and to a distributor in Japan:

o International. In 1995, Exogen established a German subsidiary,
which sells SAFHS devices in Germany and several other countries,
including Belgium, Holland, Israel, and the Scandinavian
countries. In 1995, Exogen signed a development and distribution
agreement with Teijin Limited ("Teijin"), which began to sell
SAFHS devices in Japan in June 1998.

Industry Overview

Background

Bone, which forms the human skeleton, undergoes constant change during
an individual's lifetime through a dynamic process of cellular action. Bone is
continually remodeled so that between 10% and 20% of the adult skeleton
undergoes removal and formation annually. Bone's natural remodeling process,
which is balanced between removal and formation, can be affected by a number of
factors. For example, smoking has been shown to slow the process of bone
formation, while exercise such as walking or running, which applies mechanical
force to the body on impact, has been shown to stimulate the process of bone
formation.
<PAGE>
When a fracture occurs, a complex biological healing process is
initiated. The process of bone healing in fresh fractures generally takes from
three to eight months, depending on the composition of the fractured bone. Many
fractures take substantially longer to heal, and some do not heal at all.
Physicians may identify certain fractures, at the time of occurrence, as being
susceptible to extended healing times and associated complications. According to
the orthopaedic literature, some of the factors taken into account by physicians
in making such a determination include fracture characteristics such as the
following:

o gap size;
o location;
o displacement; and
o fragmentation.

Also considered by physicians are patient characteristics, including the
following:
o age;
o gender;
o health condition;
o weight; and
o smoking habits.

Many of the fractures associated with these factors could result in costly
surgery, rehabilitation therapy, and in some cases, permanent disability.

Methods of Treating Fractures

Various methods exist for the treatment of bone fractures. The most
common therapy is to immobilize the fracture with an external cast. Certain
fractures are treated surgically using one or more of the following methods to
provide stability and promote healing:

o internal fixation devices such as plates, rods and screws;

o bone grafts using human bone or synthetic bone; and

o external fixation devices, which are external frames with metal
pins placed through the skin into the bone.

All of the conventional therapies for bone fractures supplement the
body's fracture healing process by immobilizing the injured bone, by providing
scaffolds for healing such as bone grafts, or by initiating healing when the
healing process has prematurely stopped. None, however, accelerates the fracture
healing process. Different approaches have been investigated and developed to
augment or replace conventional therapies, including electrical stimulation
devices and bone growth factors. Although electrical stimulation devices
demonstrate efficacy in initiating healing, their indications for use have been
limited to nonunion fractures (by definition, a nonunion fracture is considered
to be established when the physician determines that the fracture site shows no
visible progressive signs of healing). The FDA indications for use for
electrical-stimulation devices exclude spine and flat bones (i.e., the rib,
collarbone, skull, and certain bones of the hand and foot). Bone growth factors
are proteins that promote the healing process and have been in clinical trials
for several years, but are not commercially available in the United States.
<PAGE>
Clinical studies begun in the mid-1980s, which supported Exogen's PMA
application for its SAFHS device, demonstrated that mechanical force applied to
bone induces the formation of bone and accelerates the natural healing process
in fresh fractures. This work was based on a widely accepted scientific
principle that bone responds to mechanical force by inducing bone formation
and/or inhibiting bone loss. These clinical studies established that
acceleration of fracture healing is accomplished by using the mechanical force
produced by Exogen's proprietary low-intensity ultrasound.

Osteoporosis Background

Numerous bone disorders result from changes in the natural remodeling
process of bone removal and formation. The most widespread of these is
osteoporosis, a disease characterized by a decrease in bone mass and
deterioration of bone structure. This deterioration leads to an increase in
fracture risk due to bone fragility and reduced strength of the weight-bearing
skeleton, particularly the spine and the hip. As a person ages, this bone
removal tends to predominate and, beginning at approximately age 40, bone mass
begins to decline at the rate of approximately 0.5% per year. Women lose a
significantly greater percentage of bone mass (between 10% and 20%) following
the onset of menopause and the cessation of estrogen production. Bone mass also
deteriorates from lack of physical activity such as extended bed rest.

Several major drug companies have drug therapies, such as
estrogen-replacement therapy, calcitonin, and calcium supplements. These drug
therapies are used to prevent bone loss, but cannot form new bone. In addition,
use of existing therapies is limited by complications and certain side effects
including an increased incidence of endometrial, ovarian, and breast cancers in
women taking estrogen. Strenuous exercise has been shown to reduce bone loss in
the elderly but must be performed with caution as exercise may itself cause
fractures. Other drug companies are conducting clinical trials for the treatment
of osteoporosis to address the limitations of current therapeutic approaches. A
new estrogen-derivative drug therapy, which does not have the potential for side
effects of cancer, has recently been approved for the treatment of osteoporosis.
Another new drug, Fosamax(R), developed by a major drug company, has recently
been approved to treat osteoporosis in women after menopause. Exogen is
developing and testing in clinical trials a device that uses mechanical-stress
for the treatment of osteoporosis. This device is not commercially available,
and there is no assurance that Exogen will ever successfully develop or
commercialize this device.
<PAGE>
Products and Products Under Development

Sonic Accelerated Fracture Healing System ("SAFHS")

SAFHS is a non-invasive device that delivers ultrasound energy to
accelerate fracture healing through specifically programmed, low-intensity
acoustic pressure waves. The intensity is at the level of diagnostic ultrasound,
which is a safe method of viewing internal organs and fetuses. The SAFHS
treatment was designed to maximize ease of use. To apply the device, the
physician cuts a window in the patient's cast and installs a plastic coupling
fixture in the window. The patient coats the transducer head with an
ultrasound-conducting coupling gel to facilitate transmission of the ultrasound
signal, and locks the transducer into the coupling fixture set in the cast; a
protective cap is inserted in the fixture when the device is not being used. The
SAFHS device alerts the patient about treatment status and also contains a
patient-compliance monitoring system that automatically records all treatment
sessions and provides a detailed record, including date and time, of the
patient's use of the device for periodic review by the physician and Exogen.
Treatment requires use of the device only once daily for 20 minutes. The
treatment period averages approximately four months for treatment of a lower-leg
fracture and approximately eight weeks for a lower-arm fracture. The device is
portable and battery operated, and may be used by the patient at home, at work,
or elsewhere. When treatment is complete, the patient is requested to return the
device to Exogen. There is no financial incentive to a patient to return a
device, and consequently, not all SAFHS devices are returned. Certain components
of returned devices may be serviced and reused.

Exogen provides the SAFHS device, at a list price in the United States
of $3,500, for the duration of the treatment of the fracture, regardless of the
length of treatment. Exogen maintains a toll-free telephone number and provides
24-hour coverage to respond to inquiries from either patients or physicians. If
necessary, replacement units and supplies are provided to the patient.

Exogen is currently developing a third-generation SAFHS device. The
technology utilized in this device is expected to allow Exogen to address new
applications, which may include the treatment of spine fusions and cartilage
repair. In addition, Exogen is developing new configurations of ultrasound
transducers for use in spine fusion and cartilage repair. (See also "Research
and Development" below for a further discussion of SAFHS therapy.)

Mechanical-Stress Device

Exogen is developing a mechanical-stress device designed to inhibit
bone loss and to increase bone mass. The device delivers mechanical force to the
bone similar to the SAFHS technology. The device induces low-intensity
vibrational stress within the skeleton at frequencies similar to those generated
by the muscles of the human body. The patient stands on the device's resonating
platform, which delivers mechanical stress to the weight-bearing skeleton. (See
also "Research and Development" below for a further discussion.)
<PAGE>
SAFHS Clinical Trials and Registry Data

The SAFHS clinical trials were prospective, randomized, double-blind,
and placebo-controlled. All patients were cast-immobilized, and all received
treatment, commencing within seven days of fracture, using the SAFHS device or,
in the case of the placebo group, an identical device with no ultrasound signal
emission. The results of the studies showed that the average time to a healed
fracture (as measured clinically and by x-ray) was accelerated in the
SAFHS-treated group as compared with the placebo-treated group by approximately
38%. The SAFHS-treated lower-leg fractures healed in an average of 96 days,
compared with an average of 154 days in the placebo-treated fractures. The
SAFHS-treated lower-arm fractures healed in 61 days on average, compared with 98
days on average for the placebo-treated fractures. These clinical results
demonstrated that the SAFHS device produced a statistically significant and
clinically meaningful acceleration of all stages of healing in fresh fractures
of the lower leg and the lower arm. No contraindications or side effects were
identified in the clinical trials.

Exogen has maintained a registry of data for the fractures treated with
the SAFHS device since receiving its PMA approval in October 1994. Exogen has
accumulated this data from information received from the treating physicians and
the patients. As of September 1998, more than 5,100 physicians have prescribed
SAFHS therapy for over 11,000 fractures, of which more than half have completed
treatment with a 93% healing rate.

Agreements with Smith & Nephew, Inc.

On August 10, 1998, Exogen entered into a multi-year master agreement,
a U.S. sales representative agreement, and a stock purchase agreement with Smith
& Nephew, Inc., a leading worldwide healthcare company specializing in tissue
repair. Terms of the agreements include the following:

Right to Market SAFHS in the United States. Smith & Nephew obtained
exclusive rights to market SAFHS devices in the United States, and Exogen
transferred its existing U.S. sales and distribution organization to Smith &
Nephew. The U.S. sales representative agreement has a term of 10 years, but may
be terminated by mutual agreement of Exogen and Smith & Nephew, or by either
party in the event of a material default by the other party. Exogen's field
sales representatives became Smith & Nephew employees, and Exogen assigned all
of its contracts with independent sales agents and distributors to Smith &
Nephew.

Purchase of Common Stock. Smith & Nephew paid $4.1 million (or $5.00
per share) to purchase 820,000 shares of Exogen's common stock at the closing.
On the closing date, the fair market value of Exogen's common stock was $3.625
per share. A registration statement is pending with the Securities and Exchange
Commission to register these shares.
<PAGE>
Worldwide Distribution Option. Smith & Nephew has an option to acquire
exclusive worldwide distribution rights (except Japan) to the SAFHS device.
Smith & Nephew has a three-year period in which to exercise its worldwide
distribution option. If this option is exercised, Smith & Nephew is required to
make certain payments to Exogen during the first year of the worldwide
distribution agreement.

Prior to the exercise or expiration of the worldwide distribution
option, Exogen is required to notify Smith & Nephew if Exogen desires to
distribute and market SAFHS devices in a country in which it does not have a
sales representative, distribution, or similar agreement in effect. During the
60 days following receipt of such notice, Smith & Nephew has the exclusive right
to negotiate with Exogen a distribution agreement in that country.

Option to Purchase Additional Common Stock. Under certain
circumstances, Smith & Nephew has a one-time right to purchase from Exogen
additional shares of Exogen's common stock, up to 19% (including the shares
already acquired by Smith & Nephew) of the outstanding shares of Exogen's common
stock, after giving effect to the shares issuable upon exercise of the right.
The stock purchase right is available only if Smith & Nephew exercises its
worldwide distribution option. In addition, the right can be exercised only once
during the two-year period following the exercise of the worldwide distribution
option. The price per share to be paid would equal the stock's average fair
market value for the 20 days ending on the third trading day immediately
preceding the date Smith & Nephew announces, to Exogen, its election to exercise
the stock purchase option.

Option to Purchase and Distribute SAFHS Inventory in the United States.
Smith & Nephew has an option to assume additional responsibilities related to
the purchase and distribution of SAFHS inventory in the United States. The
option, if elected, cannot become effective until August 2000, and is subject to
the following:

o a definitive agreement specifying, in detail, the obligations of
each party; and

o payments to Exogen over a one-year period for exercising the
option.

The exercise by Smith & Nephew of this option and of the worldwide
distribution option could result in potential additional aggregate payments to
Exogen of $5.0 million.

Rights of First Negotiation. Smith & Nephew has certain rights of first
negotiation through August 2008 in the following areas:

o Exogen's ultrasound or mechanical-stress therapies, or any new
applications of such therapies; and

o a merger, a sale of substantially all of Exogen's assets, or other
similar transaction.

If Exogen desires to enter into an agreement of any kind with a third party in
connection with such areas, Exogen must give Smith & Nephew notice of Exogen's
intent to enter into such an agreement. After receiving such notice, Smith &
Nephew has the nonexclusive right to negotiate with Exogen regarding the
proposed transaction for a period of 45 days. During that period, Exogen cannot
execute a letter of intent or definitive agreement with any other person or
entity. If Smith & Nephew does not issue a letter of intent on the proposed
transaction within that 45-day period, Exogen can proceed with the third party.
<PAGE>
Selling and Marketing

Exogen's marketing strategy is to gain broad physician and third-party
payor acceptance of the SAFHS device worldwide within the approved indications
for each country. A critical element of this strategy is to utilize the results
of the SAFHS clinical trials and registry data to demonstrate the safety and
efficacy of the SAFHS treatment to physicians, government agencies, and other
third-party payors.

United States

Prior to August 10, 1998, Exogen had a nationwide network of
independent and direct sales representatives in the United States. On August 10,
1998, Exogen entered into a multi-year master agreement and a U.S. sales
representative agreement with Smith & Nephew, Inc., a leading worldwide
healthcare company specializing in tissue repair. Under these agreements, Smith
& Nephew obtained exclusive rights to market SAFHS devices in the United States,
and Exogen transferred its existing U.S. sales and distribution organization to
Smith & Nephew. The U.S. sales representative agreement has a term of 10 years,
but may be terminated by mutual agreement of Exogen and Smith & Nephew, or by
either party in the event of a material default by the other party. Exogen's
field sales representatives became Smith & Nephew employees, and Exogen assigned
all of its contracts with independent sales agents and distributors to Smith &
Nephew.

Smith & Nephew is responsible for the following principal activities:

o selling and marketing to physicians, trauma centers, and other
prescribers;

o obtaining prescriptions and appropriate documentation for the
SAFHS therapy; and

o maintaining certain minimum levels of units shipped.

Exogen is responsible for the following principal activities:

o marketing to third-party payors;

o marketing to the medical community;

o processing prescriptions and obtaining third-party payor approval
of the therapy, case-by-case;

o shipping SAFHS devices to the prescribing physicians or sales
representatives;

o providing a limited quantity of promotional devices to physicians;

o maintaining a 24-hour hot line and toll-free telephone number to
respond to inquiries from physicians and patients using the SAFHS
therapy; and

o paying Smith & Nephew a commission on revenues.

Prior to the agreements, all the above activities, except for
maintaining minimum levels of units shipped, had been the responsibility of
Exogen.
<PAGE>
Exogen believes that its relationship with Smith & Nephew will allow
better nationwide market penetration for the SAFHS device. A primary focus of
the combined marketing efforts is national and regional managed care and
workers' compensation organizations, with coordinated marketing through Exogen's
reimbursement specialists and Smith & Nephew's independent distributors and
agents.

Also under the terms of the multi-year master agreement and U.S. sales
representative agreement, Smith & Nephew has an option to assume additional
responsibilities related to the purchase and distribution of SAFHS inventory in
the United States. The option, if elected, cannot become effective until August
2000, and is subject to the following:

o a definitive agreement specifying, in detail, the obligations of
each party; and

o payments to Exogen over a one-year period for exercising the
option.

International

Exogen established a wholly owned German subsidiary in fiscal 1995, and
in fiscal 1996 introduced the SAFHS device in Germany and Austria through the
subsidiary's network of independent sales agents. In fiscal 1997, Exogen
expanded its sales into Holland and the United Kingdom. In other European
countries, Exogen is selecting and training independent distributors and agents.
Exogen is sponsoring clinical trials in Europe to augment clinical data from the
United States, with the goal of achieving acceptance by surgeons and
governmental- and private-insurance payors in these markets. (See "Third-Party
Reimbursement" below for a discussion of reimbursement.)

In November 1995, Exogen signed development agreements with Teijin
Limited, a Japanese corporation, for Exogen's SAFHS device and mechanical-stress
device. The SAFHS agreement provides for milestone payments to Exogen for
Teijin's development of the market in Japan. Exogen is responsible for
manufacturing and supplying SAFHS devices to Teijin for clinical trials and
sales in Japan. Teijin is responsible for complying with the regulatory
requirements and for marketing and distributing the SAFHS device in Japan.
Teijin received Japanese import approval to market the SAFHS Model 2A in May
1997 and the SAFHS 2000 in March 1998. In May 1998, Teijin received
reimbursement approval from the Japanese Health and Welfare Ministry, which was
the final approval necessary to begin commercial distribution of SAFHS in Japan.
Exogen shipped the first commercial devices to Teijin in March 1998, and in June
1998, Teijin began to sell SAFHS devices in Japan. The development agreement
with Teijin for the mechanical- stress device provides for milestone payments to
Exogen that will support, in part, Exogen'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.

On August 10, 1998, Smith & Nephew acquired exclusive rights to market
and sell the SAFHS devices in the United States under a multi-year master
agreement. Included in that agreement is an option for Smith & Nephew to acquire
exclusive worldwide distribution rights (except Japan) to the SAFHS device.
Smith & Nephew has a three-year period in which to exercise its worldwide
distribution option. If the option is exercised, Smith & Nephew is required to
make certain payments to Exogen during the first year of the worldwide
distribution agreement.
<PAGE>
Prior to the exercise or expiration of the worldwide distribution
option, Exogen is required to notify Smith & Nephew if Exogen desires to
distribute and market SAFHS devices in a country in which it does not have a
sales representative, distribution, or similar agreement in effect. During the
60 days following receipt of such notice, Smith & Nephew has the exclusive right
to negotiate with Exogen a distribution agreement in that country.

Exogen cannot assure that its independent distributors, sales agents,
and marketing partners will succeed in marketing and selling the SAFHS device in
Europe, Japan, and other territories. Each of the foreign markets in which
Exogen sells, or plans to sell, its products have separate regulatory and
product approval requirements. Exogen cannot assure that it will be able to
obtain the necessary regulatory approvals of the SAFHS device in foreign
markets. Exogen's international operations and sales are denominated in local
foreign currencies. In Japan, where Exogen does not have operations, its sales
to Teijin are denominated in U.S. dollars. Exogen does not currently engage in
currency hedging activities.

If Exogen fails to successfully market and sell the SAFHS device in
international markets, its business, financial condition, results of operations,
and cash flows could be materially and adversely affected.

For further information on international operations, see Footnote 3,
"Segment Information," of the Consolidated Financial Statements included herein.

Third-Party Reimbursement

United States

To expedite reimbursement for SAFHS devices in the United States,
Exogen seeks reimbursement approval from third-party payors, when possible,
prior to shipping the devices. Regardless of the availability of reimbursement
preapproval, Exogen's reimbursement staff works closely with third-party payors,
pursuing reimbursement case-by-case.

Prior to approving coverage for a new medical technology, most
third-party payors require evidence that the technology is safe and effective,
not experimental or investigational, and medically necessary and appropriate for
the specific patient. Third-party payors typically require that the technology
has received FDA approval or clearance for marketing. Also, new technologies are
often prescribed for off-label applications, for which reimbursement by
third-party payors may not be available. An increasing number of third-party
payors and managed care plans are also beginning to require evidence that the
technology is cost effective. Exogen has obtained a nationally recognized
product code for the ultrasound device, and this code may expedite reimbursement
from third-party payors for the SAFHS device. However, Exogen cannot assure that
such codes will be used appropriately, or at all.

Exogen has developed a multi-level program to obtain coverage and
reimbursement from third-party payors for the SAFHS device as a new treatment.
The SAFHS device is classified by third-party payors as durable medical
equipment. Although Exogen has not received broad approval from any
reimbursement authority for payment of the SAFHS device, it has received
approval from various third-party payors case-by-case. As of October 31, 1998,
Exogen has been paid by over 800 third-party payors, including the following:
<PAGE>
o traditional fee-for-service insurers;

o workers' compensation insurers;

o HMO and managed care organizations;

o automobile insurers; and

o third-party administrators.

In August 1995, the Technology Evaluation Center of the Blue Cross and Blue
Shield Association completed its review with a favorable assessment of the SAFHS
therapy, and disseminated that evaluation to its subscribers. Since that time,
several major third-party payors have conducted similar assessments, and have
established guidelines for reimbursement for the SAFHS device, case-by-case.
These guidelines require, in most cases, preauthorization from the third-party
payors prior to providing SAFHS devices to patients. Exogen believes that
case-by-case reimbursement approval will continue to be the predominant method
of obtaining preauthorization and reimbursement for the SAFHS device.

Within the United States, Exogen's reimbursement specialists focus on
obtaining coverage and reimbursement from major national and regional managed
care organizations and insurance carriers. Most of the third-party payors
independently evaluate new treatments by reviewing the published literature
and/or the Medicare coverage and reimbursement policy on the specific treatment.
To assist the third-party payors' evaluations of the SAFHS device, Exogen
provides scientific and clinical data that support the safety and effectiveness
of the device.

The Health Care Financing Administration ("HCFA"), which administers
the Medicare program, has a national coverage policy for electrical-stimulation
devices that initiate the healing of nonunion fractures. In August 1996, HCFA's
Technology Advisory Committee recommended that the SAFHS device not be covered
under the Medicare program. The committee's recommendation stated, "The
available data, although demonstrating a reduction in physician-determined
healing time for the study population, could not be generalized to the Medicare
population in a way that would allow a conclusion that SAFHS was an effective
procedure." Since that time, Exogen has continued to pursue coverage for SAFHS
through meetings with HCFA staff, and has provided additional support of the
clinical benefits of the SAFHS therapy, including information related to the
Medicare population. In addition, Exogen has been working with consultants and
the Health Industry Manufacturers Association to pursue various avenues to
obtain Medicare coverage for the SAFHS device. To date, Exogen has been unable
to change the Medicare noncoverage decision; however, Exogen has an ongoing
dialogue with HCFA staff. No assurance can be given that Exogen will be
successful in obtaining Medicare coverage for the SAFHS device.

Exogen cannot assure that it will be successful in obtaining
third-party reimbursement from third-party payors, including Medicare, or that
third-party payors will recommend that their programs cover the SAFHS device. If
Exogen is unable to obtain adequate third-party reimbursement for the SAFHS
device, Exogen's business, results of operations, financial position, and cash
flows will be materially and adversely affected.
<PAGE>
International

Exogen's international reimbursement plan varies by country. In
Germany, Holland, and France, Exogen is using indigenous clinical data as well
as data collected in the United States on the effectiveness of the SAFHS device
to support Exogen's filings for reimbursement coverage.

In Germany, Exogen is seeking nationwide approval by the
Bundesausschuss, the German federal organization that establishes medical
reimbursement policy for outpatient healthcare providers. In August 1998, the
Minister of Health accepted the recommendation of the Bundesausschuss not to
approve national reimbursement for SAFHS therapy. Exogen is appealing that
decision through administrative and legal channels, but has been delayed by the
November 1998 election of a new government and concurrent appointment of a new
Minister of Health. Exogen has also filed a lawsuit against the Bundesausschuss
to challenge its decision. Both actions are being actively pursued at this time.

Because there is no nationwide reimbursement approval for the SAFHS
device by the Bundesausschuss, Exogen has adopted the policy that, since
September 1997, for each prescription submitted to Exogen in Germany, Exogen
ships the SAFHS device only after receiving reimbursement approval for that
device. This preapproval involves a case-by-case review by a local reimbursement
authority, which has the discretion to reimburse for the device regardless of
the decision of the Bundesausschuss. The local decision is based on data
supplied by Exogen and the prescribing physician.

In Holland, Exogen has received approval from the Ministry of Health,
Welfare, and Sports of The Netherlands for the nationwide reimbursement of
Exogen's SAFHS device for the treatment of nonunion fractures older than six
months. The approval, which will be effective April 1, 1999, was based on an
extensive review by the Ziekenfondsraad (Sick Fund Council) of the clinical
efficacy and economic benefits of SAFHS therapy.

In France, Exogen has applied to be listed on the Tarif
Interministeriel des Prestations Sanitaires ("TIPS"), France's list of medical
devices allowed for prescription by physicians working in the private sector and
for reimbursement by the National Health Insurance. That application is still
pending, and therefore, Exogen does not sell SAFHS devices in France at this
time.

In Japan, Exogen's Japanese distributor, Teijin, received nationwide
reimbursement approval from the Japanese Health and Welfare Ministry in May
1998.

Exogen cannot assure that it will be successful in obtaining national
reimbursement approval in Germany, France, or other countries. If Exogen does
not obtain national reimbursement approval of the SAFHS device in Germany,
France, and other countries, Exogen's business, financial condition, results of
operations, and cash flows could be materially and adversely affected.
<PAGE>
Manufacturing

The SAFHS 2000 is manufactured principally by Exogen as well as by a
contract manufacturer. Exogen also refurbishes the SAFHS Model 2000 at its
facility. The agreement between Exogen and its contract manufacturer is
documented by specific purchase orders, effective through December 1999, and
covers a portion of anticipated requirements. Exogen received ISO 9003
(International Organization of Standardization) Certification and CE Mark
Certification for Exogen's SAFHS Model 2A in August 1996 and for the SAFHS 2000
in March 1998. The CE Mark signifies that Exogen conforms with the European
Community Medical Device Directive. Both Exogen's facility and its contract
manufacturer's facility have been inspected by the FDA for Good Manufacturing
Practices ("GMP") and have been found to be in compliance with GMP requirements.

Exogen believes that its Piscataway facility has sufficient capacity to
meet its anticipated manufacturing needs for at least the next three years. Any
failure by Exogen or the contract manufacturer to maintain its respective
manufacturing facility in accordance with GMP or CE requirements could result in
the inability to manufacture and deliver SAFHS devices to physicians and
patients, which would have a material adverse effect on Exogen's business,
financial condition, results of operations, and cash flows.

The manufacture of the SAFHS device involves an assembly process with a
number of significant components. Each device is tested and released by Exogen
in accordance with FDA requirements. Most purchased components are available
from more than one vendor. However, two key components currently are
manufactured by single-source vendors. For these components, there are
relatively few alternative sources of supply. However, Exogen is actively in the
process of qualifying alternative vendors for these components. If the supply of
these components is interrupted, and if Exogen is unable to establish additional
or replacement suppliers for such components, Exogen's business, financial
condition, results of operations, and cash flows will be materially and
adversely affected.

Research and Development

Exogen's principal research and development programs are focused on the
following areas:

o development of new SAFHS devices and expansion of SAFHS therapy to
other applications:

o other long-bone fractures;

o lower-spine fusion; and

o cartilage repair; and

o development of prototype devices, and preclinical and clinical
trials, of the mechanical-stress technology.

Exogen's expenditures for research and development (which includes
clinical trials, regulatory affairs, and engineering) were approximately $2.8
million in fiscal 1998, $3.1 million in fiscal 1997, and $4.0 million in fiscal
1996.
<PAGE>
Other Long Bones

Exogen recently completed clinical studies and documentation to support
the SAFHS device's label expansion in the United States for additional bone
fracture sites. In August 1998, Exogen resubmitted a PMA supplement for expanded
and new applications of the SAFHS 2000 device. Exogen is also evaluating the use
of ultrasound in a variety of orthopaedic applications. Exogen provides SAFHS
devices to physician investigators for preliminary clinical studies in the use
of ultrasound for healing stress fractures, for limb lengthening using an
external fixation device, and for healing internally fixed fractures. Exogen
also sponsors research relating to the basic science of ultrasound for both
therapeutic as well as diagnostic use.

Lower-Spine Fusion

In addition to treating nonunion bone fractures, electrical stimulation
(invasive and non-invasive) has been used to aid in the healing of the spine
following surgery. Electrical stimulation is primarily used to augment a spinal
procedure where the vertebrae are fused with graft material and, often,
instrumentation. Based on the clinical experience of low-intensity ultrasound
for fracture repair, Exogen has funded preclinical research to investigate the
feasibility of ultrasound therapy for spine fusion. This research is ongoing and
may lead to clinical investigation of low-intensity ultrasound for the
non-invasive treatment for spine fusion.

Cartilage Repair

There are two primary methods currently used to treat tear-like defects
in the cartilage of the bone. One traditional procedure involves drilling small
holes into the exposed defective bone to allow cells from the bone marrow to
infiltrate the defect, resulting in fibrocartilage. Another method of treatment
is debridement through arthroscopy. This does not eliminate the defect, but it
does relieve some of the pain from the uneven surface. Neither technique
delivers long-term results. Based on certain laboratory observations on its
low-intensity ultrasound for fracture repair, Exogen initiated preclinical
studies to investigate the therapy for the repair of torn cartilage. Following
long-term preclinical studies, Exogen may initiate a clinical investigation of
the therapy for cartilage repair.

No assurance can be given that the SAFHS treatment will prove to be
safe and efficacious for other long-bone fractures, lower-spine fusion, or
cartilage repair, or that any PMA, if applied for, will be granted by the FDA on
a timely basis, or at all.
<PAGE>
Mechanical-Stress Device

In preclinical studies conducted by Exogen, its mechanical-stress
device has been shown to inhibit bone loss and enhance bone mass with treatments
of less than 20 minutes per day. In a clinical study conducted by Exogen in
Europe, Exogen has demonstrated that approximately 90% of the vibrational stress
produced by this device reaches the hip and approximately 85% reaches the spine,
the regions of the weight-bearing skeleton most susceptible to bone loss and
resulting fractures. In 1996, Exogen began a one-year prospective, randomized,
double-blind, placebo-controlled clinical trial in the United States to
determine if the mechanical-stress device could safely and effectively inhibit
post- menopausal bone loss. The study was completed in 1998, and the data
suggest that, although there was no statistical difference between the placebo
treatment and the mechanical-stress treatment of the entire study population,
when the bone-density measurements were classified by body weight, there was a
significant effect of mechanical-stress treatment at the bone locations most
susceptible to fracture due to osteoporosis. In addition, the data suggested
that women weighing less than 145 pounds, who are also at greater risk of
osteoporosis and lose bone more quickly, may actually benefit most from
mechanical-stress treatment. The results of the feasibility trial can be useful
in defining the design of an Investigational Device Exemption pivotal trial that
may be submitted to the FDA. Exogen plans to seek a strategic corporate partner
prior to beginning pivotal clinical trials. No assurance can be given that the
mechanical-stress device will prove to be safe and efficacious, that a strategic
partnership will be established, or that product development will ever be
successfully completed. In addition, there is no assurance 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.

Intellectual Property

With respect to Exogen's SAFHS technology, Exogen holds title to 11
issued United States patents, one issued Canadian patent, one issued Taiwanese
patent, one issued New Zealand patent, one issued Japanese patent, 14 pending
United States patent applications, and corresponding Patent Cooperation Treaty
and foreign patent applications. The original United States ultrasound patent
that is the basis of the SAFHS device expires in 2007. Exogen's ten other issued
United States patents relating to SAFHS technology will expire between 2008 and
2014.

With respect to Exogen's mechanical-stress technology, Exogen is the
exclusive licensee of four issued United States patents, two issued foreign
patents, one pending United States patent application, and four pending foreign
patent applications. The four issued United States patents will expire between
2010 and 2011. The exclusive license agreement relating to the mechanical-stress
technology provides for royalty payments on sales of products using the patented
technology. Under the license agreement, Exogen's exclusive license may revert
to a nonexclusive license if Exogen does not use good faith efforts to
commercially exploit the patented technology. The license agreement expires on
the later of March 2022 or the expiration of the final patent licensed to
Exogen.
<PAGE>
Exogen also relies on trademarks, copyrights, trade secrets,
proprietary know-how, and confidentiality and assignment of invention agreements
with its employees, consultants, distributors, sales agents, and marketing
partners to protect its intellectual property. Exogen holds United States
federal trademark registrations for the marks, SAFHS(R), EXOGEN(R) and SAFHS
2000(R). Exogen also holds registrations for the SAFHS(R) mark in Japan, Canada
and Mexico. Trademark applications for the EXOGEN(R) and SAFHS 2000(R) marks are
pending in foreign countries, and an application for the EXOGEN 2000(TM) mark is
pending in the United States. Exogen holds rights to copyrights on text and
software that it develops in connection with the SAFHS device.

There can be no assurance that any issued patents or copyrights Exogen
owns will provide it with a competitive advantage or will not be challenged or
circumvented by Exogen's competitors. There can also be no assurance that
Exogen's confidentiality and assignment of invention agreements will not be
breached, or that Exogen would have adequate remedies for any such breach.
Finally, there can be no assurance that Exogen's copyrights, trade secrets,
proprietary know-how, and intellectual property will not become known or be
independently discovered by others.

Intense Competition

The medical device industry is intensely competitive. The SAFHS device
competes with non-invasive bone-growth electrical-stimulation devices and with
various surgical treatments. In the United States there are four companies that
currently market electrical stimulation devices for the treatment of
slow-healing fractures, in direct competition with the SAFHS device. The list
price of Exogen's device is similar to the list price of devices marketed by
these other companies. Exogen believes that some of these companies are
conducting preclinical or clinical research relating to the use of electrical
stimulation for the treatment of fresh fractures. If Exogen's mechanical-stress
device is developed, approved by the FDA, and commercialized, it will compete
with drug therapies, growth factors, bone-graft substitutes, and
exercise/physical therapy equipment. Many of Exogen's competitors have
substantially greater financial, technical, marketing, sales, and distribution
resources than it does. They also have more experience in research and
development, clinical trials, and regulatory matters. In addition, most of
Exogen's competitors have established third-party reimbursement for their
products. Exogen cannot assure that its competitors will not develop products
that are superior to Exogen's, achieve greater market acceptance, or render
Exogen's technology and products obsolete or noncompetitive.

Product Liability and Insurance

Exogen's business exposes it to potential product liability risks in
the event that the use of its products is alleged to have resulted in physical
harm or other adverse effects. Product liability insurance for the medical
device industry is expensive. Exogen currently carries product liability
coverage of $3 million per occurrence, with coverage in the aggregate of $3
million for all claims made in any policy year. In addition, Exogen maintains
umbrella liability insurance, including product liability coverage, of $10
million per occurrence, with coverage in the aggregate of $10 million for all
claims made in any policy year. Although to date Exogen has not been the subject
of any product liability claims, Exogen cannot assure that its insurance will
provide adequate coverage against potential claims, or that Exogen will be able
to maintain product liability insurance on acceptable terms, or at all. If a
product liability claim exceeds the coverage of Exogen's insurance policy, its
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.
<PAGE>
Employees

As of November 30, 1998, Exogen had 66 employees, consisting of five in
marketing, nine in engineering, 18 in finance and administration, three in
quality assurance, 12 in reimbursement and customer service, seven in research
and development and regulatory affairs, and 12 in manufacturing and shipping.
Exogen believes that the success of its business depends, in part, on its
ability to attract and retain qualified personnel. None of Exogen's employees is
covered by a collective bargaining agreement. Exogen believes that it maintains
good relations with its employees.

Item 2. Properties

Exogen leases approximately 30,000 square feet of a facility in
Piscataway, New Jersey. This leased space contains approximately 9,000 square
feet of manufacturing space and 21,000 square feet devoted to research and
development, marketing, and administration. This facility is leased through
October 2001, and Exogen has an option for a five-year renewal term. Exogen
believes its facility is adequate to meet its anticipated real estate
requirements for the next three years.

Item 3. Legal Proceedings

On September 30, 1998, and October 9, 1998, Exogen settled all
outstanding litigation in connection with Exogen, Inc. v. Pilla Consulting, Inc.
and Arthur A. Pilla, which was filed in the Supreme Court of the State of New
York, County of New York, and Jonathan J. Kaufman v. Interpore Orthopedics, Inc.
and Exogen, Inc., which was filed in the United States District Court for the
Southern District of New York. Exogen also entered into a settlement agreement
with Alessandro Chiabrera. Messrs. Kaufman, Pilla, and Chiabrera, former
consultants to Interpore Orthopedics, the company from which Exogen purchased
certain SAFHS ultrasound assets at the time of Exogen's formation, claimed the
right to certain royalties from the sale of SAFHS devices. As part of the
settlement, Exogen is obligated to pay the parties an aggregate $700,000,
$191,000 of which was paid in October 1998 and the remainder of which is payable
in annual cash installments through July 2002. Exogen also issued to Messrs.
Pilla and Chiabrera five-year warrants to purchase an aggregate of 125,000
shares of Exogen's common stock at an exercise price of $3.12 per share, and
granted them certain registration rights. In addition to Exogen, Interpore
Orthopedics is a party to the settlements, and is obligated to pay certain
amounts to the parties.

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

None.

<PAGE>
Item 4a. Executive Officers of the Registrant

The executive officers of Exogen are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John P. Ryaby....................................... 64 Chairman of the Board of Directors, Vice President, and
Chief Scientific Officer
Patrick A. McBrayer................................. 47 Chief Executive Officer, President, and Director
Richard H. Reisner.................................. 55 Vice President, Chief Financial Officer, and Secretary
Roger J. Talish..................................... 56 Vice President and Chief Technical Officer
</TABLE>

--------- John P. Ryaby, a founder of Exogen, has been a Director of
Exogen since March 1992, Chairman of the Board of Directors since February 1994,
and currently serves as Vice President and Chief Scientific Officer. Mr. Ryaby
served as President and Chief Executive Officer of Exogen from March 1992 to
February 1994 and as Vice President of Research and Development and Regulatory
Affairs from February 1994 to October 1998. Mr. Ryaby served from 1989 until
1992 as the President and Chief Operating Officer of Interpore Orthopaedics,
Inc., a division of Interpore International, Inc., a physical and biological
research company. Mr. Ryaby was a founder, and from 1975 to 1982 was President
and Chief Operating Officer, of Electro-Biology, Inc. ("EBI"), a company
involved in bone-growth electrical-stimulation technology, and was responsible
for obtaining regulatory approval of EBI's PMA in 1979 and for establishing
EBI's direct sales force.

Patrick A. McBrayer was named Chief Executive Officer, President, and a
Director of Exogen in February 1994. Prior to joining Exogen, Mr. McBrayer
served in various executive positions from 1987 to February 1994 at Osteotech,
Inc., including President and Chief Executive Officer. While at Osteotech, Inc.,
a company that develops and markets biologic, biomaterial, and implant systems
for musculoskeletal surgery, Mr. McBrayer guided the company's transition from
its inception to a public entity. From 1979 through 1986, he served in a variety
of positions of increasing responsibility with Johnson & Johnson, Inc.,
including Marketing Manager of the Patient Care Division, where he built a
significant business in surgical products.
<PAGE>
Richard H. Reisner, a founder of Exogen, has served as its Vice
President and Chief Financial Officer since September 1992. From 1991 to 1992,
Mr. Reisner was Vice President and Chief Financial Officer of Cirrus Diagnostics
Inc., a company that developed a system for the automation of diagnostic
immunoassay and chemistry testing, and was directly involved with the
acquisition of Cirrus by Diagnostic Products Corporation in May 1992. From 1990
to 1991, Mr. Reisner was the Corporate Controller for Datascope Corp., a
manufacturer of medical instruments. From 1989 to 1990, Mr. Reisner was
President and Chief Executive Officer of Pain Suppression Labs, Inc., a
manufacturer of electrical stimulation devices to suppress chronic headache
pain. From 1979 to 1988, Mr. Reisner was Vice President of Finance and
Administration of EBI, and was responsible for establishing third-party
reimbursement for EBI's bone-growth electrical-stimulation devices.

Roger J. Talish, a founder of Exogen, serves as Vice President and
Chief Technical Officer. Previously, Mr. Talish served as Vice President of
Operations for Exogen from March 1992 to October 1998. From 1989 to 1992, Mr.
Talish was Vice President of Operations at Interpore, and from 1985 to 1989 held
the same position at Meditron, Inc. From 1978 to 1985, Mr. Talish held various
engineering management positions at EBI, including Director of Research and
Product Engineering.
<PAGE>
PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Exogen's common stock has been quoted on the Nasdaq National Market
under the trading symbol "EXGN" since Exogen commenced public trading on July
20, 1995. Prior to that date, there was no public market for Exogen's common
stock.

The following table sets forth the high and low selling price for
Exogen's common stock for fiscal 1997 and 1998, based on transaction data as
reported by the Nasdaq National Market.

Fiscal years ended
September 30, 1997 and 1998 High Low
- --------------------------- ---- ---

1997
- ----
First quarter................... $ 6.000 $ 3.250
Second quarter.................. $ 7.625 $ 3.500
Third quarter................... $ 5.750 $ 3.375
Fourth quarter.................. $ 5.625 $ 3.000

1998
- ----
First quarter................... $ 5.250 $ 3.125
Second quarter.................. $ 5.813 $ 3.750
Third quarter................... $ 6.000 $ 2.500
Fourth quarter.................. $ 4.625 $ 2.375

On November 30, 1998, the last reported sale price for Exogen's common
stock as reported by the Nasdaq National Market was $3.25 per share.

As of November 30, 1998, there were approximately 187 holders of record
of the common stock. This number excludes individual stockholders holding stock
under nominee security position listings.

Exogen has not declared or paid any cash dividends since its inception,
and does not intend to pay any cash dividends in the foreseeable future.
<PAGE>
The Stockholder Rights Plan

Effective December 6, 1996, pursuant to a Preferred Shares Rights
Agreement (the "Rights Agreement") between Exogen and Registrar and Transfer
Company, as Rights Agent (the "Rights Agent"), Exogen's Board of Directors
declared a dividend of one right (a "Right") to purchase one one-hundredth share
of Exogen's Series A Participating Preferred Stock ("Series A Preferred") for
each outstanding share of common stock of Exogen. The dividend is payable on
December 19, 1996 (the "Record Date") to stockholders of record as of the close
of business on that date. Each Right entitles the registered holder to purchase
from Exogen one one-hundredth of a share of Series A Preferred at an exercise
price of $30.00 (the "Purchase Price"), subject to adjustment in the event
Exogen declares a dividend on the common stock payable in common stock,
subdivides the number of outstanding shares of common stock into a larger number
of such shares, or combines the number of outstanding shares of common stock
into a smaller number of such shares, among other circumstances. In addition,
under certain circumstances described more fully in the Rights Agreement, the
Rights may become exercisable for a number of shares of common stock having a
value equal to two times the Purchase Price.

The Rights approved by the Board of Directors are designed to protect
and maximize the value of the outstanding equity interests in Exogen in the
event of an unsolicited attempt by an acquirer to take over Exogen in a manner
or on terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive Exogen's Board of Directors and its
stockholders of any effective opportunity to determine Exogen's future.

Common Stock Warrants

In September 1997, Exogen and a consultant entered into an advisory
agreement whereby the consultant acquired a warrant (at a cost of $0.20 per
share) to purchase up to 100,000 shares of Exogen's common stock at an exercise
price of $4.50 per share. The warrant is fully vested and immediately
exercisable and expires five years after issuance, subject, however, to
expiration on November 1, 1998, in the event that Exogen did not, by July 31,
1998, consummate a strategic partnering transaction relating to the
commercialization of certain of Exogen's non-invasive technologies (each a
"Strategic Partnering Transaction"). Further, for each of the three Strategic
Partnering Transactions described in the advisory agreement and subsequently
entered into by Exogen, the consultant will receive a warrant (at no cost) to
purchase 75,000 shares of Exogen's common stock at an exercise price of $4.50
per share (the "Transaction Warrant"). Such Transaction Warrants, if issued,
would expire five years after issuance. As of September 30, 1998, the warrant to
purchase 100,000 shares was not exercised and no additional warrants were due to
the consultant. In November 1998, the warrant was unexercised and expired, and
Exogen subsequently terminated the advisory agreement. For one year from the
date of termination, the consultant remains eligible to receive two Transaction
Warrants subject to the consummation, if any, of certain strategic partnerships.
<PAGE>
Common Stock Issued to Smith & Nephew, Inc.

On August 10, 1998, Exogen and Smith & Nephew entered into a multi-year
master agreement, together with a U.S. sales representative agreement and a
stock purchase agreement, under which Smith & Nephew obtained exclusive rights
to market Exogen's SAFHS devices in the United States. Smith & Nephew paid $4.1
million (or $5.00 per share) to purchase 820,000 shares of Exogen's common stock
at the closing. On the closing date, the fair market value of Exogen's common
stock was $3.625 per share. A registration statement is pending with the
Securities and Exchange Commission to register these shares. The aggregate net
proceeds of the sale were $4.0 million, which will be used for general corporate
purposes.

Under certain circumstances, Smith & Nephew has a one-time right to
purchase from Exogen additional shares of Exogen's common stock, up to 19%
(including the shares already acquired by Smith & Nephew) of the outstanding
shares of Exogen's common stock, after giving effect to the shares issuable upon
exercise of the right. The stock purchase right is available only if Smith &
Nephew exercises its worldwide distribution option. In addition, the right can
be exercised only once during the two-year period following the exercise of the
worldwide distribution option. The price per share to be paid would equal the
stock's average fair market value for the 20 days ending on the third trading
day immediately preceding the date Smith & Nephew announces, to Exogen, its
election to exercise the stock purchase option.
<PAGE>
Item 6. Selected Financial Data

Set forth below are the selected consolidated financial data for Exogen
for the five fiscal years ended September 30, 1998. The following data should be
read in conjunction with Exogen's financial statements and their related notes
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
(in thousands, except per share data)
<CAPTION>

For the years ended September 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales ................................. $ 11,201 $ 7,081 $ 5,777 $ 1,852 $ --
Revenues from development agreements .......... 400 400 1,100 -- --
-------- -------- -------- -------- --------
Total revenues ............................ 11,601 7,481 6,877 1,852 --
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of product sales ......................... 4,585 3,864 3,661 1,128 --
Research and development ...................... 2,792 3,124 3,988 2,545 1,432
Selling, general, and administrative .......... 11,885 12,291 11,030 5,775 1,782
Nonrecurring charge for
international doubtful accounts ........... 800 -- -- -- --
-------- -------- -------- -------- --------
Total operating costs and expenses ........ 20,062 19,279 18,679 9,448 3,214
-------- -------- -------- -------- --------
Operating loss .................................... (8,461) (11,798) (11,802) (7,596) (3,214)
-------- -------- -------- -------- --------
Other income (expense):
Interest income (expense), net ................ 710 701 1,438 604 (185)
License fee ................................... 1,000 -- -- -- --
Litigation settlement ......................... (851) -- -- -- --
Other, net .................................... 19 (51) (224) (59) (2)
-------- -------- -------- -------- --------
Total other income (expense), net ......... 878 650 1,214 545 (187)
-------- -------- -------- -------- --------
Loss before income taxes .......................... (7,583) (11,148) (10,588) (7,051) (3,401)

Provision for income taxes ........................ 2 4 -- -- --
-------- -------- -------- -------- --------
Net loss .......................................... $ (7,585) $(11,152) $(10,588) $ (7,051) $ (3,401)
======== ======== ======== ======== ========

Basic net loss per common share ................... $ (0.64) $ (1.12) $ (1.07) -- --
======== ======== ========
Diluted net loss per common share ................. $ (0.64) $ (1.12) $ (1.07) -- --
======== ======== ========
Wghtd. avg. shares outstanding, basic and diluted . 11,860 9,946 9,875 -- --

Pro forma net loss per share ...................... -- -- -- $ (0.93) $ (0.48)
======== ========
Pro forma weighted average shares outstanding ..... -- -- -- 7,574 7,020
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short- and long-term
investments .................................. $15,582 $ 8,544 $19,534 $31,061 $ 640
Working capital .................................. 15,525 11,042 17,235 30,054 301
Total assets ..................................... 20,796 14,789 25,511 34,886 1,773
Redeemable Preferred Stock ....................... -- -- -- -- 6,002
Total stockholders' equity (deficit) ............. 16,297 12,091 23,077 33,342 (5,487)
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This Annual Report on Form 10-K contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of Exogen. 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 Exogen with the Securities and
Exchange Commission.

Results of Operations

Fiscal Year ended September 30, 1998, compared with Fiscal Year ended September
30, 1997

Essentially all of Exogen's product sales were from Exogen's SAFHS
devices. For fiscal 1998, product sales were $11.2 million, compared with $7.1
million for fiscal 1997. The increase of $4.1 million (or 58%) was a result of a
75% increase in volume, partially offset by a 10% decrease in the average
realized selling price of SAFHS devices. This decrease was primarily caused by a
shift in international sales from direct sales to sales to distributors,
principally sales to Teijin Limited ("Teijin"), Exogen's distributor in Japan.

In fiscal 1998, Exogen recorded revenues of $400,000 related to the
SAFHS development agreement with Teijin, equal to that recorded in fiscal 1997.
The 1998 revenues represented the final milestone payment to Exogen under its
agreement with Teijin in connection with the commercial introduction of SAFHS
devices in Japan. (See "Liquidity and Capital Resources" below for a further
discussion.)

Domestic product sales were $9.0 million (or 81% of total product
sales) for fiscal 1998, an increase of $3.3 million (or 56%) over $5.8 million
of domestic product sales for fiscal 1997. An increase in domestic sales volume
(38%) and in the average realized selling price of SAFHS devices (14%) caused
the increase in domestic product sales.
<PAGE>

Product sales in Europe, primarily derived from sales in Germany, were
$737,000 (or 6% of total product sales) for fiscal 1998, a decrease of $563,000
(or 43%) compared with $1.3 million for fiscal 1997. The decrease was a result
of (i) Exogen's decision, since September 1997, to sell SAFHS devices in Germany
only when reimbursement is preapproved and (ii) an adjustment of approximately
$151,000 in the quarter ended December 31, 1997, to increase the reserves for
European sales allowances and returns. In addition to product sales in Europe,
in fiscal 1998, Exogen recorded its initial sales to Teijin of $1.4 million (or
13% of total product sales). Exogen's sales to Teijin began in March 1998, and
fiscal 1998 volume represented Teijin's initial purchase of SAFHS inventory.
Exogen does not anticipate that quarterly volume in fiscal 1999 will reach the
quarterly volume achieved during the second half of fiscal 1998.

Cost of product sales was $4.6 million for fiscal 1998, compared with
$3.9 million for fiscal 1997. Included in cost of sales were royalties and the
cost to manufacture the SAFHS device by Exogen and an outside source. Excluding
revenues related to development agreements, gross profit for fiscal 1998 was
$6.6 million (or 59% as a percentage of product sales), compared with $3.2
million (or 45%) for fiscal 1997. This $3.4 million increase (or 106%) in gross
profit was principally due to the increase in sales volume and reduced per-unit
product costs, partially offset by a decrease in the average realized selling
price of SAFHS devices.

Research and development expenses in fiscal 1998 decreased to $2.8
million from $3.1 million in fiscal 1997. The decrease of $332,000 (or 11%) was
primarily a result of (i) a reduction from fiscal 1997 in the number of research
projects funded during fiscal 1998 and (ii) savings from a workforce reduction
in fiscal 1997, partially offset by the expenses of preparing a Pre-Market
Approval Supplement filed with the U.S. Food and Drug Administration for
expanded indications for the SAFHS 2000.

Selling, general, and administrative expenses in fiscal 1998 decreased
to $11.9 million from $12.3 million in fiscal 1997. The $406,000 decrease (or
3%) resulted from the following:

o savings from a workforce reduction in fiscal 1997;

o a reduction in consulting fees for marketing;

o the absence of marketing expenditures relating to the line of
synthetic casting materials; and

o the absence in fiscal 1998 of a 1997 nonrecurring charge of
$150,000 related to the workforce reduction.

Partially offsetting the overall decrease were increases in revenue-related
expenses, such as commissions and bad debt.
<PAGE>
In March 1998, Exogen recorded an $800,000 nonrecurring charge to
operations to write down certain European accounts receivable--primarily in
Germany--that exceeded 180 days outstanding. The nonrecurring charge was
precipitated by a German Supreme Social Court ruling made available to Exogen in
the quarter ended March 31, 1998. The ruling stated that reimbursement under the
Bundesausschuss system (the German federal organization that establishes medical
reimbursement policy for outpatient healthcare providers) for new medical
therapies could occur only if the new therapy was part of the official book of
therapies of the Bundesausschuss. Prior to this ruling, Exogen relied on a 1995
German Supreme Social Court ruling that established that new medical therapies
must be reimbursed under the pre-Bundesausschuss system if (i) treatment was
proven effective and economical and (ii) treatment did not exceed the scope of
what was necessary. Exogen believed the clinical effectiveness of the SAFHS
device and the device's economic benefits would satisfy the requirements of the
1995 ruling. However, based on the later ruling and the fact that the SAFHS
therapy is not part of the official book of therapies, Exogen recorded the
nonrecurring charge. Exogen continues to pursue collection of these receivables
case-by-case.

Net interest income in fiscal 1998 increased to $710,000 from $701,000
in fiscal 1997, consistent with the level of funds available for investment and
the interest rates available.

In fiscal 1998, Exogen recorded a license fee of $1 million. On August
10, 1998, Exogen and Smith & Nephew entered into a multi-year master agreement,
together with a U.S. sales representative agreement and a stock purchase
agreement, under which Smith & Nephew obtained exclusive rights to market
Exogen's SAFHS devices in the United States. Smith & Nephew paid a nonrefundable
fee of $1 million that granted Smith & Nephew (i) the exclusive marketing rights
in the United States and (ii) a nonexclusive license to the intellectual
property rights that cover the SAFHS technology. This license also allows Smith
& Nephew to manufacture the SAFHS device should Exogen fail to supply the
device, subject to certain terms and conditions. Because the payment was
nonrefundable, and because there are no further obligations on behalf of Exogen
with regard to the payment, Exogen recorded the entire $1 million fee in fiscal
1998. (See "Agreements with Smith & Nephew, Inc." below for a further
discussion.)

In September 1998, Exogen recorded an $851,000 litigation settlement
expense, representing the settlement of claims concerning rights to certain
royalties on the sale of SAFHS devices. The claims were brought against Exogen
by former consultants to Interpore Orthopedics, the company from which Exogen
purchased certain SAFHS ultrasound assets at the time of Exogen's formation. The
$851,000 charge includes:

o a noncash warrant, valued at $96,000, issued in September 1998;

o a noncash warrant, valued at $55,000, issued in October 1998; and

o a $700,000 cash payment, outstanding at September 30, 1998.

Exogen incurred a net loss of $7.6 million, or $0.64 per share, in
fiscal 1998 compared with $11.2 million, or $1.12 per share, in fiscal 1997 (per
share data based upon weighted average shares outstanding, which exclude options
because they are antidilutive). The decrease of $3.6 million (or 32%) in net
loss was caused principally by the factors discussed above.
<PAGE>
Fiscal Year ended September 30, 1997, compared with Fiscal Year ended September
30, 1996

Essentially all of Exogen's product sales were from Exogen's SAFHS
devices. For fiscal 1997, product sales were $7.1 million, compared with $5.8
million for fiscal 1996. The increase of $1.3 million (or 23%) was a result of
an increase in sales volume.

In fiscal 1997, Exogen recorded revenues of $400,000 related to
development agreements with Teijin Limited, a Japanese corporation, compared
with $1.1 million in fiscal 1996. (See "Liquidity and Capital Resources" below
for a further discussion.)

Domestic product sales were $5.8 million (or 82% of total product
sales) for fiscal 1997, an increase of $791,000 (or 16%) over $5.0 million of
domestic product sales for fiscal 1996. An increase in domestic sales volume
caused the increase in domestic product sales.

Product sales in Europe, primarily derived from sales in Germany, were
$1.3 million (or 18% of total product sales) for fiscal 1997, an increase of
$513,000 (or 65%) compared with $787,000 for fiscal 1996. The increase was a
result of an increase in sales volume.

Cost of product sales was $3.9 million for fiscal 1997, compared with
$3.7 million for fiscal 1996. Included in cost of sales were royalties and the
cost to manufacture the SAFHS device by Exogen and an outside source. Excluding
revenues related to development agreements, gross profit for fiscal 1997 was
$3.2 million (or 45% as a percentage of product sales), compared with $2.1
million (or 37%) for fiscal 1996. This $1.1 million increase (or 52%) in gross
profit was principally due to the increase in sales volume and reduced per-unit
product costs, partially offset by a decrease in the average realized selling
price of SAFHS devices. The decrease in average realized selling price was
primarily due to an increase in the allowances for returns and for price
reductions by third-party payors.

Research and development expenses in fiscal 1997 decreased to $3.1
million from $4.0 million in fiscal 1996. The decrease of $864,000 (or 22%) was
primarily the result of the following:

o reduced expenditures for designing and building the
mechanical-stress device for clinical studies;

o the discontinuation of shipments of SAFHS devices in connection
with certain clinical prescriptions for which reimbursement was
not available; and

o reduced costs associated with analyses of clinical data for the
SAFHS therapy. This decrease was partially offset by increased
expenses associated with additional research projects.
<PAGE>
Selling, general, and administrative expenses in fiscal 1997 increased
to $12.3 million from $11.0 million in fiscal 1996. The $1.3 million increase
(or 11%) resulted from the following:

o expanded selling and marketing efforts related to the SAFHS Model
2A, both in the United States and in Europe, and the introduction
in May 1997 of the second-generation SAFHS 2000, in the United
States;

o marketing activities relating to Exogen's line of synthetic
casting materials used in fracture immobilization;

o increased activities relating to reimbursement efforts; and

o a nonrecurring charge of approximately $150,000, related to a
workforce reduction in the third quarter of fiscal 1997.

Net interest income in fiscal 1997 decreased to $701,000 from $1.4
million in fiscal 1996, consistent with the level of funds available for
investment. Other expense, net for fiscal 1997 decreased to $51,000 from
$224,000 for fiscal 1996, principally due to the settlement of a legal action by
Exogen in the second quarter of fiscal 1996.

Exogen incurred a net loss of $11.2 million, or $1.12 per share, in
fiscal 1997 compared with $10.6 million, or $1.07 per share, in fiscal 1996 (per
share data based upon weighted average shares outstanding, which exclude options
because they are antidilutive). The increase of $564,000 (or 5%) in net loss was
caused principally by the factors discussed above.

Liquidity and Capital Resources

Since inception, Exogen's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $41.9 million as of September
30, 1998. Through September 30, 1997, Exogen had funded its operations primarily
through private placements of equity securities and an initial public offering
of common stock in July 1995. In October 1997, Exogen completed a private
placement of 1,799,019 shares of its common stock for aggregate net proceeds of
$7.4 million, and in August 1998, Exogen sold 820,000 shares of its common stock
to Smith & Nephew for aggregate net proceeds of $4.0 million. (See "Agreements
with Smith & Nephew, Inc." below for a further discussion.)

For the year ended September 30, 1998, Exogen used net cash of $4.3
million for operating activities, primarily to fund selling and marketing the
SAFHS 2000. Working capital was $15.5 million as of September 30, 1998, an
increase of $4.5 million (or 41%) over the balance at September 30, 1997.
Exogen's capital expenditures for fiscal 1998 were $318,000. Exogen estimates
that equipment and furnishings to expand in-house manufacturing and
administrative support activities will require capital expenditures of
approximately $450,000 during each of the next two fiscal years.

From December 1995 through September 30, 1998, Exogen has recorded $1.9
million of revenues representing milestone payments under Exogen's development
agreements with Teijin: $1.6 million related to the SAFHS development agreement,
and $300,000 related to the mechanical-stress agreement. All potential milestone
payments under the SAFHS agreement have been earned and paid.
<PAGE>

To help conserve its capital resources, Exogen reduced its workforce
during the quarter ended June 30, 1997. Through the reduction, Exogen saved
approximately $221,000 in fiscal 1997, and is now saving approximately $750,000
each year.

Exogen plans to finance its capital needs from existing capital
resources, the proceeds of the October 1997 private placement, and the proceeds
of the sale of stock to Smith & Nephew, the combination of which Exogen believes
will be sufficient to fund its operations into fiscal 2000. Exogen has not
initiated plans for funding beyond fiscal 2000. Additional funding might not be
available when needed or on terms acceptable to Exogen, which would have a
material adverse effect on Exogen's business, financial condition, results of
operations, and cash flows.

Accounts Receivable and Related Reserves

Exogen believes its accounts receivable balance of $2.7 million as of
September 30, 1998, net of reserves of $4.3 million, properly reflects
anticipated collections. Accounts receivable reserves have increased $2.6
million since September 30, 1997, as a result of higher revenue levels, the
delayed write-off of older claims as Exogen continues to actively pursue payment
of these claims, and a nonrecurring write-down of $800,000 in March 1998 on
European accounts receivable. Reserves against gross accounts receivable are
comprised of allowances for returns, pricing adjustments, and bad debts. Exogen
records revenues net of returns and pricing adjustments, while bad debt expense
is recorded as a "Selling, general, and administrative" expense.

The largest component of the reserves is the allowance for pricing
adjustments, which totals $2.9 million as of September 30, 1998. This allowance
is an estimate of adjustments that may be made to Exogen's invoiced price by
third-party payors, primarily medical insurance companies and government
entities, who are the principal reimbursers for Exogen's device. Based on fee
schedules derived by third-party payors or on provisions in patients' insurance
policies, these third-party payors may limit, modify, or deny the amount charged
for the SAFHS therapy. Exogen determines this reserve based upon historical
payment patterns within various payor categories, and also considers changes in
economic or other conditions that could affect the ability of third-party payors
to meet their obligations. Since the collection process involves multiple
parties (primary insurers, secondary insurers, and patients) and since the
appeals process in collecting medical claims can be lengthy and cumbersome,
accounts can age over an extended period of time.
<PAGE>
Exogen provides additional reserves on older claims to reflect the
reduced probability of collections on such claims, but does not write off such
amounts until Exogen determines that the claim is uncollectible based on one or
more of the following factors:

o discussion and correspondence from the payor regarding the
reason(s) for denied payment;

o Exogen's ability to provide additional information needed to
satisfy the third-party payor;

o economic or other conditions that surface regarding the payor's
ability to pay a claim; and

o the age of the invoice

Early in its operating history, Exogen had insufficient historical
information from which to analyze and establish its write-off practices. As a
result, Exogen used predetermined time criteria for writing off account
balances. Specifically, Exogen wrote off domestic receivable balances that were
older than eight months. As Exogen gained more experience in collecting accounts
and as it assembled additional historical data, it found that collections of
older accounts were possible. This data included information on Exogen's history
in appealing denied and/or reduced payments. As a result, in fiscal 1997, Exogen
adjusted its write-off practices to cease the automatic write-off of accounts
older than eight months. Consequently, accounts may now age longer than eight
months, but appropriate reserve levels are maintained and/or increased on these
accounts to cover their expected collectibility. Since a larger reserve is
required on older accounts, this adjustment in Exogen's write-off practices has
increased not only the dollar amount of the allowances but also the percentage
of the allowances relative to the gross accounts receivable balances. However,
the net accounts receivable balance continues to reflect the amount that Exogen
expects to collect. The timing of the write-offs has no impact on the expected
collection levels or on liquidity.

Of the net accounts receivable as of September 30, 1998, $382,000
represented European accounts receivable. The European accounts receivable was
net of a March 1998 nonrecurring write-down of $800,000 to reflect anticipated
reduced collectibility. Although Exogen continues to pursue collection of these
written-down European receivables case-by-case, collections have been limited,
and Exogen is not relying on the collection of these receivables to meets its
liquidity requirements.

<PAGE>
Agreements with Smith & Nephew, Inc.

Payment of License Fee. Smith & Nephew paid to Exogen a nonrefundable
fee of $1 million that granted Smith & Nephew (i) the exclusive marketing rights
in the United States and (ii) a nonexclusive license to the intellectual
property rights that cover the SAFHS technology. This license also allows Smith
& Nephew to manufacture the SAFHS device should Exogen fail to supply the
device, subject to certain terms and conditions. Exogen recorded the $1 million
fee in fiscal 1998.

Worldwide Distribution Option. Smith & Nephew has an option to acquire
exclusive worldwide distribution rights (except Japan) to the SAFHS device.
Smith & Nephew has a three-year period in which to exercise its worldwide
distribution option. If this option is exercised, Smith & Nephew is required to
make certain payments to Exogen during the first year of the worldwide
distribution agreement.

o a definitive agreement specifying, in detail, the obligations of
each party; and

o payments to Exogen over a one-year period for exercising the
option.

The exercise by Smith & Newphew of this option and of the worldwide
distribution option could result in potential additional aggregate payments to
Exogen of $5.0 million.

Rights of First Negotiation. Smith & Nephew has certain rights of first
negotiation through August 2008 in the following areas:

o Exogen's ultrasound or mechanical-stress therapies, or any new
applications of such therapies; and

o a merger, a sale of substantially all of Exogen's assets, or other
similar transaction.

Year 2000 Compliance

The Year 2000 compliance issue results from the inability of systems
that utilize computer programs to differentiate between the year 1900 and the
year 2000. This issue arises because many such programs were developed using two
digits rather than four digits to identify the applicable year. As a result,
programs that use time-sensitive calculations may not function correctly in the
year 2000. Those programs developed using four-digit years are probably Year
2000 compliant; however, all other programs will likely require modification
and/or replacement to be compliant. The Year 2000 issue not only affects
computer hardware and software, but also can affect equipment used in the
operations of Exogen, and extends to the systems of outside suppliers and
customers, upon which Exogen relies. Failure to address the Year 2000 issue on a
timely basis, or at all, for critical programs used by Exogen could result in
system failures or miscalculations, which could have a material adverse effect
on Exogen's business, results of operations, financial condition, and cash
flows.
<PAGE>
State of Readiness

In fiscal 1998, Exogen performed an initial assessment of its Year 2000
compliance. In addition, Exogen formed a Year 2000 task force, comprised of
employees across all functions, to perform a detailed review of Exogen's
operations for Year 2000 compliance. The task force has the additional
responsibilities of recommending, implementing, and monitoring corrective
actions. The task force manager reports to the Chief Financial Officer, and
updates are provided to the Board of Directors quarterly (or more frequently, if
needed).

The following summarizes the results of the initial assessment
performed by Exogen focused on the following principal areas of exposure:

SAFHS Device. Exogen expects the SAFHS device to function properly in
the year 2000. Although the device utilizes a two-digit year, the functions
performed by the device are not impacted. Certain custom-developed software used
by Exogen to analyze data collected by the device will require modification to
interpret the two-digit data. Such corrective action is not significant and is
scheduled to occur during fiscal 1999.

Information Systems' Hardware and Software. The majority of hardware
and software used to manage and access Exogen's information systems has been
recently upgraded. As a result, most of this hardware and software is asserted
by the vendors to be Year 2000 compliant. Testing will be performed to verify
compliance, and any equipment or software found to be noncompliant will be
upgraded or replaced.

Custom-Developed Business Applications. Exogen uses custom-developed
software to run certain critical operations. Such software was developed to be
Year 2000 compliant. Exogen will perform additional testing on the software
during fiscal 1999 to confirm compliance. If any significant areas of
noncompliance are found, programming modifications will occur using Exogen's
application development vendor.

Third-Party Business Software. Exogen uses various third-party software
to perform certain business processes (including purchasing, payroll, and stock
administration) and certain business functions (including spreadsheets, word
processing, and graphics). Many of these vendors have informed Exogen that they
are addressing the Year 2000 issue. In some cases, these vendors are upgrading
their current software. In other cases, Exogen will need to purchase new
software. Since Exogen regularly upgrades its software to the latest versions,
the costs associated with certain of these upgrades are part of normal
operations. Other software, if its functionality no longer meets business
requirements, would also be replaced as part of normal operations.
<PAGE>
Other Equipment Using Computer Programs. Exogen uses various equipment
to handle functions performed within Exogen, including manufacturing,
telecommunications, photocopying, and faxing. Some of the equipment is not Year
2000 compliant, and Exogen will replace such equipment during fiscal 1999.

Suppliers. Exogen relies on outside organizations to supply, in various
degrees, information, goods, and services, including the following:

o supplies, raw materials, and finished goods;

o payroll services;

o banking/financial services;

o distribution services; and

o utilities/communications services.

Exogen has received information from some suppliers regarding their Year 2000
preparedness. These suppliers are either compliant or claim they will be
compliant prior to the year 2000. In other cases, where possible and critical,
Exogen plans to investigate the suppliers' Year 2000 compliance. Where the
supplier is critical and it is reasonably likely that the supplier will be
affected by the Year 2000 issue, Exogen plans to stock additional inventory
and/or qualify other suppliers to mitigate any disruption to operations.
However, Exogen cannot guarantee the availability of additional supply or the
Year 2000 compliance of alternative vendors. The failure of key suppliers to be
Year 2000 compliant, on a timely basis or at all, could have a material adverse
effect on Exogen's business, results of operations, financial condition, and
cash flows.
<PAGE>
Customers. Exogen's customer base includes physicians, patients, and
third-party payors. The Year 2000 issue is not expected to affect the flow of
prescriptions for the device from physicians, nor the use of the product by the
patient. However, Exogen relies on third-party reimbursement organizations at
the state, federal, and private levels to pay for Exogen's device. Exogen has
received reimbursement from over 800 third-party payors, although there is not a
significant concentration with any particular payor. Exogen will attempt to
assess the impact of the Year 2000 issue on certain payors. If a significant
percentage of payors do not address the Year 2000 issue on a timely basis,
Exogen's cash flow could be materially reduced until such issues are corrected.
Exogen may consider financing alternatives if it is reasonably likely that a
significant portion of its cash flows could be impacted and existing resources
are not sufficient to cover such exposure. The inability of payors to achieve
Year 2000 compliance could affect their ability to make timely, accurate, or
complete payments, which could have a material adverse effect on Exogen's
business, results of operations, financial condition, and cash flows.

Marketing Partners. Exogen relies on Smith and Nephew to provide the
required sales organization and related support to sell the SAFHS device in the
United States. In Japan, Exogen is dependent on Teijin for the distribution of
the SAFHS device. There are no current computer systems connecting Exogen with
either of its two marketing partners. However, the ability of Smith and Nephew
and Teijin to effectively function as business organizations, and to effectively
perform the functions on which Exogen relies, is dependent on each organization
addressing the Year 2000 issue on a timely basis. Exogen will investigate each
organization's state of preparedness to determine if any significant risks exist
for Exogen, and if so, develop mutual actions needed to mitigate those risks.
The inability of either of these marketing partners to properly address the Year
2000 issue in its business operations could have a material adverse affect on
Exogen's business, results of operations, financial condition, and cash flows.

Risks

As discussed above, Exogen is not currently aware of any Year 2000 compliance
issues that exist, or that cannot be corrected on a timely basis, relating to
its:

o product;

o information systems hardware and software;

o custom-developed applications;

o general business software; and

o other equipment that uses computer programs.

As a result, Exogen does not believe that any of these areas will have a
material adverse effect on Exogen's business, results of operations, financial
condition, and cash flows. There can be no assurances, however, that Exogen will
not find Year 2000 issues in these areas as further compliance testing occurs,
or that such issues, if found, can be corrected on a timely basis.
<PAGE>

Exogen relies on, and will continue to rely on, third parties to
provide:

o equipment, goods, and services;

o reimbursement for the SAFHS device; and

o marketing and distribution support for the SAFHS device.

There can be no assurance that these third parties will adequately address Year
2000 compliance issues or that contingency plans in certain areas are possible
or practical. As a result, there could be a material adverse effect on Exogen's
business, results of operations, financial condition, and cash flows.

Costs

Certain costs in addressing the Year 2000 issue would be part of
Exogen's normal operating expenses, regardless of whether a Year 2000 issue
existed. However, Exogen does expect to incur additional expenses during fiscal
1999 in this area that are solely for Year 2000 compliance purposes. Such costs
are not expected to be material. Based on the initial assessment discussed
above, Exogen estimates the cost of remediation associated with the Year 2000
issue to range from $100,000 to $150,000 during fiscal 1999.

Contingency Plan

Exogen expects to be compliant prior to the year 2000, and does not
foresee significant risks associated with achieving such compliance. However,
certain risks exist over which Exogen has little or no control. To mitigate such
risks, the Year 2000 task force will develop a contingency plan by using the
most "reasonably likely" worst-case scenario and by assessing the critical Year
2000 risks to Exogen. Exogen anticipates that such a contingency plan will be
developed by the end of the second quarter of fiscal 1999. Like many
organizations, Exogen does not have previous experience with issues like the
Year 2000 issue. However, Exogen believes it is developing appropriate
strategies to address the issue, but such strategies do not guarantee success in
a timely manner, or at all.

These statements concerning the Year 2000 compliance issue contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. There can be no assurance that any estimates or other
forward-looking statements will be achieved, and actual results could differ
significantly from those planned or contemplated. Exogen plans to update the
status of its Year 2000 preparedness as necessary in its periodic filings and in
accordance with applicable securities laws.
<PAGE>

Business Considerations

History of Losses and Expectation of Continued Losses

We have had a history of substantial net losses since our inception.
During the past three years, we incurred net losses of $7.6 million for the year
ended September 30, 1998, $11.2 million for the year ended September 30, 1997,
and $10.6 million for the year ended September 30, 1996. As of September 30,
1998, we had an accumulated deficit of $41.9 million. The net losses we have
incurred to date and the net losses we expect to continue to incur for at least
the next two years have been due to several factors, including the following:

o engineering and developing the SAFHS device and the
mechanical-stress device;

o conducting clinical trials for the SAFHS device and
mechanical-stress device;

o obtaining FDA approval of the SAFHS device;

o developing and expanding our marketing, sales and distribution
network domestically and internationally;

o expanding our reimbursement activities domestically and
internationally; and

o expanding in-house manufacturing capability.

Although we have been marketing and selling the SAFHS device since
1994, we are still experiencing material losses. We have not achieved
profitability, and we expect to continue to incur operating losses at least
through 2000. Although our revenues have grown in recent quarters, we cannot be
certain that we will achieve sufficient revenues for profitability. Our future
revenues and profitability, if any, are critically dependent on whether we
successfully market and sell, and obtain reimbursement for, the SAFHS device.
Even if we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future.

Substantial Dependence on the SAFHS Device; Uncertainty of Market Acceptance

Our future growth depends substantially on the commercial success of
the SAFHS device. Essentially all of our product revenues are derived from sales
of the SAFHS device. We expect the SAFHS device to continue to account for
substantially all of our product revenues for the foreseeable future. Our
long-term success will depend on the following:
<PAGE>

o successful domestic and international commercialization of the
SAFHS device for its approved uses, including the ability of our
exclusive U.S. distributor, Smith & Nephew, to successfully market
the SAFHS device in the United States;

o whether the medical community will accept the ultrasound
technology of the SAFHS device as a safe and effective method of
treating fresh, bone fractures;

o whether third-party payors, including traditional fee-for-service
insurers, workers' compensation insurers, HMO and managed care
organizations, automobile insurers, third-party administrators,
Medicare, and other government entities, will provide third-party
reimbursement of the SAFHS device; and

o development and regulatory approval of the SAFHS device for
additional uses.

If the market does not accept the SAFHS device, our business, financial
condition, results of operations, and cash flows will be materially and
adversely affected.

Substantial Dependence on Smith & Nephew U.S. Distribution Arrangement

Our future growth depends substantially on the ability of our exclusive
U.S. distributor, Smith & Nephew, to successfully market the SAFHS device in the
United States. On August 10, 1998, Smith & Nephew acquired exclusive rights to
market the SAFHS device in the United States, under a multi-year master
agreement, a U.S. sales representative agreement, and a stock purchase
agreement. As a result, we are no longer involved in any direct sales activities
relating to the SAFHS device in the United States. Although the U.S. sales
representative agreement has a term of 10 years, it may be terminated by mutual
agreement of Exogen and Smith & Nephew, or by Smith & Nephew in the event of a
default by Exogen.

We cannot assure you that Smith & Nephew will succeed in its efforts to
market the SAFHS device. Smith & Nephew's sales personnel do not have prior
experience in the sale or use of the SAFHS device, although we are providing
them with training and other support. Although we believe that Smith & Nephew is
economically motivated to succeed in performing its responsibilities under the
agreements, the amount of resources and time Smith & Nephew devotes to its
responsibilities is not within our control, and therefore, we cannot assure you
that Smith &Nephew will perform its obligations as expected. If the U.S.
distribution arrangement with Smith & Nephew is not successful or if the
arrangement is terminated, our business, financial condition, results of
operations, and cash flows will be materially and adversely affected.

Substantial Dependence on Third Parties in Europe and Japan to Sell the SAFHS
Device; Risks Associated with International Operations

We depend on independent distributors, sales agents, and marketing
partners to sell the SAFHS device in Europe, Japan, and other territories.
Revenues derived from international sales of the SAFHS device represented 19%
for the year ended September 30, 1998, 18% for the year ended September 30,
1997, and 14% for the year ended September 30, 1996.
<PAGE>

Through a subsidiary in Germany, we began selling and marketing the
SAFHS device in Europe in February 1996. We also sell and market the SAFHS
device in Europe through independent distributors and sales agents. We have
recorded sales in Germany, Austria, Holland, Denmark, Switzerland, Belgium, the
United Kingdom, and Israel. Revenues derived from sales of the SAFHS device in
Europe represented 6% for the year ended September 30, 1998, 18% for the year
ended September 30, 1997, and 14% for the year ended September 30, 1996. Most of
our sales of the SAFHS device in Europe are derived from Germany, where we
receive limited local reimbursement only on a case-by-case basis. Our European
accounts receivable as of September 30, 1998, net of allowances for returns, bad
debt, and amounts a third-party payor might deduct from the price, was $0.4
million.

In Japan, we market and sell the SAFHS device through an exclusive
distribution arrangement with Teijin Limited, a Japanese corporation. We are
responsible for manufacturing and supplying the SAFHS device to Teijin for
clinical trials and sales in Japan, while Teijin is responsible for obtaining
regulatory approval and for marketing and distributing the SAFHS device in
Japan. In May 1998, Teijin announced that the Health and Welfare Ministry of
Japan had approved reimbursement for the SAFHS device, which was the final
approval they needed to begin commercial distribution of the SAFHS device in
Japan. In June 1998, Teijin began commercial sales of the SAFHS device in Japan.
Revenues derived from sales of the SAFHS device to Teijin represented 13% for
the year ended September 30, 1998. Our sales to Teijin began in March 1998, and
fiscal 1998 volume represented Teijin's initial purchase of SAFHS inventory. We
do not anticipate that quarterly volume in fiscal 1999 will reach the quarterly
volume achieved during the second half of fiscal 1998.

Under the distribution arrangement with Smith & Nephew, Smith & Nephew
has an option to obtain exclusive distribution rights to the SAFHS device
worldwide (except for Japan). We cannot assure you that Smith & Nephew will
exercise its option to obtain worldwide (except for Japan) distribution rights
to the SAFHS device. We also cannot assure you that the existence of this option
will not materially and adversely affect our ability to maintain effective
distribution arrangements in international markets, pending the exercise or
expiration of this option.

We cannot assure you that our independent distributors, sales agents,
and marketing partners will succeed in marketing and selling the SAFHS device in
Europe, Japan, and other territories. Each of the foreign markets in which we
sell, or plan to sell, our products have separate regulatory and product
approval requirements. We cannot assure you that we will be able to obtain the
necessary regulatory approvals of the SAFHS device in foreign markets. Our
international operations and sales are denominated in local foreign currencies.
In Japan, where we do not have operations, our sales to Teijin are denominated
in U.S. dollars. We do not currently engage in currency hedging activities.
<PAGE>
Our international operations are subject to other inherent risks,
including the following:

o fluctuations in currency exchange rates;

o regulatory and product approval requirements;

o tariffs and other trade barriers;

o greater difficulty in accounts receivable collection and longer
collection periods;

o reimbursement approvals (both government and private);

o difficulties and costs of staffing and managing foreign operations
and distributors;

o potentially adverse tax consequences;

o reduced protection for intellectual property rights in some
countries, including restrictions on repatriation of earnings;

o burdens of complying with a wide variety of foreign laws;

o the impact of recessions in economies outside the United States;

o political and economic instability; and

o seasonal reductions in business activity during the summer months
in Europe and other parts of the world.

If we fail to successfully market and sell the SAFHS device in
international markets, our business, financial condition, results of operations,
and cash flows could be materially and adversely affected.

Quarterly Operating Results Are Subject to Significant Fluctuations

Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors, not all of which are within our control.
These factors include the following:

o the success of our exclusive U.S. distributor, Smith & Nephew, in
marketing the SAFHS device in the United States;

o the timing of sales of the SAFHS device;

o the mix of sales of the SAFHS device in the United States and
Europe and to Japan;

o the timing of reimbursement approval and payments by governmental
authorities and third-party payors;

o new product introductions by us or our competitors;

o expenses incurred in the research and development of new products;

o changes in our pricing policies or those of our competitors;
<PAGE>

o timing of regulatory actions;

o general economic and market conditions;

o the Asian economic crisis and instability; and

o currency fluctuations.

Our revenues for the foreseeable future are almost entirely dependent
on sales of the SAFHS device. If revenues grow slower than we anticipate, our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.

Dependence on Third-Party Reimbursement

Successful sales of the SAFHS device in the United States, Europe,
Japan, and other territories will depend, in part, on whether we will be
reimbursed by third-party payors, including traditional fee-for-service
insurers, workers' compensation insurers, HMO and managed care organizations,
automobile insurers, third-party administrators, Medicare, and other 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. Third-party payors are increasingly challenging the price of
medical devices, and as a result, are limiting reimbursement coverage for
medical devices and, in many instances, are putting pressure on medical
suppliers to lower their prices. Legislative bodies in the United States and
around the world continue to propose fundamental reforms in the health care
industry that could affect the availability of third-party reimbursement, and we
cannot predict the timing or effect of any such legislation.

United States. We cannot assure you that costs associated with medical
devices incorporating new technology, such as the SAFHS device, will be
reimbursed. To expedite reimbursement for SAFHS devices in the United States, we
seek reimbursement approval from third-party payors, when possible, prior to
shipping the devices. Regardless of the availability of reimbursement
preapproval, our reimbursement staff works closely with third-party payors,
pursuing reimbursement case-by-case. Prior to approving coverage for a new
medical technology, most third-party payors require evidence that the technology
is safe and effective, not experimental or investigational, and medically
necessary and appropriate for the specific patient. Third-party payors typically
require that the technology has received FDA approval or clearance for
marketing. Also, new technologies are often prescribed for uses other than those
approved by the FDA (off-label applications), for which reimbursement by
third-party payors may not be available. An increasing number of third-party
payors and managed care plans are also beginning to require evidence that the
technology is cost effective. We have obtained a nationally recognized product
code for the ultrasound device, and this code may expedite reimbursement from
third-party payors for the SAFHS device. However, we cannot assure you that such
codes will be utilized appropriately, or at all.

We have developed a multi-level program to obtain coverage and
reimbursement from third-party payors for the SAFHS device as a new treatment.
The SAFHS device is classified by third-party payors as durable medical
equipment. Although we have not received broad approval from any reimbursement
authority for payment of the SAFHS device, we have received approval from
various third-party payors on a case-by-case basis.
<PAGE>

The Health Care Financing Administration ("HCFA"), which administers
the Medicare program, has a national coverage policy for electrical-stimulation
devices that initiate the healing of nonunion fractures. In August 1996, HCFA's
Technology Advisory Committee recommended that the SAFHS device not be covered
under the Medicare program. The committee's recommendation stated, "The
available data, although demonstrating a reduction in physician- determined
healing time for the study population, could not be generalized to the Medicare
population in a way that would allow a conclusion that SAFHS was an effective
procedure." Since that time, we have continued to pursue coverage for SAFHS
through meetings with HCFA staff, and have provided additional support of the
clinical benefits of the SAFHS therapy, including information related to the
Medicare population. In addition, we have been working with consultants and the
Health Industry Manufacturers Association to pursue various avenues to obtain
Medicare coverage for the SAFHS device. To date, we have been unable to change
the Medicare noncoverage decision; however, we have an ongoing dialogue with
HCFA staff. The United States Congress has the power to significantly reduce
Medicare and Medicaid expenditures, and considers from time to time proposals to
reduce such expenditures. We cannot predict when Congress may enact legislation
reducing Medicare and Medicaid expenditures, and if such legislation is enacted,
what effect, if any, such legislation may have on our business, financial
condition, results of operation and cash flows.

We cannot assure you that we will be successful in obtaining
third-party reimbursement from third-party payors, including Medicare, or that
third-party payors will recommend that their programs cover the SAFHS device. If
we are unable to obtain adequate third-party reimbursement for the SAFHS device,
our business, financial condition, results of operations, and cash flows will be
materially and adversely affected.

International. Our international reimbursement plan varies by country.
In Germany, Holland, and France, we are using indigenous clinical data as well
as data collected in the United States on the effectiveness of the SAFHS device
to support our filings for reimbursement coverage.

The operating loss for fiscal 1998 includes an $800,000 nonrecurring
charge, recorded in the three months ended March 31, 1998, to write down certain
international accounts receivable--primarily in Germany--that exceeded 180 days
outstanding. The nonrecurring charge was precipitated by a German Supreme Social
Court ruling made available to Exogen in the quarter ended March 31, 1998. The
ruling stated that reimbursement under the Bundesausschuss system (the German
federal organization that establishes medical reimbursement policy for
outpatient healthcare providers) for new medical therapies could occur only if
the new therapy was part of the official book of therapies of the
Bundesausschuss. Prior to this ruling, Exogen relied on a 1995 German Supreme
Social Court ruling that established that new medical therapies must be
reimbursed under the pre-Bundesausschuss system if (i) treatment was proven
effective and economical and (ii) treatment did not exceed the scope of what was
necessary. Exogen believed the clinical effectiveness of the SAFHS device and
the device's economic benefits would satisfy the requirements of the 1995
ruling. However, based on the later ruling and the fact that the SAFHS therapy
is not part of the official book of therapies, Exogen recorded the nonrecurring
charge.
<PAGE>

To assist in the collection of outstanding claims and to expedite the
reimbursement process on future claims, Exogen is seeking nationwide approval by
the Bundesausschuss. To this end, in August 1997, Exogen submitted a formal
application to the National Krankenkasse (the predecessor to the
Bundesausschuss). The application process includes scientific and economic
assessments. In August 1998, the Minister of Health accepted the recommendation
of the Bundesausschuss not to approve national reimbursement for SAFHS therapy.
Exogen is appealing the Minister of Health's decision through administrative and
legal channels, but has been delayed by the November 1998 election of a new
government and concurrent appointment of a new Minister of Health. Exogen has
also filed a lawsuit against the Bundesausschuss to challenge its decision. Both
actions are being actively pursued at this time.

In Holland, we have received approval from the Ministry of Health,
Welfare, and Sports of The Netherlands for the nationwide reimbursement of
Exogen's SAFHS device for the treatment of non-union fractures older than six
months. The approval, which will be effective April 1, 1999, was based on an
extensive review by the Ziekenfondsraad (Sick Fund Council) of the clinical
efficacy and economic of SAFHS therapy.

In France, we have applied to be listed on the Tarif Interministeriel
des Prestations Sanitaries ("TIPS"). France's list of medical devices allowed
for prescription by physicians working in the private sector and for
reimbursement by the National Health Insurance. That application is still
pending, and therefore, we do not sell SAFHS devices in France at this time.

In Japan, our Japanese distributor, Teijin, received nationwide
reimbursement approval from the Japanese Health and Welfare Ministry in May
1998.

We cannot assure you that we will be successful in obtaining national
reimbursement approval in Germany, France, or other countries. If we do not
obtain national reimbursement approval of the SAFHS device in Germany, France,
and other countries, our business, financial condition, results of operations,
and cash flows could be materially and adversely affected.
<PAGE>

Extensive Government Regulation

United States. Our current product and our future products, if any, are
subject to extensive regulation by the FDA in the United States and by similar
regulatory authorities in other countries. Prior to commercial sale in the
United States, each of our products must undergo an extensive regulatory
approval process conducted by the FDA under the Federal Food, Drug and Cosmetic
Act ("FDC Act"). The FDA regulates the clinical testing, manufacturing,
labeling, distributing, and promoting of medical devices. Noncompliance with
applicable requirements can result in failure of the government to grant
pre-market approval ("PMA") for devices, withdrawal of the PMA, total or partial
suspension of production, fines, injunctions, civil penalties, recall or seizure
of products, and criminal prosecution.

Medical devices are classified into three classes (I, II, or III) on
the basis of the controls necessary to reasonably assure their safety and
effectiveness. The SAFHS device is classified as a Class III device, the class
subject to the highest level of regulation by the FDA. In addition to the
general control requirements of the FDC Act (including registration, labeling,
pre-market notification, and adherence to Good Manufacturing Practices ["GMP"]),
the SAFHS device is also subject to pre-market approval.

Before a new Class III device can be introduced into the market, the
manufacturer must obtain FDA clearance through a PMA application. The less
burdensome 510(k) pre-market notification process has not been, and is not
expected to be, available for any of our products. Accordingly, we have had to
obtain, and expect to apply for, PMAs and PMA supplements for our future
products.

A PMA application must be supported by extensive data, including
preclinical and clinical trial data, to demonstrate the safety and efficacy of
the device for the uses specified in the PMA application. If human clinical
trials of a device are required and the device presents a "significant risk,"
the manufacturer or the distributor of the device must file an Ivestigational
Device Exemption ("IDE") and have an approved application prior to commencing
human clinical trials.

The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved,
human clinical trials may begin at a specific number of investigational sites
with a specified maximum number of patients, as recommended by the FDA. Sponsors
of clinical trials are permitted to sell those devices distributed in the course
of study as long as compensation does not exceed recovery of the costs of
manufacturing, researching, developing, and handling.
<PAGE>

Upon receipt of the PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. An FDA review of a PMA application generally takes between two and
three years from the date the PMA application is filed, but may take
significantly longer. The review time is often significantly extended by
requests from the FDA for more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, including clinicians, will likely be convened to review and evaluate
the application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of a PMA
application.

The PMA process can be expensive, lengthy, and uncertain. We cannot
assure you that we will be able to obtain necessary regulatory approvals. The
loss of previously received approvals, or failure to comply with existing or
future regulatory requirements, would have a material adverse effect on our
business, financial condition, results of operations, and cash flows.

We are required to file a PMA supplement for new or expanded uses of
our SAFHS technology and for any material modifications to the SAHFS device. If
a PMA supplement is not accepted by the FDA for a new or expanded use or
material modification of the SAFHS device, we must commence and complete the
entire pre-market approval process with respect to such use or modification of
the SAFHS device. We began commercial distribution of the SAFHS 2000, the
second-generation SAFHS device, in the United States in May 1997 pursuant to FDA
approval of a PMA supplement in March 1997. In August 1998, we resubmitted a PMA
supplement for expanded and new applications of the SAFHS 2000 device. We cannot
guarantee that this supplement will be accepted on a timely basis or at all. In
addition, we will be required to file a PMA application for our
mechanical-stress device, if and when development is completed. We cannot assure
you that any PMA application relating to the mechanical-stress device will be
filed or granted on a timely basis, or at all.

Any products manufactured or distributed by us pursuant to an approved
PMA are subject to pervasive and continuous regulation by the FDA, including
record-keeping requirements, reports of adverse experience with the use of the
device, postmarket surveillance, postmarket registry, and other actions as
deemed necessary by the FDA. Product labeling and promoting activities are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. Exogen and its agents may promote products only for the products'
approved indications. We cannot assure you that the FDA will not impose
modifications to the labeling that could adversely affect our ability to market,
sell, or be reimbursed for the SAFHS device. In addition, we cannot assure you
that we will not become subject to FDA actions as a result of physicians'
prescribing the SAFHS device for off-label uses.
<PAGE>

We are also subject to numerous federal, state, and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire-hazard control, and disposal of hazardous or
potentially hazardous substances. We cannot assure you that we will not be
required to incur significant costs to comply with such laws and regulations in
the future, or that such laws or regulations will not have a material adverse
effect upon our business, financial conditions, results of operations, or cash
flows.

International. To market and sell the SAFHS device or any future
products in foreign markets, we must comply with foreign government regulations,
the requirements of which differ substantially from country to country. In
Europe, we are required to comply with the Medical Device Directive, which
covers most medical devices. Under the Medical Device Directive, most medical
devices must qualify for the CE mark, and effective June 1998, must bear a CE
mark to be marketed and sold in the European Union. To obtain the CE mark, a
manufacturer must demonstrate compliance with product safety requirements as
well as quality system requirements. The CE mark is recognized by countries that
are members of the European Union and the European Free Trade Association. We
received the CE mark for the SAFHS Model 2A in August 1996 and for the SAFHS
2000 in March 1998. We cannot assure you that we will be able to obtain CE marks
for future generations, if any, of the SAFHS device.

Although members of the European Union must accept for marketing
medical devices bearing a CE mark without imposing further requirements related
to product safety and performance, each country may require the use of its own
language on labels and instructions for use. National Competent Authorities, who
are required to enforce compliance with the requirements of the Medical Device
Directive, can restrict, prohibit, and recall CE-marked products if they are
considered to be unsafe. Such a decision must be confirmed by the European
Commission to be valid. Member countries may impose additional requirements as
long as they do not violate the Medical Device Directive or constitute technical
barriers to trade.

We cannot assure you that the FDA or any foreign regulatory authority
will approve our current or future products in a timely manner, or at all. If we
experience delays or failure in obtaining such approvals, lose any previously
received approvals, or fail to comply with existing or future regulatory
requirements, our business, financial condition, results of operations, and cash
flows will be materially and adversely affected.

Uncertainty of New Product Development

We plan to seek FDA approval to begin clinical trials to expand the
approved uses for the SAFHS technology to include other long-bone fractures,
lower-spine fusion, and cartilage repair. We also plan to undertake additional
development activities and human clinical trials for our mechanical-stress
device, which is designed to prevent bone loss related to osteoporosis. Our
research and development efforts with respect to expanded uses of the SAFHS
technology and the mechanical-stress device may not lead to development of
applications or products that are shown to be safe and effective in clinical
trials. In addition, these new applications or products may not:
<PAGE>

o meet applicable regulatory standards;

o be capable of being manufactured in commercial quantities at
acceptable costs;

o be eligible for third-party reimbursement from governmental or
private insurers;

o be successfully marketed; or

o achieve market acceptance.

At any stage of the development process, new applications or products
that appeared promising in preclinical studies or trials may not demonstrate
efficacy in larger-scale clinical trials and as a result, would not receive
regulatory approval. As a result, it is possible that we may have to curtail,
redirect, suspend, or eliminate some or all of our product development programs.

Risks Associated with Intense Competition

The medical device industry is intensely competitive. The SAFHS device
competes with non-invasive bone-growth electrical-stimulation devices and with
various surgical treatments. In the United States there are four companies that
currently market electrical stimulation devices for the treatment of
slow-healing fractures, in direct competition with the SAFHS device. We believe
that some of these companies are conducting preclinical or clinical research
relating to the use of electrical stimulation for the treatment of fresh
fractures. If our mechanical-stress device is developed, approved by the FDA,
and commercialized, it will compete with drug therapies, growth factors,
bone-graft substitutes, and exercise/physical therapy equipment. Many of our
competitors have substantially greater financial, technical, marketing, sales,
and distribution resources than we do. They also have more experience in
research and development, clinical trials, and regulatory matters than us. In
addition, most of our competitors have established third-party reimbursement for
their products. We cannot assure you that our competitors will not develop
products that are superior to ours, achieve greater market acceptance, or render
our technology and products obsolete or noncompetitive, in which case our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.

Risks Associated with Rapid Technological Change

The medical device industry is characterized by rapid product
development and technological change. We expect that the technologies associated
with medical devices will continue to develop rapidly. As a result, our future
success will depend in large part upon our ability to maintain a competitive
position with respect to those technologies. Technological developments by
others may result in our products' obsolescence or becoming too expensive before
they are marketed or before we recover a significant portion of expenses
incurred in connection with developing and commercializing those products, in
which case our business, financial condition, results of operations, and cash
flows will be materially and adversely affected.
<PAGE>

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

Our success will depend in part on our ability to obtain and maintain
United States and foreign patent protection, preserve our copyrights and trade
secrets, and operate without infringing the proprietary rights of third parties.
We place considerable importance on obtaining patent protection for significant
new technologies, products, and processes. With respect to our SAFHS technology,
we hold title to 11 issued United States patents, one issued Canadian patent,
one issued Taiwanese patent, one issued New Zealand patent, one issued Japanese
patent, 14 pending United States patent applications, and corresponding Patent
Cooperation Treaty and foreign patent applications. The original United States
ultrasound patent that is the basis of the SAFHS device expires in 2007. Our 10
other issued United States patents relating to SAFHS technology will expire
between 2008 and 2014.

With respect to our mechanical-stress technology, we are the exclusive
licensee of four issued United States patents, two issued foreign patents, one
pending United States patent application, and four pending foreign patent
applications. The four issued United States patents will expire between 2010 and
2011. The exclusive license agreement relating to the mechanical-stress
technology provides for royalty payments on sales of products using the patented
technology. Under the license agreement, our exclusive license may revert to a
nonexclusive license if we do not use good faith efforts to commercially exploit
the patented technology. The license agreement expires on the later of March
2022 or the expiration of the final patent licensed to us.

We believe we own or have the right to use all the proprietary
technology necessary to manufacture and market our products. Under current law,
patent applications in the United States are maintained in secrecy until patents
issue, 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, rather than the first to file a
patent application, while in foreign countries, ownership of a patent is
typically determined by priority of patent filing, not invention. Consequently,
we cannot be certain that we were the first to invent certain technology covered
by pending patent applications or that we were the first to file patent
applications for such inventions. In addition, the patent positions of medical
device companies, including ours, are generally uncertain partly because the
positions involve complex legal and factual questions.

Legal standards relating to the validity of patents covering medical
devices and biotechnological inventions and the scope of claims made under such
patents are still developing. Our patent position is highly uncertain and
involves complex legal and factual questions. We cannot be certain that the
applicants or inventors of subject matter covered by patent applications or
patents owned by or licensed to us were the first to invent or the first to file
patent applications for such inventions. In addition, we cannot guarantee that:
<PAGE>

o patent applications to which we hold rights will result in the
issuance of patents;

o any patents issued or licensed to us will be free from challenge
and that if challenged, they would be held to be valid;

o any such patents will provide commercially significant protection
to our technology, products, and processes;

o others will not independently develop substantially equivalent
proprietary information that is not covered by patents to which we
own rights or obtain access to our know-how; or

o others will not be issued patents that may prevent the sale of one
or more of our products, or require a license and the payment of
significant fees or royalties by us to third parties to enable us
to conduct our business.

We have not received any notices alleging, and we are not aware of, any
infringement by us of any other entity's patents. However, because of the volume
of patents issued and patents applications filed relating to medical devices, we
cannot assure you that current and potential competitors and other third parties
have not filed or will not file patent applications, or have not received or
will not receive patents, relating to materials or processes we use or propose
to use. Accordingly, we cannot assure you our products do not infringe any
patents or proprietary rights of third parties.

If another party claims the same or overlapping subject matter with
subject matter we have claimed in a United States patent application or patent,
we may decide or be required to participate in interference proceedings in the
United States Patent and Trademark Office to determine priority of invention.
Loss of such an interference proceeding would deprive us of patent protection
sought or previously obtained. Participating in such proceedings could result in
substantial costs, whether or not the eventual outcome is favorable.

In addition to patent protection, we rely on trademarks, copyrights,
trade secrets, proprietary know-how, and confidentiality and assignment of
invention agreements with our employees, consultants, distributors, sales
agents, and marketing partners to protect our intellectual property. We hold
United States federal trademark registrations for the marks: SAFHS(R),
EXOGEN(R), and SAFHS 2000(R). We also hold registrations for the SAFHS(R) mark
in Japan, Canada, and Mexico. Trademark applications for the EXOGEN(R) and SAFHS
2000(R) marks are pending in foreign countries, and an application for the
EXOGEN 2000(TM) mark is pending in the United States. We hold rights to
copyrights on text and software we develop in connection with the SAFHS device.

We cannot assure you that any issued patents or copyrights we own will
provide us with a competitive advantage or will not be challenged or
circumvented by our competitors. We also cannot assure you that our
confidentiality and assignment of invention agreements will not be breached or
that we would have adequate remedies for any such breach. Finally, we cannot
assure you that our copyrights, trade secrets, proprietary know-how, and
intellectual property will not become known or be independently discovered by
others.
<PAGE>

Litigation may be necessary to defend against claims of infringement,
to enforce patents and copyrights issued or licensed to us, or to protect trade
secrets. If we must litigate such issues, we may be forced to incur substantial
costs and to devote substantial resources and time. We cannot assure you that we
would prevail in such litigation. In addition, if any relevant claims of
third-party patents are upheld as valid and enforceable, we could be prevented
from selling our products or could be required to obtain licenses from the
owners of such patents. We cannot guarantee that such licenses would be
available or, even if available, would be on acceptable terms to us. If we are
forced to incur substantial costs in litigation or fail to obtain a license, our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.

Manufacturing and Related Risks

We have developed in-house manufacturing and refurbishing capability
for the SAFHS 2000 device. Although we are able to manufacture our entire SAFHS
2000 production in-house, we use a contract manufacturer for a portion of our
SAFHS 2000 production. The FDA regulates manufacturers of medical devices that
have received FDA approval. We are required to adhere to FDA regulations setting
forth GMP requirements relating to tests, control, and documentation. State and
federal agencies monitor ongoing compliance with GMP and other applicable
regulatory requirements through periodic inspections. The FDA has inspected and
approved our facilities and those of our contract manufacturer under the FDA's
Quality System Regulations. If we or the contract manufacturer fail to maintain
our facilities in accordance with the FDA's GMP requirements, the noncomplying
party could lose the ability to manufacture the SAFHS device on a commercial
scale. Loss of this manufacturing capability could limit our ability to deliver
the SAFHS device to physicians or patients. If this occurs, our business,
financial condition, results of operations, and cash flows will be materially
and adversely affected.

The manufacture of the SAFHS device involves an assembly process with a
number of significant components. Each device is tested and released by us in
accordance with FDA requirements. Most purchased components are available from
more than one vendor. However, two key components currently are manufactured by
single-source vendors. For these components, there are relatively few
alternative sources of supply. However, we are actively in the process of
qualifying alternative vendors for these components. If the supply of these
components is interrupted, and we are unable to establish additional or
replacement suppliers for such components, our business, financial condition,
results of operations, and cash flows will be materially and adversely affected.

Royalty Payment Obligations; Potential Loss of Exclusive License

If we successfully develop the mechanical-stress device, we will be
required to pay a royalty on any net revenues from sales of this product. We
have an exclusive license to the mechanical-stress technology, which we will
lose if we do not commercially exploit the technology underlying the license. We
cannot assure you that we will be able to commercially exploit this technology.
If we lose the exclusive license, our business, financial condition, results of
operations, and cash flows could be materially and adversely affected.
<PAGE>

Reliance on Key Personnel

Our success depends to a significant extent upon our executive officers
and other key technical personnel. If we lose the services of an executive
officer or one or more key employees or our ability to attract and retain such
personnel, our business, financial condition, results of operations, and cash
flows will be materially and adversely affected. Except for Patrick McBrayer,
none of our executive officers or key employees is a party to an employment
agreement with Exogen. We do not have "key person" life insurance policies
covering any of our employees.

Possible Volatility of Stock Price

The trading price of our common stock has been subject to wide
fluctuations in the past. Our common stock's trading price could continue to
fluctuate in response to variations in quarterly operating results,
announcements of technological innovations or new products by us or our
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 significant price and volume fluctuations that
have affected the market prices of equity securities of many companies in
industries similar to ours. This volatility has often been unrelated to the
operating performance of these companies. These market fluctuations may
adversely affect the market price of our common stock. In the past, companies
that have experienced volatility in the market price of their stock have been
the object of securities class action litigation. If we were the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.

Risks Associated With Low-Priced Stocks

Continued inclusion of our common stock on the Nasdaq National Market
will require the following:

o that the public float consist of at least 750,000 shares of common
stock, valued in the aggregate at more than $5 million;

o that we maintain at least $4 million in net tangible assets;

o that our common stock be held by at least 400 holders; and

o that the minimum bid price for our common stock be at least $1.00
per share.

If we are unable to satisfy such maintenance requirements, our common
stock may be removed to the Nasdaq SmallCap Market or delisted from the Nasdaq
Stock Market. In the event our common stock is delisted from the Nasdaq Stock
Market, trading, if any, in the securities would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the National Association of
Securities Dealers' "Electronic Bulletin Board." Consequently, the liquidity of
our common stock could be materially impaired, not only in the number of
securities that can be bought and sold at a given price, but also through delays
in the timing of transactions and reduction in security analysts' and the
media's coverage of us. This could result in lower prices for our common stock
than might otherwise be attained, and could also result in a larger spread
between the bid and asked prices for our common stock.
<PAGE>

In addition, if our common stock is delisted from trading on the Nasdaq
Stock Market and the trading price of our common stock is less than $5.00 per
share, trading in the common stock would also be subject to the requirements of
Rule 15g-9 promulgated under the Exchange Act. Under such rule, broker/dealers
who recommend low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally any equity security
not traded on an exchange or quoted on the Nasdaq Stock Market that has a market
price of less than $5.00 per share, subject to certain exceptions), including
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the associated risks. Such requirements
could severely limit the market liquidity of our common stock. We cannot assure
you that our common stock will not be delisted or treated as a penny stock.

Year 2000 Risks

The Year 2000 compliance issue results from the inability of systems
that utilize computer programs to differentiate between the year 1900 and the
year 2000. This issue arises because many such programs were developed using two
digits rather than four digits to identify the applicable year. As a result,
programs that use time-sensitive calculations may not function correctly in the
year 2000. Those programs developed using four-digit years are probably Year
2000 compliant, however, all other programs will likely require modification
and/or replacement to be compliant. The Year 2000 issue not only affects
computer hardware and software, but also can affect equipment used in our
operations, and extends to the systems of outside suppliers and customers, upon
which we rely. Failure to address the Year 2000 issue on a timely basis, or at
all, for critical programs used by us could result in system failures or
miscalculations, which could have material adverse effect on our business,
results of operations, financial condition, and cash flows.

In fiscal 1998, we performed an initial assessment of our Year 2000
compliance relating to the following:

o the SAFHS devices;

o our information systems' hardware and software;

o our custom-developed business applications;

o third-party business software; and

o other equipment using computer programs.

We do not believe that any of these areas will have a material adverse effect on
our business, results of operations, financial condition, and cash flows. We
cannot assure you that we will not find Year 2000 issues in these areas as
further compliance testing occurs, or that such issues, if found, can be
corrected on a timely basis.
<PAGE>

We also performed an initial assessment of Year 2000 compliance on our
suppliers, customers, and marketing partners. We rely on, and will continue to
rely on, these third parties to provide the following:

o equipment, goods, and services;

o reimbursement for the SAFHS devices; and

o marketing and distribution support for the SAFHS device.

There can be no assurance that these third parties will adequately address Year
2000 compliance issues or that contingency plans in certain areas are possible
or practical. As a result, there could be a material adverse affect on our
business, results of operations, financial conditions, and cash flows.

Possible Adverse Effect of the Euro Conversion

On January 1, 1999, 11 of the 15 member countries of the European Union
will establish fixed conversion rates between their existing currencies and a
new common currency called the "euro." This represents an initial step in a
process expected to culminate in the replacement of the existing currencies with
the euro. The conversion to the euro may have operational and legal implications
for some of our international business activities. We have begun consideration
of the effects of the euro conversion on our operations, but we are currently
unsure of the potential impact that the euro conversion will have on our
business, financial condition, results of operations, and cash flows,
particularly as the euro conversion relates to our European operations.

Certain Anti-Takeover Provisions

Certain provisions of our Certificate of Incorporation could make it
more difficult for a third party to acquire control of our business, even if
such change in control would be beneficial to our stockholders. Our Certificate
of Incorporation allows our Board of Directors to issue preferred stock without
stockholder approval. In addition, we entered into a Rights Agreement in
December 1996 that allows our Board of Directors to declare a dividend of one
right to purchase, under certain circumstances, one one-hundredth of a share of
preferred stock for each share of common stock outstanding. Although we do not
have any current plans to issue any preferred stock, the issuance of preferred
stock in the future could make it more difficult for a third party to acquire
our business.

In addition, certain provisions of Delaware law and our bylaws could
discourage a third party from attempting to acquire control of our business.
Section 203 of the Delaware General Corporation Law prohibits us from engaging
in any business combination with an interested stockholder (generally a
stockholder who, together with its affiliates, owns 15% or more of our
outstanding stock) for a period of three years unless certain conditions are
met. Section 203 may also have the effect of discouraging a proxy contest or
tender offer. In addition, certain provisions of our bylaws contain specific
procedures stockholders must follow in making director nominations and
submitting proposals for consideration at stockholder meetings. These provisions
could make it more difficult for a third party to acquire our business.
<PAGE>

Product Liability and Insurance

Our business exposes us to potential product liability risks in the
event that the use of our products is alleged to have resulted in physical harm
or other adverse effect. Product liability insurance for the medical device
industry is expensive. We currently carry product liability coverage of $3
million per occurrence, with coverage in the aggregate of $3 million for all
claims made in any policy year. In addition, we maintain umbrella liability
insurance, including product liability coverage, of $10 million per occurrence,
with coverage in the aggregate of $10 million for all claims made in any policy
year. Although to date we have not been the subject of any product liability
claims, we cannot assure you that our insurance will provide adequate coverage
against potential claims or that we will be able to maintain product liability
insurance on acceptable terms, or at all. If a product liability claim exceeds
the coverage of our insurance policy, our business, financial condition, results
of operations, and cash flows will be materially and adversely affected.

Shares Eligible for Future Sale

If our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants)
in the public market, the market price of our common stock could fall. Such
sales also might make it difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. As of
November 30, 1998, there were 12,709,343 shares of common stock outstanding as
follows:

o 820,000 shares of common stock are held by Smith & Nephew and are
covered by a registration statement which has been filed with the
SEC but not declared effective;

o Approximately 2.7 million shares are held by affiliates and are
subject to the volume restrictions of Rule 144; and

o the remaining outstanding shares of common stock are freely
tradeable.

The possible sale of a significant number of the above shares of common stock
may cause the price of our common stock to fall.

We have registered for resale 1,350,000 shares of common stock reserved
for issuance under our 1995 Stock Option/Stock Issuance Plan, as amended. As of
November 30, 1998, options to purchase 1,113,910 shares of common stock were
outstanding and will be eligible for sale in the public market from time to
time, subject to vesting. In addition, 185,189 shares of common stock are
available under Exogen's employee stock purchase plan, as amended. Also, there
are 125,000 shares of common stock issuable upon exercise of warrants, which may
be sold in accordance with Rule 144 one year after their date of issuance. The
possible sale of a significant number of the shares issuable upon exercise of
stock options and warrants, or under the employee stock purchase plan, may cause
the price of our common stock to fall.
<PAGE>

Under the August 1998 agreements between Smith & Nephew and us, Smith &
Nephew has an option to acquire exclusive worldwide distribution rights (except
Japan) to the SAFHS device. This worldwide distribution option is limited to a
three-year period. If Smith & Nephew exercises this option, it has a one-time
right to purchase from us additional shares of our common stock, up to 19%
(including the shares already acquired by Smith & Nephew) of the outstanding
shares of our common stock, after giving effect to the shares issuable upon
exercise of the right. The price per share to be paid would equal the stock's
average fair market value over a 20-day period preceding the date Smith & Nephew
announces, to Exogen, its election to exercise the stock purchase option. Any of
these additional shares of our common stock sold to Smith & Nephew under these
agreements would require that we file a registration statement with the
Securities and Exchange Commission to register the shares. The possible sale of
a significant number of these shares may cause the price of our common stock to
fall.

No Intention to Pay Dividends

We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth, and
therefore, do not expect to pay any dividends in the foreseeable future.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about Exogen's risk management includes
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from the results discussed in the forward-looking
statements.

Currency Rate Fluctuations

Since 6% of Exogen's fiscal 1998 net product revenues were derived from
a European subsidiary operating in a local currency environment, and 3% of
Exogen's total assets at September 30, 1998, were European, Exogen's results of
operations, financial position, and cash flows are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The principal
non-U.S. currency used for valuation by Exogen's subsidiary is the German mark.
Exogen does not limit its risk in this area by using any financial tools, such
as currency hedge contracts. Therefore, volatility in currency exchange rates
could have a material adverse effect on those revenues and assets denominated in
non-U.S. currencies.

Market Risk

Exogen's accounts receivables are subject, in the normal course of
business, to collection risks. Exogen regularly assesses these risks, and has
established policies and business practices to protect against the adverse
effects of collection risks. As a result, Exogen does not anticipate any
material losses in this area.

Interest Rate Risk

Exogen's investments are held to maturity; therefore, changes in the
market's interest rates do not affect the value of the investments as recorded
by Exogen.
<PAGE>
Item 8. Financial Statements and Supplementary Data

The information in response to this item is set forth in the
Consolidated Financial Statements beginning on page F-3 of this report on Form
10-K.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.
<PAGE>
PART III

Item 10. Directors and Executive Officers of the Registrant

Information in response to this item is incorporated herein by
reference to "Election of Directors" in Exogen, Inc.'s definitive proxy
statement ("Definitive Proxy Statement") to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 (the "Exchange Act") with the Securities
and Exchange Commission ("SEC") not later than 120 days after the end of fiscal
1998. Information with respect to compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference to "Compliance with Reporting
Requirements" in Exogen's Definitive Proxy Statement to be filed with the SEC.

Item 11. Executive Compensation

Information in response to this item is incorporated herein by
reference to "Executive Officers and Information Regarding Executive
Compensation" in Exogen's Definitive Proxy Statement to be filed with the SEC.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information in response to this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management" in
Exogen's Definitive Proxy Statement to be filed with the SEC.

Item 13. Certain Relationships and Related Transactions

Information in response to this item is incorporated herein by
reference to "Certain Transactions" in Exogen's Definitive Proxy Statement to be
filed with the SEC.
<PAGE>
PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Documents filed as a part of this Form 10-K:

(1) Financial Statements. The following Consolidated Financial
Statements of Exogen, Inc. and report of independent public
accountants relating thereto are filed with this report on Form
10-K:

Consolidated Balance Sheets as of September 30, 1998 and 1997

Consolidated Statements of Operations and Statements of
Comprehensive Income for the years ended September 30, 1998,
1997, and 1996

Consolidated Statement of Changes in Stockholders' Equity for
the years ended September 30, 1998, 1997, and 1996

Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997, and 1996

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules.

Schedule II--Valuation and Qualifying Accounts for the years ended
September 30, 1998, 1997, and 1996

Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or
is shown in the Consolidated Financial Statements or notes
thereto.

(3) Exhibits.
3.1 Second Amended and Restated Certificate of
Incorporation of Exogen. Incorporated by reference to
Exhibit 3.1 to Exogen's Form 10-Q for the third
quarter ended June 30, 1995.

3.2 Amended and Restated Bylaws of Exogen. Incorporated
by reference to Exhibit 3.3 to Exogen'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 Exogen
defining rights of holders of common stock of Exogen.

10.1 Amended and Restated Investors' Rights Agreement
dated as of November 14, 1994, among Exogen, the
investors listed on Schedule A thereto, and the
individuals listed on Schedule B thereto.
Incorporated by reference to Exhibit 10.1 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
<PAGE>
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 Exogen's
Form S-1 Registration Statement (Registration No. 33-
92740).

10.3 [RESERVED]

10.4 [RESERVED]

10.5 Form of Consulting Agreements between Exogen and each
of Drs. McLeod and Rubin, as amended. Incorporated by
reference to Exhibit 10.5 to Exogen's Form S-1
Registration Statement (Registration No. 33-92740).

10.6 Form of Stock Restriction Agreement between Exogen
and each of Drs. McLeod and Rubin and Messrs.
Reisner, Ryaby, Talish, McBrayer, and Bohan.
Incorporated by reference to Exhibit 10.6 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).

10.7 Form of Stock Purchase Agreement between Exogen and
each of Messrs. Reisner, Ryaby, and Talish.
Incorporated by reference to Exhibit 10.7 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).

10.8 Manufacturing Agreement dated January 20, 1994,
between Exogen and Hi-Tronics Designs, Inc.
Incorporated by reference to Exhibit 10.8 to Exogen'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 Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).

10.10 [RESERVED]

10.11 [RESERVED]

10.12 Lease Agreement dated December 13, 1994, by and
between Exogen and Siemens Medical Systems, Inc.
Incorporated by reference to Exhibit 10.13 to
Exogen'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 Exogen's Form S-1 Registration
Statement (Registration No. 33-92740).
<PAGE>

10.14 SAFHS Agreement dated November 30, 1995, between
Exogen and Teijin Limited. Incorporated by reference
to Exhibit 10.14 to Exogen's Form 10-K for the year
ended September 30, 1995.

10.15+ Mechanical-Stress Agreement dated November 30, 1995,
between Exogen and Teijin Limited. Incorporated by
reference to Exhibit 10.15 to Exogen's Form 10-K for
the year ended September 30, 1995.

10.16 Employment Agreement dated March 1, 1997, between
Exogen and Patrick A. McBrayer. Incorporated by
reference to Exhibit 10.16 to Exogen's Form 10-Q for
the second quarter ended March 31, 1997.

10.17 Severance Agreement, dated May 27, 1997, between
Exogen and John Bohan. Incorporated by reference to
Exhibit 10.17 to Exogen's Form 10-K for the year
ended September 30, 1997.

10.18 Common Stock Purchase Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.18 to Exogen's Form 10-K for the year
ended September 30, 1997.

10.19 Registration Rights Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.19 to Exogen's Form 10-K for the year
ended September 30, 1997.

10.20 The 1995 Stock Option / Stock Issuance Plan, as
amended on November 14, 1997. Incorporated by
reference to Exhibit 99.1 to Exogen's Form S-8
Registration Statement (Registration No. 333-51731).

10.21 The Employee Stock Purchase Plan, as amended on
November 14, 1997. Incorporated by reference to
Exhibit 99.9 to Exogen's Form S-8 Registration
Statement (Registration No. 333-51731).

10.22++ Master Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc.

10.23+/ Common Stock Purchase Agreement, dated August 10,
1998, between Exogen and Smith & Nephew Holdings,
Inc.

10.24** United States Sales Representative Agreement, dated
August 10, 1998, between Exogen and Smith & Nephew,
Inc. Incorporated by reference to Exhibit 10.24 to
Exogen's Current Report on Form 8-K, dated August 10,
1998.
<PAGE>

10.25** License Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.25 to Exogen's Current Report
on Form 8-K, dated August 10, 1998.

10.26 Promissory Note, dated October 6, 1998, issued by
Exogen to Jonathan J. Kaufman. Incorporated by
reference to Exhibit 10.1 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.

10.27 Promissory Note, dated October 6, 1998, issued by
Exogen to Alessandro Chiabrera. Incorporated by
reference to Exhibit 10.2 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.

10.28 Warrant to Purchase Common Stock, dated October 9,
1998, issued by Exogen to Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.3 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.

10.29 Registration Rights Agreement, dated October 9, 1998,
by and between Exogen and Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.4 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.

10.30 Promissory Note, dated September 30, 1998, issued by
Exogen to Pilla Consulting, Inc. Incorporated by
reference to Exhibit 10.5 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.

10.31 Warrant to Purchase Common Stock, dated September 30,
1998, issued by Exogen to Arthur A. Pilla.
Incorporated by reference to Exhibit 10.6 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.

10.32 Registration Rights Agreement, dated September 30,
1998, by and between Exogen and Arthur A. Pilla.
Incorporated by reference to Exhibit 10.7 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.

10.33* Amendment to Employment Agreement, dated October 1,
1998, between Exogen and Patrick A. McBrayer.

21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to Exogen's Form 10-K for the year ended
September 30, 1995.

23.1* Consent of Arthur Andersen LLP.

27* Financial Data Schedule.
<PAGE>

99.1 Preferred Shares Rights Agreement, dated December 6,
1996, between Exogen 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 Exogen's Form 10-K for the year ended
September 30, 1996.

+ Confidential treatment has been granted.

* This exhibit is filed herewith.

** Exogen has applied for confidential treatment of portions
of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.

+/ Confidential treatment of this exhibit has been withdrawn.
The exhibit is refiled herewith in its entirety.

++ This exhibit is refiled herewith pursuant to Exogen's
request for confidential treatment.

(b) Reports on Form 8-K:

On September 23, 1998, Exogen filed a report on Form 8-K in
connection with a multi-year master agreement, dated August
10, 1998, under which Smith & Nephew obtained exclusive rights
to market Exogen's SAFHS devices in the United States. Exogen
filed under Item 7 as Exhibits 10.22 through 10.25 a master
agreement, a common stock purchase agreement, a United States
sales representative agreement, and a license agreement
between Exogen and Smith & Nephew.

On October 19, 1998, Exogen filed a report on Form 8-K to
report under Item 5 the settlement of all outstanding
litigation in connection with claims by certain consultants to
royalties from the sale of Exogen's SAFHS devices. Exogen
filed under Item 7 as Exhibits 10.1 through 10.7 certain
promissory notes, warrants, and registration rights agreements
between Exogen and the former consultants.
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

EXOGEN, INC.

By: /s/ Patrick A. McBrayer May 26, 1999
--------------------------------------------------------------------------
Patrick A. McBrayer, Chief Executive Officer, President, and Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C>
By: /s/ John P. Ryaby May 26, 1999
----------------------------------------------------------------------------
John P. Ryaby, Chairman of the Board, Vice President, and Chief Scientific
Officer

By: /s/ Patrick A. McBrayer May 26, 1999
----------------------------------------------------------------------------
Patrick A. McBrayer, Chief Executive Officer, President, and Director
(Principal Executive Officer)

By: /s/ Richard H. Reisner May 26, 1999
----------------------------------------------------------------------------
Richard H. Reisner, Vice President, Chief Financial Officer, and Secretary
(Principal Financial and Accounting Officer)

By: * May 26, 1999
----------------------------------------------------------------------------
Buzz Benson, Director

By: * May 26, 1999
----------------------------------------------------------------------------
Donald J. Lothrop, Director

By: * May 26, 1999
----------------------------------------------------------------------------
Peter C. Madeja, Director

By: * May 26, 1999
----------------------------------------------------------------------------
David J. Ottensmeyer, Director

By: * May 26, 1999
----------------------------------------------------------------------------
Terence D. Wall, Director

*By: /s/ Patrick A. McBrayer May 26, 1999
----------------------------------------------------------------------------
Patrick A. McBrayer
Attorney-in-Fact
</TABLE>
<PAGE>
EXOGEN, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

1. FINANCIAL STATEMENTS

Report of Independent Public Accountants.............................

Consolidated Balance Sheets as of September 30, 1998 and 1997........

Consolidated Statements of Operations for the years ended
September 30, 1998, 1997, and 1996..............................

Consolidated Statement of Changes in Stockholders' Equity
for the years ended September 30, 1998, 1997, and 1996..........

Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997, and 1996..............................

Notes to Consolidated Financial Statements...........................

2. FINANCIAL STATEMENT SCHEDULES

Schedule II--Valuation and Qualifying Accounts for the years ended
September 30, 1998, 1997, and 1996..............................

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Exogen, Inc.:

We have audited the accompanying consolidated balance sheets of Exogen,
Inc. (a Delaware corporation) and subsidiary as of September 30, 1998 and 1997,
and the related consolidated statements of operations, statements of
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1998. These consolidated
financial statements and the schedule referred to below are the responsibility
of Exogen's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Exogen, Inc. and
subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedules is presented for purposes
of complying with the Securities and Exchange Commission's rules, and is not
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements,
and in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

New York, New York
November 3, 1998
<PAGE>
<TABLE>
EXOGEN, INC.

CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
<CAPTION>
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 9,833 $ 4,018
Short-term investments ....................................... 5,749 4,526
Accounts receivable, net of allowances of $4,349 and $1,786 in
1998 and 1997, respectively ............................. 2,703 3,384
Inventories .................................................. 830 1,515
Interest receivable .......................................... 119 60
Other current assets ......................................... 459 237
-------- --------
Total current assets ............................ 19,693 13,740
Furniture, fixtures and equipment, net ........................... 689 758
Other assets ..................................................... 414 291
-------- --------
Total assets .................................... $ 20,796 $ 14,789
======== ========

<PAGE>
EXOGEN, INC.

CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
<CAPTION>
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 691 $ 463
Accrued liabilities .......................................... 2,903 2,178
Accrued litigation settlement--current ....................... 424 --
Other current liabilities .................................... 150 57
-------- --------
Total current liabilities ....................... 4,168 2,698
Accrued litigation settlement--noncurrent ........................ 331 --
-------- --------
Total liabilities ............................... 4,499 2,698

Commitments and contingencies (Note 8)

Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares
authorized in 1998 and 1997; no shares issued or
outstanding ............................................. -- --
Common Stock, $0.0001 par value; 27,000,000 shares
authorized in 1998 and 1997; 12,703,718 shares issued
and outstanding in 1998 and 9,998,140 shares issued
and outstanding in 1997 ................................. 1 1
Additional paid-in capital ................................... 58,495 46,691
Accumulated other comprehensive loss ......................... (288) (275)
Accumulated deficit .......................................... (41,911) (34,326)
-------- --------
Total stockholders' equity ...................... 16,297 12,091
-------- --------
Total liabilities and stockholders' equity ...... $ 20,796 $ 14,789
======== ========
</TABLE>

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

CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share data)
<CAPTION>
For the years ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales ......................................... $ 11,201 $ 7,081 $ 5,777
Revenues from development agreements .................. 400 400 1,100
-------- -------- --------
Total revenues ................................... 11,601 7,481 6,877
-------- -------- --------
Operating costs and expenses:
Cost of product sales ................................. 4,585 3,864 3,661
Research and development .............................. 2,792 3,124 3,988
Selling, general, and administrative .................. 11,885 12,291 11,030
Nonrecurring charge for international doubtful accounts 800 -- --
-------- -------- --------
Total operating costs and expenses .............. 20,062 19,279 18,679
-------- -------- --------

Operating loss ............................................. (8,461) (11,798) (11,802)

Other income (expense):
Interest income, net .................................. 710 701 1,438
License fee ........................................... 1,000 -- --
Litigation settlement ................................. (851) -- --
Other, net ............................................ 19 (51) (224)
-------- -------- --------
Total other income, net ......................... 878 650 1,214
-------- -------- --------

Loss before income taxes ................................... (7,583) (11,148) (10,588)

Provision for income taxes ................................. 2 4 --
-------- -------- --------

Net loss ................................................... $ (7,585) $(11,152) $(10,588)
======== ======== ========

Basic net loss per common share ............................ $ (0.64) $ (1.12) $ (1.07)
======== ======== ========
Diluted net loss per common share .......................... $ (0.64) $ (1.12) $ (1.07)
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(in thousands)

For the years ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss .................................... $ (7,585) $(11,152) $(10,588)

Other comprehensive loss:
Foreign currency translation adjustments (13) (253) (11)
-------- -------- --------
Total other comprehensive loss .... (13) (253) (11)
-------- -------- --------

Comprehensive loss .......................... $ (7,598) $(11,405) $(10,599)
======== ======== ========

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE>
<TABLE>
EXOGEN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
For the Years Ended September 30, 1998, 1997, and 1996
(in thousands)
<CAPTION>
Common Stock Additional Cumulative
------------------- Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
------ ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995........ 9,850 $ 1 $ 45,938 $ (11) $(12,586) $ 33,342

Issuance of Common Stock........ 39 - 245 - - 245
Exercise of stock options....... 20 - 37 - - 37
Amortization of
nonemployee stock
option compensation.......... - - 52 - - 52
Net loss........................ - - - - (10,588) (10,588)
Other comprehensive
loss--translation
adjustment................... - - - (11) - (11)
------ ------- -------- --------- -------- --------
Balance, September 30, 1996........ 9,909 1 46,272 (22) (23,174) 23,077

Issuance of Common Stock........ 57 - 205 - - 205
Exercise of stock options....... 32 - 12 - - 12
Sale of warrants................ - - 20 - - 20
Amortization of
nonemployee stock
option and warrant
compensation................. - - 182 - - 182
Net loss........................ - - - - (11,152) (11,152)
Other comprehensive
loss--translation
adjustment................... - - - (253) - (253)
------ ------- -------- --------- -------- --------
Balance, September 30, 1997........ 9,998 1 46,691 (275) (34,326) 12,091

Issuance of Common Stock........ 2,688 - 11,578 - - 11,578
Exercise of stock options....... 18 - 10 - - 10
Issuance of warrants............ - - 96 - - 96
Amortization of
nonemployee stock
option and warrant
compensation................. - - 120 - - 120
Net loss........................ - - - - (7,585) (7,585)
Other comprehensive
loss--translation
adjustment................... - - - (13) - (13)
------ ------- -------- --------- -------- --------
Balance, September 30, 1998........ 12,704 $ 1 $ 58,495 $ (288) $(41,911) $ 16,297
====== ======= ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
EXOGEN, INC.

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

<CAPTION>
For the years ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (7,585) $(11,152) $(10,588)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 393 394 330
Amortization of net (discount) premium on short- and
long-term investments ............................. (16) 72 (196)
Amortization of nonemployee stock
option/warrant compensation ....................... 120 182 52
Stock warrant expense--litigation settlement ........... 151 -- --
Provision for losses on accounts receivable ............ 304 250 --
Nonrecurring charge for international
doubtful accounts ................................. 800 -- --
Other adjustments ...................................... (82) 2 14
Decrease (increase) in assets:
Accounts receivable, net ............................... (431) (908) (2,081)
Interest receivable .................................... (59) 142 (158)
Inventories ............................................ 685 (320) 311
Other current assets ................................... (137) 104 (131)
Other assets ........................................... (127) (30) (46)
Increase (decrease) in liabilities:
Accounts payable ....................................... 220 (207) 162
Accrued liabilities .................................... 719 577 637
Litigation settlement liability ........................ 700 -- --
Other current liabilities .............................. 93 (52) 107
-------- -------- --------
Net cash used in operating activities ............. (4,252) (10,946) (11,587)
-------- -------- --------
Cash flows from investing activities:
Purchase of short- and long-term investments ................ (7,972) (1,392) (20,868)
Proceeds from maturity of short- and long-term
investments ............................................... 6,765 8,212 18,532
Purchase of furniture, fixtures and equipment ............... (318) (165) (411)
Other investing activities .................................. -- -- 4
-------- -------- --------
Net cash (used in) provided by investing activities (1,525) 6,655 (2,743)
-------- -------- --------

<PAGE>
EXOGEN, INC.

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

<CAPTION>
For the years ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options ..................... 10 12 37
Proceeds from sale of stock warrants ........................ -- 20 --
Proceeds from sale of Common Stock .......................... 11,578 205 245
Principal payments under capital leases ..................... -- (15) (14)
-------- -------- --------
Net cash provided by financing activities ......... 11,588 222 268
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents ................................................... 4 (28) 1
-------- -------- --------

Net increase (decrease) in cash and cash equivalents ............. 5,815 (4,097) (14,061)
Cash and cash equivalents, beginning of year ..................... 4,018 8,115 22,176
-------- -------- --------
Cash and cash equivalents, end of year ........................... $ 9,833 $ 4,018 $ 8,115
======== ======== ========
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Exogen, Inc. ("Exogen"), was incorporated in New York in January 1992,
was reincorporated in Delaware in February 1993, and began operations in March
1993. Exogen designs, develops, manufactures, and markets medical devices for
the non-invasive treatment of musculoskeletal injury and disease. Exogen's
proprietary ultrasound and mechanical-stress technologies deliver energy that
promotes the growth, repair, and maintenance of bone. These technologies are
based on the principle that bone growth is stimulated by mechanical force.

Exogen markets and sells SAFHS devices in the United States and Europe
and to a distributor in Japan:

o Domestic. In August 1998, Exogen and Smith & Nephew, Inc. entered
into multi-year agreements under which Smith & Nephew obtained
exclusive rights to market Exogen's SAFHS devices in the United
States. (See also Note 9, "License Fee; Agreements with Smith &
Nephew, Inc.," for a further discussion.)

Essentially all Exogen's product sales are generated from sales of the
SAFHS device, and therefore, Exogen is subject to the risks associated with a
single product. The majority of primary payors for significantly all Exogen's
sales are third-party insurers, except for sales in Japan, where Exogen's sole
customer/payor is its distributing partner, Teijin.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Significant Accounting Policies

Consolidated Financial Statements

The consolidated financial statements include the accounts of Exogen,
Inc. and its wholly owned subsidiary. These statements are prepared from records
maintained in the country in which the enterprise is located. All intercompany
transactions and balances are eliminated in consolidation.

Exogen established a German subsidiary, Exogen (Europe) GmbH, in May
1995, and the subsidiary received final incorporation status in August 1995. The
subsidiary began distributing the SAFHS device in Europe in fiscal 1996.

Translation of Foreign Currency

All assets and liabilities of Exogen's foreign operations are
translated to U.S. dollars at year-end exchange rates, while the income
statement is translated at average exchange rates in effect during the year.
Translation adjustments are recorded as a component of stockholders' equity.

Revenue Recognition and Cost of Sales

Upon shipment of the SAFHS device, Exogen records revenue net of the
following:

o allowances for returns of unused devices and

o allowances for pricing adjustments, including those due to
third-party payors limiting, modifying, or denying the amount
charged for SAFHS therapy based on fee schedules or provisions
within patients' insurance policies.

Revenue is recorded at time of shipment of the SAFHS device to the patient. The
price is a one-time flat fee and does not vary based on the time required to
heal a fracture.

When revenue is recognized, Exogen classifies the related costs,
including royalties and projected warranty costs, as cost of sales. Where
reimbursement for the device is not available, no revenue is recognized, and the
cost of the device is recorded as either:

o selling, general, and administrative expense for a device provided
as a professional courtesy to physicians; or

o research and development expense for a device supplied for
preliminary clinical studies.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash and Cash Equivalents and Investments

Exogen considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash, cash
equivalents, and investments consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents
Cash .......................................... $ 1,158 $ 205
Money markets ................................. 2,664 1,557
Commercial paper .............................. 6,011 2,256
------- -------
9,833 4,018
Short-term investments
U.S. Agency notes ............................. -- 1,000
Corporate bonds ............................... 1,720 2,518
Bank notes .................................... 2,400 1,008
Commercial paper .............................. 1,629 --
------- -------
5,749 4,526

Total cash, cash equivalents, and investments ...... $15,582 $ 8,544
======= =======
</TABLE>

As of September 30, 1998 and 1997, these investments are classified as
held to maturity and are stated at amortized cost, which approximates market.

Accounts Receivable

Accounts receivable is recorded net of accumulated allowances for (i)
returns, (ii) pricing adjustments (see also "Revenue Recognition and Cost of
Sales" discussed above), and (iii) bad debt. Management estimates these
allowances based on historical returns, third-party reimbursement, and
collection experience, and also considers changes in economic or other
conditions that could affect the ability of third-party payors to meet their
obligations.

Bad debt expense is classified as a "Selling, general, and
administrative expense," and was $304,000 for fiscal 1998 and $250,000 for
fiscal 1997. In addition, in 1998 Exogen recorded an $800,000 nonrecurring
charge for international doubtful accounts. No bad debt expense was recorded
prior to fiscal 1997; instead, Exogen recorded accounts receivable allowances in
the aggregate as revenue reserves. Because the SAFHS device was new and marketed
only since October 1994, and because historical data segregating the allowances
were not available, Exogen could not segregate, prior to fiscal 1997, the total
of the allowances discussed above into three components.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Of the $2.7 million in "Accounts Receivable, net" at September 30,
1998, approximately 14% was derived from Exogen's operations in Europe,
principally Germany, where Exogen has received limited local reimbursement on a
case-by-case basis. (See Note 10, "Nonrecurring Charge for International
Doubtful Accounts," for a further discussion of international accounts
receivable.)

Inventories

Inventories are stated at the lower of cost or market on a first-in,
first-out basis.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the related assets' estimated
useful lives, which range from two to five years. Leasehold improvements are
recorded at cost, and are amortized using the straight-line method over the
useful life of the asset or the lease term, whichever is shorter. Management
reviews these assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets might not be recoverable.
Exogen has determined that, as of September 30, 1998, no long-lived assets have
been impaired.

Patent Costs

Exogen expenses costs relating to the development of patents as
incurred.

Advertising Costs

Exogen expenses advertising costs as incurred. Advertising expense was
$224,000 in fiscal 1998, $396,000 in fiscal 1997, and $169,000 in fiscal 1996.

Income Taxes

Deferred income taxes are provided for temporary differences between
the financial-statement bases and the tax bases of assets and liabilities. The
taxes recognized are calculated by multiplying the temporary differences by the
tax rates that, according to current tax regulations, will be effective when the
differences are expected to reverse.

Net Loss Per Common Share

Effective fiscal 1998, Exogen adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share," which requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share is computed by dividing net loss by the weighted-average common shares
outstanding for the period. Diluted earnings per share includes options and
warrants, if dilutive. As Exogen has recorded losses during all periods
presented, the options and warrants are antidilutive, and therefore, are not
included in the calculation of diluted earnings per share. Accordingly, Exogen's
basic and diluted net loss per share do not differ for any period presented.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The weighted-average number of shares used in the calculation of basic and
diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Weighted-average shares outstanding ............... 11,860,399 9,945,885 9,874,936
</TABLE>

Net loss per share under the provisions of SFAS 128 for periods prior to fiscal
1998 did not differ from the net loss per share as reported in those prior
periods.

The following table summarizes securities that were outstanding as of September
30, 1998, 1997 and 1996, but not included in the calculation of diluted net loss
per share because such shares are antidilutive:

September 30,
-----------------------------------------------
1998 1997 1996
--------- ------- -------
Options ............... 1,124,635 632,973 490,037
Warrants .............. 180,000 100,000 --

Stock-Based Compensation

Accounting for stock options issued to employees and nonemployee
directors and stock issued pursuant to Exogen's employee stock purchase plan is
based upon the "intrinsic value" method set forth in Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," with
supplemental pro forma disclosures of "fair value" as required by Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."

The "fair value" method of accounting is used for stock options and
warrants issued to consultants. The fair value is calculated using an option
pricing model, and the resultant compensation is recognized over the shorter of
the vesting period or the service period.

Management's Use of Significant Estimates

To prepare financial statements in conformity with generally accepted
accounting principles, management must make estimates and assumptions that
affect:

o the reported amounts of assets and liabilities at the date of the
financial statements and

o the reported amounts of revenues and expenses during the reported
period.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Specifically, the accounts receivable and revenue of Exogen have been reduced by
an estimated reserve for returns and disallowed amounts; additionally, the
accounts receivable has been reduced by an estimated reserve for bad debts.
Also, Exogen's inventory consists primarily of high-technology finished goods
subject to management's estimates as to the need of obsolescence reserves.
Actual results could differ from those estimates.

Recent Pronouncements

Effective fiscal 1998, Exogen adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and displaying comprehensive income and its components (revenue,
expenses, gains, and losses) in a full set of general-purpose financial
statements.

Effective fiscal 1998, Exogen also adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." (See Note 3, "Segment Information," for the disclosures so
required.)

Reclassification

Certain prior year amounts have been reclassified to conform with the
current year's presentation.

3. Segment Information

Effective fiscal 1998, Exogen adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In May 1995, Exogen began operations outside the United States by
establishing a German subsidiary, Exogen (Europe) GmbH, which sells SAFHS
devices in Europe. In March 1998, Exogen began selling SAFHS devices to Teijin
Limited, the distributor responsible for SAFHS sales in Japan. Exogen operates
in one line of business and, therefore, identifies its reportable business
segments on the basis of geography.

For fiscal 1998, 1997, and 1996, segment profit and loss, certain
revenue and expense items, and segment assets are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues from external customers:
United States ............................. $ 9,040 $ 5,781 $ 4,990
Europe .................................... 737 1,300 787
Japan ..................................... 1,424 -- --
Intersegment revenues:
United States ............................. 539 1,219 1,194
Europe .................................... -- -- --
Japan ..................................... -- -- --
Interest income (expense), net:
United States ............................. 710 705 1,439
Europe .................................... -- (4) (1)
Japan ..................................... -- -- --
Provision for income taxes:
United States ............................. 2 4 --
Europe .................................... -- -- --
Japan ..................................... -- -- --
Depreciation and amortization:
United States ............................. 386 386 330
Europe .................................... 7 8 --
Japan ..................................... -- -- --
Provision for losses on accounts receivable:
United States ............................. 304 180 --
Europe .................................... 800 70 --
Japan ..................................... -- -- --
Segment (loss) profit:
United States ............................. (5,881) (10,061) (9,983)
Europe .................................... (2,083) (1,091) (605)
Japan ..................................... 379 -- --
Segment assets (as of September 30):
United States ............................. 20,084 13,041 24,449
Europe .................................... 712 1,748 1,062
Japan ..................................... -- -- --
Expenditures for additions to long-lived assets:
United States ............................. 314 141 409
Europe .................................... 4 24 2
Japan ..................................... -- -- --
</TABLE>
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Management assesses segment performance excluding intersegment
transactions. Therefore, in the segment disclosures above, the total of the
segments equals that disclosed on a consolidated basis.

Intersegment export sales of U.S.-produced goods are based on
established sales prices between the related segments, and are eliminated in
reporting consolidated results. In computing segment profit or loss, management
does not allocate general corporate expenses or interest.

Segment assets for Europe and Japan are those that directly relate to
operations. United States assets consist of all other assets of Exogen,
including unallocated assets.

All Exogen's sales in the Japanese segment are to Teijin, Exogen's only
major customer. Otherwise, sales are to patients, and essentially all
collections on these sales are from third-party payors.

4. Development Agreement Revenues

Exogen recorded revenues of $400,000 in fiscal 1998, $400,000 in fiscal
1997, and $1.1 million in fiscal 1996, related to development agreements with
Teijin Limited, a Japanese corporation. These development agreements cover two
of Exogen's technologies: (i) the SAFHS device and (ii) the mechanical-stress
device under development to treat the loss of bone mass associated with
osteoporosis. Except for $300,000 recorded in fiscal 1996 related to the
mechanical-stress technology, the recorded revenues related to the SAFHS
technology.

The SAFHS agreement provides for nonrefundable milestone payments to
Exogen for Teijin's development of the product for launch in Japan. Exogen is
responsible for manufacturing and supplying SAFHS devices to Teijin for clinical
trials and sales in Japan, while Teijin is responsible for complying with the
regulatory requirements and for marketing and distributing the SAFHS device in
Japan. In the quarter ended June 30, 1998, Teijin announced that the Japanese
Health and Welfare Ministry had approved reimbursement for the SAFHS, which was
the final approval needed to begin commercial distribution of the SAFHS.
Consequently, Teijin paid Exogen the final milestone payment covering the SAFHS
development agreement.

The mechanical-stress agreement provides for nonrefundable milestone
payments to Exogen that will support, in part, Exogen'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.
<PAGE>
5. Inventories

Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997
------ ------
<S> <C> <C>
Finished goods ........................... $ 576 $1,218
Parts and components ..................... 254 297
------ ------
$ 830 $1,515
====== ======
</TABLE>

6. Furniture, Fixtures and Equipment, Net

Furniture, fixtures and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Furniture, fixtures and equipment ................ $ 1,811 $ 1,573
Leasehold improvements ........................... 84 80
------- -------
1,895 1,653
Accumulated depreciation and amortization ........ (1,206) (895)
------- -------
$ 689 $ 758
======= =======
</TABLE>

The related depreciation and amortization expense was $389,000 in
fiscal 1998, $383,000 in fiscal 1997, and $319,000 in fiscal 1996.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
------ ------
<S> <C> <C>
Compensation and benefits .................. $ 944 $ 637
Royalties .................................. 216 103
Taxes other than income .................... 782 446
Warranty expenses .......................... 157 156
Research and development ................... 337 312
Other ...................................... 467 524
------ ------
$2,903 $2,178
====== ======
</TABLE>

8. Commitments and Contingencies

Exogen leases a facility in Piscataway, New Jersey; the lease commenced
May 1995 and has a remaining term of three years. The length of the lease is
subject to adjustment, under certain conditions, as defined in the lease
agreement.

The approximate minimum annual rentals for the above-mentioned lease
are as follows (in thousands):

Operating Lease
---------------
1999.................................................... $ 391
2000.................................................... 396
2001.................................................... 402
-------
$ 1,189
=======

Rent expense was $468,000 in fiscal 1998, $493,000 in fiscal 1997, and
$353,000 in fiscal 1996.

On March 1, 1993, Exogen purchased certain assets related to the SAFHS
ultrasound technology from Interpore Orthopaedics, Inc. ("Interpore") under the
terms of an asset purchase agreement. Concurrently, Exogen acquired a license to
the initial ultrasound United States patent for bone healing under an agreement
dated March 1, 1993 (the "License Agreement"). Under the terms of the asset
purchase agreement, Exogen is obligated to make royalty payments to Interpore
based upon net revenues from sales of devices covered by the initial ultrasound
U.S. patent. Royalty expense was $677,000 in fiscal 1998, $417,000 in fiscal
1997, and $346,000 in fiscal 1996.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Exogen's SAFHS device is currently both manufactured by Exogen and
produced by a contract manufacturer. The agreement between Exogen and this
manufacturer is documented by specific purchase orders, effective through
December 1999, and covers anticipated requirements. As of September 30, 1998,
these purchase orders amounted to commitments of approximately $1.8 million.

In March 1996, Exogen settled a legal action brought against Exogen on
March 15, 1995, by a former sales representative of Exogen. This settlement was
recorded in "Other expense, net."

Litigation Settlement

In September 1998, Exogen recorded an $851,000 charge representing the
settlement of litigation in connection with claims concerning rights to certain
royalties on the sale of SAFHS devices. The claims were brought against Exogen
by former consultants to Interpore Orthopedics, the company from which Exogen
purchased certain SAFHS ultrasound assets at the time of Exogen's formation. The
$851,000 charge includes:

o a noncash warrant, valued at $96,000, issued in September 1998;

o a noncash warrant, valued at $55,000, issued in October 1998; and

o a $700,000 cash payment, outstanding at September 30, 1998.

9. License Fee; Agreements with Smith & Nephew, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

o a definitive agreement specifying, in detail, the obligations of
each party; and

o payments to Exogen over a one-year period for exercising the
option.

The exercise by Smith & Nephew of this option and of the worldwide
distribution option could result in potential additional aggregate payments to
Exogen of $5.0 million.

Rights of First Negotiation. Smith & Nephew has certain rights of first
negotiation through August 2008 in the following areas:

o Exogen's ultrasound or mechanical-stress therapies, or any new
applications of such therapies; and

o a merger, a sale of substantially all of Exogen's assets, or other
similar transaction.
<PAGE>

10. Nonrecurring Charge for International Doubtful Accounts

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. Stock Option Plans and Stockholders' Equity

Stock Option / Stock Issuance Plans

Exogen's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") was
adopted by the Board of Directors and stockholders as of May 25, 1995, for the
purpose of attracting and retaining the services of selected employees
(including officers and directors) and consultants. The Plan is the successor
equity incentive program to Exogen's 1993 Stock Option Plan (the "1993 Plan"),
and options outstanding under the 1993 Plan were incorporated into the 1995
Plan. The 1995 Plan provides for options designated as either nonqualified or
incentive stock options with a term of no more than 10 years. The 1995 Plan
became effective with the Initial Public Offering and will terminate on April
30, 2005, unless sooner terminated by the Board of Directors. A total of
1,350,000 shares of common stock has been authorized for issuance under the 1995
Plan, and 155,611 shares remain available for future grant as of September 30,
1998.

The 1995 Plan is divided into four separate components:

o the Discretionary Option Grant Program, under which employees,
nonemployee directors (other than the members of the Compensation
Committee), and consultants may, at the discretion of the plan
administrator, be granted options to purchase shares of common
stock at an exercise price of not less than the fair market value
of the common stock on the grant date, and under which stock
appreciation rights may be issued that will allow the holders to
surrender their outstanding options for an appreciation
distribution, in cash or common stock, from Exogen;

o the Stock Issuance Program, under which such persons may, in the
plan administrator's discretion, be issued shares of common stock
directly, through the purchase of such shares at a price not less
than the fair market value of the common stock at the time of
issuance or as a bonus tied to the performance of services;

o the Salary Investment Option Grant Program, under which selected
officers and other key executives may elect to have a portion of
their base salaries applied each year to the acquisition of
options to purchase shares of common stock at an aggregate
discount from the then fair market value equal to their salaries'
investment; and

o the Automatic Option Grant Program, under which option grants will
automatically be made at periodic intervals to eligible
nonemployee directors to purchase shares of common stock at an
exercise price equal to 100% of the fair market value of the
common stock on the grant date.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock option activity pursuant to the 1995 Plan is summarized as
follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Shares Average
Shares Exercise Price Exercisable Exercise Price
------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995.............. 349,300 $ 4.98 15,999 $0.02
Granted............................... 173,250 $ 15.27
Exercised............................. (19,989) $ 1.84
Canceled/Forfeited.................... (12,524) $ 4.49
---------
Balance at September 30, 1996.............. 490,037 $ 8.76 86,417 $6.71
Granted............................... 450,175 $ 4.17
Exercised............................. (31,952) $ 0.39
Canceled/Forfeited................... (275,287) $ 11.89
---------
Balance at September 30, 1997.............. 632,973 $ 4.55 119,124 $5.21
Granted............................... 658,250 $ 3.71
Exercised............................. (17,688) $ 0.56
Canceled/Forfeited.................... (148,900) $ 7.18
---------
Balance at September 30, 1998.............. 1,124,635 $ 3.77 254,055 $3.95
=========
</TABLE>

In fiscal 1998, an option to purchase 100,000 of Exogen's common stock
was issued to Exogen's President. The option vests in four consecutive, equal
annual installments starting July 2003; however, the vesting of these options is
subject to acceleration in full as of the close of the first fiscal quarter in
which Exogen achieves quarterly profitability (as defined under the option
agreement).

During fiscal 1998 and 1997, stock options to purchase 48,500 and
148,000 shares of common stock, which were previously issued to certain
consultants and employees with a weighted-average exercise price per share of
$11.12 and $14.96, respectively, were canceled and reissued at the fair market
value of Exogen's common stock on the date of reissuance. The weighted-average
exercise price of the reissued options was $4.18 in fiscal 1998 and $4.15 per
share in fiscal 1997, and the vesting period of these options commenced from the
reissuance date.

Except for the option issued to the President as discussed above,
options generally become exercisable in ratable installments over two- to
five-year periods from the date of grant. In the opinion of management, all
options were issued at the fair market value of Exogen's common stock on the
date of grant, including those issued to the President.
<PAGE>

The following table summarizes information about stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices Sept. 30, 1998 Life Price Sept. 30, 1998 Price
--------------- -------------- ---- ----- -------------- -----
<S> <C> <C> <C> <C> <C>
$0.02 - $0.60 92,935 6.05 years $ 0.39 63,248 $ 0.31
$2.50 - $2.50 150,000 9.92 years $ 2.50 - $ -
$3.00 - $3.00 89,000 9.77 years $ 3.00 - $ -
$3.50 - $3.50 30,400 8.64 years $ 3.50 9,600 $ 3.50
$4.00 - $4.00 229,175 8.29 years $ 4.00 74,245 $ 4.00
$4.13 - $4.31 378,000 9.47 years $ 4.29 25,500 $ 4.24
$4.50 - $4.75 112,000 8.33 years $ 4.73 47,313 $ 4.71
$5.13 - $5.50 21,500 7.35 years $ 5.39 17,690 $ 5.37
$8.00 - $25.50 21,625 7.14 years $ 12.64 16,459 $ 13.89
--------- -------
$0.02 - $25.50 1,124,635 8.81 years $ 3.77 254,055 $ 3.95
========= =======
</TABLE>

There were no direct issuances of common stock or stock appreciation
rights under the 1995 Plan as of September 30, 1998.

Employee Stock Purchase Plan

Exogen's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and stockholders as of May 25, 1995. The Purchase
Plan, which is in accordance with Section 423 of the Internal Revenue Code, is
designed to allow eligible employees of Exogen and participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, through periodic
payroll deductions. Payroll deductions may not exceed 10% of the participant's
total cash earnings in each semi-annual period, and the purchase price per share
will be eighty-five percent (85%) of the lower of (i) the fair market value of
the common stock on the participant's date of entry into the offering period or
(ii) the fair market value on the semi-annual purchase date. The Purchase Plan
will terminate upon the earliest of the following:

o the last business day in July 2005;

o the date on which all shares available for issuance under the
Purchase Plan have been sold pursuant to purchase rights exercised
under the Purchase Plan; or

o the date on which all purchase rights are exercised in connection
with a Corporate Transaction as defined in the Purchase Plan.
<PAGE>
A total of 350,000 shares of common stock has been reserved for
issuance under the Purchase Plan. Shares of stock issued pursuant to the
Purchase Plan during fiscal 1998 was 68,871, fiscal 1997, 56,996, and fiscal
1996, 38,944, at weighted-average purchase prices per share of $3.11 during
fiscal 1998, $3.60 during fiscal 1997, and $6.47 during fiscal 1996. As of
September 30, 1998, 185,189 shares remained available for future grant under the
Purchase Plan.

Stock Warrants

In September 1997, Exogen and a consultant entered into an advisory
agreement whereby the consultant acquired a warrant (at a cost of $0.20 per
share) to purchase up to 100,000 shares of Exogen's common stock at an exercise
price of $4.50 per share. The warrant is fully vested and immediately
exercisable and expires five years after issuance, subject, however, to
expiration on November 1, 1998, in the event that Exogen does not, by July 31,
1998, consummate a strategic partnering transaction relating to the
commercialization of certain of Exogen's non-invasive technologies (each a
"Strategic Partnering Transaction"). Further, for each of the three Strategic
Partnering Transactions described in the advisory agreement and subsequently
entered into by Exogen, the consultant will receive a warrant (at no cost) to
purchase 75,000 shares of Exogen's common stock at an exercise price of $4.50
per share (the "Transaction Warrant"). Such Transaction Warrants, if issued,
would expire five years after issuance. As of September 30, 1998, the warrant to
purchase 100,000 shares was not exercised and no additional warrants were due to
the consultant. In November 1998, the warrant was unexercised and expired, and
Exogen subsequently terminated the advisory agreement. For one year from the
date of termination, the consultant remains eligible to receive two Transaction
Warrants subject to the consummation, if any, of certain strategic partnerships.

In September 1998, in conjunction with a litigation settlement (see
Note 10, "Nonrecurring Charge for International Doubtful Accounts"), Exogen
issued a warrant (at no cost) to one party in the settlement to purchase up to
80,000 shares of Exogen's common stock at an exercise price of $3.12 per share.
The warrant is fully vested and immediately exercisable and expires in July
2003. In October 1998, in connection with the same litigation settlement, Exogen
issued an additional warrant to another party in the settlement to purchase up
to 45,000 shares of Exogen's common stock, under the same terms and conditions.

Fair Value Disclosures

Stock options granted to employees (and nonemployee directors) are set
at the closing price of Exogen's common stock on the date of grant, and the
related number of shares granted are fixed at that point in time. Therefore,
under the principles of APB 25, Exogen does not recognize compensation expense
associated with the grant of such options. Additionally, under provisions of APB
25, employee stock purchase plans such as Exogen's do not require the
recognition of compensation expense. However, under the provisions of SFAS 123,
Exogen is required to use an option valuation model to provide supplemental pro
forma information regarding options granted and stock issued under the employee
stock purchase plan after September 30, 1995.

Stock options and warrants issued to consultants and warrants issued in
connection with the litigation settlement are accounted for under SFAS 123.
Compensation expense recognized for such options and warrants was $271,000 in
fiscal 1998, $182,000 in fiscal 1997, and $52,000 in fiscal 1996.
<PAGE>

The fair value of all options and warrants was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1998, 1997, and 1996, respectively:

o risk-free interest rates of 5.34%, 6.13%, and 5.67%;

o dividend yields of 0%, 0%, and 0%;

o volatility factors for the expected market price of Exogen's
common stock of 41.0%, 38.4%, and 40.6%; and

o expected lives of the options of 3.55 years, 3.55 years, and 4.44
years.

These assumptions resulted in weighted-average fair values of $1.33 (fiscal
1998), $1.45 (fiscal 1997), and $6.17 (fiscal 1996) per share for stock options
and warrants granted to employees (and nonemployee directors) and consultants.

The fair value of shares under Exogen's employee stock purchase plan
was estimated at the subscription date (i.e., "enrollment" date) of participants
into the respective offering periods under the purchase plan. The estimate was
based upon a Black-Scholes option pricing model with the following
weighted-average assumptions for purchase periods during fiscal 1998, 1997, and
1996, respectively:

o risk-free interest rates of 6.05%, 6.05%, and 5.48%;

o dividend yields of 0%, 0%, and 0%;

o volatility factors for the expected market price of Exogen's
common stock of 36.4%, 37.0%, and 50.1%; and

o expected term length of 1.96 years, 1.94 years, and 1.17 years.

Pro forma information regarding net loss and net loss per share, as
shown below, was determined as if Exogen had accounted for its employee stock
options and shares sold under its employee stock purchase plan under the fair
value method of SFAS 123. For purposes of pro forma disclosures, the estimated
fair value is amortized over the applicable vesting periods. Since the SFAS 123
method of accounting has not been applied during fiscal years prior to October
1, 1995, the resulting pro forma compensation expense might not be
representative of that to be expected in future years. Exogen's pro forma
information is as follows (in thousands, except per share information):
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported ...................... $ (7,585) $ (11,152) $ (10,588)
Pro forma ........................ $ (7,968) $ (11,370) $ (10,733)

Net loss per share (basic and diluted):
As reported ...................... $ (0.64) $ (1.12) $ (1.07)
Pro forma ........................ $ (0.67) $ (1.14) $ (1.09)
</TABLE>

Restricted Stock Agreements

All holders of common stock issued prior to Exogen's initial public
offering entered into restricted stock purchase agreements that grant certain
repurchase rights to Exogen upon the sale, assignment, transfer, encumbrance, or
other disposition of Exogen's shares or upon termination of service with Exogen.
The repurchase rights terminate over time with respect to any and all shares in
which the purchaser's interest has vested. As of September 30, 1998, all shares
of common stock issued prior to the initial public offering had vested.

The Stockholder Rights Plan

Exogen's Second Amended and Restated Certificate of Incorporation,
dated July 25, 1995, grants the Board of Directors the authority to issue up to
3,000,000 shares of preferred stock of Exogen, $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 a Preferred Shares Rights
Agreement (the "Rights Agreement") between Exogen and Registrar and Transfer
Company, as Rights Agent (the "Rights Agent"), Exogen's Board of Directors
declared a dividend of one right (a "Right") to purchase one one-hundredth share
of Exogen's Series A Participating Preferred Stock ("Series A Preferred") for
each outstanding share of common stock of Exogen. The dividend was payable on
December 19, 1996 (the "Record Date"), to stockholders of record as of the close
of business on that date. Each Right entitles the registered holder to purchase
from Exogen one one-hundredth of a share of Series A Preferred at an exercise
price of $30.00 (the "Purchase Price"), subject to adjustment in the event
Exogen declares a dividend on the common stock payable in common stock,
subdivides the number of outstanding shares of common stock into a larger number
of such shares, or combines the number of outstanding shares of common stock
into a smaller number of such shares, among other circumstances. In addition,
under certain circumstances described more fully in the Rights Agreement, the
Rights may become exercisable for a number of shares of common stock having a
value equal to two times the Purchase Price.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Rights will expire December 19, 2006, which should give Exogen
adequate time to determine whether any further protection is required. The
Rights may be redeemed by Exogen at the direction of the Board of Directors at
one cent per Right prior to 10 business days after the accumulation, through
open-market purchases, a tender offer, or otherwise, of 15% or more of the
combined number of Exogen's shares of common stock by a single acquirer or
group, and thereafter in certain circumstances. Thus, the Rights should not
interfere with any merger or business combination approved by the Board of
Directors prior to that time.

12. Income Taxes

As a result of the losses generated, Exogen has no provision for income
taxes. Exogen has recorded a full valuation allowance against its deferred tax
assets, because realizability of such asset is predicated upon Exogen's
achieving profitability. The change in valuation allowance was $3,704,000 during
fiscal 1998, $5,050,000 during fiscal 1997, and $3,478,000 during fiscal 1996.

The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax asset and their approximate tax effects are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Asset:
Start-up costs ..................................... $ 244 $ 488
Research and development costs ..................... 548 548
Research and development and related patent acquired 442 7
Vacation accrual ................................... 58 52
Allowances for returns, pricing adjustments, and
bad debts ....................................... 747 650
Net operating loss ................................. 11,133 9,936
German net operating loss .......................... 2,485 1,135
Other .............................................. 1,571 708
-------- --------
Deferred tax asset ................................. 17,228 13,524
Less: Valuation Allowance .............................. (17,228) (13,524)
-------- --------
$ -- $ --
======== ========
</TABLE>

At September 30, 1998, Exogen has net operating loss carryforwards for
United States federal income tax purposes of approximately $27.8 million. These
net operating loss carryforwards expire on various dates beginning 2007.
Exogen's ability to utilize its net operating loss carryforwards is subject to
annual limitations in future periods pursuant to the "change in ownership rules"
under Section 382 of the Internal Revenue Code, as amended. At September 30,
1998, Exogen also has net operating loss carryforwards for German income tax
purposes of $4.9 million, which are not subject to any limitations.
<PAGE>
EXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. Supplemental Disclosure of Cash Flow Information

Cash paid for interest was $7,000 in fiscal 1998, $12,000 in fiscal
1997, and $9,000 in fiscal 1996.

Exogen paid $3,000 in fiscal 1998 and $4,000 in fiscal 1997 in income
taxes, net of refunds, if any. No income taxes were paid in fiscal 1996.
<PAGE>
EXOGEN, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996

Allow. for returns, bad debt,
and pricing adjustments ............ $ 198 $ 1,667 $ - $ 1,519 (a) $ 346

Year ended September 30, 1997 (b)

Allowance for returns ................. $ - $ 563 $ 49 (c) $ 426 (d) $ 186
Allow. for bad debt.................... $ - $ 250 $(51) (c)
$ 1 (e) $ - $ 200
Allow. for pricing adjustments (b)..... $ 346 $ 2,998 $ 2 (c)
$(59) (e) $ 1,887 (f) $ 1,400

Year ended September 30, 1998

Allowance for returns.................. $ 186 $ 676 $ - $ 558 (d) $ 304
Allow. for bad debt.................... $ 200 $ 1,104 $ 69 (e) $ 257 (f) $ 1,116
Allow. for pricing adjustments ........ $ 1,400 $ 2,768 $ 26 (e) $ 1,265 (f) $ 2,929
</TABLE>

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

(a) Returns and write-offs.

(b) At October 1, 1996, the accounts receivable allowances were recorded in
the aggregate. During fiscal 1997, sales provisions and bad debt
expense were segregated and so recorded. At year-end, the allowances
were isolated and classified accordingly.

(d) Returns.

(e) Foreign currency translation adjustments.

(f) Write-offs.
<PAGE>
EXOGEN, INC.

EXHIBIT INDEX
-------------

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

3.1 Second Amended and Restated Certificate of Incorporation of
Exogen. Incorporated by reference to Exhibit 3.1 to Exogen's
Form 10-Q for the third quarter ended June 30, 1995.

3.2 Amended and Restated Bylaws of Exogen. Incorporated by
reference to Exhibit 3.3 to Exogen'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 Exogen defining rights of holders
of common stock of Exogen.

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 Exogen's Form S-1 Registration
Statement (Registration No. 33-92740).

10.3 [RESERVED]

10.4 [RESERVED]

10.5 Form of Consulting Agreements between Exogen and each of Drs.
McLeod and Rubin, as amended. Incorporated by reference to
Exhibit 10.5 to Exogen's Form S-1 Registration Statement
(Registration No. 33-92740).

10.6 Form of Stock Restriction Agreement between Exogen and each of
Drs. McLeod and Rubin and Messrs. Reisner, Ryaby, Talish,
McBrayer, and Bohan. Incorporated by reference to Exhibit 10.6
to Exogen's Form S-1 Registration Statement (Registration No.
33-92740).

10.7 Form of Stock Purchase Agreement between Exogen and each of
Messrs. Reisner, Ryaby, and Talish. Incorporated by reference
to Exhibit 10.7 to Exogen's Form S-1 Registration Statement
(Registration No. 33-92740).

10.8 Manufacturing Agreement dated January 20, 1994, between Exogen
and Hi-Tronics Designs, Inc. Incorporated by reference to
Exhibit 10.8 to Exogen's Form S-1 Registration Statement
(Registration No. 33-92740).
<PAGE>
EXOGEN, INC.

EXHIBIT INDEX
-------------

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

10.9 Form of 1993 Stock Option Plan Option Agreement. Incorporated
by reference to Exhibit 10.9 to Exogen's Form S-1 Registration
Statement (Registration No. 33-92740).

10.10 [RESERVED]

10.11 [RESERVED]

10.12 Lease Agreement dated December 13, 1994, by and between Exogen
and Siemens Medical Systems, Inc. Incorporated by reference to
Exhibit 10.13 to Exogen'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 Exogen's Form S-1 Registration Statement (Registration No.
33-92740).

10.14 SAFHS Agreement dated November 30, 1995, between Exogen and
Teijin Limited. Incorporated by reference to Exhibit 10.14 to
Exogen's Form 10-K for the year ended September 30, 1995.

10.15+ Mechanical-Stress Agreement dated November 30, 1995, between
Exogen and Teijin Limited. Incorporated by reference to
Exhibit 10.15 to Exogen's Form 10-K for the year ended
September 30, 1995.

10.16 Employment Agreement dated March 1, 1997, between Exogen and
Patrick A. McBrayer. Incorporated by reference to Exhibit
10.16 to Exogen's Form 10-Q for the second quarter ended March
31, 1997.

10.17 Severance Agreement, dated May 27, 1997, between Exogen and
John Bohan. Incorporated by reference to Exhibit 10.17 to
Exogen's Form 10-K for the year ended September 30, 1997.

10.18 Common Stock Purchase Agreement, dated October 20, 1997,
between Exogen and certain investors listed on Schedule 1
thereto. Incorporated by reference to Exhibit 10.18 to
Exogen's Form 10-K for the year ended September 30, 1997.

10.19 Registration Rights Agreement, dated October 20, 1997, between
Exogen and certain investors listed on Schedule 1 thereto.
Incorporated by reference to Exhibit 10.19 to Exogen's Form
10-K for the year ended September 30, 1997.

10.20 The 1995 Stock Option / Stock Issuance Plan, as amended on
November 14, 1997. Incorporated by reference to Exhibit 99.1
to Exogen's Form S-8 Registration Statement (Registration No.
333-51731).
<PAGE>
EXOGEN, INC.

EXHIBIT INDEX
-------------

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

10.21 The Employee Stock Purchase Plan, as amended on November 14,
1997. Incorporated by reference to Exhibit 99.9 to Exogen's
Form S-8 Registration Statement (Registration No. 333-51731).

10.22++ Master Agreement, dated August 10, 1998, between Exogen and
Smith & Nephew, Inc.

10.23+/ Common Stock Purchase Agreement, dated August 10, 1998,
between Exogen and Smith & Nephew Holdings, Inc.

10.24** United States Sales Representative Agreement, dated August 10,
1998, between Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.24 to Exogen's Current Report on Form
8-K, dated August 10, 1998.

10.25** License Agreement, dated August 10, 1998, between Exogen and
Smith & Nephew, Inc. Incorporated by reference to Exhibit
10.25 to Exogen's Current Report on Form 8-K, dated August 10,
1998.

10.26 Promissory Note, dated October 6, 1998, issued by Exogen to
Jonathan J. Kaufman. Incorporated by reference to Exhibit 10.1
to Exogen's Current Report on Form 8-K, dated September 30,
1998.

10.27 Promissory Note, dated October 6, 1998, issued by Exogen to
Alessandro Chiabrera. Incorporated by reference to Exhibit
10.2 to Exogen's Current Report on Form 8-K, dated September
30, 1998.

10.28 Warrant to Purchase Common Stock, dated October 9, 1998,
issued by Exogen to Alessandro Chiabrera. Incorporated by
reference to Exhibit 10.3 to Exogen's Current Report on Form
8-K, dated September 30, 1998.

10.29 Registration Rights Agreement, dated October 9, 1998, by and
between Exogen and Alessandro Chiabrera. Incorporated by
reference to Exhibit 10.4 to Exogen's Current Report on Form
8-K, dated September 30, 1998.

10.30 Promissory Note, dated September 30, 1998, issued by Exogen to
Pilla Consulting, Inc. Incorporated by reference to Exhibit
10.5 to Exogen's Current Report on Form 8-K, dated September
30, 1998.

10.31 Warrant to Purchase Common Stock, dated September 30, 1998,
issued by Exogen to Arthur A. Pilla. Incorporated by reference
to Exhibit 10.6 to Exogen's Current Report on Form 8-K, dated
September 30, 1998.
<PAGE>
EXOGEN, INC.

EXHIBIT INDEX
-------------

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

10.32 Registration Rights Agreement, dated September 30, 1998, by
and between Exogen and Arthur A. Pilla. Incorporated by
reference to Exhibit 10.7 to Exogen's Current Report on Form
8-K, dated September 30, 1998.

10.33* Amendment to Employment Agreement, dated October 1, 1998,
between Exogen and Patrick A. McBrayer.

21.1 List of Subsidiary. Incorporated by reference to Exhibit 21.1
to Exogen's Form 10-K for the year ended September 30, 1995.

23.1* Consent of Arthur Andersen LLP.

27* Financial Data Schedule.

99.1 Preferred Shares Rights Agreement, dated December 6, 1996,
between Exogen 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 Exogen's Form 10-K for the year ended
September 30, 1996.

--------------------------
+ Confidential treatment has been granted.
* This exhibit is filed herewith.
** Exogen has applied for confidential treatment of portions
of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
+/ Confidential treatment of this exhibit has been withdrawn.
The exhibit is refiled herewith in its entirety.
++ This exhibit is refiled herewith pursuant to Exogen's
request for confidential treatment.