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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   -----------

                                    FORM 10-K

                 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
                     OF THE SECURITIES EXCHANGE ACT OF 1934

        For the fiscal year ended            Commission file Number
              June 30, 1998                          0-26234

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                             METRA BIOSYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

               California                              33-0408436
    (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)               Identification Number)

              265 North Whisman Road, Mountain View, CA 94043-3911
              (Address of Registrant's principal executive offices)

                                 (650) 903-9100
               (Registrant's telephone number including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

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

                          Common Stock, $.001 Par Value
                         Preferred Share Purchase Rights

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section13 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. |X| Yes |_| 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 the 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 |_|

      At August 31, 1998 there were 12,687,845 shares of Common Stock
outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant was $6,978,819 based upon the closing price of
the Common Stock at August 31, 1998. Shares of Common Stock held by each officer
and director and each person who owns 5% or more of the outstanding Common Stock
have been excluded from this computation in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement of Registrant for the 1998 Annual Meeting
of Shareholders are incorporated in Part III of this Form 10-K.

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                             METRA BIOSYSTEMS, INC.
                                      INDEX

PART I.

Item 1.    Business......................................................      2
Item 2.    Properties....................................................     18
Item 3.    Legal Proceedings.............................................     18
Item 4.    Submission of Matters to a Vote of Security Holders...........     18

PART II.

Item 5.    Market for Registrant's Common Equity and Related Stockholder 
           Matters.......................................................     19
Item 6.    Selected Financial Data.......................................     19
Item 7.    Management's Discussion and Analysis of Financial Condition 
           and Results of Operation......................................     20
Item 8.    Financial Statements and Supplementary Data...................     25
Item 9.    Changes in and Disagreements with Accountants on Accounting 
           and Financial Disclosure......................................     45

PART III.

Item 10.   Directors and Executive Officers of the Registrant............     45
Item 11.   Executive Compensation........................................     45
Item 12.   Security Ownership of Certain Beneficial Owners and 
           Management....................................................     45
Item 13.   Certain Relationships and Related Transactions................     45

PART IV.

Item 14.   Exhibits, Financial Statement Schedules, and Reports on 
           Form 8-K......................................................     46
           Signatures....................................................     49

<PAGE>

                             INTRODUCTORY STATEMENT

      Except for historical information contained in this annual report on Form
10-K, the matters discussed herein are forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. These risks and uncertainties include,
but are not limited to, the risk that the Company's products will not achieve
market acceptance, the Company's reliance upon collaborative relationships and
the intense competition in the market for biochemical markers, as well as the
other risks and uncertainties described herein, under the heading "Risk Factors"
in the Company's Prospectuses dated April 23, 1996 and June 30, 1995,
respectively, delivered in connection with the Company's public offerings, and
as described in the Company's Annual Reports on Form 10-K for the years ended
June 30, 1997 and 1996, and other risks included from time to time in the
Company's other SEC reports and press releases, copies of which are available
from the Company upon request. The Company assumes no obligation to update any
forward-looking statements contained herein. This report on Form 10-K includes
trademarks of companies other than the Company.

                                     PART I

Item 1. BUSINESS

        Metra Biosystems, Inc. (the "Company" or "Metra") is a leader in
developing and commercializing innovative diagnostic products for the detection
and management of metabolic bone and joint diseases and disorders. The Company's
strategy is to offer a portfolio of diagnostic products that provide consumers
and physicians with comprehensive clinical information regarding the metabolism
of bone and other connective tissues. For bone, this includes products that
assess both the "state" of bone health and the "rate" of bone loss, in order to
detect disease and then provide the ability to monitor effective prevention or
treatment. The Company has developed and is currently marketing for either
research or clinical use immunodiagnostic tests to assess bone resorption,
immunodiagnostic tests to assess bone formation, an immunodiagnostic test to
assess bone growth disorders, and an immunodiagnostic test to assess arthritis.
The Company is also currently developing products to serve the doctor's office
testing market that include a portable ultrasound device designed to assess bone
fragility and a bone-resorption test for use in the physicians offices, as well
as serum versions of its Pyrilinks(R) bone resorption tests (currently urine
based).

Business Strategy

      The Company's general business strategy is comprised of certain key
elements: first, the expansion of consumer, physician and managed care awareness
and support regarding proactive bone disease prevention, detection and treatment
management benefits and the adoption of Metra's product alternatives; second,
distribution capabilities in key markets on both a direct basis and with
established diagnostic companies; and, third, continual development,
in-licensing and acquisition of new diagnostic products to complement the
Company's existing products.

      During fiscal 1998, a number of significant events and results that
support the execution of the three basic elements of the Company's business
strategy occurred, including:

      o     More than 200,000 individual calls were made to obstetricians and
            gynecologists as a result of corporate partners' marketing programs.

      o     Approximately a 25% increase in sales of Dpd tests, in both manual
            and automated formats, during fiscal year 1998 compared to fiscal
            year 1997 as a result of both Metra's manual and corporate partners'
            automated Dpd tests being available on a worldwide basis.
            Additionally, in the clinical laboratory market, the Company's
            corporate partners sold approximately six times more automated Dpd
            tests during the fourth quarter of fiscal year 1998 than during the
            fourth quarter of fiscal year 1997.


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      o     The establishment of reimbursement for Osteolinks-DPD through
            Japan's Ministry of Health and Welfare and the launch of this
            product in April 1998 by Sumitomo Pharmaceuticals Co., Ltd., Metra's
            Japanese corporate partner.

      o     The FDA clearance for expanded clinical utility of Metra's tests
            with the increased and primary osteoporosis treatment and prevention
            drugs, including hormone replacement therapy and Merck & Co.'s drug,
            Fosamax(R) (alendronate).

      o     The establishment of guidelines for standardized Federal Medicare
            reimbursement of bone mineral density and ultrasound testing with
            our support of reimbursement groups.

      o     The establishment of state Medicare reimbursement for Metra's
            Pyrilinks(R)-D test in 30 more states and Washington D.C., bringing
            the number of states offering reimbursement to 43.

      The key elements of the Company's strategy are based upon a premise that
currently only a small percentage of the population at risk for certain bone and
connective tissue diseases and disorders, such as osteoporosis, rheumatoid
arthritis (RA), and osteo arthritis (OA), are diagnosed early enough for
preventative treatment to be effective. The Company believes that the historical
lack of consistent therapeutic intervention can be traced in part to the limited
availability of timely, cost-effective and accurate methods to detect and
monitor these diseases. The Company believes the demand for its products will be
driven in part by physicians' need to easily, inexpensively and accurately (i)
identify those persons most at risk before significant onset of these diseases,
(ii) quantify the parameters of each patient's disease progression, (iii)
determine therapeutic dosage and duration of therapy and (iv) monitor the
effectiveness of, and compliance with, prescribed therapies.

Osteoporosis

      The most widespread metabolic bone disease is osteoporosis, a disorder
characterized by a decrease in bone mass that leads to increased susceptibility
to fractures, particularly those of the hip, spine and wrist. There are two
major types of osteoporosis. The most common type is primary osteoporosis, which
includes post-menopausal osteoporosis, resulting from an estrogen deficiency in
women, and senile osteoporosis, an age-related condition primarily affecting men
and women over age 75. Secondary osteoporosis occurs as a side effect of some
medications, or as a consequence of another disease that causes a decrease in
bone mass.

      Osteoporosis is often called the "silent disease" because the process of
bone loss causes no physical symptoms in the earlier stages. In many cases,
doctors and patients are not aware of the problem until certain bones in the
skeletal system have become so weak that a sudden strain, bump, or fall causes a
fracture. If diagnosed early enough, the rate of bone loss can be reduced using
one or a combination of drug therapies, dietary supplements, or changes in
lifestyle. Consequently, diagnosis of bone loss and preventive intervention is
important for a physician to develop an effective care plan for the patient.

      According to the National Osteoporosis Foundation ("NOF"), osteoporosis
afflicts over 28 million Americans and over 200 million people worldwide. In the
United States, approximately 1.5 million osteoporosis-related fractures occur
each year, including more than 250,000 hip fractures, 500,000 vertebral
fractures and 240,000 wrist fractures. For Caucasian women, it is estimated that
the risk of hip fractures approximates the combined risks of breast, endometrial
and ovarian cancers. In addition, approximately one in three women over age 65
will suffer vertebral fractures. By age 75, approximately one-third of all men
will also be affected by osteoporosis. Industry studies estimate that the
lifetime risk of hip fracture in men approximates the risk of prostate cancer.

      In the United States, the annual cost to the Medicare system to treat
fractures among older adults in 1995 was $14 billion. The most severe
osteoporosis-related fracture is that of the hip. Over 95% of
osteoporosis-related hip fractures require hospitalization, between 12% and 20%
result in fatality from other health complications arising from the fractures
and half of the patients who survive are unable to walk unassisted for the rest
of their lives. Another 25% are confined to long-term care under supervised
conditions.


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Other Bone-Related Diseases

      In addition to developing diagnostic tests to assess osteoporosis, assays
for a number of other diseases that can adversely affect bone remodeling (a
metabolic process which consists of bone formation and resorption or loss),
including Paget's disease of bone, cancers that metastasize to bone,
hyperthyroidism, hyperparathyroidism, osteoarthritis, and growth hormone
deficiency are also being developed. Unlike osteoporosis, these diseases do have
physical symptoms that may alert a physician to the possibility of bone loss
and, accordingly, the need to monitor the bone remodeling process with
diagnostic tests.

Therapies for Osteoporosis

      During the past several decades, a number of therapies have been developed
to address bone diseases and disorders. Most of these are prescription
therapies, including hormone replacement therapy ("HRT"), calcitonins and
bisphosphonates, and are focused on preventing further bone loss rather than
systemically forming new bone. Other products include dietary supplements that
are available over-the-counter, such as calcium and vitamin D.

      The Company believes the market for drugs to treat osteoporosis will grow
as a result of several factors, including worldwide aging of the population,
heightened public awareness of osteoporosis, FDA approval of new therapeutics,
and the development and availability of effective diagnostic tests.

            Hormone Replacement Therapy. Hormone replacement therapies, such as
      estrogen and progestin, are the most frequently prescribed drugs given to
      alleviate symptoms in post-menopausal women. HRT products act to decrease
      bone loss (are anti-resorptive) and are also approved for preventive
      treatment of osteoporosis. There are a number of estrogen products
      currently approved by the FDA and available worldwide for use in
      preventing or managing osteoporosis, including Berlex Laboratories'
      Climara, Wyeth-Ayerst Laboratories' Premarin, and Eli Lilly's Evista.

            Calcitonins. Calcitonin acts to slow bone resorption and may be a
      viable substitute for estrogen as an anti-resorptive drug, especially in
      male patients or in those female patients who do not take hormone
      replacement therapy. In the United States, Sandoz Ltd.'s Miacalcin and
      Rhone-Poulenc Rorer Inc.'s Calcimar are FDA-approved calcitonin products.

            Bisphosphonates. Bisphosphonates are approved for the prevention and
      treatment of osteoporosis. Fosamax, a bisphosphonate from Merck & Co.,
      Inc. was approved in late 1995 for the treatment of patients with low bone
      mineral density, and in 1997 expanded the claims to prevention of bone
      loss. Additionally, Didronel, a bisphosphonate from The Procter & Gamble
      Company, is currently approved for use in treating Paget's disease.
      Several next generation bisphosphonates are in various stages of
      development.

            Others. Other products used for the prevention of bone loss include
      vitamin D and calcium supplements such as Citracal, a leading calcium
      supplement from Mission Pharmacal. In addition, injectible vitamin D
      metabolites are a prescribed therapy for preventing bone loss that are
      widely used in Japan but are not approved in the United States. There are
      a number of other new therapies under development, including estrogen
      analogs designed to minimize the side effects of HRT and slow release
      sodium fluoride, which is believed to increase bone mineral density.

            Worldwide osteoporosis sales, which include all therapeutic classes
      previously discussed, is expected to grow at a compound annual rate of 19%
      through 2000. Worldwide sales for 1998 are estimated to exceed $4.0
      billion.

Osteoporosis-Related Diagnostics

      Diagnostics for bone health are based upon two paradigms; first, imaging
technologies which provide a primary assessment of bone density, commonly
referred to as the state of bone health; and second, biochemical tests which
provide real time information on the metabolic process of bone resorption and
formation, or rate of change. The Company believes that as the medical
profession becomes more aware of the diagnostics and therapies available for
bone health, and consumers understand the benefits of early assessment of bone
health, the two types of diagnostics will provide highly complementary
information referred to as the "rate and state".


                                       4
<PAGE>

      Imaging Technologies

      Imaging technologies provide varying degrees of sensitivity for the
assessment of bone mineral density and have traditionally been based on x-ray
technology. The most advanced imaging technique currently available is Dual
Energy X-ray Absorptiometry (DXA), and can be performed as whole body tests or
in partial or peripheral measurements (such as the forearm, wrists, heel bone,
etc).

      Recently, additional technologies, such as ultrasound, have been developed
that have the potential to be less expensive than DXA, do not involve radiation,
and may provide additional diagnostic information concerning bone structure and
quality. Two ultrasound densitometers received FDA clearance to market during
fiscal year 1998.

      Biochemical Tests

      Biochemical tests have been developed that can be used to assess the
dynamic rates of bone resorption and bone formation. Specifically, they measure
certain by-products of the bone remodeling process and through clinical trials,
the manufacturers of such tests have established normal and abnormal ranges.

      The Company believes its biochemical tests can be particularly useful at
the early stages of accelerated bone loss for determining individuals "at risk",
and upon the initiation of therapeutic intervention, to monitor the
effectiveness of the particular therapy.

Arthritis

      Arthritis is generally characterized by joint pain and swelling. There are
more than 100 types of arthritis affecting approximately 40 million people in
the United States. The two most prevalent forms of arthritis are osteoarthritis
("OA") and rheumatoid arthritis ("RA"). Although the causes of OA and RA are
very different, both diseases result in the common problem of joint destruction.

      Osteoarthritis is the most common form of arthritis. The prevalence of
osteoarthritis among individuals aged 45 to 50 is estimated to be approximately
30%, and approaches a 60% prevalence rate for individuals over 65 years of age.
Osteo, or degenerative, arthritis is a disease believed to result from the
breakdown of cartilage in a specific joint or joints and bone proximate to
joints. Osteoarthritis can affect any type of joint, but the disease most
commonly occurs in weight bearing joints such as the hips, knees and spine.

      Rheumatoid arthritis is the second most common form of arthritis. In North
America, it is estimated that two million people are afflicted with this
condition, and in excess of $200 million dollars is spent each year for the care
and treatment of the disease. Rheumatoid arthritis can occur at any age, but the
onset of the disease typically peaks between ages 35 and 45. This disease is
thought to be a systemic autoimmune disorder in which the synovium becomes
inflamed, causing hot, tender, and swollen joints. Only the freely mobile joints
such as hands, feet and knees are affected by this form of arthritis. As the
disease progresses, the cartilage and eventually the bone are destroyed by
various autoimmune-mediated enzymatic responses. This process results in
continuous pain, progressive deformity, and disability.

Arthritis Therapies

      No approved treatments stop or reverse osteoarthritis. Current treatment
for OA is primarily focused on reducing pain, minimizing inflammation, and
improving joint function. Physicians most commonly recommend analgesics to
reduce pain and non-steroidal anti-inflammatory drugs ("NSAIDs") such as
ibuprofen to reduce inflammation. In advanced OA, more invasive measures such as
injection of steroids into the joint space, arthroscopic surgery, and partial or
total joint replacement are examples of treatment options.

      For treatment of RA, physicians commonly prescribe NSAIDs in an effort to
reduce inflammation. Additionally, doctors often prescribe other non-specific
drugs designed to reduce the body's immune response and associated inflammation.
The effectiveness of these therapies is variable from patient to patient, and
may involve various side effects and complications.


                                       5
<PAGE>

      There are numerous pharmaceutical companies working to develop more
effective therapies which include the ability to regenerate cartilage to treat
OA and RA. During the early stages of arthritis, the patient is not necessarily
aware of the progression of the disease until the associated pain and swelling
occurs accompanied by reduced joint mobility. In certain patients who are
experiencing pain, there may be little correlation between the severity of
active disease and the amount of pain. The Company believes that if a
biochemical marker test were introduced and integrated into the overall health
care of a patient, it might help improve early detection of arthritis and enable
more effective treatments with emerging therapies along with subsequent
therapeutic drug monitoring.

Arthritis Diagnostics

      Many non-specific diagnostic tools for OA and RA exist, but are not
disease specific enough for arthritis to confirm a diagnosis of either type of
disease, or accurately assess disease progression. Current diagnosis of
arthritis is based on:

      o     Medical history and a physical examination;

      o     Symptoms, i.e., swelling, red and hot joints, nodules under the
            skin, and stiffness;

      o     X-rays (which are not designed for detection of soft tissue
            disorders) which can detect a pattern of visible damage only after
            multiple exposures; and

      o     In the case of RA, laboratory tests for anemia, low white-blood-cell
            count, rheumatoid factor ("RF") and erythrocyte sedimentation rate
            ("ESR"). Anemia can be an accompanying symptom of rheumatoid
            arthritis but is not caused by or otherwise necessarily correlated
            to arthritis. RF is present in 85% of people with rheumatoid
            arthritis, but also does not necessarily indicate rheumatoid
            arthritis. ESR indicates a systemic inflammatory condition but not
            necessarily rheumatoid arthritis.

Market for Immunodiagnostic Tests

      Diagnostic tests are widely used for both research and routine clinical
use. Academic and clinical researchers in universities, teaching hospitals,
pharmaceutical companies and government research units, such as the National
Institutes of Health, use research products routinely. However, not all research
products are introduced for routine clinical use for many reasons, including a
lack of clinical utility or cost of obtaining regulatory approval.

      Immunodiagnostic tests are performed in a variety of manual or automated
formats. A common format for research and clinical testing is the microtiter
plate format utilizing enzyme immunoassay ("EIA") detection. EIA utilizes an
immune reaction, that is, an antibody reacting with an antigen, and the
detection of the reaction using enzymes that are attached to the reactants as
indicators. Although this technology is considered an established industry
standard, a manual format is relatively slow, has low throughput, and requires
skilled technicians. Instrument systems are in routine use that automate tests
to increase throughput and decrease the cost per test. Most of the widely used
immunodiagnostic tests have been adapted to automated systems. These formats are
used in hospitals and clinical laboratories throughout the world. The Company
believes that, in addition to the automated systems, more convenient and faster
formats are required for physicians' offices or for home use.

Products

      The Company has developed and is currently marketing for research and
clinical use immunodiagnostic tests to assess bone resorption and formation, a
test to assess certain bone growth disorders and an immunodiagnostic test to
assess arthritic disorders. In guidelines to pharmaceutical companies developing
new osteoporosis drugs, the FDA recommends using a combination of three
biochemical markers that together detect both resorption and bone formation to
assess efficacy as part of their pre-clinical and clinical testing. Metra has
developed immunoassays which meet all three of these requirements. Metra's
immunoassays are (i) pyridinium crosslinks, (ii) osteocalcin and (iii)
bone-specific alkaline phosphatase. The Company currently offers tests for each
of these biochemical markers.

      The Company's Pyrilinks tests are proprietary and measure specific
biochemical markers. Although the Company's other tests such as Alkphase-B(R),
NovoCalcin(R), and Prolagen-C(R) measure markers are not proprietary,


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<PAGE>

and similar tests are available from other companies, these tests allow the
Company to offer a more complete line of relevant clinical and research use
tests to measure different aspects of bone metabolism.

      The Company has also just begun to market [for research and clinical use]
QUS(TM)-2, a portable ultrasound product that provides a fast and cost efficient
method for assessing the state of a patient's bone health in the physician's
office.

      The following table identifies the Company's products, their application,
and their current regulatory status in most major markets throughout the world.

          Marketed Products                     Marketing Status
          -----------------                     ----------------

     Bone Resorption
       Pyrilinks(R)-D              o  Cleared for clinical use in US*, Europe,
                                      Japan and Asia/Pacific
                                   o  Available in automated formats through
                                      Chiron Diagnostics (ACS:180 DPD), 
                                      Diagnostic Products Corporation
                                      (IMMULITE(R) PYRILINKS-D) and Bayer
                                      Corporation (Immuno-1 Dpd)
                                   o  Cleared for clinical use in Japan as
                                      Osteolinks-DPD for marketing by Sumitomo
                                      Pharmaceuticals Ltd.
       Pyrilinks(R)                o  Cleared for clinical use in US*, Europe
                                      (outside France), and Asia/Pacific
                                      Research use only in Japan and France
     Bone Formation
       Alkphase-B(R)               o  Cleared for clinical use in US*, Europe
                                      (outside France) and Asia/Pacific
                                   o  Research use only in Japan 
       NovoCalcin(R)               o  Available for clinical use in Europe
                                      (outside France) and Asia/Pacific
                                   o  Research use only in US, Japan and France
     Growth Disorders
       Prolagen-C(R)               o  Available for clinical use in Europe
                                      (outside France) and Asia/Pacific
                                   o  Research use only in US, Japan and France
     Arthritis
       Chondrex(TM)                o  Research use worldwide

     Bone Quality
       QUS(TM)-2 Portable          o  Will be cleared for clinical use in Europe
       Ultrasound device              upon receiving CE mark; investigational
                                      use only in the US

       Products in Development                       Status
       -----------------------                       ------

     Point-of-care version of      o  Development-expected to be available for 
       Pyrilinks-D on Cholestech's    clinical use in fiscal 1999
       LoDoX Immunoassay System
     Serum Pyrilinks               o  Development-expected to be available for
                                      research use in fiscal 1999

----------
*     Received 510(k) clearance from US Food and Drug Administration


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<PAGE>

Sales and Marketing

      The Company's products are currently being marketed internationally for
both clinical and research use. The market for the Company's products consists
of clinical and reference laboratories, academic and clinical researchers in
universities, and physicians. The Company's approach is to initially market the
tests for research purposes to academic and clinical researchers in
universities, teaching hospitals, pharmaceutical companies and government
institutions. As regulatory clearances are obtained for clinical use, clinical
reference laboratories, hospital laboratories, and physicians are also targeted
as customers.

      The Company's marketing and sales strategy for its manual tests is to
provide its products on a worldwide basis either through its direct sales force
in selected countries or through established country specific distributors. The
Company currently has direct operations in the United States, United Kingdom,
and Italy and works with over 30 distributors of diagnostic products throughout
the rest of the world that have established distribution channels. One of the
Company's primary development and distribution alliances is with Sumitomo
Pharmaceuticals Co., Ltd. in Japan. The loss (or poor performance) of one or
more of these distributors or the inability to find new distributors could have
a material effect on the Company's business, financial condition and results of
operations.

      Upon the planned launch of QUS-2 in Europe, the Company intends to broaden
its product base to include providing physicians with a comprehensive diagnostic
service in the form of rate and state bone health diagnosis. QUS-2 will provide
state diagnosis and, currently, specialty testing laboratories will provide
Pyrilinks-D rate of loss testing. Morever, in the near term, when launched,
Metra's Dpd point of care testing product directed to physicians will add to
this program. The Company has limited experience in sales, marketing and
distribution of its products. Accordingly, there can be no assurance that the
Company's direct sales and marketing efforts will be successful.

      International product sales accounted for approximately 74%, 77% and 78%
of product revenues for the fiscal years ended June 30, 1998, 1997, and 1996,
respectively. The Company expects that such sales will continue to account for a
significant portion of the Company's revenues in the future. In order to
successfully manage international sales with an expanded focus on providing a
comprehensive diagnostic service beginning with the launch of QUS-2, the Company
may need to establish additional foreign operations, hire additional personnel
and recruit additional international distributors and commissioned
representatives. This will require significant management attention and
financial resources and could adversely affect the Company's operating margins.
In addition, to the extent the Company is unable to effect these additions in a
timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, there can be no
assurance that the Company will be able to maintain or increase international
sales of the Company's products. The Company's international sales to
distributors are currently denominated in United States dollars. As a result,
increases in the value of the United States dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in markets served by such distributors. For
example, during fiscal year 1998 the Company experienced, in Asia's historically
growing markets, weakened economies that caused, in part, a 27% decrease in
product sales compared to fiscal year 1997. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences including restrictions on the repatriation
of earnings, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance such factors will not have a material adverse effect
on the Company's future international sales and consequently, the Company's
business, financial condition and results of operations.

      The Company provides its products to the market in a microtiter plate
format, commonly referred to as a manual kit, through the Company's direct sales
force or distribution network throughout the world. In order to promote a broad
acceptance of its technology and, in particular, its lead product for bone
resorption, Pyrilinks-D, the Company has established collaborations with a
number of diagnostic companies that have an existing installed base of high
speed, automated laboratory testing systems. These partners include Abbott
Laboratories, Bayer Corporation, Chiron Diagnostics, and Diagnostic Products
Corporation (DPC). Together, these partners represent up to 80% of the installed
base of high throughput, automated immunoassay testing systems. Both Chiron
Diagnostics and DPC in late fiscal 1997 and Bayer Corporation in late fiscal
1998 launched the Company's Pyrilinks-D technology on their automated systems
and commenced marketing and selling efforts. The Company believes that market
adoption of its Dpd test is increasing as unit sales by these automated
corporate partners in the 


                                       8
<PAGE>

fourth quarter of fiscal year 1998 were approximately six times the units sold
during the same quarter in fiscal year 1997. The Company expects Abbott
Laboratories to launch the Pyrilinks-D technology on its automated system after
its 510(k) clearance is received. The Company receives a royalty on sales from
each of these automated partners.

      The Company will increasingly depend on agreements with its partners to
sell the Company's tests in automated formats. In particular, the Company relies
on collaborative partners to adapt the Company's technology to high-volume
automated instruments such as those sold by Abbott, Bayer, Chiron and DPC.
Substantially all of the Company's collaborative agreements are non-exclusive,
and therefore, such partners are free to enter into similar agreements with
third parties, including the Company's competitors. In addition, the Company has
not yet fully developed physician office or home-use adaptations of its products
and there can be no assurance that the Company or its collaborative partners
will complete development of such formats, obtain regulatory approvals, or sell
the Company's tests on their formats. There can be no assurance that any of
these partners will perform their contractual obligations or that such partners
will not terminate their agreements. The failure to adapt the Company's products
to different formats and instruments, or commercialize or co-promote such
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.

      During late fiscal year 1998, the Company signed a cross-licensing
agreement with Beckman Coulter that gave Beckman Coulter the right to develop,
commercialize and sell the Pyrilinks-D test for use on its automated laboratory
analyzer, the ACCESS(R) immunoassay system, in exchange for certain patent
rights. The Company expects to enter into additional collaborative agreements in
the future to develop, commercialize and sell its products. There can be no
assurance that the Company will be able to negotiate acceptable agreements in
the future, or that such new agreements or existing agreements will be
successful. In addition, there can be no assurance that the Company's
collaborative partners will not pursue alternative competing technologies.

      The Company believes that educating patients and physicians about the
long-term health benefits and cost-effectiveness of diagnosis and treatment of
bone diseases and disorders at an early stage is critical to market acceptance
for the Company's products. The Company believes the trend toward management of
health care costs in the United States will lead to increased awareness of and
emphasis on disease prevention, and as a result, will increase demand for
cost-effective diagnostic tests.

      The Company has developed a number of proprietary marketing programs aimed
at educating both patients and physicians including, but not limited to:
establishing collaborative relationships with other pharmaceutical, diagnostic,
and laboratory testing companies; the sponsorship of a clinical summit on bone
health in which leading physicians and researchers from around the world discuss
the current state of assessing all elements of bone health; and numerous other
programs managed within the Company's marketing and sales organization all aimed
at educating patients and physicians.

      In the second half of fiscal 1997, the Company entered into two alliances
in the United States that the Company believes have had some effect on extending
and will further extend Metra's medical educational focus.

      First, a three-way co-promotion agreement with Berlex Laboratories, a
provider of female healthcare products and in particular Climara, a seven-day
estrogen patch currently approved for marketing by the FDA in the US, and,
Norland Medical Systems ("Norland"), a distributor of imaging systems that
provide the current state of bone health. Under the terms of this agreement, the
companies have been marketing to the OB/GYN physicians a suite of products for
the management of the symptoms and problems of menopause for women. To reach the
OB/GYNs, the companies have utilized the direct detail pharmaceutical force of
Berlex Laboratories that call on over 30,000 OB/GYNs. During fiscal 1998, the
Company paid Berlex $3.0 million for promotional activities over the first year
of the promotional agreement, recorded an expense for the fair value of warrants
issued of approximately $0.5 million, and paid commissions on increased sales of
the Company's Pyrilinks-D product.

      Second, the Company entered into an alliance with two parties, Mission
Pharmacal and a leading provider of laboratory testing services, focused on
generating demand through consumers. The launch of this program was delayed due
to the party participating as the leading provider of laboratory testing
services being changed, but is now planned to begin in the near term. Under the
terms of this agreement the companies will work together to educate consumers
about assessing the current rate of bone loss (Metra's Pyrilinks-D), the use of
Citracal, which is the second largest calcium supplement sold over the counter
in the United States and manufactured by Mission Pharmacal, and where to obtain
the laboratory testing to assess the effectiveness of the calcium supplement.
One feature of the program is to include information in every box of Citracal
sold in the United States that discusses the 


                                       9
<PAGE>

elements of the program as outlined. There are no material financial commitments
between the parties to this agreement

      The Company will need to rely on current and any future collaborative
partners to help build market awareness and acceptance of the Company's
products. The Company, together with its partners, will continue to originate
research and clinical studies to demonstrate and explain how the Company's
products relate to improvements in early detection, disease management and drug
compliance. The commercial success of the Company's products will depend upon
their acceptance by the medical community and third-party payers as clinically
useful, cost-effective and safe. Market acceptance will depend on several
factors, including the establishment of clinical utility of these biochemical
tests, the receipt of regulatory clearances where required, the development of
diagnostic tests that can be processed using commercially available automated
systems, the availability of third-party reimbursement, extensive physician
education and the approval and commercial acceptance of therapies for the
treatment of osteoporosis. There can be no assurance that the Company's products
will gain market acceptance. Failure to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Research and Development

      The Company's research and development efforts are currently focused in
four principal areas: (i) development of its ultrasound technology, (ii)
formatting of Metra's existing tests in alternative formats to address different
segments of the diagnostic testing market; (iii) conducting clinical studies
designed to broaden the clinical claims for its existing products; and (iv)
development and or discovery of new, in-licensed or acquired biochemical marker
tests focused in the area of bone and cartilage diseases. The Company's expense
for research and development efforts for the years ended June 30, 1998, 1997 and
1996 was $5.7 million, $5.7 million and $4.3 million, respectively.

      Ultrasound Technology

      In order to offer a broader portfolio of products to provide physicians
with more comprehensive clinical information regarding bone, Metra acquired
Osteo Sciences Corporation, a company developing applications of ultrasound
technology to bone based on proprietary algorithms and product designs. The
Company plans to complete for launch in Europe in fiscal year 1999, QUS-2, a
portable ultrasound device designed to evaluate the state of bone health or
certain characteristics of bone that are associated with bone weakness and bone
quality. The target market for the device will be for physicians' offices or
small group practices. The Company expects this device will provide physicians
and patients with a convenient and cost effective alternative to the currently
available imaging techniques for assessing bone.

      Alternative Test Formats

      The Company believes that less complicated and capital intensive formats
may be more suitable for decentralized testing in physician office laboratories,
small clinics, satellite laboratories and for home use. Metra is reformatting
its lead bone resorption product, Pyrilinks-D, for the Cholestech point-of-care
analyzer (LoDoX) for use in the physicians offices.

      The Company has a collaborative agreement to develop and manufacture its
Pyrilinks-D test in a radioimmunoassay ("RIA") format which was launched for
clinical use in France in May, 1996. Reimbursement was established in France for
both RIA and EIA formats.

      Clinical Studies

      The Company is conducting clinical studies designed to gather data to
submit to the FDA for clearance to market the Company's existing products for
broader clinical claims. The Company is investigating use of its products in
applications including therapeutic drug monitoring, and fracture risk
assessment. During fiscal year 1998, Metra received FDA clearance for expanded
clinical utility of its tests with hormone replacement therapy and Merck & Co.'s
drug, Fosamax(R) (alendronate).


                                       10
<PAGE>

      New Bone and Cartilage Tests

      The Company is funding internal and third-party research and development
efforts designed to identify additional markers for bone and other connective
tissue conditions and develop new immunoassays to measure markers that it
believes will have clinical utility. As new immunodiagnostic tests are
developed, the Company intends to offer them first to researchers, and to the
extent such researchers in the medical community validate the clinical utility
of the new tests, the Company will further develop and commercialize the new
tests based on existing immunodiagnostic testing formats. The Company currently
sponsors research and development at institutions and companies including The
Rowett Research Institute in the United Kingdom and Proteomix, Inc., a
subsidiary of NovaDx International, Inc., in the U.S.

      There can be no assurance that Metra will be successful in developing new
products or that new products developed by the Company will receive necessary
government approval or, if approved, will gain market acceptance. Any failure by
the Company to successfully develop and introduce new products could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Manufacturing

      The Company's manufacturing operations are fully integrated and consist of
antibody production, reagent purification, reagent and microtiter plate
processing, filling, labeling, packaging and distribution. If the Company
experiences significant demand for its products, the Company will have to
manufacture its products in commercial quantities in compliance with regulatory
requirements at acceptable costs, and may require additional capital resources
to develop large-scale manufacturing capabilities. If the Company is unable to
develop large-scale manufacturing capabilities, the Company's competitive
position and financial condition could be adversely affected. Failure to
increase production volumes, if required, in a cost-effective manner or lower
than anticipated yields or production constraints encountered as a result of
changes in the manufacturing process could result in shipment delays as well as
increased manufacturing costs, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

      The majority of raw materials and purchased components used to manufacture
the Company's products are readily available. However, certain of these
materials are obtained from a sole supplier or a limited group of suppliers. The
Company maintains a long-term agreement with one of its key suppliers. The
reliance on sole or limited suppliers and the failure to maintain long-term
agreements with other suppliers involves several risks, including the inability
to obtain an adequate supply of required raw materials and components and
reduced control over pricing, quality and timely delivery. Although the Company
attempts to minimize its supply risks by maintaining an inventory of raw
materials and continuously evaluating other sources, any interruption in supply
could have a material adverse effect on the Company's business, financial
condition and results of operations.

      The Company's business, financial condition and results of operations
could be adversely affected by the inability to obtain working capital,
satisfactory manufacturing facilities, equipment and qualified manufacturing
personnel. In addition, because the Company has received FDA clearance to market
certain of its products for clinical use and its operations undergo current good
manufacturing practices, the Company's manufacturing facilities and its
operations are subject to periodic inspections conducted by the FDA and by State
of California officials. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, suspension or withdrawal
of clearances or approvals, seizures or recalls of products, operation
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or adoption of new regulations could prevent the Company from
obtaining, or affect the timing of, future clearances or approvals. There can be
no assurance that the Company will be able to obtain necessary regulatory
clearances or approvals on a timely basis or at all. Delays in receipt of or
failure to receive such clearances or approvals or loss of previously received
clearances or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.

      In September 1996, the Company received ISO 9001 certification for its
quality management systems. The Company's certification is officially recognized
by European and North American authorities and is accepted worldwide, and will
become a requirement for doing business in some countries in the future.


                                       11
<PAGE>

      The Company faces a risk of exposure to product liability claims in the
event that the use of its products is alleged to have resulted in adverse
effects to a patient. The Company maintains a general insurance policy which
includes coverage for product liability claims. The policy is limited to a
maximum of $1.0 million per product liability claim and an annual aggregate
policy limit of $1.0 million. There can be no assurance that liability claims
will not exceed the coverage limits of such policy or that such insurance will
continue to be available on commercially reasonable terms or at all.
Consequently, a product liability claim or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the Company's business, financial condition and results of operations.

Competition

      Competition in the market for products that diagnose and monitor bone and
other connective tissue diseases and disorders is intense and expected to
increase. The Company currently competes with other medical technology
companies, biotechnology companies, pharmaceutical companies and research and
academic institutions, both in the United States and abroad. Metra believes that
its most significant competitors in the area of biochemical tests include
Bio-Rad Laboratories, a life sciences company, DSL, a diagnostic company that in
1996 received 510(k) clearance from the FDA to market Osteometer's bone
resorption product in the United States; IncStar, a diagnostic company; Quest
Diagnostics, a research laboratory and diagnostic company; Orion, a diagnostic
and pharmaceutical company in Finland; Osteometer, a diagnostic company in
Denmark; Hybritech, a division of Beckman Instruments, a diagnostic company that
in 1996 received 510(k) clearance from the FDA to market its test for bone
specific alkaline phosphatase; and Ostex International, Inc., a diagnostic
company that in 1995 received 510(k) clearance from the FDA to market an
immunoassay for bone resorption. In addition, the Company will compete with
companies that measure the same biochemical markers as Metra using different
testing methods. The most established of these are companies manufacturing high
pressure liquid chromatography (HPLC) assays, including Quest Diagnostics and
Bio-Rad Laboratories. The Company believes that although the HPLC method for
measuring pyridinium crosslinks is extremely accurate, it is primarily a
research tool and is unsuitable for routine clinical use because it has low
throughput, is expensive and labor intensive, and requires skilled technicians.
There can be no assurance, however, that competitors have not developed, or are
not developing, less expensive, more clinically useful HPLC products. In
addition, as the Company licenses its technology to diagnostic companies for use
in alternative formats, tests sold by these licensees will compete with the
Company's products.

      Certain diseases and disorders targeted by the Company's products can also
be diagnosed and monitored using existing imaging technologies, such as DXA.
Although DXA may be considered more expensive and less convenient than tests for
biochemical markers, there can be no assurance that competitors have not
developed, or are not developing, less expensive, more clinically convenient
imaging devices. The Company believes that, at least in their present forms,
current imaging systems and tests for biochemical markers are complementary
because one of Metra's tests can identify a patient's rate of bone resorption,
as compared to imaging analysis, which measures a patient's existing bone
density.

      The Company's ultrasound product has just begun to be marketed in Europe
and is under development in the U.S. The market for this product is expected to
be highly competitive and subject to rapid technological change and evolving
industry requirements and standards. The Company believes that these trends will
continue into the foreseeable future.

      The Company's ultrasound-based diagnostic product could experience
competition from several companies, including Hologic, Inc., IGEA S.r.l., McCue
PLC, Lunar Corporation, Myriad Ultrasound Systems, Ltd., and Osteometer MediTech
AS, have developed ultrasound systems to assess bone fragility. The Company
believes that competition in the field of ultrasound systems is based on price,
precision, speed of measurement, size and ease of operation, product reliability
and quality of service. As the Company's competitors obtain FDA clearance or
approval for ultrasound bone analyzers in the United States before the Company,
it could have a material adverse effect on the Company's ability to introduce
its ultrasound device (if developed), which in turn could have a material
adverse effect on the Company's business, financial condition and results of
operations.

      In addition, other companies have developed ultrasound technology for uses
unrelated to measurement of bone characteristics. There can be no assurance that
such companies will not successfully adapt their technology to the bone field,
and obtain significant market share. The entry of such companies into the market
for the Company's ultrasound product under development could have a material
adverse effect on its business, financial condition and results of operations.


                                       12
<PAGE>

      Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company. In addition, many of these
competitors have substantially greater experience than the Company in research
and development, undertaking clinical trials, obtaining regulatory approvals and
third-party reimbursement and manufacturing, marketing and selling diagnostic
products. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with larger companies.
Furthermore, academic institutions, governmental agencies, and other public and
private research organizations conduct research, seek patent protection and
establish collaborative arrangements for product development and marketing and
therefore could become significant competitors.

      A number of diagnostic tests and procedures for measuring bone metabolism
and other connective tissue diseases and disorders currently exist and others
are in development by other companies. These products, as well as products that
may be developed in the future, may be available for sale prior to the Company's
products, or at a lower cost, or with better technical characteristics,
rendering the Company's products less competitive or obsolete. In addition, as
the Company licenses its technology to diagnostic companies for use in
alternative formats, tests sold by these licensees will compete with the
Company's products. Any product that the Company succeeds in developing and for
which it gains regulatory approval must then compete for market acceptance and
market share. There can be no assurance that competitors' products will not be
found more competitive, either for general use or in specific applications such
as patients with particular medical conditions, or those who are receiving
certain therapies. The Company believes that for all of its immunoassay products
important competitive factors include the relative speed with which companies
can develop products, establish clinical utility, complete the clinical testing
and regulatory approval processes, obtain reimbursement and supply commercial
quantities of the product to the market. The Company's inability to compete
favorably with respect to any of these factors could have a material adverse
effect on its business, financial condition and results of operations.

Patents, Proprietary Rights and Related Litigation Risks

      The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. The Company
owns or has exclusive rights to 19 United States and foreign patents for
biochemical tests, 3 United States patents for ultrasound and 36 pending United
States and foreign patent applications. As a result of in-licensed patents, the
Company pays royalties to the Rowett Research Institute upon sales of the
Company's Pyrilinks products and to Proteomix, Inc. and the Regents of the
University of California ("Regents") upon sales of the Company's Chondrex
product. Additionally, minimum royalties will begin to the Regents in 1999.

      The Company's ability to protect its proprietary position is in part
dependent on the issuance of patents on current and future applications. The
Company currently has applications pending in the United States, Europe, Japan,
Canada and Australia. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions, and therefore,
are highly uncertain. Not all patent applications covering the technology
underlying the Company's products have been issued to date and no assurance can
be given that such and other pending patent applications or any future patent
applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership to the patents and other
proprietary rights held by the Company. The failure of the Company to obtain
issuances of patents that cover the technology underlying the Company's products
or any other outstanding patent applications, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that others have not developed or will
not develop similar products, duplicate any of the Company's products or design
around the Company's patents. In addition, others may hold or receive patents or
file patent applications that contain claims having a scope that covers products
developed by the Company. In the event that any relevant claims of third-party
patents are upheld as valid and enforceable, the Company could be prevented from
practicing the subject matter claimed in such patents or could be required to
obtain licenses from the patent owners of each of such patents or to redesign
its products or processes to avoid infringement. There can be no assurance that
such licenses would be available or, if available, would be on terms acceptable
to the Company or that the Company would be successful in any attempt to
redesign its products or processes to avoid infringement. The Company also
relies upon unpatented trade secrets to protect its proprietary technology, and
no assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent techniques or otherwise gain access
to the Company's proprietary technology or that the Company can ultimately
protect meaningful rights to such unpatented proprietary technology.


                                       13
<PAGE>

      There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry, and although the
Company is not currently engaged in litigation regarding intellectual property
matters, from time to time the Company sends and receives communications to and
from third parties regarding such matters. Litigation, which would result in
substantial cost to and diversion of effort by the Company, may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others or to determine the ownership, scope or validity of the
proprietary rights of the Company and others. An adverse determination in any
such litigation could subject the Company to significant liability to third
parties, could require the Company to seek licenses from third parties, which
licenses may not be available or, if available, may not be on terms acceptable
to the Company, and ultimately could prevent the Company from manufacturing,
selling or using its products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.

      Metra also relies on trade secrets and proprietary know-how in its
manufacturing processes. The Company requires each of its employees, consultants
and advisors to execute a confidentiality agreement upon the commencement of any
employment, consulting or advisory relationship with the Company. Each agreement
provides that all confidential information developed or made known to the
individual during the course of the relationship will be kept confidential and
not disclosed to third parties except in specified circumstances. In the case of
employees, the agreements provide that all inventions conceived by an individual
shall be the exclusive property of the Company, other than inventions unrelated
to the Company and developed entirely on the employee's own time. There can be
no assurance, however, that these agreements will provide meaningful protection
or adequate remedies for misappropriation of the Company's trade secrets in the
event of unauthorized use or disclosure of such information.

Reimbursement

      The Company's ability to successfully commercialize its products depends
in part on the availability of, and the Company's ability to obtain, adequate
levels of third-party reimbursement for use of its diagnostic tests. Although
the Company's products are available for clinical use in many European
countries, reimbursement is not currently available in all of those countries.

      In the United States, the Company has received FDA clearance for
Alkphase-B, Pyrilinks and Pyrilinks-D. Reimbursement for the Company's FDA
cleared tests is in part determined by CPT codes and may vary by state.
Reimbursement under a specific CPT code is available for Alkphase-B and as of
January 1997, for both Pyrilinks and Pyrilinks-D. In the United States, the cost
of medical care is funded, in substantial part, by government insurance
programs, such as Medicare and Medicaid, and private and corporate health
insurance plans. The Company's ability to commercialize its products
successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of such products and related treatment are
obtained from government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). In certain
states, reimbursement levels have been established which the Company believes
are favorable to continued market acceptance for Pyrilinks and Pyrilinks-D.
During fiscal year 1998, the Company worked with reimbursement groups to assist
them with developing guidelines for standardized Federal Medicare reimbursement
of bone mineral density and ultrasound testing. Additionally, state Medicare
reimbursement for the Pyrilinks-D test is now available in 43 states and
Washington, DC. The trend towards managed health care in the United States and
the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for the Company's products.
The cost containment measures that health care providers are instituting and the
impact of any health care reform could have an adverse effect on the Company's
ability to sell its products and may have a material adverse effect on the
Company's business, financial condition and results of operations.

      There can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products. The
unavailability of third-party reimbursement or the inadequacy of the
reimbursement for medical procedures using the Company's tests could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company is unable to forecast what
additional legislation or regulation, if any, relating to the health care
industry or 


                                       14
<PAGE>

third-party coverage and reimbursement may be enacted in the future or what
effect such legislation or regulation could have on the Company's business.

Government Regulation

      The manufacturing, testing, labeling, distribution, marketing, advertising
and promotion of the Company's products are subject to extensive and rigorous
regulation by the FDA and, to varying degrees of regulation, by state and
foreign regulatory agencies. The Company's products are regulated by the FDA
under the Federal Food, Drug and Cosmetic Act (the "Act"), as amended by the
Medical Device Amendments of 1976 and the Safe Medical Devices Act of 1990,
among other laws. Under the Act, the FDA regulates the clinical testing,
manufacturing, labeling, distribution, sale, advertising and promotion of
medical devices in the United States. In addition, various foreign countries in
which the Company's products are or may be sold, including, Germany, France,
Japan and Canada, impose local regulatory requirements. The testing for,
preparation of and subsequent FDA and foreign regulatory review of required
applications is expensive, lengthy and uncertain. Failure to comply with FDA and
similar foreign requirements could result in civil monetary penalties or
criminal sanctions, restrictions on or injunction against marketing of the
Company's products, as well as seizure or recall of the Company's products, or
other regulatory action. There can be no assurance the Company will obtain
necessary regulatory approvals or clearances on a timely basis or at all, and
delays in receipt of or failure to receive such approvals or clearances, the
loss or limitation of previously received approvals or clearances, adoption of
future regulations which may further restrict the production or sales of the
Company's products, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

      The Act, among other things, classifies medical devices into three
categories over which the FDA maintains increasing levels of regulation: Class I
(general controls), II (special controls) and III (premarket approval). Although
most devices new to the marketplace after May 1976 are automatically classified
as Class III, the Company believes that many of Metra's products should be
classified as Class I or II devices and hence, not subject to the requirement of
premarket approval by the FDA. Prior to marketing any of these devices, the
Company is required to submit a 510(k) premarket notification to the FDA and
await the FDA's determination that the product may be marketed. In any 510(k)
premarket notification the Company must, among other things, demonstrate the
product to be marketed is substantially equivalent in performance, formula,
design and intended use to a legally marketed Class I or Class II predicate
device or to a Class III device for which the FDA has not required premarket
approval. Test data from clinical trials may be required to demonstrate
substantial equivalence and that the products are safe and effective, which may
delay the 510(k) premarket notification review period.

      Following submission of a 510(k) premarket notification, a company may not
market the device for clinical use until an order is issued by the FDA finding
the product to be substantially equivalent. The FDA has no specific time limit
by which it must respond to a 510(k) premarket notification. The FDA may agree
that the product is substantially equivalent to a predicate device and allow the
product to be marketed in the United States. The FDA, however, may (i) determine
that the new device is not substantially equivalent and require a premarket
approval application ("PMA"), or (ii) require further information, such as
additional test data, including data from clinical studies, before it is able to
make a determination regarding substantial equivalence. By requesting additional
information the FDA can further delay market introduction of a Company's
products.

      In August 1995, Metra received FDA clearance of its 510(k) premarket
notification for Alkphase-B for use as an aid in the management of patients
diagnosed with Paget's disease. In November 1995, Metra received FDA clearance
of its 510(k) premarket notification for Pyrilinks as a measure of type I
collagen degradation, especially bone collagen. In December 1995, Metra received
FDA clearance of its 510(k) premarket notification for Pyrilinks-D as a measure
of bone resorption. In February and June 1998, Metra received FDA clearance of
its 510(k) premarket notifications for the use of the Pyrilinks-D bone
resorption immunoassay and the Alkphase-B serum-based laboratory test for bone
formation, respectively, to monitor response to anti-resorptive therapies in the
treatment & prevention of osteoporosis (including HRT and Merck & Co.'s drug
Fosamax(R)).

      There can be no assurance that the FDA will act favorably or quickly in
its review of the Company's future 510(k) submissions, if any, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
products in the United States. Furthermore, there can be no assurance that the
FDA will not request additional data, require that the Company conduct further
clinical studies or require a PMA, causing the Company to incur further cost and
delay. In addition, 


                                       15
<PAGE>

there can be no assurance that the FDA will not limit the intended use of the
Company's products as a condition of 510(k) clearance or PMA approval. Further,
if a company wishes to propose modifications to a product after FDA clearance of
a 510(k) premarket notification or approval of a PMA, including changes in
indications or other significant modifications to labeling or manufacturing,
additional clearances or approvals will be required from the FDA. Failure to
receive or delays in receipt of FDA clearances or approvals, including the need
for extensive clinical trials or additional data as a prerequisite to approval,
or any FDA limitations on the intended use of the Company's products, could have
a material adverse effect on the Company's business, financial condition and
results of operations.

      If the FDA indicates that a PMA is required for any of the Company's
products, the application will require the results of extensive clinical
studies, manufacturing information and likely review by a panel of medical
experts outside the FDA. Clinical studies would need to be conducted in
accordance with FDA requirements. Failure to comply with FDA requirements could
result in the FDA's refusal to accept the data or the imposition of regulatory
sanctions. FDA review of a PMA application can take significantly longer than
that for a 510(k) premarket notification. There can be no assurance that the
Company will be able to meet the FDA's PMA requirements or that any necessary
approvals will be received. Failure to obtain necessary regulatory approvals,
the restriction, suspension or revocation of regulatory approvals, if obtained,
or any other failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.

      The Act and California laws also require the Company to be licensed and to
manufacture its products in compliance with current good manufacturing practices
("GMP") regulations. These regulations require that the Company manufacture its
products and maintain related documentation in a prescribed manner with respect
to manufacturing, testing and control activities. The Company is also required
to comply with various FDA requirements for labeling and marketing, and the FDA
prohibits a device, whether or not cleared under a 510(k) premarket notification
or approved under a PMA, from being marketed for unapproved clinical uses. If
the FDA believes that a company is not in compliance with the regulations, it
can institute proceedings to detain or seize a product, issue a recall, prohibit
marketing and sale of the company's products and assess civil and criminal
penalties against the company, its officers or its employees. There can be no
assurance that Metra will receive marketing clearance or approval for any of its
future products or that its manufacturing facility will satisfy GMP or
California manufacturing requirements. The Company's facilities and
manufacturing processes have been periodically inspected by the State of
California and other agencies, but remain subject to audit from time to time.
The Company believes that it is in substantial compliance with all applicable
federal and state regulations. Nevertheless, there can be no assurance that the
FDA or a state agency will agree with the Company's position, or that its GMP
compliance will not be challenged at some subsequent point in time. Enforcement
of the GMP regulations has increased significantly in the last several years and
the FDA has publicly stated that compliance will be more strictly scrutinized.
In the event that the Company is determined to be in noncompliance with FDA
regulations, to the extent that the Company is unable to convince the FDA or
state agency of the adequacy of its compliance, the FDA or state agency has the
power to assert penalties or remedies, including injunction or temporary
suspension of shipment until compliance is achieved. Noncompliance may also lead
to a recall of product. Such penalties or remedies could have a materially
adverse effect on the Company's business, financial condition and results of
operations. In addition, the manufacture, sale or use of the Company's products
are also subject to regulation by other federal entities, such as the
Occupational Safety and Health Agency and the Environmental Protection Agency,
and by various state agencies, including the California Environmental Protection
Agency. Federal and state regulations regarding the manufacture, sale or use of
the Company's products are subject to future change, which changes could have a
material adverse effect on the Company's business, financial condition and
results of operations.

      Distribution of the Company's products outside the United States may be
subject to FDA export and extensive foreign government regulation. These
regulations, including the requirements for approvals or clearance to market,
the time required for regulatory review and the sanctions imposed for
violations, vary from country to country. There can be no assurance that the
Company will obtain regulatory approvals in such countries or that it will not
be required to incur significant costs in obtaining or maintaining its foreign
regulatory approvals. In addition, the export by the Company of certain of its
products which have not yet been cleared for domestic commercial distribution
may be subject to FDA export restrictions. Failure to obtain necessary
regulatory approvals, the restriction, suspension or revocation of existing
approvals or any other failure to comply with regulatory requirements outside
the United States could have a material adverse effect on the Company's
business, financial condition and results of operations.


                                       16
<PAGE>

      Many of Metra's customers using its diagnostic devices for clinical use in
the United States may also be regulated under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality
and reliability of all medical testing in laboratories in the U.S. by requiring
that any health care facility in which testing is performed meet specified
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations have established three levels of
regulatory control based on test complexity; "waived," "moderately complex" and
"highly complex". Metra's Alkphase-B test is categorized as a highly complex
test for clinical use in the United States, and the Company believes that its
other tests will also be categorized as highly complex. Laboratories that
perform either moderately or highly complex tests must meet certain standards
with the major difference in requirements being quality control and personnel
standards. Personnel requirements for highly complex tests are more rigorous
than those for moderately complex tests, requiring that personnel have more
education and experience than personnel conducting moderately complex tests.
Under the CLIA regulations, all laboratories performing high or moderately
complex tests are required to obtain either a registration certificate or
certification of accreditation from the Health Care Financial Administration
("HCFA"). As a result of the CLIA requirements, physician office laboratories
and small volume test sites may be dissuaded from initiating, continuing or
expanding patient testing, particularly if the tests are classified as
moderately or highly complex tests. There can be no assurance that the CLIA
regulations and future administrative interpretations of CLIA will not have an
adverse impact on the potential market for the Company's products.

Employees

      As of June 30, 1998, the Company had 62 full-time employees, 13 of whom
were engaged in, or directly supported, the Company's research and development
activities, 21 of whom were in sales and marketing, 19 of whom were in
manufacturing operations, and 9 of whom were in administration. The Company also
employs several part-time employees and uses outside consultants. The Company
considers relations with its employees to be good. None of the Company's
employees is covered by a collective bargaining agreement.

Executive Officers of the Company

      The following table sets forth certain information with respect to the
executive officers and certain other officers of the Company as of July 1, 1998:

    Name                                Age             Position
    ----                                ---             --------

    George W. Dunbar, Jr...............  51    President, Chief Executive
                                               Officer, Chief Financial Officer,
                                               and Director

    Gerald J. Allen, Ph.D..............  48    Vice President, Research and
                                               Development

    John F. Coombes....................  54    Vice President, Sales & Marketing

    Debby R. Dean......................  42    Vice President, Human Resources
                                               and Administration

      The officers of the Company are appointed by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
the directors or officers of the Company.

      Mr. Dunbar joined the Company as President, Chief Executive Officer and
Director in July 1991. He also became Chief Financial Officer in June 1998.
Prior to joining the Company, he was the Vice President Licensing and Business
Development of The Ares-Serono Group ("Ares-Serono"), a Swiss health care
company that markets pharmaceutical, diagnostic and veterinary products
worldwide, from 1988 until 1991, where he established a licensing and
acquisition group for its health care divisions. From 1974 until 1987, he held
various senior management positions with Amersham International ("Amersham"), a
health care and life sciences company, where he most recently served as Vice
President for its Life Sciences business in North America. Mr. Dunbar also
served as Amersham's General Manager of Pacific Rim markets and Eastern Regional
operations and, prior to that, he managed the international marketing of
Amersham's medical and industrial radioisotopes. Mr. Dunbar also serves as a
director of DepoTech, a public biotechnology company, LJL Biosystems, a life
sciences systems company, 


                                       17
<PAGE>

SONUS Pharmaceuticals, Inc., a public biotechnology company, and Metra
Biosystems (U.K.) Ltd., the Company's wholly owned subsidiary. Mr. Dunbar holds
a B.S. in electrical engineering and an M.B.A. from Auburn University, and sits
on the Auburn School of Business M.B.A. Advisory Committee.

      Dr. Allen joined the Company as Vice President Research and Development in
June 1997. Dr. Allen has worked in the commercial immunoassay industry since
1975 with various companies including Amersham International, Serono
Diagnostics, and G.D. Searle. From 1991 to 1997, Dr. Allen was Vice President
Diagnostics at R & D Systems, Inc. in Minneapolis. Dr. Allen received his B.S.
and Ph.D. degrees from The University of Bristol.

      Mr. Coombes joined the Company in November 1993 as Director, European
Sales. Mr. Coombes was appointed Vice President, Sales and Marketing in June
1997 after serving as Vice President International since August 1996 and
previously as Director, European Operations and Managing Director of Metra
Biosystems (U.K) from November 1994 to August 1996. Previously, Mr. Coombes held
positions in European sales management at T Cell Diagnostics, a division of T
Cell Sciences, a biotechnology company, Digen Limited, a distributor for Gene
Trak Systems, and Gene Trak Systems, a human diagnostics, food industry and
industrial biotechnology company. Mr. Coombes received an Ordinary National
Diploma in chemistry from Bromsgrove College in Worcestershire, England and
Higher National Diplomas in chemistry and analytical chemistry from Lanchester
Polytechnic in Coventry, England.

      Ms. Dean joined the Company as Senior Director of Human Resources and
Administration in September 1995, and was appointed Vice President Human
Resources and Administration in July 1997. From 1992 to 1995, Ms. Dean was Vice
President, Corporate Administration & Communications at DNX Corporation, a
biopharmaceutical company. Prior to DNX, Ms. Dean worked with Serono, as
Director, Human Resources. Ms. Dean received a B.S. in Management from Allentown
College, and an M.B.A. from Lehigh University.

Item 2. PROPERTIES

      Metra currently leases approximately 30,600 square feet of laboratory and
office space at two facilities in Mountain View, California. The Company leases
these facilities under operating leases which last through May 2001, each with a
renewal option that, if exercised, would extend the term of the lease through
May 2003. In addition, the Company leases approximately 1,600 square feet of
office space in Lake Oswego, Oregon under an operating lease which lasts until
December 1998. The Company also leases space in England, Italy and Germany under
operating leases which expire at various times. The Company believes that its
existing facilities will be sufficient for its operational purposes through
1998.

Item 3. LEGAL PROCEEDINGS

      Not Applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not Applicable.


                                       18
<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock is traded on the Nasdaq National Market under
the symbol MTRA. The range of reported high and low bid quotations for the
shares of the Company's Common Stock, as reported by the Nasdaq National Market,
are set forth below for the periods indicated:

   Fiscal 1998      High       Low        Fiscal 1997      High        Low   
   -----------      ----       ---        -----------      ----        ---
   1st Quarter     $ 5.00     $ 3.13      1st Quarter     $ 7.25     $ 4.50
   2nd Quarter     $ 4.38     $ 3.00      2nd Quarter     $ 6.00     $ 3.75
   3rd Quarter     $ 4.13     $ 2.13      3rd Quarter     $ 6.75     $ 3.75
   4th Quarter     $ 3.13     $ 1.69      4th Quarter     $ 5.00     $ 2.63
                                                                  
      The above quotations represent prices quoted between dealers, do not
include retail markup, markdown or commissions and may not represent actual
transactions. On September 14, 1998, the closing price of the Company's Common
Stock was $1.03.

Holders

      As of September 14, 1998 the Company had approximately 125 shareholders of
record, including several holders who are nominees for an undetermined number of
beneficial owners.

Dividends

      The Company has never declared or paid any cash dividends or made any
other cash distribution on its Common Stock, and the Company anticipates that in
the foreseeable future it will follow a policy of retaining any earnings for use
in its business. Any future determination as to declaration and payment of
dividends will be made at the discretion of the Board of Directors.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

      The following selected financial data are derived from consolidated
financial statements of Metra Biosystems, Inc. The consolidated balance sheet as
of June 30, 1998 and 1997 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended June 30, 1998 and 1997,
included elsewhere herein, have been audited by Ernst & Young LLP, independent
auditors. The consolidated balance sheets ended June 30, 1996, 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1996
have been audited by other independent auditors. The data should be read in
conjunction with the consolidated financial statements, related notes, and other
financial information included herein.


                                       19
<PAGE>

<TABLE>
<CAPTION>
                                         1998        1997        1996        1995        1994
                                         ----        ----        ----        ----        ----
                                               (in thousands, except per share amounts)
<S>                                    <C>         <C>         <C>         <C>         <C>     
Consolidated Statement of
Operations Data:
Product sales                          $  6,544    $  6,405    $  4,413    $  2,552    $  1,439
Partner revenue                           1,162         320       2,057         744       2,032
                                       --------    --------    --------    --------    --------
  Total revenues                          7,706       6,725       6,470       3,296       3,471
Total operating expenses (1)             21,597      22,035      29,670      10,436       7,211
Net loss (1)                           $(11,922)   $(13,127)   $(21,399)   $ (6,803)   $ (3,575)

Basic and diluted net loss per share   $  (0.94)   $  (1.04)   $  (2.05)   $  (1.10)   $  (0.70)
Shares used to compute basic and
diluted net loss per share               12,643      12,586      10,449       6,199       5,071

Consolidated Balance Sheet Data:
Working capital                        $ 17,871    $ 30,729    $ 44,231    $  2,759    $  9,803
Total assets                             34,563      47,768      60,193       7,400      12,807
Long-term  portion  of  capital
  lease obligations                         944       1,574       1,367          40          93
Redeemable preferred stock                   --          --          --      23,260      23,260
Total shareholders' equity (deficit)     30,097      42,077      54,424     (17,856)    (11,650)
</TABLE>

(1)   The fiscal 1996 total operating expenses and net loss include $11,291 of
      acquired in-process research and development associated with the
      acquisition of Osteo Sciences Corporation in January, 1996.

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

Overview

      Since its commencement of operations in March 1990, Metra has been engaged
in the development and commercialization of diagnostic products for the
detection and management of metabolic bone and joint diseases and disorders.

      The Company's principal sources of revenue are product sales and partner
revenues. Product sales are principally derived from sales of the Company's
biochemical tests to assess bone resorption, formation and growth disorders for
research as well as clinical use in many other countries, including Germany,
Italy, Japan, and the United Kingdom. In the United States, three of these tests
have received 510(k) clearance from the FDA for clinical use and three others
are being marketed for research use only. Partner revenues result from certain
collaborative relationships and primarily consist of milestone payments,
licensing fees and, during the most recent fiscal year, royalties received from
these partners. Additionally, these revenues include sales to these partners of
proprietary reagents for use with their test formats.

      The Company commenced its clinical marketing efforts in the United States
upon receiving 510(k) clearance for several of its key products in late 1995.
Significant revenues from clinical sales of its products in the United States
will be dependent, in part, upon the rate at which the Company can increase
consumer awareness regarding bone and joint health management and can increase
acceptance of its products among clinicians. Additionally, increased sales
growth and improved product margins depend on the following: the success of the
Company's programs with pharmaceutical partners, adequate levels of third-party
reimbursement for clinical use of its products, the Company's ability to
successfully launch new products, continued sales growth of its manual test
formats, and successful market penetration of automated test formats by the
Company's diagnostic partners to the extent that this substantially increases
overall market demand versus converting the existing manual kit business. There
can be no assurance that the Company can successfully increase consumer and
physician awareness or adoption of its products and failure to do so could have
a material adverse effect on the Company's business, 


                                       20
<PAGE>

financial condition and results of operations. Due to seasonal factors such as
customer and distributor vacations, the Company expects reduced product sales
during the summer months, particularly in Europe. As a result of this seasonal
effect, the Company's revenues could be lower in the quarter ending September 30
than in the other quarters.

      Historically, the Company's revenues have fluctuated significantly.
Partner revenues have fluctuated primarily as a result of the timing of
milestone payments received from corporate collaborations. Product sales have
fluctuated primarily as a result of the introduction of new products, seasonal
variations in demand, the rate of acceptance of the Company's products,
international economic conditions, and variations in the timing and volume of
distributor purchases. The Company expects that total revenues will fluctuate as
a result of these and other factors and that international sales will continue
to account for a significant portion of its revenues in the future. As a result,
the Company expects its results from operations will vary significantly from
quarter to quarter and from year to year and will depend on, among other things,
gaining regulatory clearances in the United States and elsewhere, the rate of
acceptance of the Company's products in the marketplace, the availability of
reimbursement, the timing of fees and milestone payments from its partners in
collaborative relationships, the execution of new collaborative relationships,
costs associated with the development of the Company's new products, and costs
associated with and the financial impact of any mergers and acquisitions. In
fiscal year 1999, the Company plans to reduce current operating costs except
those costs associated with product development completion and the worldwide
launch of its portable ultrasound device.

      The Company's gross margin is affected by a number of factors, including
product mix, product pricing, the extent of diagnostic test sales compared to
reagent sales and royalty revenue, the percentage of direct sales compared to
distributor sales, and manufacturing costs, including overhead and material
costs.


Results of Operations

      Fiscal Years Ended June 30, 1998 and 1997

      Total revenues and product sales for the year ended June 30, 1998
increased to $7,706,000 and $6,544,000, respectively, from $6,725,000 and
$6,405,000, respectively, for the year ended June 30, 1997. The 15% year over
year increase in total revenues resulted primarily from an increase in
non-recurring corporate partner milestone payments and from an increase in the
test units sold worldwide. The Company generated approximately a 25% volume
increase in Dpd tests sold based on broader adoption of the Company's bone
resorption tests for worldwide clinical and research use. However, despite such
increase in volume, the Company experienced only a 2% increase in product sales
as the relative mix of Dpd tests sold is transitioning to automated formats from
product sales resulting from manual formats. The clinical lab segment of the
biochemical marker market is steadily changing how tests are performed from
manual to automated tests. In order to maintain and further establish its
current products in that market, Metra has licensed several corporate partners
to market and sell products in the automated format. The revenues associated
with automated format sales, however, are royalties instead of product sales and
royalties provide income that is only a percentage of the equivalent manual test
product sales. The Company believes that market adoption of its Dpd test is
increasing as unit sales by these automated corporate partners in the fourth
quarter of fiscal year 1998 were approximately six times the units sold during
the same quarter in fiscal year 1997. The overall product adoption rate,
however, has been slower than anticipated, so the Company remains focused on
increasing consumer and physician awareness and acceptance. Product sales were
also negatively impacted during the year ended June 30, 1998 by two other
unrelated factors -- weakened Asian economies and the variable stocking patterns
of several large distributors. International product sales accounted for 74% and
77% of product sales for the fiscal years ended June 30, 1998 and 1997,
respectively.

      Partner revenues for the fiscal year ended June 30, 1998 increased to
$1,162,000 from $320,000 for the fiscal year ended June 30, 1997 due to
non-recurring milestone payments and increased royalties from corporate
partners. The Company earned such milestone payments in connection with Sumitomo
Pharmaceuticals Co., Ltd. establishing reimbursement with Japan's Ministry of
Health and Welfare for Osteolinks-DPD and Bayer Corporation, one of Metra's
automated test corporate partners, commencing sale of its clinical laboratory
assay, the Immuno-1(TM) Dpd test.


                                       21
<PAGE>

      Cost of product sales for the fiscal year ended June 30, 1998 decreased to
$3,737,000 from $3,982,000 for the fiscal year ended June 30, 1997, reflecting a
slightly decreased volume of manual test products sold as well as certain
reduced manufacturing costs. The gross margin on product sales for the fiscal
year ended June 30, 1998 was 43% compared to 38% for the prior fiscal year. The
increased gross margin average was due to increases in average selling prices
resulting from an increased presence in direct markets with higher selling
prices as well as efficiency gains in the Company's production process.

      Research and development expenses for the fiscal year ended June 30, 1998
increased to $5,716,000 from $5,670,000 for the fiscal year ended June 30, 1997.
This increase resulted from incremental development costs associated with the
QUS-2 portable ultrasound device that was part of the Osteo Sciences January
1996 acquisition. During the upcoming fiscal year, the Company expects research
and development expenses to decrease from the current levels as the Company
plans to complete development of the QUS-2.

      Sales and marketing expenses for the fiscal year ended June 30, 1998
increased to $9,523,000 from $8,838,000 for the fiscal year ended June 30, 1997.
The net increase was due to a $3.5 million expense recognized during the current
fiscal year in connection with the Company's Co-Promotion Agreement with Berlex
Laboratories, Inc. ("Berlex"). $3.0 million of this expense covered promotional
activities performed by Berlex that included the utilization of the Berlex
direct detailing pharmaceutical sales force. The remaining $506,000 of this
expense was the fair value of the common stock purchase warrant issued to
Berlex. Additionally, the Company paid Berlex commissions based upon increased
sales of the Company's products. The Berlex program expense was partially offset
by decreased direct promotional marketing expenses when compared to the fiscal
year ended June 30, 1997. During fiscal 1999, the maximum payment to Berlex
could be $2.5 million, not including commissions on increased product sales, and
the maximum warrant issuance will be for the number shares derived from $3.0
million divided by 110% of the average NASDAQ closing price for the 30 trading
days prior to the warrant's date of issuance. The Company and Berlex are
currently in discussions regarding possible changes to the scope and terms of
their commercial relationship under the Co-Promotion Agreement. The Company
believes it is possible that Berlex's activities under the Co-Promotion
Agreement may in the future be reduced in exchange for reduced payments by the
Company, although there can be no assurance that such reductions will be
implemented in the near future, if at all. The Company expects other sales and
marketing expenses to decrease, primarily in the area of medical education, in
the upcoming fiscal year.

      General and administrative expenses for the fiscal year ended June 30,
1998 decreased to $2,621,000 from $3,545,000 for the fiscal year ended June 30,
1997, due to decreased personnel costs and legal and consulting expenses. The
Company expects future general and administrative expenses to approximate
current levels.

      Net interest and other income for the fiscal year ended June 30, 1998
decreased to $1,969,000 from $2,183,000 for the fiscal year ended June 30, 1997
primarily as a result of the investments on which interest was earned during the
current fiscal year being less than the total amounts invested during the
previous fiscal year.

      Fiscal Years Ended June 30, 1997 and 1996

      Product sales for the year ended June 30, 1997 increased to $6,405,000
from $4,413,000 for the year ended June 30, 1996. The increase in product sales
was due to increasing volume from broader adoption of the Company's biochemical
tests for clinical and research use worldwide. The Company's bone resorption
products were cleared for marketing in the U.S. by the FDA in the second fiscal
quarter of 1996. International product sales accounted for 77% and 78% of
product revenues the fiscal years ended June 30, 1997 and 1996, respectively.

      Partner revenues for the fiscal year ended June 30, 1997 decreased to
$320,000 from $2,057,000 for the fiscal year ended June 30, 1996. This decrease
resulted primarily from a decrease in non-recurring milestone payments from
corporate partners, earned upon receipt of FDA clearance of Pyrilinks (November
1995) and Pyrilinks-D (December 1995), which were received in fiscal year 1996.

      Cost of product sales for the fiscal year ended June 30, 1997 increased to
$3,982,000 from $3,276,000 for the fiscal year ended June 30, 1996, reflecting
the increased volume of products sold and associated production costs. The gross
margin on product sales for the fiscal year ended June 30, 1997 was 38%,
compared to 26% for the prior fiscal year. The increase in the gross margin was
due to production volume increases and efficiency gains in the production
process.


                                       22
<PAGE>

      Research and development expenses for the fiscal year ended June 30, 1997
increased to $5,670,000 from $4,308,000 for the fiscal year ended June 30, 1996.
This increase resulted from increased internal product development,
collaborative programs, and the on-going research costs of the ultrasound
program that was acquired in January 1996.

      Sales and marketing expenses for the fiscal year ended June 30, 1997
increased to $8,838,000 from $7,725,000 for the fiscal year ended June 30, 1996.
The increase is due to increased expenses associated with medical education
programs and sales related spending increases at international locations.

      General and administrative expenses for the fiscal year ended June 30,
1997 increased to $3,545,000 from $3,070,000 for the fiscal year ended June 30,
1996, due to increased personnel costs as well as additional legal and
consulting expenses necessary to support the Company's expanded operations.

      Net interest and other income for the fiscal year ended June 30, 1997
increased to $2,183,000 from $1,801,000 for the fiscal year ended June 30, 1996
primarily as a result of the interest earned on the investment of the proceeds
from the Company's follow-on offering in April 1996.

Liquidity and Capital Resources

      The Company has financed its operations from inception primarily through
the sale of preferred and common stock, payments received under collaborative
research and development agreements, sales of the Company's diagnostic products
for research and clinical use and, to a lesser extent, through equipment
financing arrangements. In July 1995, the Company completed its initial public
offering of 3,450,000 shares of common stock. All preferred stock was
automatically converted into shares of common stock upon closing of the
offering. The cash proceeds from the initial public offering, net of
underwriters discounts were $32,085,000. Total additional expenses associated
with the offering were $727,000, resulting in net proceeds from the offering of
$31,358,000. In April 1996, the Company had a follow-on offering of 2,300,000
shares of Common Stock. The cash proceeds from the Company's follow-on offering,
completed April 22, 1996, net of underwriters' discounts were $29,187,000. Total
additional expenses associated with the follow-on offering were $450,000,
resulting in net proceeds to the Company from the follow-on offering of
$28,737,000.

      As of June 30, 1998, the Company had cash and investments of $27,217,000.
During the fiscal year ended June 30, 1998, the Company's use of cash in
operating activities was $10,813,000 compared to $12,515,000 for the fiscal year
ended June 30, 1997. The decrease in cash used in operating activities was due
to the decreased net loss primarily generated by decreased general and
administrative expenses, increased partner revenue and the increased product
gross margin.

      The Company has historically utilized leasing arrangements to finance
capital purchases. As of June 30, 1998, $1,574,000 was outstanding in
conjunction with these leases. The leases are classified as capital leases and
expire in fiscal years 2000 and 2001. The Company's leasing agreements include
negative covenants that require an irrevocable letter of credit in the event of
non-compliance with the covenants.

      The Company's future capital requirements depend upon, among other things,
the costs of research and development programs, the funding of clinical and
regulatory related studies, the expansion of marketing and selling activities,
costs involved in filing, prosecuting and enforcing patent claims, and the time
and costs associated with obtaining regulatory approvals for future products.
Funds may also be used for investments in, or acquisitions of, complementary
businesses, products or technologies and, in the longer term, in expanding the
Company's manufacturing capacity or in improving its existing facilities.
Although the Company believes that its current cash, cash equivalents and
investment securities will be sufficient to meet the Company's operating
expenses and capital requirements through at least fiscal year 2000, the
Company's future liquidity and capital requirements will depend on numerous
factors, including regulatory actions by the FDA and other international
regulatory bodies, market acceptance of its products, the Company's approach to
its marketing and sales activities, the cost of intellectual property protection
and the costs associated with any company or product acquisitions. The Company
may, however, seek additional equity or debt financing to fund further expansion
of its operations, other projects or acquisitions. The timing and amount of such
capital requirements cannot be precisely determined at this time and will depend
on a number of factors, including demand for the Company's products, product mix
changes, industry 


                                       23
<PAGE>

conditions and competitive factors. There can be no assurance that if it becomes
necessary to raise additional capital that such capital will be available on
acceptable terms, if at all.

      The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The primary objective of the
Company's investment activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this
objective, the Company primarily invests in high quality debt instruments with
average maturities of less than one year. A hypothetical 60 basis point increase
in interest rates would result in an approximate $90,000 decrease (less than
0.4%) in the fair value of the Company's available-for-sale securities.

      A substantial majority of the Company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the Company does
enter into these transactions in other currencies, primarily the British pound
and Italian lira. To the extent that foreign currency cash collections from
customers offset foreign currency denominated expenses, the Company's foreign
currency risk is reduced. An adverse change of 10% in the foreign currency
exchange rates is expected to result in an accounting loss before taxes of
approximately $65,000.

      The Company is currently upgrading its financial information system
software to a year 2000 compliant version. The Company plans for the upgrade to
be tested and operational by the end of fiscal year 1999. The Company is
currently assessing the Year 2000 compliance of its other primary computer
system software and is planning to complete any software upgrades required by
the end of fiscal year 1999. The cost of year 2000 initiatives is not expected
to be material to the Company's results of operations or financial position.
Failure to timely complete the Company's Year 2000 initiatives could result in
the Company's primary software being rendered inoperative. The Company is also
currently assessing its third-party relationships to ensure that those parties
have appropriate plans in place to correct any year 2000 issues. While the
Company believes its planning efforts are adequate to address its year 2000
concerns, there can be no assurance that the systems and products of other
companies on which the Company's operations rely will be converted on a timely
basis and will not have a material adverse effect on the Company's results of
operations.


                                       24
<PAGE>

ITEM 8. FINANCIAL STATEMENTS

                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders
Metra Biosystems, Inc.

We have audited the accompanying consolidated balance sheets of Metra
Biosystems, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. Our audit also included the financial statement schedule for the
years ended June 30, 1998 and 1997 listed in the index at Item 14(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Metra
Biosystems, Inc. as of June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein for the year ended June 30, 1998.


                                       ERNST & YOUNG LLP


Palo Alto, California
July 22, 1998


                                       25
<PAGE>

                          Independent Auditors' Report

The Board of Directors and Shareholders
Metra Biosystems, Inc.

We have audited the accompanying consolidated statements of operations,
shareholders equity, and cash flows of Metra Biosystems, Inc. and subsidiaries
(the Company) for the year ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metra Biosystems,
Inc. and subsidiaries as of June 30, 1996, and the results of their operations
and their cash flows for the year ended June 30, 1996, in conformity with
generally accepted accounting principles.


                                                           KPMG PEAT MARWICK LLP


San Francisco, California
July 18, 1996


                                       26
<PAGE>

                             METRA BIOSYSTEMS, INC.

                           Consolidated Balance Sheets
                             June 30, 1998 and 1997
               (in thousands, except share and per share amounts)

                                                             1998        1997
                                                             ----        ----
                         Assets
Current assets:
  Cash and cash equivalents                                $  6,976    $ 11,709
  Short-term investments                                     12,831      18,876
  Accounts receivable, net of allowance for doubtful
    accounts of $180 and $147 at June 30, 1998 and
    1997, respectively                                        1,831       1,576
  Interest receivable                                           275         503
  Inventories                                                   869       1,446
  Prepaid expenses and other current assets                     615         736
                                                           --------    --------

           Total current assets                              23,397      34,846

Property and equipment, net                                   3,302       4,182
Long-term investments                                         7,410       8,555
Other assets                                                    454         185
                                                           --------    --------

                                                           $ 34,563    $ 47,768
                                                           ========    ========

          Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable                                         $  1,058    $  1,068
  Accrued liabilities                                         1,834       2,483
  Current portion of capital lease obligations                  630         566
                                                           --------    --------

           Total current liabilities                          3,522       4,117

Long-term portion of capital lease obligations                  944       1,574

Commitments and contingencies

Shareholders' equity:
  Preferred stock, $0.001 par value, 5,000,000 shares            --          --
    authorized, no shares issued or outstanding
  Common  stock, $0.001 par value, 50,000,000 shares
    authorized; 12,687,845 and 12,628,618 shares
    issued and outstanding at June 30, 1998 and 1997,            13          13
    respectively
  Additional paid-in capital                                 95,329      95,219
  Notes receivable from  shareholders                           (40)        (40)
  Deferred compensation                                         (22)        (70)
  Unrealized loss on investments                               (209)        (13)
  Cumulative translation adjustment                             (36)        (16)
  Accumulated deficit                                       (64,938)    (53,016)
                                                           --------    --------

           Total shareholders' equity                        30,097      42,077
                                                           --------    --------

                                                           $ 34,563    $ 47,768
                                                           ========    ========

          See accompanying notes to consolidated financial statements.


                                       27
<PAGE>

                             METRA BIOSYSTEMS, INC.

                      Consolidated Statements of Operations
                    Years ended June 30, 1998, 1997, and 1996
                    (in thousands, except per share amounts)

                                                   1998       1997       1996
                                                   ----       ----       ----
Revenues:
  Product sales                                  $  6,544   $  6,405   $  4,413
  Partner revenue                                   1,162        320      2,057
                                                 --------   --------   --------

    Total revenues                                  7,706      6,725      6,470
                                                 --------   --------   --------

Operating expenses:
  Cost of product sales                             3,737      3,982      3,276
  Research and development                          5,716      5,670      4,308
  Sales and marketing                               9,523      8,838      7,725
  General and administrative                        2,621      3,545      3,070
  Acquired in-process research and development         --         --     11,291
                                                 --------   --------   --------

    Total operating expenses                       21,597     22,035     29,670
                                                 --------   --------   --------

  Loss from operations                            (13,891)   (15,310)   (23,200)

Interest income                                     1,854      2,430      1,947
Interest expense                                     (201)      (214)      (106)
Other income (expense)                                316        (33)       (40)
                                                 --------   --------   --------

    Net loss                                     $(11,922)  $(13,127)  $(21,399)
                                                 ========   ========   ========

Basic and diluted net loss per share (Note 1)    $  (0.94)  $  (1.04)  $  (2.05)
                                                 ========   ========   ========

          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

                             METRA BIOSYSTEMS, INC.
                 Consolidated Statements of Shareholders' Equity
                    Years ended June 30, 1998, 1997, and 1996
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                      Notes    
                                                          Common Stock            Additional       Receivable
                                                   ---------------------------      paid-in           From    
                                                     Shares           Amount        capital       shareholders
                                                   -----------     -----------    -----------     ------------
<S>                                                <C>             <C>             <C>             <C>
Balances as of June 30, 1995                       $   874,095     $         1    $       990     $      (169)

Issuance of common stock under  employee
  stock option and purchase plans                       98,927              --            205              79
Issuance of common stock related to acquisition
  of Osteo Sciences Corporation                        541,072               1         10,000              -- 
Conversion of preferred stock into common stock      5,324,685               5         23,255              -- 
Conversion of warrants into common stock                 9,989              --             --              -- 
Issuance of common stock related to public
  offerings                                          5,750,000               6         60,089              -- 
Amortization of deferred compensation                       --              --             --              -- 
Translation adjustment                                      --              --             --              -- 
Unrealized loss on investments                              --              --             --              -- 
Net loss                                                    --              --             --              -- 
                                                   -----------     -----------    -----------     -----------
Balances as of June 30, 1996                        12,598,768              13         94,539             (90)

Issuance of common stock under employee
  stock option and purchase plans                       46,344              --            157              50
Repurchase of common stock                             (16,494)             --            (20)             -- 
Deferred compensation relating to granting
  of stock options                                          --              --             37              -- 
Amortization of deferred compensation                       --              --             --              -- 
Issuance of warrants                                        --              --            506              -- 
Translation adjustment                                      --              --             --              -- 
Unrealized gain on investments                              --              --             --              -- 
Net loss                                                    --              --             --              -- 
                                                   -----------     -----------    -----------     -----------
Balances as of June 30, 1997                        12,628,618              13         95,219             (40)

Issuance of common stock under employee
  stock option and purchase plans                       60,269              --            111              -- 
Repurchase of common stock                              (1,042)             --             (1)             -- 
Amortization of deferred compensation                       --              --             --              -- 
Translation adjustment                                      --              --             --              -- 
Unrealized gain (loss) on investments                       --              --             --              -- 
Net loss                                                    --              --             --              -- 
                                                   -----------     -----------    -----------     -----------

Balances as of June 30, 1998                        12,687,845     $        13    $    95,329     $       (40)
                                                   ===========     ===========    ===========     ===========

<CAPTION>
                                                                                                                      Total
                                                                   Unrealized      Cumulative                      shareholders'
                                                    Deferred         loss on       translation     Accumulated       equity
                                                  compensation     investments      adjustment       deficit        (deficit)
                                                  ------------     -----------     -----------     -----------     -----------
<S>                                                <C>             <C>             <C>             <C>             <C>        
Balances as of June 30, 1995                       $      (187)    $        (1)    $        --     $   (18,490)    $   (17,856)

Issuance of common stock under employee
  stock option and purchase plans                           --              --              --              --             284
Issuance of common stock related to acquisition
  of Osteo Sciences Corporation                             --              --              --              --          10,001
Conversion of preferred stock into common stock             --              --              --              --          23,260
Conversion of warrants into common stock                    --              --              --              --              --
Issuance of common stock related to public
  offerings                                                 --              --              --              --          60,095
Amortization of deferred compensation                      108              --              --              --             108
Translation adjustment                                      --              --              13              --              13
Unrealized loss on investments                              --             (82)             --              --             (82)
Net loss                                                    --              --              --         (21,399)        (21,399)
                                                   -----------     -----------     -----------     -----------     -----------
Balances as of June 30, 1996                               (79)            (83)             13         (39,889)         54,424

Issuance of common stock under employee
  stock option and purchase plans                           --              --              --              --             207
Repurchase of common stock                                  --              --              --              --             (20)
Deferred compensation relating to granting
  of stock options                                         (37)             --              --              --              --
Amortization of deferred compensation                       46              --              --              --              46
Issuance of warrants                                        --              --              --              --             506
Translation adjustment                                      --              --             (29)             --             (29)
Unrealized gain on investments                              --              70              --              --              70
Net loss                                                    --              --              --         (13,127)        (13,127)
                                                   -----------     -----------     -----------     -----------     -----------
Balances as of June 30, 1997                               (70)            (13)            (16)        (53,016)         42,077

Issuance of common stock under employee
  stock option and purchase plans                           --              --              --              --             111
Repurchase of common stock                                  --              --              --              --              (1)
Amortization of deferred compensation                       48              --              --              --              48
Translation adjustment                                      --              --             (20)             --             (20)
Unrealized gain (loss) on investments                       --            (196)             --              --            (196)
Net loss                                                    --              --              --         (11,922)        (11,922)
                                                   -----------     -----------     -----------     -----------     -----------

Balances as of June 30, 1998                       $       (22)    $      (209)    $       (36)    $   (64,938)    $    30,097
                                                   ===========     ===========     ===========     ===========     ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       29
<PAGE>

                             METRA BIOSYSTEMS, INC.

                      Consolidated Statements of Cash Flows
                    Years ended June 30, 1998, 1997, and 1996
                Increase (decrease) in cash and cash equivalents
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                               1998         1997         1996
                                                                             --------     --------     --------
<S>                                                                          <C>          <C>          <C>      
Cash flows from operating activities:
  Net loss                                                                   $(11,922)    $(13,127)    $(21,399)
    Adjustments to reconcile net loss to net cash used
      in operating activities:
        Depreciation and amortization                                           1,264        1,295          610
        Warrants issued in connection with marketing activities (Note 10)         506           --           --
        Compensation expenses paid in stock                                        48           46          108
        Forgiveness of notes receivable from officers                              39           37           29
        Loss on disposition of property and equipment                              74           52           19
        Write-off of in-process research and development                           --           --       11,291
        Changes in operating assets and liabilities:
          Trade accounts and interest receivable                                  (27)        (235)      (1,284)
          Inventories                                                             577         (406)        (402)
          Other current assets and other assets                                  (713)         265       (1,046)
          Accounts payable and accrued expenses                                  (659)        (442)       1,344
                                                                             --------     --------     --------
            Net cash used in operating activities                             (10,813)     (12,515)     (10,730)
Cash flows from investing activities:
  Purchases of investments                                                    (25,659)     (28,111)     (46,837)
  Maturities of investments                                                    32,653       33,780       14,725
  Purchases of property and equipment, net                                       (469)      (1,215)      (3,048)
  Proceeds from sale of property and equipment                                     11           --           --
  Repayment of notes receivable from officers                                      --           50           79
                                                                             --------     --------     --------

            Net cash provided by (used in) investing activities                 6,536        4,504      (35,081)
Cash flows from financing activities:
  Proceeds from capital lease financing                                            --          847        1,922
  Repayment of capital lease obligations                                         (566)        (481)        (240)
  Proceeds from sales of common stock, net                                        110          137       61,029
                                                                             --------     --------     --------

            Net cash provided by (used in) financing activities                  (456)         503       62,711
                                                                             --------     --------     --------
Net increase (decrease) in cash and cash equivalents                           (4,733)      (7,508)      16,900

Cash and cash equivalents at beginning of year                                 11,709       19,217        2,317
                                                                             --------     --------     --------

Cash and cash equivalents at end of year                                     $  6,976     $ 11,709     $ 19,217
                                                                             ========     ========     ========

Supplemental disclosure of cash flow information:
  Cash paid during the year for interest                                     $    201     $    214     $    106

Supplemental disclosure of non-cash investing and financing activities:
  Assets acquired from purchase of Osteo Sciences Corporation                $     --     $     --     $   (605)
  Liabilities assumed from purchase of Osteo Sciences                        $     --     $     --     $    686
  Issuance of warrants under Co-Promotion agreement (Note 10)                $     --     $    506     $     --
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>

                             METRA BIOSYSTEMS, INC.

                   Notes to Consolidated Financial Statements
                                  June 30, 1998

(1) The Company and Summary of Significant Accounting Policies

(a) The Company

      Metra Biosystems, Inc. ("Metra" or the "Company"), a California
corporation, is engaged in the development and commercialization of diagnostic
products for the detection and management of metabolic bone and joint diseases
and disorders. The Company primarily markets its products for clinical and
research use in Europe, the United States and Pacific Rim countries.

(b) Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The operations of Osteo
Sciences Corporation are included in the Company's results of operations
beginning February 1, 1996 (see note 14).

(c) Cash and Cash Equivalents

      The Company considers all highly liquid debt instruments purchased with an
original maturity of less than three months to be cash equivalents.

(d) Investments

      The Company's policy is to protect the value of its investment portfolio
and to minimize principal risk by earning returns based on current interest
rates. The Company, by policy, invests primarily in highly rated debt
instruments and limits the amount of investment with any one issuer. The
Company's marketable investments are classified as available-for-sale as of the
balance sheet date and are reported at fair value, with unrealized gains and
losses recorded as a separate component of shareholders' equity. The cost of
securities sold is based on the specific identification method. Realized gains
or losses and declines in value, if any, judged to be other than temporary on
available-for-sale securities are reported in other income or expense. Fair
values of cash and cash equivalents approximate cost due to the short period of
time to maturity. Fair values of long-term and short-term investments are based
on quoted market prices.

(e) Major Customers and Concentrations of Credit Risk

      Financial instruments that potentially expose the Company to a
concentration of credit risk consist primarily of investments and trade accounts
receivable. As of June 30, 1998, one distributor had a balance that was 23% of
accounts receivable and as of June 30, 1997, no single customer accounted for
greater than 10% of accounts receivable. To reduce credit risk, the Company
performs ongoing credit evaluations of its customers' financial condition. The
Company does not generally require collateral on credit sales to its customers.

      The Company earns revenues primarily through product sales through
distributors and through collaborative agreements with partners. Product
revenues from one distributor constituted 14%, 15% and 12% of total revenues for
the years ended June 30, 1998, 1997 and 1996, respectively. For the year ended
June 30, 1998 one corporate partner constituted 10% of total revenues, including
a milestone payment and product sales, for the year ended June 30, 1997 no
corporate partner constituted greater than 10% of total revenues and for the
year ended June 30, 1996 one corporate partner constituted 16% of total revenues
with that revenue related to milestone payments.

(f) Inventories

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


                                       31
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(1) The Company and Summary of Significant Accounting Policies (Continued)

(g) Property and Equipment

      Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, which generally range from three to five years. Assets under capital
leases and leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful lives of the related
assets.

(h) Revenue Recognition

      Revenue from development contracts is recognized as the relevant technical
milestones are attained. Revenue from licensing is recognized when the
nonrefundable fees are received and the license is executed. Revenue from
product sales, net of estimated product returns, is recognized upon product
shipment when title passes to the buyer.

(i) Partner Revenue

      Partner revenue consists principally of milestone payments, licensing
fees, royalties, and proceeds from sales of reagents to collaborative partners
for research purposes.

(j) Promotion and Advertising Costs

      All costs related to marketing and production costs of promoting and
advertising the Company's products are expensed in the period incurred.

(k) Foreign Currency

      Foreign currency transactions and financial statements are translated into
U.S. dollars at current rates, except that revenue, costs and expenses are
translated at average rates during each reporting period. Gains and losses
resulting from foreign currency transactions and intercompany balances expected
to be paid in the foreseeable future are included in results of operations.
Gains and losses resulting from translation of financial statements are excluded
from results of operations and are reflected as a cumulative translation
adjustment, which is reported as a separate component of shareholders' equity.
The Company has sales denominated in foreign currencies, primarily the British
pound and the Italian lira. The Company offsets the foreign currency exposure of
these sales with expenses denominated in local currencies. The Company does not
utilize foreign currency forwards or options to manage the foreign currency
exposure. As of June 30, 1998, the Company has not experienced material gains or
losses from foreign currency fluctuations.

(l) Basic and Diluted Net Loss Per Share

      In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary and fully diluted earnings per share, non-vested stock is not
considered to be outstanding for the purposes of computing basic and diluted
earnings per share. However, for the purpose of computing dilutive earnings per
share during periods of income, the dilutive effect of non-vested stock is
included using the treasury stock method for periods with income. The Company
has restated net loss per share, where appropriate, to conform to the
requirements of Statement 128. The following table sets forth the computation of
net loss per share:


                                       32
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

<TABLE>
<CAPTION>
                                                                       1998         1997          1996
                                                                     --------     --------      --------
                                                                               (in thousands)
<S>                                                                  <C>          <C>          <C>      
      Numerator for basic and diluted net loss per share:

      Net loss                                                       $(11,922)    $(13,127)    $(21,399)
                                                                     ========     ========     ======== 
      Denominator:

      Weighted average shares                                          12,652       12,610       10,515

      Weighted  average  non-vested  shares subject to repurchase          (9)         (24)         (66)
                                                                     --------     --------     -------- 
      Denominator  for basic and  diluted net loss per share           12,643       12,586       10,449
                                                                     ========     ========     ======== 
      Basic and diluted net loss per share                           $  (0.94)    $  (1.04)    $  (2.05)
                                                                     ========     ========     ======== 
</TABLE>

      The Company has securities outstanding that could dilute basic earnings
per share in the future that were not included in the computation of diluted net
loss per share in the periods presented as their effect is antidilutive. As of
June 30, 1998, the Company has the following potentially dilutive securities
outstanding (shares in thousands):

      Stock options                              1,178,572

      Non-vested shares subject to repurchase        2,084

      Warrants                                     413,233

      These potentially dilutive securities would be included in the computation
of diluted earnings per share upon certain events including the Company
achieving profitability and increases in the market price of the Company's
stock.

(m) Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts could differ from those estimates.

(n) Stock-Based Compensation

      In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). As permitted by SFAS 123, the Company
accounts for stock options under the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the
Company does not record compensation expense for stock option grants to
employees and directors when the exercise price equals or exceeds the market
price of the Company's common stock on the date of grant. The Company recognizes
compensation expense for options granted to consultants and other non-employees
based upon the fair value of the options granted at the grant date. Such amounts
have not been material in any period presented.


                                       33
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(2) Investments

      Investments consisted of the following at June 30:

<TABLE>
<CAPTION>
                                                   1998                                                1997
                              -----------------------------------------------     -----------------------------------------------
                                          Unrealized   Unrealized     Fair                    Unrealized   Unrealized     Fair
                                Cost        Gains        Losses       Value         Cost        Gains        Losses       Value
                              --------    ----------   ----------    --------     --------    ----------   ----------    --------
                                                                        (in thousands)
                                                                        --------------
<S>                           <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>     
Corporate bonds & notes       $  9,119     $     10     $     (5)    $  9,124     $ 18,635     $     13     $     (4)    $ 18,644
Commercial paper                 7,052           --           (1)       7,051        3,492           --           --        3,492
Mortgaged backed
  securities                     3,500            5           (1)       3,504        6,284           --           (5)       6,279
U.S. government
  securities                        --           --           --           --        4,499            5           --        4,504
State & municipal
  obligations                       --           --           --           --        3,327            1           --        3,328
Other debt securities            3,372           --           --        3,372        2,461           --                     2,461
                              --------     --------     --------     --------     --------     --------     --------     --------

                                23,043           15           (7)      23,051       38,698           19           (9)      38,708

Marketable equity
  securities                     4,050           --         (217)       3,833        2,450           --          (23)       2,427
                              --------     --------     --------     --------     --------     --------     --------     --------

Total available-for-sale        27,093           15         (224)      26,884       41,148           19          (32)      41,135
  securities
Less amounts classified as
  cash equivalents              (6,643)          --           --       (6,643)     (13,704)          --           --      (13,704)
                              --------     --------     --------     --------     --------     --------     --------     --------

Total investments             $ 20,450     $     15     $   (224)    $ 20,241     $ 27,444     $     19     $    (32)    $ 27,431
                              ========     ========     ========     ========     ========     ========     ========     ========
</TABLE>

There were no material proceeds or gross realized gains or losses in the years
ended June 30, 1998, 1997 or 1996.

The cost and estimated fair value of securities available-for-sale as of June
30, 1998, by contractual maturity, consisted of the following:

                                                         Cost        Fair Value
                                                         ----        ----------
                                                           (in thousands)

      Due in one year or less                          $14,975        $14,974
      Due in one to three years                          4,568          4,573
                                                       -------        -------
                                                        19,543         19,547

      Marketable equity securities                       4,050          3,833
      Mortgage-backed securities                         3,500          3,504
                                                       -------        -------
                                                       $27,093        $26,884
                                                       =======        =======


                                       34
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(3) Inventories

      Inventories consist of the following:

                                                                 June 30,
                                                           --------------------
                                                             1998         1997
                                                           -------      -------
                                                              (in thousands)

      Raw materials                                        $   298      $   224
      Work in process                                          275           95
      Finished goods                                           296        1,127
                                                           -------      -------
      0                                                    $   869      $ 1,446
                                                           =======      =======

(4) Property and Equipment

      Property and equipment consists of the following:

                                                                 June 30,
                                                           --------------------
                                                             1998         1997
                                                           -------      -------
                                                              (in thousands)

      Machinery and equipment                              $ 3,925      $ 4,023
      Furniture and fixtures                                   154          171
      Leasehold improvements                                 3,010        2,999
                                                           -------      -------
                                                             7,089        7,193
      Less accumulated depreciation and amortization        (3,787)      (3,011)
                                                           -------      -------
                                                           $ 3,302      $ 4,182
                                                           =======      =======

      Included in property and equipment is approximately $2,770,000 of
equipment recorded under capital lease agreements at June 30, 1998 and 1997.
Accumulated amortization related to this equipment was approximately $1,722,000,
and $1,083,000 as of June 30, 1998 and 1997, respectively. During the years
ended June 30, 1998 and 1997, the Company disposed of and retired fully
depreciated property and equipment having a historical cost of $558,000 and
$135,000, respectively.

(5) Accrued Liabilities

      A summary of accrued liabilities follows:

                                                                 June 30,
                                                           --------------------
                                                             1998         1997
                                                           -------      -------
                                                              (in thousands)

      Compensation expenses                                $   601      $   525
      Contract manufacturing costs                              90          400
      Other expenses                                         1,143        1,558
                                                           -------      -------
                                                           $ 1,834      $ 2,483
                                                           =======      =======


                                       35
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(6) Lease Commitments

      The Company leases certain equipment and its facilities under leases
classified as capital and operating leases, respectively. These leases expire at
various dates through 2002. Future minimum lease payments relating to these
non-cancelable leases are as follows:

      Year ended June 30:                                 Capital      Operating
      -------------------                                  leases        leases
                                                          -------      ---------
                                                              (in thousands)

        1999                                              $   767       $   344
        2000                                                  768           344
        2001                                                  245           318
        2002                                                   --            14
                                                          -------       -------
                  
      Total minimum lease payments                          1,780       $ 1,020
                                                                        =======
      Less amount representing interest                      (206)
                                                          -------
      Present value of minimum lease payments               1,574
      Less current portion of capital lease obligations      (630)
                                                          -------
      Long-term portion of capital lease obligations      $   944
                                                          =======

      Interest expense related to capital leases was $201,000, $210,000 and
$106,000 for the years ended June 30, 1998, 1997 and 1996, respectively. Rent
expense for the years ended June 30, 1998, 1997 and 1996 was $384,000, $380,000
and $322,000, respectively.

(7) Shareholders' Equity

(a) Common Stock Subject to Repurchase

      Since inception, 289,165 shares of common stock have been issued to
certain individuals under stock purchase agreements that permit the Company to
repurchase, at the original issuance price, a portion of such shares in the
event an individual shareholder ceases to be associated with the Company. The
shares subject to repurchase generally expire on a pro-rata basis over a
four-year period. As of June 30, 1998 and 1997, there were approximately 2,084
and 15,626 shares, respectively, subject to repurchase.

(b) Shareholder Rights Plan

      Under the Company's Shareholder Rights Plan, adopted in August 1996, one
preferred share purchase right (a "Right") is attached to each share of common
stock of the Company. Each Right will entitle shareholders to purchase 1/1000 of
a share of Series A participating preferred stock of the Company, a designated
series of preferred stock for which each 1/1000 of a share has economic
attributes and voting rights equivalent to one share of the Company's common
stock, at an exercise price of $50. The Rights only become exercisable in
certain limited circumstances involving acquisitions of 20% or tender offers for
30% or more of the Company's common stock. For a limited period of time after
the announcement of any such acquisition or offer, the Rights are redeemable at
a price of $.01 per Right. After becoming exercisable, in certain more limited
circumstances, each Right entitles its holder to purchase for $50 an amount of
common stock of the Company, or in certain circumstances, securities of the
acquiror, having a then current market value equal to $100. The Rights expire in
August, 2006.


                                       36
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(c) Notes Receivable from Shareholders

      At June 30, 1998 and 1997, the Company had one note receivable from a
shareholder totaling $40,000 for a purchase of common stock at an interest rate
of 7.60%. At June 30, 1996, the Company had two notes receivable outstanding
from shareholders totaling $90,000 for purchases of common stock at an interest
rate of 7.60%. Full payment of principal and accrued interest on the notes is
due four years from the date of purchase of the common stock.

(8) Stock Option and Purchase Plans

(a) 1990 Stock Option Plan

      The Company has reserved 700,000 shares for issuance under its 1990 Stock
Option Plan which provided for stock options to be granted to employees
(including consultants, officers, and directors). Upon the adoption of the
Company's 1995 Stock Option Plan, the Company's Board of Directors determined to
make no future grants under the 1990 Stock Option Plan. Options available for
grant and options outstanding as of June 30, 1998 under the 1990 Incentive Stock
Plan were 92,967 and 137,329, respectively.

      The Company has recorded deferred compensation of $575,000 related to
certain of the Company's common stock options granted for the year ended June
30, 1995 under the 1990 Incentive Stock Plan. This amount is being amortized
over the relevant period of benefit. For the years ended June 30, 1998, 1997 and
1996, $48,000, $46,000 and $108,000, respectively, was amortized.

(b) 1995 Stock Option Plan

      The Company's 1995 Stock Option Plan (the 1995 Option Plan) was adopted by
the Board of Directors in April 1995 and was approved by the Company's
shareholders in June 1995. An aggregate of 1,000,000 shares of the Company's
common stock were initially reserved for issuance under the 1995 Option Plan. An
additional 500,000 shares were reserved for issuance in December 1996. The 1995
Option Plan provides for the granting to employees of incentive stock options
and for the granting to consultants of nonstatutory stock options. The exercise
price of all incentive stock options granted under the 1995 Option Plan must be
at least equal to the fair market value of the common stock of the Company on
the date of grant (at least 85% of the fair market value for nonstatutory stock
options). The exercise price of any incentive stock option granted to an
optionee who owns stock representing more than 10% of the voting power of the
Company's outstanding capital stock must equal at least 110% of the fair market
value of the common stock on the date of grant. Options generally become
exercisable over 4 years and have a ten-year term. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of the Company, the maximum term of the option must not exceed
five years. If not terminated earlier, the 1995 Stock Option Plan will terminate
in 2005.

      Options available for grant and options outstanding as of June 30, 1998
under the 1995 Option Plan were 848,377 and 941,243, respectively.


                                       37
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(c) 1995 Director Stock Option Plan

      The 1995 Director Stock Option Plan (the Directors' Plan) was adopted by
the Board of Directors in April 1995 and was approved by the Company's
shareholders in June 1995. A total of 200,000 shares of common stock has been
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of nonstatutory stock options to nonemployee directors of the
Company. The Directors' Plan provides that each person who was a nonemployee
director of the Company on the date of the Company's IPO and each person who
first becomes a nonemployee director of the Company after the date of the
Company's IPO shall be granted a nonstatutory stock option to purchase 10,000
shares of common stock (the First Option) on the effective date of the Company's
IPO or on the date on which the optionee first becomes a nonemployee director of
the Company. Thereafter, on the date of each annual meeting of the Company's
shareholders at which such director is elected, each such nonemployee director
shall be granted an additional option to purchase 5,000 shares of common stock
(a Subsequent Option) if, on such date, he or she shall have served on the
Company's Board of Directors for at least six months. The Directors' Plan
provides that the First Option shall become exercisable in installments as to
25% of the total number of shares subject to the First Option on each of the
first, second, third and fourth anniversaries of the date of grant of the First
Option; each Subsequent Option shall become exercisable in full on the first
anniversary of the date of grant of that Subsequent Option. The exercise price
of all stock options granted under the Directors' Plan shall be equal to the
fair market value of a share of the Company's common stock on the date of grant
of the option. Options granted under the Directors' Plan have a term of ten
years.

      Options available for grant and options outstanding as of June 30, 1998
under the Directors' Plan were 100,000 and 100,000, respectively.

(d) Summary Stock Option Information

The following table summarizes option activity under the stock option plans:

<TABLE>
<CAPTION>
                                 Options            Total                                Weighted
                              available for        options            Range of            average
                                  grant          outstanding       exercise prices    price per share
                             ---------------    ------------      -----------------   ---------------
<S>                               <C>               <C>             <C>                 <C>     
Balances as of June 30, 1995         144,259          371,659       $0.03 - $10.00      $    3.18
  Options authorized               1,000,000               --             --                   --
  Options granted                   (937,733)         937,733        0.46 - 20.88           14.29
  Options exercised                       --          (79,813)       0.03 - 14.50            1.07
  Options canceled                   349,529         (349,529)       0.48 - 20.88           15.34
                                  ----------        ---------
Balances as of June 30, 1996         556,055          880,050        0.24 -19.81            10.38
  Options authorized                 500,000               --             --                   --
  Options granted                 (1,115,165)       1,115,165        4.50 - 05.88            5.00
  Options exercised                       --          (14,314)       0.46 - 06.00            1.86
  Options canceled                   720,820         (720,820)       0.46 - 15.50           11.93
  Shares repurchased                  16,494               --             --                   --
                                  ----------        ---------
Balances as of June 30, 1997         678,204        1,260,081        0.24 - 19.81            4.83
  Options authorized                 300,000               --             --                   --
  Options granted                   (364,200)         364,200        2.25 - 04.75            4.48
  Options exercised                       --          (19,411)       0.46 - 02.29            0.82
  Options canceled                   426,298         (426,298)       0.46 - 19.81            5.40
  Shares repurchased                   1,042               --             --                   --
                                  ----------        ---------
Balances as of June 30, 1998       1,041,344        1,178,572        $0.24 - $10.00      $   4.58
                                  ==========        =========
</TABLE>


                                       38
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

The following table summarizes information about options outstanding as of June
30, 1998:

<TABLE>
<CAPTION>
                                         Outstanding                         Exercisable
                            -------------------------------------       --------------------
                                           Weighted
                                            average      Weighted                   Weighted
                                          contractual    average         Number     average
          Range of           Number of      life (in     exercise          of       exercise
      Exercise Prices         shares         years)        price         shares       price
      ---------------       ----------    -----------    --------       -------     --------

<S>                          <C>              <C>        <C>            <C>          <C>     
      $0.24  - $2.29           148,614        5.6        $    0.98      128,421      $   0.82

      $3.50  - $5.00           920,794        7.8        $    4.79      360,899      $   4.92

      $9.00  -$10.00           109,164        7.4        $    7.71       57,736      $   7.80
                             ---------                                  -------

         Total               1,178,572        7.5        $    4.58      547,056      $   4.26
                             =========                                  =======
</TABLE>

      At June 30, 1998, 1997, 1996 options for 547,056, 326,353 and 139,389
shares, respectively, were exercisable under the stock options plans.

      In 1995, 19,343 options were issued at prices ranging from $0.46-$2.29 per
share due to the conversion of options held by Osteo Science option holders in
connection with the Osteo Sciences acquisition. On January 31, 1996, the
Company's Board of Directors approved an option exchange, subject to election by
the option holders, whereby options to purchase 272,400 shares of the Company's
common stock at prices ranging from $17.00 to $20.88 per share were canceled and
reissued at $15.25 per share which was the fair market value of the Company's
common stock on that date. The new options generally vest over four years
beginning January 31, 1996. On August 21, 1996, the Company's Board of Directors
approved an option exchange, subject to election by the option holders, whereby
options to purchase 550,485 shares of the Company's common stock at prices
ranging from $6.50 to $15.50 per share were canceled and reissued at $5.00 per
share which was the fair market value of the Company's common stock on that
date. The new options generally vest over four years beginning August 21, 1996.

(e) Pro forma information

      If the Company had elected to recognize compensation cost based on the
fair value of stock options granted, as prescribed under SFAS 123, net loss and
net loss per share would have been increased to the pro forma amounts indicated
in the table below:

                                                        1998             1997
                                                      --------         --------
                                                         (in thousands, except
                                                           per share amounts)
      Net Loss - as reported                          $(11,922)        $(13,127)
      Net loss - pro forma                            $(13,720)        $(14,471)
      Net loss per share - as reported                $  (0.94)        $  (1.04)
      Net loss per share - pro forma                  $  (1.08)        $  (1.15)


                                       39
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

      The fair value of each option grant, for purposes of calculating the pro
forma net loss above was estimated using the Black-Scholes option-pricing model
with the following assumptions:

                                                        1998               1997
                                                        ----               ----
      Expected stock price volatility                   .636               .670
      Risk-free interest rate range                     6.0%           5.5-6.5%
      Expected life of options                       4 years        1 - 4 years
      Dividend yield                                      0%                 0%

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options. The weighted average estimated fair
value of employee stock options granted during 1998, 1997 and 1996 computed
using the Black-Scholes method was 2.40, $2.13 and $5.75 per share,
respectively.

      Because SFAS No. 123 is applicable only to options granted subsequent to
June 30, 1995, its pro forma effect will not be fully reflected until 1999.

(f) 1995 Employee Stock Purchase Plan

      The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was
adopted by the Board of Directors in April 1995 and was approved by the
shareholders in June 1995. A total of 200,000 shares of common stock has been
reserved for issuance under the Purchase Plan. The Purchase Plan has two
six-month offering periods each year. The Purchase Plan is administered by the
Board of Directors. Employees (including officers and employee directors) of the
Company, or of any majority owned subsidiary designated by the Board, are
eligible to participate if they are customarily employed by the Company or any
such subsidiary for at least 20 hours per week and more than five months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 5% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the Company's common stock at the beginning or end of the offering period.
Common stock purchased under the Purchase Plan must be held for a period of six
months before it may be sold. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company.

Purchases of shares made under the Purchase Plan were 40,858 and 32,030 for the
years ended June 30, 1998 and 1997, respectively.

(g) Common Stock Reserved

      At June 30, 1998, the Company has reserved shares of common stock for
future issuances as follows:

                                                   In Thousands
      Stock option plans                                  2,220
      Stock purchase plan                                   108
      Stock warrants                                        413
                                                          -----
        Total                                             2,741
                                                          =====


                                       40
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(9) Development and License Agreements

      The Company has a significant number of development and license
agreements, most of which relate to the use of the Company's technology on the
automated diagnostic testing systems of the partner. Revenues earned from
milestone and licensing fees under development and license agreements were
$840,000, $100,000 and $1,670,000 for the years ended June 30, 1998, 1997 and
1996, respectively.

      Significant development and license agreements include the following:

Sumitomo Pharmaceuticals Co., Ltd.

      In March 1993, the Company entered into a research and development
agreement with Sumitomo Pharmaceuticals Co., Ltd. (Sumitomo). Under the terms of
the agreement, the Company will update existing, and develop new, diagnostic
assay kits for the detection and management of bone and other connective tissue
diseases. The distribution and marketing rights for these kits in Japan will be
held by Sumitomo. Under certain circumstances, Sumitomo will also have the right
to acquire marketing and distribution rights in certain Asian markets. Under the
agreement, the Company will also manufacture and supply the products at formula
prices that are subject to periodic renegotiation. The term of the agreement is
for an initial ten-year period with options to extend the term upon mutual
consent. Sumitomo has the right to terminate the agreement upon six months
written notice. Payments for certain ongoing costs of research and development
incurred by the Company are payable to the Company under the agreement upon the
achievement of certain milestones and regulatory approvals.

      In June 1994 and February 1995, the Company entered into two additional
agreements with Sumitomo, granting Sumitomo certain additional marketing and
distribution rights. These agreements call for Sumitomo to pay the Company
certain amounts upon the achievement of certain milestones and regulatory
approvals.

(10) Other Agreements

      In April 1997, the Company entered into a Co-Promotion Agreement with
Berlex Laboratories, Inc. ("Berlex"). The Company paid Berlex $3 million in
December 1997 for promotional activities performed by Berlex over the first year
of the promotional agreement that started on July 1, 1997. The $3 million has
been recognized as expense ratably over the initial one-year term. In connection
with this agreement, the Company issued Berlex a warrant to acquire 413,233
shares of common stock at an exercise price of $4.84 per share. The warrant has
a four-year term. The fair value of the warrant issued to Berlex of $506,000 has
also been amortized over the initial one-year service period. In addition, the
Company paid Berlex additional commissions based upon increased sales of the
Company's products over the prior fiscal year. During fiscal 1999, the maximum
payment to Berlex could be $2.5 million, not including commissions on increased
product sales, and the maximum warrant issuance could be for shares valued at no
more than $3.0 million with an exercise price still to be determined as 110% of
the average NASDAQ closing price for the 30 trading days prior to the warrant's
date of issuance. The Company and Berlex are currently in discussions regarding
possible changes to the scope and terms of their commercial relationship under
the Co-Promotion Agreement. The Company believes it is possible that Berlex's
activities under the Co-Promotion Agreement may in the future be reduced in
exchange for reduced payments by the Company, although there can be no assurance
that such reductions will be implemented in the near future, if at all.

(11) Income Taxes

      Due to the operating losses incurred since inception, income tax expense
for all periods has consisted only of minimum state taxes.

      Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% of pretax losses as a result of the following:


                                       41
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

<TABLE>
<CAPTION>
                                                                           June 30,
                                                             -----------------------------------
                                                               1998          1997          1996
                                                             -------       -------       -------
                                                                       (in thousands)
      <S>                                                    <C>           <C>           <C>     
      Computed "expected" tax benefit                        $(4,053)      $(4,193)      $(7,276)

      Losses and credits for which no benefit has
        been recognized                                        3,996         4,145         3,139
      Purchased research and development                          --            --         3,839
      Change in the beginning of the year
        valuation allowance, including use of net
        operating loss carryforwards and foreign losses           41            23           280
      Other                                                       16            25            18
                                                             -------       -------       -------

                                                             $    --       $    --       $    --
                                                             =======       =======       =======
</TABLE>

      The tax effect of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities is presented
below:

                                                       Year ended June 30,
                                                     -----------------------
                                                       1998           1997
                                                     --------       --------
                                                         (in thousands)
      Deferred tax assets:
        Capitalized research and development         $    769       $    285
        Net operating loss carryforwards               17,752         13,771
        Research and development credits                1,151            844
        Other                                           1,409          1,163
                                                     --------       --------

            Total gross deferred tax assets            21,081         16,063

          Less valuation allowance                    (21,081)       (16,063)
                                                     --------       --------

            Deferred tax assets / (liabilities)      $     --       $     --
                                                     ========       ========

      Management believes significant uncertainty exists regarding the ability
to realize the Company's deferred tax assets and accordingly, a valuation
allowance has been established. The valuation allowance for deferred tax assets
as of July 1, 1996 was $11,569,000. The net change in the valuation allowance
for the years ended June 30, 1998, 1997 and 1996 was an increase of $4,549,000,
$4,473,000 and $4,355,000, respectively. If realized, approximately $259,000 of
deferred tax assets will be credited to paid-in-capital.

      As of June 30, 1998 and 1997, the Company had federal tax net operating
loss carryforwards of approximately $49,179,000 and $38,174,000, respectively,
which expire in 2004 through 2012. The Company also had foreign loss
carryforwards of $1,610,000 and $1,070,000 at June 30, 1998 and 1997,
respectively, which extend indefinitely.

      The Company also has federal research and development credit carryforwards
of approximately $780,000 and $572,000 at June 30, 1998 and 1997, respectively,
which will expire in 2004 through 2012.

      State tax net operating loss carryforwards were approximately $17,675,000
and $13,572,000 and research and development credit carryforwards were $485,000
and $370,000 at June 30, 1998 and 1997, respectively. The state losses expire in
1998 through 2003 and the credits may be carried forward indefinitely.


                                       42
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

      The Company's ability to utilize federal and state net operating loss
carryforwards and research credits may be subject to substantial annual
limitations due to the "change of ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitations may result in
the expiration of net operating loss carryforwards and credits before
utilization.

(12) Employee Benefits

      The Company has a deferred savings 401(k) plan for its domestic employees.
The Company may make matching contributions to the plan at its discretion. To
date, no contributions have been made by the Company to the plan.

(13) Industry and Geographic Information

      The Company markets its products in the United States and in foreign
countries through its sales personnel and distributors. Export sales account for
a significant portion of the Company's product sales that are summarized by
geographic area as follows:

                                                    Year ended June 30,
                                           ------------------------------------
                                            1998           1997           1996
                                           ------         ------         ------
                                                      (in thousands)

      United States                        $1,681         $1,480         $  987
      Export sales:
        Europe                              3,799          3,581          2,279
        Pacific Rim                           727            993            917
        Other international                   337            351            230
                                           ------         ------         ------
          Total export sales                4,863          4,925          3,426
                                           ------         ------         ------
          Total product sales              $6,544         $6,405         $4,413
                                           ======         ======         ======

(14) Acquisition of Osteo Sciences Corporation

      On January 31, 1996, the Company purchased Osteo Sciences Corporation
("Osteo") in a tax free exchange which resulted in shareholders of Osteo
exchanging all of their shares of preferred and common stock for shares of the
Company's common stock. The Company issued 541,072 shares of common stock to
Osteo shareholders valued at approximately $9,672,000 and assumed options to
purchase 19,343 shares of the Company's common stock valued at approximately
$345,000. The transaction was recorded using the purchase method of accounting
and resulted in the Company incurring a one-time charge of $11,291,000 for
acquired in-process research and development. The operations of Osteo were
included in the Company's results of operations beginning February 1, 1996. The
value of the research and development acquired from Osteo Sciences was
determined based upon an analysis of the present value of expected future cash
flows related to the technology. At the date of acquisition, technical
feasibility of the acquired technology had not yet been established and the
technology had no foreseeable future alternative uses.


                                       43
<PAGE>

                             METRA BIOSYSTEMS, INC.

              Notes to Consolidated Financial Statements, continued
                                  June 30, 1998

(15) Recent Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in fiscal year 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.

      In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"), which is
required to be adopted in fiscal year 1999. Statement 131 establishes standards
for the way that 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. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Management has not
completed review of Statement 131, but does not anticipate that the adoption of
this statement will have a significant effect on earnings or the financial
position of the Company.

      In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("Statement 130"), which is required to be adopted in fiscal year 1999.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components. Components of comprehensive income for the Company
include items such as net income, changes in the value of available-for-sale
securities, and translation gains and losses. Management does not anticipate
that the adoption of the Statement 130 will have a significant effect on
earnings or the financial position of the Company.


                                       44
<PAGE>

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

      Effective May 2, 1997, the Board of Directors of the Company engaged the
accounting firm of Ernst & Young LLP as independent public accountants for the
Company. The Company's former independent public accountants, KPMG Peat Marwick
LLP, were dismissed effective May 2, 1997. The Company's audit committee
recommended, and the Company's Board of Directors approved, these actions.

      During the two most recent fiscal years and subsequent interim periods
prior to May 2, 1997, there were no disagreements with KPMG Peat Marwick LLP on
any matter of accounting principles or practices, financial statement
disclosure, auditing scope or procedure, or any reportable events, which
disagreements, if not resolved to the satisfaction of KPMG Peat Marwick LLP,
would have caused it to make reference to the subject matter of such
disagreements in connection with its reports.

      The reports of KPMG Peat Marwick LLP on the financial statements of the
Company for the past two years contained no adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles.

      The Company did not consult with Ernst & Young LLP during the two years
prior to their appointment as independent auditors of the Company.

      The Company requested that KPMG Peat Marwick LLP furnish a letter
addressed to the SEC stating whether they agree with the above statements. A
copy of the KPMG Peat Marwick LLP letter to the SEC, dated May 8, 1997 was filed
as an exhibit to the Form 8-K filed by the Company on May 9, 1997.

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in Registrant's proxy statement for
use in connection with the 1998 Annual Meeting of Shareholders ("1998 Proxy
Statement") and is incorporated herein by reference. The 1998 Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year.

      Information regarding Registrant's executive and other officers is set
forth in this Form 10-K in Part I, Item 1.

Item 11. EXECUTIVE COMPENSATION

      The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Compensation of
Executive Officers" in the 1998 Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The caption "Common Stock Ownership of Certain Beneficial Owners and
Management" in the information required by this item is incorporated by
reference into this Form 10-K from the information set forth under the 1998
Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the 1998 Proxy Statement.


                                       45
<PAGE>

                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Certain Documents filed as part of the Form 10-K

1.    Financial Statements                                                 Page
                                                                           ----
      Reports of Independent Auditors                                      25
      Consolidated Balance Sheets                                          27
      Consolidated Statements of Operations                                28
      Consolidated Statement of Shareholders' Equity (Deficit)             29
      Consolidated Statements of Cash Flows                                30

2.    Financial Statement Schedules

Schedule II. Valuation Accounts

<TABLE>
<CAPTION>
                                Balance at    Provision
                                Beginning     charged to        Accounts        Balance at
                                 of year      operations       written off      end of year
                                ---------     ----------       -----------      ----------
<S>                             <C>             <C>             <C>               <C>     
Allowance for doubtful accounts:

Year ended June 30, 1996        $ 33,188        $ 70,500        $  (3,000)        $100,688
Year ended June 30, 1997         100,688          55,410           (8,754)         147,344
Year ended June 30, 1998         147,344          36,000           (3,520)         179,824

Inventory reserves:

Year ended June 30, 1996        $264,045        $177,979        $(112,105)        $329,919
Year ended June 30, 1997         329,919         166,553         (148,472)         348,000
Year ended June 30, 1998         348,000         154,000         (100,000)         402,000
</TABLE>

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

(b) REPORTS ON FORM 8-K -- None


                                       46
<PAGE>

(c) Exhibits

                                                                       Exhibit
Description of Document                                                Number
------------------------------------------------------------------------------
Articles of Incorporation of Registrant.                               3.1*
Form of Amended and Restated Articles of Incorporation of Registrant.  3.2*
Bylaws of Registrant.                                                  3.3*
Rights Agreement among the Registrant and certain security holders 
  of the Registrant, dated as of January 11, 1994.                     4.2*
Amendment No. 1 to Preferred Shares Rights Agreement, dated as of 
  January 17, 1997, between Metra Biosystems, Inc. and the First 
  National Bank of Boston                                              4.99(b)
Form of Indemnification Agreement.                                     10.1*
1990 Incentive Stock Plan.                                             10.2*
Forms of agreements under 1990 Incentive Stock Plan.                   10.2a*
1995 Stock Option Plan.                                                10.3*
Form of Option Agreement under 1995 Stock Option Plan.                 10.3a*
1995 Employee Stock Purchase Plan.                                     10.4*
Form of Subscription Agreement under 1995 Employee Stock Purchase 
  Plan.                                                                10.4a*
1995 Directors' Stock Option Plan.                                     10.5*
Form of Option Agreement under 1995 Directors' Stock Option Plan.      10.5a*
Industrial Real Estate Lease (Single-Tenant Facility) and Lease 
  Addendum, dated November 1, 1993, between the Registrant and State 
  Teachers Retirement System, and First Amendment, dated as of 
  July 26, 1994, thereto.                                              10.6+*
License Agreement between the Registrant and The Rowett Research 
  Institute, dated as of April 30, 1990.                               10.7+*
License Agreement between the Registrant and Collagen Corporation, 
  dated as of June 30, 1990.                                           10.8+*
Distribution and License Agreement between the Registrant and 
  Haematologic Technologies, Inc., dated as of September 1, 1992.      10.9+*
Product Research and Development Agreement between the Registrant 
  and Sumitomo Pharmaceuticals Co., Ltd., dated as of March 29, 1993.  10.10+*
License Agreement between the Registrant and Celtrix Pharmaceuticals,
  Inc., dated as of July 28, 1993.                                     10.11+*
License, Supply and Development Agreement between the Registrant 
  and Hybritech Incorporated, dated as of September 15, 1993.          10.12+*
Development and License Agreement between the Registrant and 
  Ciba-Geigy Limited, dated as of June 26, 1990, as amended by the 
  Agreement between Registrant and Ciba-Geigy Limited, dated as of 
  November 5, 1993.                                                    10.13+*
License, Supply and Development Agreement between the Registrant and
  Ciba Corning Diagnostics Corp., dated as of November 5, 1993.        10.14+*
OEM Agreement between the Registrant and Diagnostic Products 
  Corporation, dated December 22, 1993.                                10.15+*
Product Research and Development Agreement between the Registrant
  and Sumitomo Pharmaceuticals Co., Ltd., dated as of June 29, 1994.   10.16*(c)
IDS OEM Agreement between the Registrant and Immunodiagnostic Systems
  Ltd., dated as of January 19, 1995.                                  10.17+*
License Agreement between the Registrant and BioQuant, Inc., dated 
  as of February 15, 1995.                                             10.18+*
Product Research and Development Agreement between the Registrant and
  Sumitomo Pharmaceuticals Co., Ltd., dated as of February 28, 1995.   10.19+*
International Distributor Agreement between the Registrant and 
  Amersham K.K., dated as of April 8, 1993.                            10.20*(c)
International Distributor Agreement between the Registrant and DPC 
  Biermann GmbH, dated as of January 1, 1995.                          10.21+*
Series D Preferred Stock Purchase Agreement, dated as of January 17,
  1992, among the Registrant and certain Investors listed on Exhibit 
  A thereto.                                                           10.22*
Series E Preferred Stock Purchase Agreement, dated as of January
  11, 1994, among the Registrant and certain Investors listed on 
  Exhibit A thereto.                                                   10.23*
Letter Agreement, dated as of May 24, 1991, between the Registrant
  and George W. Dunbar, Jr.                                            10.24*
Letter Agreement, dated as of February 1, 1992, between the 
  Registrant and Ronald T. Steckel.                                    10.25*


                                       47
<PAGE>

Promissory Note, dated as of September 11, 1991, executed by 
  George W. Dunbar, Jr. and Lucy H. Dunbar in favor of the 
  Registrant.                                                          10.26*
Promissory Note, dated as of June 24, 1992, executed by Ronald T.
  Steckel and Laurie A. Steckel in favor of the Registrant.            10.27*
Promissory Note, dated as of July 16, 1992, executed by Ronald T.
  Steckel in favor of the Registrant.                                  10.28*
Promissory Note, dated as of July 18, 1993, executed by George W. 
  Dunbar, Jr. in favor of the Registrant.                              10.29*
Promissory Note, dated as of November 1, 1994, executed by Colette 
  Z. Andrea in favor of the Registrant.                                10.30*
Promissory Note, dated as of December 30, 1994, executed by George 
  W. Dunbar, Jr. in favor of the Registrant.                           10.31*
Promissory Note, dated as of December 30, 1994, executed by Colette 
  Z. Andrea in favor of the Registrant.                                10.32*
Promissory Note, dated as of December 30, 1994, executed by Ronald 
  T. Steckel in favor of the Registrant.                               10.33*
License and Supply Agreement between the Registrant and Bayer 
  Corporation dated as of July 26, 1995.                               10.34+
Separation and Mutual  Release, dated September 18, 1996, between
  the Company and Colette Z. Andrea                                    10.43(a)
Co-Promotion Agreement, dated April 25, 1997, between the Company
  and Berlex Laboratories, Inc.                                        10.44+
Form of Change in Control Agreement                                    10.45
List of Subsidiaries of the Registrant.                                22.1*
Consent of Ernst & Young LLP, Independent Auditors                     23.1
Consent of KPMG Peat Marwick LLP, Independent Auditors and Report
  on Schedules                                                         23.2
Financial Data Schedule                                                27.1

*     Incorporated by reference to identically numbered exhibits filed with the
      Company's Registration Statement (No. 33-92452) filed on May 18, 1995, or
      with Amendments No. 1 or Amendment No. 2 thereto, which became effective
      on June 30, 1995.

+     Confidential treatment granted or requested as to a portion of this
      Exhibit.

(a)   Incorporated by reference to identically numbered exhibit filed with the
      Company's Form 10-Q/A filed on February 10, 1997.

(b)   Incorporated by reference to identically numbered exhibit filed with the
      Company's Form 8-A/A filed on January 24, 1997.

(c)   Incorporated by reference to identically numbered exhibit refiled with the
      Company's Form 10-Q filed on May 14, 1997.


                                       48
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.


                                        METRA BIOSYSTEMS, INC.


                                        By: /s/ GEORGE W. DUNBAR, JR.
                                            ------------------------------------
Date: September 24, 1998                    President, Chief Executive Officer
                                            and Chief Financial Officer

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George W. Dunbar, his attorney-in-fact
and agent, each with the power of substitution and resubstitution, for him in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully as to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>
       Signature                                       Title                                    Date
       ---------                                       -----                                    ----
<S>                                  <C>                                                  <C>
/s/ GEORGE W. DUNBAR, JR.            President, Chief Executive Officer and Chief         September 24, 1998
--------------------------------       Financial Officer  (Principal Executive,
George W. Dunbar, Jr.                  Financial and Accounting Officer)


/s/ CLAUDE D. ARNAUD, M.D.                           Director                             September 24, 1998
--------------------------------
Claude D. Arnaud, M.D.


/s/ MARIANN BYERWALTER                               Director                             September 24, 1998
--------------------------------
Mariann Byerwalter


/s/ JOHN L. CASTELLO                                 Director                             September 24, 1998
--------------------------------
John L. Castello


/s/ GREGORY B. LAWLESS, PH.D.                        Director                             September 24, 1998
--------------------------------
Gregory B. Lawless, Ph.D.


/s/ MARY LAKE POLAN, M.D., PH.D.                     Director                             September 24, 1998
--------------------------------
Mary Lake Polan, M.D., Ph.D.


/s/ CRAIG C. TAYLOR                                  Director                             September 24, 1998
--------------------------------
Craig C. Taylor
</TABLE>


                                       49