OSTEX INTERNATIONAL, INC.
                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31,                                     1997       1996       1995       1994      1993

<S>                                                          <C>        <C>        <C>         <C>        <C>    <C>
Statement of Operations Data:
Revenues:
          Product sales and research testing services        $   3,658  $   2,860  $   1,830   $  1,152   $   417
          License and research and development fees                450      1,087      1,495        630     1,485
                                                             ------------------------------------------------------
          Total revenues                                         4,108      3,947      3,325      1,782     1,902
                                                             ------------------------------------------------------

Operating expenses:
          Costs of products sold                                   899        926        603        517       226
          Research and development                               4,470      3,163      3,200      3,308     1,940
          Selling, general and administrative                    8,031      9,201      6,583      2,222     1,754
                                                             ------------------------------------------------------
                     Total operating expenses                   13,400     13,290     10,386      6,047     3,920
                                                             ------------------------------------------------------
Loss from operations                                            (9,292)    (9,343)    (7,061)    (4,265)   (2,018)

Other income:
          Proceeds from legal settlement                         6,200          -          -          -         -
          Interest income, net                                     828      1,273      1,684        194       128
                                                             ------------------------------------------------------
                                                             ======================================================
Net loss                                                      $ (2,264)  $ (8,070)  $ (5,377)  $ (4,071)  $(1,890)
-------------------------------------------------------------======================================================

Basic and diluted net loss per common and
          common equivalent share                             $ (0.18)   $  (0.65)  $  (.045)  $ (0.47)    $    -
-------------------------------------------------------------======================================================

Shares used in calculation of net loss per share               $ 12,574   $ 12,441   $ 11,929   $  8,737  $     -
-------------------------------------------------------------======================================================


(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
December 31,                                                       1997       1996       1995       1994      1993

Balance Sheet Data:
Cash, cash equivalents and short-term
          investments                                          $ 18,965   $ 21,229   $ 27,794   $  3,668  $
                                                                                                             7,916
Working capital                                                  18,368     20,901     28,361      3,172     7,890
Total assets                                                     24,112     25,691     32,841      5,590     8,807
Accumulated deficit                                            (24,128)   (21,864)   (13,794)     (8,417)   (4,346)
Total shareholders equity                                      $ 21,644   $ 23,526   $ 31,518   $  4,698  $  8,460
-------------------------------------------------------------======================================================

</TABLE>
<PAGE>

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

OVERVIEW

Ostex  International,  Inc.  (the  "Company")  is engaged in the  discovery  and
commercialization   of  products   associated   with   osteoporosis   and  other
collagen-related   diseases.   The  Company  believes  its  lead  product,   the
OSTEOMARK-registered  trademark- test,  incorporates  breakthrough technology in
the  area  of  bone  resorption  measurement.  Ostex  has  formed  collaborative
relationships with leading diagnostic and pharmaceutical companies to aid in the
commercialization  of Osteomark.  

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations  includes a number of  forward-looking  statements  which
reflect the Company's  current views with respect to future events and financial
performance.  These forward-looking  statements are subject to certain risks and
uncertainties,  including those discussed below, that could cause actual results
to differ materially from historical  results or those  anticipated.  Words used
herein such as  "believes,"  "anticipates,"  "expects,"  "intends,"  and similar
expressions are intended to identify forward-looking  statements but are not the
exclusive means of identifying such statements.  In addition, the disclosures on
page 23 under the caption  "Other  Factors that May Affect  Operating  Results,"
consist  principally  of a brief  discussion  of risks  which may affect  future
results and are thus, in their entirety,  forward-looking in nature. Readers are
urged to  carefully  review and  consider  the various  disclosures  made by the
Company  in this  report  and in the  Company's  other  reports  filed  with the
Securities and Exchange  Commission (the "SEC"),  including the Company's Annual
Report on Form 10-K for fiscal year ended  December  31,  1997,  that attempt to
advise interested parties of the risks and factors that may affect the Company's
business. 

     On May 8, 1995, the Osteomark test first became  commercially  available in
the United States as a urinary assay that provides a quantitative measure of the
excretion  of  cross-linked  N-telopeptides  of type I  collagen  ("NTx")  as an
indicator of human bone resorption.  Prior to becoming  commercially  available,
the Osteomark test was available domestically only for research purposes.

     To date, the Company's  revenues have consisted  primarily of product sales
and fees for  research  testing  services,  as well as  licensing,  research and
development fees from Mochida Pharmaceutical, Co., Ltd. ("Mochida"), and Johnson
& Johnson Clinical Diagnostics,  Inc. ("Johnson & Johnson").  Mochida has agreed
to pay Ostex up to  approximately  $6,600,000 in a combination of licensing fees
and research and development  milestone  payments,  of which $5,850,000 has been
received to date. Under the research and development  agreement,  Mochida has an
option to  license  the NTx  serum  assay  under  development.  Future  payments
totaling $750,000 are contingent upon Mochida's  decision to exercise its option
to license the NTx serum assay and achievement of certain milestones.

     Expenses incurred have been primarily for selling, administrative, research
and  development  activities  and have exceeded  revenues in each year since the
Company's  inception.  As of December 31, 1997,  the Company had an  accumulated
deficit of $24,128,000.  Successful  future operations depend upon the Company's
ability to effectively  commercialize and market its products.  The Company will
require a substantial  amount of additional funds to develop new products and to
fund the level of selling,  general and administrative expenses that the Company
expects to incur in connection with its product commercialization efforts in the
next several years.

RESULTS OF OPERATIONS  

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995. 

     The Company had  revenues of  $4,108,000  for the year ended  December  31,
1997,  compared to $3,947,000  and  $3,325,000  for the years ended December 31,
1996 and 1995,  respectively.  Revenue from product  sales and research  testing
services  for the year ended  December  31,  1997 was  $3,658,000,  compared  to
$2,860,000  and  $1,830,000  in the  years  ended  December  31,  1996 and 1995,
respectively.  The  increase  of  $798,000  in 1997  and  $1,030,000  in 1996 is
attributable  to higher  volumes  of  Osteomark  kits sold to  laboratories  and
distributors worldwide during those years.

<PAGE>

     License and  research and  development  fees  received  during 1997 totaled
$450,000,  all from Mochida.  License and research and development  fees in 1996
totaled  $1,087,000,  primarily  from  Mochida.  The $637,000  reduction in fees
collected  under license and research and  development  agreements  with Mochida
from 1996 to 1997 was expected and is due to attainment of scheduled milestones.
In 1995 fees of $1,495,000  consisted of  $1,000,000  from Johnson & Johnson and
$495,000 from Mochida.

     The  Company's  cost of products  sold totaled  $899,000 for the year ended
December  31,  1997,  compared to $926,000  and $603,000 for the same periods in
1996 and 1995, respectively. The gross profit rate on product sales for the year
ended  1997 was 75%,  compared  to 68% for 1996 and 67% for 1995.  The change in
gross  profit  rate from 1996 to 1997 and from  1995 to 1996 was a  function  of
increased  manufacturing  volume and  overall  efficiency  gains made in part by
improvements in the production process.  Increased  manufacturing volume reduces
unit cost by spreading  certain fixed overhead  expenses over a higher number of
units produced.

     The Company's  research and development  expenditures  totaled  $4,470,000,
$3,163,000,  and  $3,200,000,  in  1997,  1996,  and  1995,  respectively.   The
$1,307,000 increase from 1996 to 1997 was primarily  attributable to funding the
NTx test point-of-care  development programs with Hologic,  Inc. ("Hologic") and
Metrika,  Inc.  ("Metrika").  In  addition,  research and  development  expenses
increased due to the cost of clinical  studies  commenced at the end of 1996 and
during  1997.  Included  in 1997 was a study  for the  determination  of the NTx
reference range in males, a study to complement physician  interpretation of NTx
results in  postmenopausal  women,  and  preliminary  studies for the use of the
Osteomark test in helping to identify bone  metastases.  Additionally,  research
and development  expenditures increased in 1997 due to the extension of research
grants to the University of Washington ("UW"). Expenditures remained steady from
1995 to 1996 due to an increase in research and development grants and royalties
paid to the Washington  Research Foundation ("WRF") offset by decreased clinical
trial expenditures due to the completion of a clinical trial in November 1995.

     Selling,   general  and   administrative   expenses   totaled   $8,031,000,
$9,201,000,  and  $6,583,000,  in 1997,  1996 and  1995,  respectively.  The 13%
decrease from 1996 to 1997 was primarily due to the  completion of the Company's
free testing program in 1996 and the completion of a hearing before the American
Arbitration Association against Boehringer Mannheim GmbH ("Boehringer Mannheim")
in  September  1996,  partially  offset  by  increased  costs of  litigation  in
connection  with the  Osteometer  and C.R.  Bard lawsuits (see Note number 11 on
page 32 in the Notes to  Financial  Statements).  The 40%  increase  in selling,
general and  administrative  expenses from 1995 to 1996 was due primarily to the
implementation of marketing programs to support the Osteomark test in the United
States,  the addition of sales  personnel to support  these  efforts,  increased
legal  costs  involved  with the  Boehringer  Mannheim  arbitration  and  patent
litigation costs.

     Proceeds from legal settlement resulted from the receipt of a non-recurring
payment of $6,200,000 from  Boehringer  Mannheim in October 1997. The settlement
between the two parties was the result of a ruling by the  American  Arbitration
Association awarding damages to the Company in connection with a dispute between
the Company and Boehringer Mannheim.

     Interest income totaled $901,000,  $1,317,000, and $1,684,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.  The decrease in 1997 and
1996 was primarily due to lower average invested  balances  resulting from using
cash to fund the Company's operating losses.

     At December 31, 1996, the Company had tax net operating loss  carryforwards
of $29,527,000, which will begin to expire in 2004. Income taxes are provided in
the  Statements of  Operations as required by Statement of Financial  Accounting
Standards No. 109,  "Accounting  For Income Taxes" ("SFAS No. 109").  Under SFAS
No. 109,  deferred taxes are determined  using an asset and liability  approach.
The Company has  determined  that the tax assets do not satisfy the  recognition
criteria set forth in SFAS No. 109. Accordingly, a valuation adjustment has been
recorded  against the  applicable  deferred  tax assets,  and  therefore  no tax
benefit has been recorded.


<PAGE>

LIQUIDITY  AND CAPITAL  RESOURCES  

     The Company has financed its operations  from inception  primarily  through
three  private  placements  of  preferred  stock  that  provided   approximately
$12,800,000  aggregate  proceeds,  and its initial public  offering of 3,645,642
shares of common stock that provided net proceeds of approximately  $32,000,000.
Funds  of  approximately  $16,608,000  have  been  generated  through  sales  of
Osteomark  test  kits and  fees for  research  testing  services,  collaborative
research and licensing  agreements.  The settlement of a dispute with Boehringer
Mannheim provided an additional $6,200,000. As of December 31, 1997, the Company
had $18,965,000 in cash and cash equivalents and short-term investments, working
capital of $18,368,000 and total  shareholders'  equity of  $21,644,000.  During
1997, cash, cash equivalents and short-term investments decreased by $2,264,000,
working capital  decreased by $2,533,000 and  shareholders'  equity decreased by
$1,882,000.  The  decreases  were  primarily the result of the net loss incurred
during 1997.

     The  Company  used  $1,181,000  of cash for  operating  activities  in 1997
($7,381,000 excluding the receipt of $6,200,000 from Boehringer  Mannheim),  and
$1,105,000   for   laboratory   expansion   and  the  purchase  of   laboratory,
manufacturing  and office  equipment.  In 1996, the Company  entered into a note
agreement  that provides up to $1,500,000  for  expansion of  manufacturing  and
administrative  facilities and has borrowed  $746,000 against the note. The note
is  repayable in 48 equal  monthly  installments  of  principal  and interest of
$19,784.  As of December 31, 1997,  outstanding  borrowings under this agreement
amounted to $509,000.  The Company  does not  anticipate  additional  borrowings
during 1998 and has no material capital purchase commitments.

     The  Company's  future  capital  requirements  depend  upon  many  factors,
including  effectiveness  of Osteomark  test  commercialization  activities  and
arrangements;  continued  scientific  progress in its research  and  development
programs; the costs involved in filing, prosecuting and enforcing patent claims;
the costs involved in legal efforts to enforce  patent rights;  and the time and
costs involved in obtaining regulatory  approvals.  Additional funds from equity
or  debt  financing  will be  required.  There  can be no  assurance  that  such
additional funds will be available on favorable terms, if at all. Because of the
Company's  significant  long-term  cash  requirements,  it  may  seek  to  raise
additional  capital if conditions in the public  equity  markets are  favorable,
even if the Company does not have an immediate need for additional  cash at that
time. If additional financing is not available, the Company anticipates that its
existing  available cash, its future license and research revenues from existing
collaboration agreements, its current level of product sales and interest income
from  short-term  investments  will be adequate to fund its  operations  through
1999.

OTHER FACTORS THAT MAY AFFECT OPERATING  RESULTS 

     The  Company's  operating  results may fluctuate due to a number of factors
including,  but not limited  to,  volume and timing of product  sales,  pricing,
market acceptance of the Company's products, changing economic conditions in the
healthcare  industry,  activities of competitors,  delays and increased costs of
product  and  technology  development,  the  Company's  ability to  develop  and
maintain collaborative  arrangements,  the outcome of litigation, and the effect
of the  Company's  accounting  policies and other risk  factors  detailed in the
Company's 1997 Form 10-K and other SEC filings. All of the foregoing factors are
difficult  for the Company to predict and can  materially  adversely  affect the
Company's business and operating results.

     The Company is  currently  in the  process of  evaluating  its  information
technology  infrastructure  for the Year 2000  compliance.  The Company does not
expect that the cost to modify its information  technology  infrastructure to be
Year 2000  compliant  will be material to its financial  condition or results of
operations.  The Company  does not  anticipate  any material  disruption  in its
operations  as a result of any failure by the Company to be in  compliance.  The
Company  does  not  currently  have any  information  concerning  the Year  2000
compliance  status of its suppliers and customers.  In the event that any of the
Company's  significant  suppliers or customers does not  successfully and timely
achieve Year 2000  compliance,  the Company's  business or  operations  could be
adversely affected.

<PAGE>

                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)



December 31,                                               1997      1996

ASSETS

Current Assets:
         Cash and cash equivalents                       $ 2,201   $ 1,289
         Short-term investments                           16,764    19,940
         Trade receivables and other current assets, 
         net of allowance of $25 in 1997 and 1996          1,344     1,161
         Inventory, at cost                                  201       153
                                                         -----------------
                  Total current assets                    20,510    22,543
                                                         -----------------

Property, Plant and Equipment, net of 
accumulated depreciation                                   2,965     2,474
Other Assets                                                 637       674
                                                         -----------------
                  Total assets                           $24,112  $ 25,691
                                                         =================

LIABILITIES AND SHAREHOLDERS' EQUITY 

Current Liabilities:
         Accounts payable                               $  1,429   $ 1,259
         Accrued expenses                                    530       234
         Current portion of note payable                     183       149
                                                        ------------------
                  Total current liabilities                2,142     1,642
                                                        ------------------

Noncurrent Liabilities:
         Note payable, net of current portion                326       523
                                                        ------------------

Commitments and Contingencies

Shareholders' Equity:
         Common stock, $.01 par value, 50,000,000 
          shares authorized; 12,696,250 and 12,441,617 
          issued and outstanding, respectively               127       125
         Additional paid-in capital                       45,642    45,195
         Unrealized gain on short-term investments             3        70
         Accumulated deficit                             (24,128)  (21,864)
                                                         -----------------
                  Total shareholders' equity              21,644    23,526
                                                         -----------------
                  Total liabilities and 
                   shareholders' equity                  $24,112   $25,691
                                                         ================= 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


<PAGE>

                            STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

Year Ended December 31,                                     1997         1996      1995
<S>                                                       <C>          <C>       <C>   
Revenue:
     Product sales and research testing services          $ 3,658      $ 2,860   $ 1,830
     License and research and development fees                450        1,087     1,495
                                                          ------------------------------
               Total revenues                               4,108        3,947     3,325

Operating Expenses:
      Cost of products sold                                   899          926       603
      Research and development                              4,470        3,163     3,200
      Selling, general and administrative                   8,031        9,201     6,583
                                                          ------------------------------
               Total operating expenses                    13,400       13,290    10,386
                                                          ------------------------------
               Loss from operations                        (9,292)      (9,343)   (7,061)

Other Income (Expense):
         Proceeds from legal settlement                     6,200          -         -
         Interest income                                      901        1,317     1,684
         Interest expense                                     (73)         (44)      -
                                                          ------------------------------
                  Net loss                                $(2,264)     $(8,070)  $(5,377)
                                                          ==============================
 
Basic and diluted net loss per common and 
common equivalent share                                   $ (0.18)     $ (0.65)  $ (0.45)
                                                          ============================== 
Shares used in calculation of net loss per share           12,574       12,441    11,929
                                                          ==============================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

Year Ended December 31,                                      1997         1996     1995
<S>                                                       <C>          <C>       <C>   
Cash Flows from Operating Activities:
         Net loss                                         $(2,264)     $(8,070)  $(5,377)
         Adjustments to reconcile net loss to net 
               cash used in operating activities
                      Depreciation and amortization           651          504       295
                      Expense from stock awards 
                       and grants                             197           33        40
                      (Increase) decrease in receivables      (10)         554    (1,318)
                      (Increase) decrease in inventory        (48)          83      (161)
                      (Increase) in other current assets     (173)         (61)      (15)
                      Increase in accounts payable 
                       and accrued expenses                   466          170       511
                                                           -----------------------------
                          Net cash used in operating 
                           activities                      (1,181)      (6,787)   (6,025)
                                                           -----------------------------
Cash Flows from Investing Activities:
         Purchases of short-term investments              (20,426)     (22,958)  (52,521)
         Proceeds from sales and maturities of 
          short-term investments                           23,535       24,575    32,996
         Purchases of property, plant and equipment        (1,105)        (495)   (1,746)
         Long-term investments                                -             -       (500)
                                                           -----------------------------
                          Net cash provided by (used 
                           in) investing activities         2,004        1,122   (21,771)
                                                           -----------------------------
Cash Flows from Financing Activities:
         Net proceeds from issuance of common stock
                  and exercise of stock options               252           41    32,166
         Proceeds from borrowings on note payable              -           746       -
         Payments on note payable                            (163)         (74)      -
         Proceeds from stock subscription payment              -            -        165
                                                           -----------------------------
                          Net cash provided by 
                           financing activities                89          713    32,331
                                                           -----------------------------

                          Net Increase (Decrease) in 
                           Cash and Cash Equivalents          912       (4,952)    4,535
                          Cash and Cash Equivalents, 
                           beginning of period              1,289        6,241     1,706
                                                           -----------------------------
                          Cash and Cash Equivalents, 
                           end of period                  $ 2,201      $ 1,289   $ 6,241
                                                           =============================

Supplemental Disclosure of Noncash Transactions:
         Stock granted for research and 
          development services                            $   191      $   -     $   -
                                                           =============================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                               Unrealized
                                                                   Additional  Gain/Loss on  Stock                     Total      
                                    Preferred Stock  Common Stock  Paid-In     Short-term    Subscriptions Accumulated Shareholders'
                                    Shares  Amount  Shares  Amount Capital     Investments   Receivable    Deficit     Equity
<S>                                <C>      <C>     <C>     <C>   <C>              <C>       <C>           <C>        <C>          
Balance, December 31, 1994          1,059    $10     3,011   $30   $13,240          $-        $(165)       $(8,417)    $ 4,698
                                    -----------------------------------------------------------------------------------------------
 
    Sale of common stock in initial
      public offering and 
      conversionof preferred stock (1,059)   (10)    9,153    92    31,468           -           -              -       31,550
    Compensation expense for stock
      option grants                   -        -       -       -        40           -           -              -           40
    Stock options and warrants
      exercised                       -        -      269      3       373           -           -              -          376
    Payment for subscription
      receivable                      -        -       -       -        -            -          165             -          165
    Unrealized gain on short-term
      investments                     -        -       -       -        -           66           -              -           66
    Net loss                          -        -       -       -        -            -           -           (5,377)    (5,377)
Balance, December 31, 1995            -        -   12,433    125    45,121          66           -          (13,794)    31,518

    Compensation expense for stock
      option grants                   -        -       -       -       33            -           -              -           33
    Stock options exercised           -        -       9       -       41            -           -              -           41
    Unrealized gain on short-term
      investments                     -        -       -       -       -             4           -              -            4
    Net loss                          -        -       -       -       -             -           -          (8,070)     (8,070)
Balance, December 31, 1996            -        -   12,442    125    45,195          70           -         (21,864)     23,526

    Expense for stock and
      option grants                   -        -      70       -       197           -           -              -          197
    Stock options exercised           -        -     184       2       250           -           -              -          252
    Unrealized loss on short-term
      investments                     -        -      -        -        -          (67)          -              -          (67)
    Net loss                          -        -      -        -        -            -           -          (2,264)     (2,264)
Balance, December 31, 1997            -       $-   12,696   $127   $45,642          $3         $ -        $(24,128)    $21,644

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>


                         NOTES TO FINANCIAL STATEMENTS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

NOTE 1

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION

     Ostex International,  Inc. (the "Company"),  a Washington  Corporation,  is
engaged in the  discovery  and  commercialization  of products  associated  with
osteoporosis and other collagen-related  diseases. The Company believes its lead
product, the Osteomark-registered trademark- NTx test, incorporates breakthrough
technology in the area of bone resorption  measurement.  The Company markets the
Osteomark NTx test through laboratories and distributors worldwide.

     The Company was incorporated in the state of Washington on May 11, 1989 and
completed  its initial  public  offering of common stock in February  1995.  The
United  States  has been the  Company's  principal  market.  Foreign  sales were
approximately $652, $370 and $528 in 1997, 1996 and 1995, respectively.  Foreign
sales were primarily to Europe and Japan.

ESTIMATES  AND  UNCERTAINTIES  

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

REVENUE  RECOGNITION  

     License and research and development fees are recognized upon attainment of
the  agreed-upon  milestones.  Research  testing  fees are  recognized  when the
services are substantially complete. Product sales are recognized upon shipment.

RESEARCH  AND  DEVELOPMENT  EXPENSES  

     Research and development costs are expensed as incurred.

PROPERTY,  PLANT AND  EQUIPMENT

     Property,  plant and equipment are stated at cost and depreciated using the
straight-line  method over the  estimated  useful  life of the asset.  Estimated
lives range from five to 10 years.  Depreciation  expense  charged to operations
during 1997, 1996 and 1995 was $614, $502 and $294, respectively.

SHORT-TERM INVESTMENTS  

     The Company  considers  all of its  investments  as  "available  for sale,"
reporting them at fair market value with unrealized gains and losses included in
Shareholders'  Equity.  Realized  gains  and  losses  and  declines  in value of
securities judged to be other than temporary are included in income.

INVENTORY  

     Inventory  consists  principally  of  raw  materials  and  finished  goods.
Inventories are stated at the lower of cost (first-in, first-out) or market.

STATEMENTS OF CASH FLOWS 

     For the purpose of the statements of cash flows, the Company  considers all
highly  liquid debt  instruments  with a maturity  of three  months or less when
purchased to be cash  equivalents.  The carrying amount  approximates fair value
due to the short maturity of these instruments.

NET LOSS PER  COMMON  AND COMMON  EQUIVALENT  SHARE 

     The Company adopted SFAS No. 128,  "Earnings per Share," effective December
15, 1997. Basic net loss per share is the net loss divided by the average number
of shares  outstanding during the year. Diluted net loss per share is calculated
as the net loss divided by the sum of the average  number of shares  outstanding
during the year plus the net  additional  shares that would have been issued had
all dilutive options been exercised,  less shares that would be repurchased with
the  proceeds  from such  exercise  (Treasury  Stock  Method).  During all years
presented,   the  effect  of  including  outstanding  options  is  antidilutive,
therefore,  options have been excluded from the  calculation of diluted net loss
per share. There is no difference between previously reported net loss per share
and the basic and diluted net loss per share.


<PAGE>

NOTE 2 

OTHER ASSETS 

     Other assets primarily include investments totaling $637 in preferred stock
of Metrika,  Inc., a privately held medical  device  company in the  development
stage.  The investment is recorded in the accompanying  financial  statements at
cost and represents an ownership interest of less than 10%.

NOTE 3 

PROPERTY,  PLANT & EQUIPMENT 

     Property,  plant & equipment at December 31, 1997 and 1996 consisted of the
following:
                                         1997    1996

Leasehold improvements                $ 2,426  $ 1,463
Laboratory and manufacturing
         equipment                      1,277    1,198
Computers and office equipment            975      912
                                       ---------------
                                        4,678    3,573
Accumulated depreciation and
         amortization                  (1,713)  (1,099)
                                       ---------------
Net property, plant and equipment     $ 2,965  $ 2,474
                                       ===============


NOTE 4

SHORT-TERM INVESTMENTS

The Company's short-term investments at December 31, 1997 and 1996, consisted of
the following:
                                             1997    1996

United States treasury obligations         $7,955   $8,807
Federal agency obligations and
         discount notes                     2,686    7,706
Government agency obligations               3,389      -
Corporate and municipal bonds               2,734    3,427
                                           ---------------
                                          $16,764  $19,940
                                           ===============
The maturity of all classes of the  Company's  short-term  investments  was less
than two years at December 31, 1997 and 1996.

NOTE 5

ACCRUED EXPENSES

Accrued expenses at December 31, 1997 and 1996, consisted of the following:

                                            1997    1996

Business taxes payable                      $359    $127
Accrued wages, benefits and
         payroll taxes                       171     107
                                            ------------
                                            $530    $234
                                            ============
NOTE 6

NOTE PAYABLE

In July  1996,  the  Company  borrowed  $746  under a  secured  promissory  note
agreement.  The note is secured by real property and equipment and is payable in
equal monthly  installments  of principal and interest of $20. The interest rate
is based on the three-year U.S.  Treasury Note, at the time of drawdown,  plus a
margin of 5.80%,  (12.5% as of December 31, 1997 and 1996).  The note  agreement
allows the Company to make additional borrowings,  up to a maximum of $1,500 for
future capital needs.  The note contains a number of covenants that, among other
things, require the Company to meet specific financial ratios, including minimum
tangible net worth,  maximum  liabilities to total net worth and a minimum level
of cash,  cash  equivalents  and  short-term  investments.  The  Company  was in
compliance with these covenants at December 31, 1997 and 1996. Minimum principal
payments are as follows: 

1998          $183 
1999           207
2000           119
              ----
              $509


<PAGE>

NOTE 7

SHAREHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

On January  25,  1995 the  Company  completed  its  initial  public  offering of
3,645,642  shares of common  stock at $9.50 per share for  proceeds  of $34,634,
less underwriting discounts,  commissions and other offering costs approximating
$3,085. Convertible preferred stock outstanding immediately prior to the closing
was converted  into  5,506,464  shares of common  stock.  

STOCK OPTION PLANS 

     The Company has three stock option  plans;  the Amended and Restated  Stock
Option Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both
administered by the  Compensation  Committee of the Board of Directors,  and the
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively
the "Stock  Option  Plans").  The Old Plan no longer  permits  additional  stock
option  grants.  The 1994  and  Directors'  Plans  were  amended  in 1997 by the
shareholders  to  increase  the number of options  that  could be  reserved  for
issuance under these plans.  Shares of common stock reserved for issuance to the
Company's employees and directors under the Stock Option Plans are 2,107,000 and
350,000, respectively, and shares available for grant to the Company's employees
and directors at December 31, 1997, under the Stock Option Plans are 259,000 and
145,000, respectively.  Under all option plans, as of December 31, 1997, options
for 667,000  shares have been  exercised,  and  1,962,000  shares are subject to
outstanding  options at exercise  prices  ranging  from $.08 to $17.13 per share
with a remaining  weighted average  contractual  life of 8 years.  These options
vest over periods of two to four years.  Total options vested as of December 31,
1997 were 481,000,  with a weighted average exercise price of $3.34. All options
granted under these plans expire either 90 days after  termination of employment
or 10 years from the date of grant, whichever occurs first.

     Prior  to the  Company's  initial  public  offering,  the  Company  granted
nonqualified  options  under  the Old Plan  whose  exercise  price was below the
estimated fair market value of the Company's  common stock on date of grant. The
difference  between the grant price and the estimated  fair market value on date
of grant is recognized as compensation  expense over the vesting  period.  Total
compensation  expense recognized was approximately $6, $33 and $40 in 1997, 1996
and 1995,  respectively.  Information relating to stock options outstanding and
stock options exerciseable at December 31, 1997 is as follows:

<TABLE>
<CAPTION>

                                      Options Outstanding                          Options Exerciseable
                          -------------------------------------------------     ----------------------------
                                        Weighted Average   Weighted Average 
Range of Exercise         Number        Remaining Life     Exercise Price       Number       Weighted Average
Prices                    of shares     in Years                                of Shares    Exercise Price
<S>                      <C>            <C>                <C>                  <C>          <C>             
$ .08 -  $ .80                78,750             3                  $.42              78,750      $  .42
$2.10 -  $5.00             1,825,001             9                 $3.27             378,367      $ 3.45
$5.75 - $17.13                58,550             8                 $9.33              24,334      $11.04
                         -----------------------------------------------------------------------------------
                           1,962,301             8                 $3.34             481,451      $ 3.34
                         ===================================================================================

</TABLE>

<PAGE>


Information  relating to activity  under the Company's stock option plans 
is as follows:

                                                Weighted
                                    Shares       Average
                                  Subject to    Exercise     
                                    Option        Price

Balance, December 31, 1994        1,545,190     $ 3.19
         Granted                    245,500       9.09
         Exercised                 (268,786)      1.38
         Canceled                   (90,625)      3.56
                                  -----------------------
Balance, December 31, 1995        1,431,279       4.51
         Granted                    446,000      12.30
         Exercised                   (8,950)      4.56
         Canceled                   (40,703)      9.64
                                  -----------------------
Balance, December 31, 1996        1,827,626       6.61
         Granted                  2,227,925       3.76
         Exercised                 (184,000)      1.37
         Canceled                (1,909,250)      7.14
                                  -----------------------
Balance, December 31, 1997        1,962,301     $ 3.34
                                  =======================


The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting  Standards  No.  123  (SFAS No.  123),  "Accounting  for  Stock-Based
Compensation."  Accordingly,  no compensation cost has been recognized for stock
options issued at market value on the date of grant. Had  compensation  cost for
the Company's two stock option plans been determined  based on the fair value of
the options at the grant date for awards in 1997,  1996 and 1995 consistent with
the  provisions  of SFAS 123,  the  Company's  net loss and net loss per  common
equivalent share would have changed to the pro forma amounts indicated below:

                                    1997      1996       1995

Net loss - as reported           $(2,264)   $(8,070)  $(5,377)
Net loss - pro forma             $(2,222)   $(8,729)  $(5,528)
Basic and diluted net
         loss per common
         and common
         equivalent share -
         as reported               $(.18)     $(.65)    $(.45)
Basic and diluted net
         loss per common
         and common
         equivalent share -
         pro forma                 $(.18)     $(.70)    $(.46)

The fair value of each option  grant is  established  on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used  for  new  grants  in  1997:  zero  dividend  yield;  expected
volatility of 85.3%; risk-free interest rates varying by grant date between 6.4%
and 7.1%; and expected lives of five years.  Assumptions  for options granted in
1996 were: zero dividend yield;  expected  volatility of 59%; risk-free interest
rates between 5.8% and 6.5%;  and expected  lives of five years.  The difference
between reported and pro forma net loss in 1997 is a $42 credit to income as the
model  recognizes  canceled  options in the period they occur.  The SFAS No. 123
method of accounting has not been applied to options granted prior to January 1,
1995,   therefore  the  resulting  pro  forma   compensation  cost  may  not  be
representative  of  that  to be  expected  in  future  years.  

NOTE 8  

LICENSING AGREEMENTS 

Under the Company's  worldwide  exclusive license agreements with the
Washington Research Foundation ("WRF"), the Company has the right to manufacture
and market  technology  developed  from certain  research by the  University  of
Washington  ("UW").  As  consideration  for the  licenses  acquired  and for the
attainment  of certain  milestones,  the Company paid WRF certain  nonrefundable
fees  and  issued  common  stock to the WRF and UW.  In  addition,  future  cash
payments  up to $500 and common  stock  grants of up to 5,000  shares may be due
upon attainment of certain other milestones.  All legal costs incurred by WRF in
connection  with the filing,  prosecution,  and  maintenance of certain  defined
patent rights, are paid by the Company.  During 1997, 1996 and 1995, the Company
incurred  approximately $123, $154 and $379 of license fees, including the value
of stock grants, and patent legal expenses. All license and legal fees and stock
grants have been  expensed as research  and  development  costs.  The Company is
obligated to pay WRF  royalties on net sales of any  licensed  products.  


<PAGE>

NOTE 9

REVENUES 

The Company has a sublicense  agreement and a research and  development
agreement  with  Mochida   Pharmaceutical  Co.,  Ltd.  ("Mochida").   Under  the
sublicense agreement, the Company granted exclusive manufacturing, marketing and
distribution  rights to  certain of the  Company's  products  in Japan.  Through
December 31, 1997, the Company had earned fees and milestone payments of $2,000,
including  $450  during  1997,  in  connection  with this  agreement.  Under the
research and development  agreement,  the Company earned no fees during 1997 and
$1,080 and $550 during 1996 and 1995, respectively. As of December 31, 1997, the
Company had received all milestone  payments to be earned in connection with the
license  agreement  for the urine  assay.  Mochida  has an option to license the
Company's serum assay under  development.  

During 1995, the Company entered into
research,  development,  license and supply  agreements  with  Johnson & Johnson
Clinical Diagnostics, Inc. ("JJCD") under which Ostex earned $1,000 during 1995.
These  agreements  grant  JJCD a license  to  manufacture,  sell and  distribute
certain products  utilizing Ostex' bone resorption  technology.  Ostex will also
receive royalties on JJCD sales of products  incorporating the Ostex technology.

NOTE 10 

RELATED PARTY TRANSACTIONS  

Research  Agreements The Company has entered
into two research  agreements  with the  University of  Washington  which extend
through  December 31, 1999.  Total expense was $499,  $304 and $185 during 1997,
1996 and 1995, respectively.  Following is a schedule of future minimum payments
under these agreements as of December 31, 1997:

1998      $428 
1999       310
          -----
          $738

NOTE 11

COMMITMENTS AND CONTINGENCIES

LEASES

The Company has entered into noncancelable operating leases for office space and
certain equipment. Future minimum payments under these leases are as follows:

1998                      $  514
1999                         501
2000                         494
2001                         496
2002                         527
                          ------
                          $2,532
                          ======

Total rent expense was approximately $584, $538 and $374 in 1997, 1996 and 1995,
respectively. 

LITIGATION 

     In June 1996,  the Company  filed an action in the United  States  District
Court for the Western District of Washington  against  Osteometer Biotech A/S, a
medical  technology  company  based in Denmark  ("Osteometer"),  and  Diagnostic
Systems  Laboratories  Inc. for patent  infringement of United States Patent No.
5,455,179.   The  Company  believes  Osteometer's  bone  resorption  immunoassay
incorporates technology which infringes patented Ostex technology.  In September
1996, the defendants  filed a response denying  infringement and  counterclaimed
that Ostex'  patent is invalid and  unenforceable.  By order dated July 7, 1997,
the Court  granted  Ostex'  motion to file a  supplemental  complaint,  to add a
second  cause of action based upon United  States  Patent No.  5,641,837,  which
issued on June 24, 1997. On October 24, 1997, Ostex filed a second  supplemental
complaint to add third and fourth  causes of action  based upon U.S.  Patent No.
5,652,112,  which issued on July 29, 1997, and U.S. Patent No. 5,656,439,  which
issued  on August  12,  1997.  The  lawsuit  is  currently  scheduled  for trial
commencing  October 20, 1998. At the present time management  cannot predict the
outcome  of the  lawsuit  but  intends  to  continue  to  vigorously  assert its
position.


<PAGE>

     On April 9, 1997, the Company was served with a lawsuit filed in the United
States  District  Court,  Central  District of  California  by C.R.  Bard,  Inc.
("Bard").  The complaint  alleges that Ostex' Osteomark  product  infringes U.S.
Patent No. 4,628,027 assigned to Bard in 1993. On June 4, 1997 the Company filed
a response denying infringement and counterclaimed that Bard's patent is invalid
and  unenforceable.  On  November 7, 1997 the judge set a trial date of November
10,  1998,  and on December  27,  1997,  the Company  filed a motion for summary
judgment.  Management  believes  that this suit is without merit and that Ostex'
Osteomark product falls outside the claims of the subject patent.

NOTE 12

OTHER INCOME - PROCEEDS FROM LEGAL  SETTLEMENT 

     On  November 4, 1997,  the Company  announced  settlement  with  Boehringer
Mannheim GmbH  ("Boehringer  Mannheim")  under which the Company received a lump
sum payment of $6,200.  The settlement between the two parties was the result of
a ruling by the American Arbitration Association awarding damages to the Company
in connection with a dispute between the Company and Boehringer Mannheim.

NOTE 13 

FEDERAL INCOME TAXES 

Deferred taxes
are determined using an asset and liability  approach.  The Company has incurred
operating  losses since  inception and  accordingly  has determined that the net
deferred tax assets do not satisfy recognition criteria.  Therefore, a valuation
allowance  has been  recorded  against  the net  deferred  tax assets and no tax
benefit has been  recorded in the  accompanying  statements of  operations.  The
change in the  valuation  allowance  during  1997 and 1996 was $586 and  $3,006,
respectively. The Company's deferred tax assets (liabilities) are as follows:

         December 31,         1997       1996      1995

Net operating loss
         carryforward      $10,039      $9,448    $6,576
Research and
         experimentation
         credits               363         313       135
Excess of market value
         over the exercise
         price of common
         stock options          77          77        65
Section 195 start-up
         expenses                -          52        151
Amortization and
         depreciation          (47)        (44)       (64)
Other                           68          68         45
                           -------------------------------
Gross deferred
         tax asset          10,500       9,914       6,908
Valuation allowance        (10,500)     (9,914)     (6,908)
                           -------------------------------  
Net deferred tax asset     $    -       $   -      $   -
                           ===============================

At December 31, 1997,  the Company had tax net operating loss  carryforwards  of
$29,527 which expire between 2004 and 2012.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Ostex International, Inc.:

We have audited the accompanying balance sheets of Ostex International,  Inc. (a
Washington  corporation)  as of  December  31,  1997 and 1996,  and the  related
statements of  operations,  shareholders'  equity and cash flows for each of the
three years in the period ended December 31, 1997.  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  financial  statements  referred to above present  fairly,  in all
material  respects,  the financial position of Ostex  International,  Inc. as of
December 31, 1997 and 1996 and the results of its  operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

                                           /S/ ARTHUR ANDERSEN LLP

Seattle, Washington
February 13, 1998

<PAGE>


CORPORATE DIRECTORY

BOARD OF DIRECTORS

Thomas J. Cable
Chairman of the Board of Directors

Thomas A. Bologna
President and Chief Executive Officer

Elisabeth L. Evans, M.D.
Physician, Obstetrics and Gynecology,
Overlake Obstetricians and Gynecologists, P.C.

David R. Eyre, Ph.D.
Co-Founder;
Burgess Chair of Orthopedic Research,
University of Washington

Fredric J. Feldman, Ph.D.
President, FJF Associates

Gilbert S. Omenn, M.D., Ph.D.
Executive Vice President for Medical Affairs
University of Michigan Health System

Gregory D. Phelps

John H. Trimmer

EXECUTIVE OFFICERS
AND MANAGEMENT

Thomas A. Bologna
President and Chief Executive Officer

John M. Brenneman
Director, Finance and Operations

Thomas F. Broderick
Vice President, Patent and General Counsel

J. Daniel Clemens
Director, Research and Development

Donna J. DeLong
Vice President, Marketing

Robert M. Littauer
Senior Vice President, Finance and Administration

Nancy J.S. Mallinak
Vice President, Regulatory and Clinical Affairs

Cory J. Smith
Director, Manufacturing

William K. Strelke
Vice President, Sales

SCIENTIFIC ADVISORY BOARD

Charles H. Chesnut III, M.D.
Chair, Ostex Scientific Advisory Board; Professor of Medicine and Radiology,
Professor of Nutritional Sciences, Adjunct Professor of Orthopedics, University
of Washington

Elizabeth Barrett-Connor, M.D.
Professor and Chair, Family and Preventive Medicine; Director, Division of
Epidemiology, University of
California, San Diego

Laurence M. Demers, Ph.D.
Distinguished Professor, Departments of Pathology
and Medicine; Director of Clinical Chemistry, Core-Endocrine Laboratory, The
Pennsylvania State Geisinger Health System, The Milton S. Hershey Medical
Center, The Pennsylvania State University College of Medicine

David R. Eyre, Ph.D.
Burgess Chair of Orthopedic Research, Adjunct Professor of Biochemistry and Oral
Biology, Director, Orthopedic Research Laboratories, University of Washington

C. Conrad Johnston, Jr., M.D.
Professor of Medicine, Indiana School of Medicine;
Director, Division of Endocrinology and Metabolism, Indiana University Medical
Center

Howard Judd, M.D.
Chairman, Department of Obstetrics and Gynecology, Olive View/UCLA Medical
Center; Professor,
Department of Obstetrics and Gynecology, Chief,
Division of Reproductive Endocrinology, UCLA
Clinical Center for Women's Health Initiative

Robert Lindsay, M.D., Ph.D.
Chief of Internal Medicine, Helen Hayes Hospital
New York; President, National Osteoporosis Foundation

Allan Lipton, M.D.
Professor, Department of Medicine; Chief, Division
of Oncology, The Milton S. Hershey Medical Center,
The Pennsylvania State University

Veronica Ravnikar, M.D.
Professor of Obstetrics and Gynecology, Director of Reproductive Endocrinology
and Infertility, University
of Massachusetts Medical Center

Markus Seibel, M.D.
Head, Endocrine and Osteodiagnostic Laboratories, Department of Medicine,
Division of Endocrinology & Metabolism, University of Heidelberg, Germany

Frederick R. Singer, M.D.
Medical Director, Osteoporosis/Metabolic Bone Disease Program, St. Johns 
Hospital and Health Center;
Professor of Medicine in Residence, UCLA

<PAGE>

SHAREHOLDER INFORMATION

CORPORATE HEADQUARTERS

Ostex International, Inc.
2203 Airport Way South, Suite 400
Seattle, WA  98134-9967
Tel:     (206) 292-8082
Fax:     (206) 292-8625

INDEPENDENT ACCOUNTANTS

Arthur Andersen LLP
801 Second Avenue, Suite 800
Seattle, WA  98104

LEGAL COUNSEL

Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA  98101

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Website: www.chasemellon.com

INVESTOR RELATIONS

Lippert/Heilshorn & Associates
300 Montgomery Street, Suite 1140
San Francisco, CA  94104

Sec Form 10-k

A copy of the Company's annual report to the Securities and Exchange  Commission
on Form 10-K is  available  without  charge  upon  written  request to  Investor
Relations at the Company's headquarters.

SHAREHOLDERS OF RECORD

As of December 31, 1997, the Company had 160
registered shareholders of record of its common stock.

SHAREHOLDER INQUIRIES

Communications concerning transfer requirements,  lost certificates, and changes
of address  should be directed to the Transfer  Agent.  For general  information
about the Company and its  activities,  contact  Investor  Relations  at Company
headquarters.  

INFORMATION  SERVICE 

For timely  information  about  Ostex,  news
releases are available via facsimile on the Company's  News-on-Demand service by
calling     (800)     356-8061     or    on    the    World    Wide    Web    at
http://www.hnt.com/bizwire/cnn/451.htm.

PRICE RANGE OF COMMON STOCK

The  following  table  lists the high and low trading  places for the  Company's
common stock as reported on the Nasdaq National Market System.

         1997                High     Low
         1st quarter       $ 7.88   $ 3.75
         2nd quarter         4.38     1.94
         3rd quarter         4.13     2.25
         4th quarter       $ 4.50   $ 2.13

         1996                High     Low
         1st quarter       $20.00   $12.25
         2nd quarter        16.25     9.13
         3rd quarter        11.50     6.63
         4th quarter       $ 8.75   $ 5.25

The Company's  common stock is traded on the Nasdaq National Market System under
the symbol OSTX. No dividends have been paid on the common stock. 

ANNUAL MEETING

The Annual Meeting of Shareholders will be held Monday, May 18, 1998, at 9:00 am
at the Museum
of History & Industry, Seattle, Washington.

OSTEX WEBSITE

For more information about Ostex, visit us at http://www.ostex.com.


Osteomark  and Ostex are  registered  trademarks  of Ostex  International,  Inc.
Evista  is a  registered  trademark  of Eli  Lilly  and  Company.  Fosamax  is a
registered trademark of Merck & Co., Inc.
Premarin is a  registered  trademark  of  American  Home  Products  Corporation.
Miacalcin is a registered trademark of Sandoz Pharmaceutical Corporation.