**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-K**

 
| **ý****            Annual  Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                    |
| **For the fiscal year ended December 31, 2002**                                                                                                                         |
|                                                                                                                                                                    |
| **– or –**                                                                                                                                                    |
|                                                                                                                                                                    |
| **o****      Transition  Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                      |
|                                                                                                                                                                    |
| **For the transition period  from         to         **                       |

 

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**0-25250CommissionFile Numbe***r*

 

**OSTEX INTERNATIONAL, INC.**

Exact Name ofRegistrant as Specified in Its Charter

 

| **State of Washington**                                                                    |                              | **91-1450247**                                               |
|--------------------------------------------------------------------------------------------|-----------------------------------|--------------------------------------------------------------|
| State  or Other Jurisdiction of Incorporation or Organization                              |                              | I.R.S.  Employer Identification Number                       |
|                                                                                       |                              |                                                         |
| **2203 Airport Way South, Suite 400, Seattle,  Washington  98134  206-292-8082** |
| Address  and Telephone Number of Principal Executive Offices                               |
|                                                                                       |                              |                                                         |
| Securities registered pursuant to Section 12(b) of the Act:                                |                              | Securities registered pursuant  to Section 12(g) of the Act: |
|                                                                                       |                              |                                                         |
| **(none)**                                                                                 | **(none)**                        |                                                         | **Common Stock, $.01 par value** |
| Title of Class                                                                             | Each Exchange on Which Registered |                                                         | Title  of Class |

 

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| Indicate by check mark whether the registrant (1) has  filed all reports required to be filed by Section 13 or 15(d) of the  Securities Exchange Act of 1934 during the preceding 12 months (or for such  shorter period that the registrant was required to file such reports), and (2)  has been subject to such filing requirements for the past 90 days. |   | Yes  ý             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| No  o                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |
| Indicate by check mark if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-K is not contained herein, and  will not be contained, to the best of registrant’s knowledge, in definitive  proxy or information statements incorporated by reference in Part III of this  Form 10-K or any amendment to this Form 10-K.               |   | ý                       |   |
|                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |
| Indicate by check mark whether the registrant is an  accelerated filer (as defined in Exchange Act Rule 12b-2).                                                                                                                                                                                                                                              |   | Yes  o  No  ý |   |

 

The aggregate market value of the voting and non-votingstock held by non-affiliates of the registrant was approximately $18,038,865 onMarch 12, 2003, based on the per-share closing price of $1.80 on The NasdaqNational Market on that date. The aggregate market value of the voting andnon-voting stock held by non-affiliates of the registrant was approximately$13,726,111 on June 28, 2002, based on the per share closing price of $1.37 onThe Nasdaq National Market on that date.

 

The number of shares of Common Stock outstanding as of March 12, 2003was 12,583,745.

 

 

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**OSTEXINTERNATIONAL, INC.**

 

**INDEX TO FORM 10-K**

 
| **PART I**     |
|----------------|
|           |   |
| ITEM 1         | BUSINESS |
|           |   |
| ITEM 1A        | RISK FACTORS |
|           |   |
| ITEM 2         | PROPERTIES |
|           |   |
| ITEM 3         | LEGAL PROCEEDINGS |
|           |   |
| ITEM 4         | SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS |
|           |   |
| **PART II**    |
|           |   |
| ITEM  5        | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS |
|           |   |
| ITEM 6         | SELECTED FINANCIAL DATA |
|           |   |
| ITEM 7         | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|           |   |
| ITEM 7A        | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK |
|           |   |
| ITEM 8         | FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA |
|           |   |
| ITEM 9         | CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|           |   |
| **PART III**   |
|           |   |
| ITEM 10        | DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT |
|           |   |
| ITEM 11        | EXECUTIVE COMPENSATION |
|           |   |
| ITEM  12       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|           |   |
| ITEM 13        | CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS |
|           |   |
| ITEM 14        | CONTROLS AND PROCEDURES |
|           |   |
| **PART IV**    |
|           |   |
| ITEM 15        | FINANCIAL STATEMENTS,  FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K |
|           |   |
| SIGNATURES     |
|           |   |
| CERTIFICATIONS |

 

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**PART I**

 

Whenused in this Report, the words “may,” “will,” “believes,” “anticipates,”“expects,” “intends,” “estimates,” “predicts,” and similar expressions areintended to qualify as forward-looking statements but are not the exclusivemeans of identifying such statements. Such statements are subject to certain risks and uncertainties and thereare a number of important factors that could cause actual results to differmaterially from those projected.  Thesefactors include, among others, the factors described under the section entitled“Risk Factors” below and under Part II, Item 7 entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—OtherFactors that May Affect Operating Results.”  Readers are cautioned not to place undue reliance on suchforward-looking statements, which speak only as of the date hereof.  Ostex undertakes no obligation to updatepublicly any forward-looking statements to reflect new information, events orcircumstances after the date of this Report, or to reflect the occurrence ofunanticipated events.

 

**Item 1.****  Business**

 

Ostex International, Inc. (Ostex), a Washingtoncorporation incorporated in May 1989, develops and commercializes products tomake “disease management a reality,” with osteoporosis being the first area offocus.  Ostex’ lead product, theOsteomark® NTx test, which is available in multiple formats, incorporatesbreakthrough and patented technology for the management of osteoporosis.  Ostex has collaborative relationships withleading reference laboratories and distributors and markets it Osteomark NTxPoint-of-Care device primarily to pharmaceutical companies to aid in thecommercialization of its Osteomark technology.

 

Osteoporosisis a significant health problem.  TheNational Osteoporosis Foundation (the NOF) updated its first prevalence reportpublished in 1997 entitled “America’s Bone Health:  The State of Osteoporosis and Low Bone Mass in our Nation.”  Based on 2000 Census data, the diseasestatistics indicate that 44 million U.S. women and men aged 50 and older haveor are at high risk for developing osteoporosis due to low bone mass.  Of these 44 million, over 10 million people,approximately 80 percent of them women, already have osteoporosis and anestimated 34 million have low bone mass density.  By the year 2010, it is estimated that over 52 million Americanwomen and men in this same age category will be affected and, if current trendscontinue, the figure will climb to over 61 million by 2020.  Additionally, millions of people are at riskof skeletal degradation associated with Paget’s disease of bone, cancer thatmetastasizes to bone, hyperparathyroidism (overactivity of the parathyroidgland characterized by a reduction of bone mass) and renal osteodystrophy.  Despite the serious human and economicconsequences of these diseases (according to the NOF, the national directexpenditures for osteoporotic and associated fractures was $17 billion in2001), medical intervention usually commences only after pain, immobility,fractures, or other symptoms have appeared. Ostex expects the osteoporosis therapeutic market will continue to growas the population ages.

 

Ostexis the exclusive licensee of the Osteomark technology, known clinically as theNTx test, which is available in multiple formats that can aid in healthcaredecision-making at early menopause and beyond.

 

TheOsteomark NTx test is a non-invasive test that quantitatively indicates thelevel of bone resorption.  Individualswho are losing bone collagen at accelerated rates may progress to low bonemass, a major cause of osteoporosis. Identification of high levels of bone resorption provides theopportunity to predict skeletal response (bone mineral density) to hormonalantiresorptive therapy, such as Wyeth’s Premarin®, in postmenopausal women,which is intended for the prevention and treatment of osteoporosis.  In addition, the Osteomark NTx test can aidclinicians in monitoring in postmenopausal women and those diagnosed withosteoporosis the effects of antiresorptive therapies, such as Merck & Co.,Inc.’s Fosamax®, Eli Lilly and Company’s Evista®, and Procter & GamblePharmaceuticals, Inc.’s and Aventis Pharmaceuticals, Inc.’s Actonel®, in amatter of three months versus one to two years with conventional technology.

 

Ostexhas the worldwide exclusive right to commercialize technology developed fromcertain research conducted by the University of Washington under licenseagreements with the Washington Research Foundation.  As consideration for the licenses acquired and for the attainmentof certain milestones, Ostex paid the Washington Research Foundation certainnonrefundable fees and issued common stock to the

 

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Washington ResearchFoundation and the University of Washington. All legal costs incurred by the Washington Research Foundation inconnection with the filing, prosecution, and maintenance of certain definedpatent rights are paid by Ostex.  Ostexis obligated to pay the Washington Research Foundation royalties on net salesof any licensed products and also pays royalties to the Washington ResearchFoundation on milestones received from licensees of the products.

 

Thefirst Osteomark test became commercially available in May 1995 as a urinarytest in a microtiter plate format that provides a quantitative measure of theexcretion of cross-linked N-telopeptides of Type I collagen (NTx) as anindicator of human bone resorption.  InJuly 1996, Ostex received expanded claims for the urine microtiter test whichallow that an Osteomark test measurement, if taken prior to the initiation ofhormonal antiresorptive therapy, can be utilized to predict a patient’sresponse to that therapy, in terms of its effect on bone mineral density.Additionally, the claims allow that the test can be used to measure the effectof antiresorptive therapies in postmenopausal women, as well as in individualsdiagnosed with osteoporosis and Paget’s disease.  In March 1998, the urine microtiter test claims were furtherexpanded by allowing that an Osteomark test measurement can identify theprobability for a decrease in bone mineral density in postmenopausal womentaking calcium supplements relative to those treated with hormonalantiresorptive therapy.

 

Ostex’second Osteomark test is a serum microtiter plate test that became commerciallyavailable in February 1999. This was the first commercially available serumtest in the United States that measures specific bone breakdown by osteoclastsusing a blood sample.  Ostex believesthat the use of a serum NTx test provides a number of advantages to centralizedtesting laboratories, including the elimination of the requirement to normalizeNTx values to creatinine concentration.

 

TheOsteomark NTx Point-of-Care device became commercially available in October1999 for use in the physician’s office. Ostex and Metrika, Inc. developed a physician’s office “Point-of-Care” Osteomarktest device which is a fully disposable point-of-care NTx test for urine as anindicator of bone resorption that computes an NTx value and displays itdigitally.  In May 2000, Ostex announcedit had acquired the exclusive right from Metrika to manufacture the OsteomarkNTx Point-of-Care device, as well as the exclusive worldwide license tomanufacture, market and sell this device for the measurement of NTx and otherconnective tissue markers, including those associated with osteoarthritis.  Under the agreement, Metrika receives aroyalty based on the sales of the NTx Point-of-Care device.  In August 2001, Ostex received Rx Home-Useclearance and CLIA Waiver status for its NTx Point-of-Care device from the FDA.  This allows the device to be used in essentiallyall physician offices, and physicians can write a prescription for the deviceso that patients can purchase it at the pharmacy and use it in their own homesunder the direction of their physicians.

 

Ostexmanufactures its Osteomark NTx Urine and Serum kits in an Enzyme-linkedImmunosorbent Assay format at its manufacturing facility in Seattle,Washington.  After initial delays, Ostexcompleted validation lots for and began shipping NTx Point-of-Care devices inlate May 2002 from its new point-of-care manufacturing facility, also locatedin Seattle.

 

Ostexbegan working with Procter & Gamble in 2000 to launch a test program inGermany to use the NTx Point-of-Care device with Actonel, Procter& Gamble’s osteoporosis drug for the management of osteoporosis. Thisprogram initially was expanded by Procter & Gamble and its partner, AventisPharmaceuticals, and tested in a number of countries.  Ostex could not deliver as many NTx Point-of-Care devices toProcter & Gamble and Aventis as anticipated in the second half of 2001 dueto product supply difficulties.  Inaddition, because of delays encountered with the start-up of its manufacturingfacility, Ostex was unable to deliver NTx Point-of-Care devices to Procter &Gamble and Aventis during most of the first half of 2002.  As a result, Procter & Gamble andAventis cancelled a portion of their NTx Point-of-Care back ordersor switched to the Osteomark NTx Urine test in the microtiter plateformat.  Ostex validated itsmanufacturing process late in the second quarter of 2002 and has shipped NTxPoint-of-Care devices to Procter & Gamble and Aventis.  Ostex has maintained a continuing dialoguewith Procter & Gamble and Aventis and is working to rebuild their confidencein its manufacturing capabilities. Ostex is also working to expand sources of demand for its products andhas shipped NTx Point-of-Care devices to other large pharmaceutical companies.

 

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Ostexand Mochida Pharmaceutical Co., Ltd., a Japanese pharmaceutical company,entered into a research and development agreement and a license agreement in1992 for the commercialization of the Osteomark NTx Urine test in Japan.  Under the license agreement, Ostex granted Mochidaexclusive marketing and distribution rights to certain products in Japan.  In January 1998, Mochida launched theOsteomark NTx Urine test in a microtiter plate format in Japan for themanagement of patients with hyperparathyroidism and for patients withmetastatic bone tumors.  In December1999, Mochida received an additional regulatory indication from the JapaneseMinistry of Health, Labor and Welfare for the Osteomark test for selectingsuitable drugs for the treatment of osteoporosis and monitoring efficacy ofdrug therapy for osteoporosis.  InFebruary 2002, Mochida exercised its option to license the serum test inJapan.  The total license fee was$750,000, $500,000 of which Mochida paid to Ostex in March 2002, 30 days afterthe time it exercised the option to license, and $250,000 of which Mochida paidto Ostex in August 2002, after Mochida received the official announcement ofthe Japanese reimbursement price from the Ministry of Health.  Mochida obtained the Import Approval forOsteomark NTx Serum from the Japanese Ministry of Health, Labor and Welfare inJuly 2002 and launched the product for sale in November 2002.

 

Worldwidepromotion of the Osteomark NTx Urine test is also supported by Johnson &Johnson Clinical Diagnostics, Inc.  In1995, Ostex entered into research, development, license and supply agreementswith Johnson & Johnson.  Theseagreements grant Johnson & Johnson a license to manufacture, sell anddistribute certain products using our bone resorption technology.  Johnson & Johnson currently distributesin the United States and certain foreign countries the Osteomark NTx Urine testin the microtiter plate format manufactured by Ostex.  Johnson & Johnson also offers the NTx urine test on itsVitros® automated analyzer, for which Ostex receives payments for materialssupplied to Johnson & Johnson and royalties on Johnson & Johnson’ssales.  Under the Johnson & Johnsonlicense agreement, Ostex has the right to license its technology for use onautomated instruments to one other company in addition to Johnson &Johnson.

 

Ostexhas technology for measuring Type II and Type III collagen degradation.  Type II collagen is a primary constituent ofjoint cartilage.  Osteoarthritis, adegenerative disease of joint cartilage, affects over 20 million people in theUnited States alone.  The first symptom,joint pain, occurs after substantial cartilage damage has taken place.  Further development of the Type II collagendegradation test will be needed to allow reliable monitoring of joint cartilagechanges, for validating the effectiveness of drugs under development and foridentifying patients with early-stage disease. Similar to the Osteomark NTx test used in connection with osteoporosis,Ostex believes that the Type II collagen degradation test will aid in theclinical management of osteoarthritis patients.  Type III collagen is a significant constituent of blood vesselssuch as coronary arteries.  Measuringdegradation of this type of collagen may be useful in identifyingcardiovascular disease.  Ostex has noimmediate plans to commercialize tests for Type II or Type III collagendegradation, but has patents in these areas if it decides to commercializethese tests in the future.

 

Ostexalso has technology to enhance artificial joint recovery.  Ostex is the exclusive licensee of U.S.Patents No. 6,190,412 and No. 6,508,838, directed to prosthetic devices havinghydroxyapatite-coated bone attachment surfaces to which tartrate-resistant acidphosphatase (TRAP) is absorbed. Research supported by Ostex established that the human TRAP enzyme has adirect role as a local factor in the recruitment of osteoclasts fromhematopoietic cells.  Such research alsoestablished that recombinantly produced TRAP absorbs readily to hydroxyapatite,a bone-like mineral used to coat medical and dental implants.  Ostex may seek collaborations to confirmwhether or not such TRAP-induced stimulation of osteoclast recruitment resultsin osteointegration and enhanced bonding of the graft or prosthesis to thepatient’s bone.

 

OSTEOMARK®and OSTEX® are registered United States trademarks of Ostex and the OSTEOMARKtrademark is registered in 47 other countries. The collagen breakdown test technology is covered by 37 U.S. patents, 3European patents, 6 Japanese patents, and patents in Australia, Canada,Ireland, Korea, Russia, Spain, Norway, Hong Kong, and Singapore.  Two of the European patents are inopposition proceedings.  Additionalpatent applications are pending.  Thesepatents are variously directed to Type I collagen breakdown products, includingNTx, CTx, and deoxypyridinoline, as well as related breakdown products of TypeII and Type III collagen.  The Type Icollagen patents will begin to expire in late 2007 for the U.S. and in 2010 forEurope and Japan.  Ostex is also theexclusive worldwide licensee of Metrika’s patents relating topoint-of-care devices and subcomponents thereof for the measurement of NTx andother connective tissue markers.  The Metrika patents will begin to expirein 2013.

 

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**Employees**

 

Asof March 12, 2003, Ostex had 47 full-time employees and 1 part-timeemployee.  Ostex considers its relationswith its employees to be good.

 

**Proposed Merger with Inverness**

 

OnSeptember 9, 2002, Ostex announced that it had entered into an agreement andplan of merger with Inverness Medical Innovations, Inc. and Geras AcquisitionCorp., a wholly-owned subsidiary of Inverness. Under the terms of the agreement, Geras Acquisition Corp. will be mergedwith and into Ostex, Ostex will become a wholly owned subsidiary of Inverness,and each outstanding share of Ostex common stock will be converted into theright to receive common stock, par value $.001 per share, of Inverness based ona conversion ratio that will be determined immediately prior to the closing ofthe merger. Under the merger agreement, as amended on February 18, 2003, theper share conversion ratio is designed to provide that an aggregate ofapproximately 1.9 million shares of Inverness common stock will be:

 

•                  issued in exchange for alloutstanding Ostex common stock; and

•                  reserved for issuance upon exerciseof the outstanding stock options and warrants to purchase Ostex common stockthat will be assumed by Inverness in the merger.

 

Themerger cannot be completed unless certain conditions are satisfied, includingInverness obtaining the consent of certain of its lenders and the approval bythe affirmative vote of two-thirds of the outstanding shares of Ostex’ commonstock. Ostex’ directors and their affiliates, who collectively own an aggregateof approximately 19.8% of the total outstanding common stock of Ostex, haveentered into a voting agreement with Inverness, which provides that they willvote their shares in favor of the acquisition. Additionally, in connection with the acquisition, Inverness received anoption to purchase up to 19.9% of Ostex’ common stock that will be exercisableunder certain circumstances.

 

OnJanuary 2, 2003, Ostex and Inverness announced that Inverness had been unableto obtain the required consent of certain of its lenders to the merger.  Theamendment to the merger agreement, which, among other things, reduced theaggregate number of shares of Inverness common stock to be issued in the mergerfrom 2.3 million shares to 1.9 million shares, is intended to increase thelikelihood of Inverness receiving the consent of certain of its lenders.  As reflected in the joint press releaseissued by Inverness and Ostex on February 19, 2003, Inverness advises that ithas been working closely with its lenders to develop a proposal acceptable toits lenders and is optimistic that it will be able to satisfy its lenders’requirements in a timely manner and obtain their consent to the merger.  There can be no assurance, however, thatInverness’ lenders will give their consent to the proposed merger.  Likewise, there can be no assurance thatOstex’ shareholders will approve the merger. Failure to complete the merger could have a material adverse effect onOstex’ financial condition and results of operations.  Ostex has provided additional information about some of thesepotential adverse effects under the captions “Liquidity and Capital Resources”and “Additional Factors That May Affect Results” below.

 

Invernessand Ostex have filed relevant documents concerning the merger with theSecurities and Exchange (SEC), including a registration statement on Form S-4and subsequently filed Reports and amendments. You should refer to these documents for further information about theproposed merger.

 

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**Item 1A.****   Risk Factors**

 

**RisksRelated to the Proposed Merger with Inverness**

 

**Failureto complete the proposed merger with Inverness could negatively impact Ostex’stock price and future business and operations.**

 

If the merger is not completed for any reason, Ostex may be subject to anumber of material risks, including the following:

 

•                Ostex may be required to pay Invernessa termination fee of $1.8 million;

 

•                the stock option granted by Ostex toInverness may become exercisable;

 

•                the price of Ostex common stock maydecline to the extent that the current market price of Ostex common stockreflects an assumption that the merger will be completed;

 

•                Ostex must pay its accrued costsrelated to the merger, such as legal, accounting and financial advisory fees,even if the merger is not completed;

 

•                Ostex will need to repay all amountsthat it borrowed under the loan agreement with Inverness by December 31, 2003at the latest;

 

•                Ostex will need to seek immediateadditional funding to meet its capital and other requirements, which fundingmay not be available when needed or may not be available on terms acceptable toOstex; and

 

•                Ostex will be delisted from The NasdaqNational Market for failing to satisfy The Nasdaq National Market $10 millionminimum shareholders’ equity requirement, which delisting could adverselyaffect the liquidity and trading price of its common stock.

 

In addition, Ostex’ customers may, in response to the announcement of themerger, delay or defer purchasing decisions. Any delay or deferral in purchasing decisions by Ostex customers wouldhave a material adverse effect on Ostex’ business, regardless of whether or notthe merger is ultimately completed. Similarly, current and prospective Ostex employees may experienceuncertainty about their future role with Inverness until Inverness’ strategieswith regard to Ostex are announced or executed.  This uncertainty may adversely affect Ostex’ ability to attractand retain key management, marketing, technical, manufacturing, administrative,sales and other personnel.

 

The obligations of the parties to effect the merger are subject to anumber of conditions, including obtaining consents of lenders of Inverness andapproval by holders of Ostex common stock, and there can be no assurance that themerger will occur.

 

**Ostexbelieves that the price of its common stock is based in large part on the priceof Inverness common stock; the price of Inverness common stock may be affectedby factors different that those affecting the price of Ostex common stock.**

 

Upon completion of the merger with Inverness, the holders of Ostex commonstock will become holders of Inverness common stock.  In addition, prior to the merger and unless the merger agreementwith Inverness is terminated, Ostex believes that the price of its common stockwill be determined in part by the expectation that the merger will be completedand that Ostex shareholders will become shareholders of Inverness, and theprice of Ostex common stock will be affected by the price of Inverness’ commonstock.  The business, strategy andfinancial condition of Inverness are different from those of Ostex.  Inverness’ results of operations, as well asthe price of Inverness’ common stock, will be affected by factors that may bedifferent than those affecting Ostex’ results of operations and common stockprice.

 

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**RisksRelated to Ostex’ Business**

 

**Ostexhas a history of losses and may not be able to continue as a going concern.**

 

KPMG LLP, Ostex’independent auditors, has included a going concern uncertainty paragraph in itsaudit report on Ostex’ financial statements for the year ended December 31,2002, which states that Ostex’ recurring losses from operations and need toraise additional capital to meet its operating and debt requirements if theproposed merger with Inverness is unsuccessful, raise substantial doubt aboutOstex’ ability to continue as a going concern.

 

Ostex has not beenprofitable for any year since its formation in 1989.  Ostex had an accumulated deficit through December 31, 2002 of$43,309,000.  Ostex expects to incuradditional costs as it continues with its existing operations, marketing andsales efforts for its products, and research and development activities.  Ostex’ lead product, the Osteomark NTx Urinetest, became commercially available in May 1995 in the United States, but salesto date have not been significant enough to generate net income.  Ostex’ ability to achieve long-termprofitability is dependent upon successfully manufacturing, marketing, andcommercializing existing products. Ostex expects to continue to incur additional losses in the near-termfuture and Ostex is unable to predict when, if ever, it will achieveprofitability.  Ostex’ ability tocontinue as a going concern is dependant upon numerous factors, including itsability to obtain additional financing, its ability to increase its level offuture revenues and its ability to reduce operating expenses.

 

**Ostexcannot assure you that its Common Stock will continue to be listed on TheNasdaq National Market, and delisting could depress its stock price, limitshareholder liquidity and make it more difficult for Ostex to raise capital.**

 

On November 22, 2002, Nasdaq notified Ostex that the Nasdaq Staff wasreviewing the Ostex’ eligibility for continued listing on The Nasdaq NationalMarket in light of Ostex’ failure to satisfy the $10,000,000 minimumshareholders’ equity requirement set forth in Marketplace Rule 4450(a)(3).  After reviewing information concerning theproposed merger with Inverness submitted by Ostex, Nasdaq granted Ostex anextension.  Under the terms of theextension, if the merger with Inverness is not consummated by February 28, 2003or Ostex does not apply for transfer to The Nasdaq SmallCap Market, Nasdaq willprovide formal written notification that Ostex’ securities will bedelisted.  On March 18, 2003, Ostexreceived formal written notice of the Nasdaq Staff’s determination that Ostex’securities should be delisted from The Nasdaq National Market.  On March 21, 2003, Ostex requested ahearing before a Nasdaq Listing Qualifications Panel to review the Staffdelisting determination.  At thehearing, Ostex intends to request continued listing on The Nasdaq NationalMarket pending completion of the merger with Inverness.    If Ostex’ appeal fails or if the merger isnot consummated, Ostex may seek to list its Common Stock on The Nasdaq SmallCapMarket.  If Ostex does not qualify forlisting on The Nasdaq SmallCap Market, its Common Stock would be listed on theover-the-counter bulletin board or another quotation system orexchange on which Ostex would qualify. If Ostex’ Common Stock is delisted, the delisting could have a materialadverse effect on the trading price and liquidity of the stock, and shareholders’ability to sell shares of Ostex stock would be severely limited.  Among other things, if not listed on TheNasdaq National Market or The Nasdaq SmallCap Market, Ostex’ Common Stock maythen constitute “penny stock” which would place increased regulatory burdens onbrokers, making them less likely to make a market in Ostex stock.  Loss of Ostex’ Nasdaq National Market statuscould also make it more difficult for Ostex to raise capital and would alsocomplicate compliance with state “blue sky” laws.

 

**Themarket acceptance and demand for Ostex’ products is uncertain.**

 

The Osteomark NTxtest, became commercially available in May 1995 in the United States, but salesto date have not been significant enough to generate net income.  There can be no assurance that Ostex’Osteomark NTx tests will gain widespread acceptance from the medical community,clinical or hospital laboratories, pharmaceutical companies, physicians orpatients as readily as other forms for testing or any newly developed test.  There can be no assurance that Ostex will beable to develop significant market share for its products or maintain orincrease its current market share. Ostex did not deliver as many NTx Point-of-Care devices to Procter &Gamble and Aventis Pharmaceuticals as anticipated in the second half of 2001due to product supply difficulties.  Inaddition, because of delays encountered with the start-up of Ostex’point-of-care manufacturing facility, Ostex was unable to deliver NTx Point-of-Caredevices to Procter & Gamble and Aventis during most of the first half of2002.  As a result, Procter & Gambleand Aventis cancelled a portion of their NTx Point-of-Care back orders orswitched to Ostex’ Osteomark NTx Urine test in the microtiter plate format.

 

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Ostex’point-of-care manufacturing facility was validated to produce a high volume ofdevices.  The production capacityexceeds the production plan for devices in the near-term and may exceed theproduction plan for devices in the long-term. If this were to occur, the resulting excess capacity may have a negativeimpact to Ostex’ margins in future periods. The inability of Ostex to increase market acceptance and demand for itsproducts could have a material, adverse effect on Ostex’ business, financialcondition, and results of operations.

 

**Ostexcurrently relies on a small number of customers, and the loss of a significantOstex customer could harm Ostex’ business.**

 

Ostex’ currentoperations are dependent upon a relatively small number of customers, whichchange from time to time.  Ostex’ mostsignificant customers during 2002 were Mochida Pharmaceutical Co., Ltd., QuestDiagnostics Incorporated, Covance Central Lab Services, Johnson & JohnsonClinical Diagnostics, Inc. and Fisher Scientific.  These customers collectively accounted for approximately 56% ofOstex’ total product sales during the year. See discussion under the heading “Concentration of Credit Risk” in Note1 to Financial Statements below for a summary of customers that comprisedgreater than 10% of Ostex’ total revenues in each of the last three fiscalyears.  Ostex generally does not havelong-term purchase contracts with its customers, who order products on apurchase order basis.  In certaincircumstances, customer orders may be cancelled, changed or delayed on shortnotice.  Because Ostex’ finished goodsinventory has a limited shelf life, inventory amounts that are not sold withinan appropriate time are charged against the cost of goods sold.  There can be no assurance that Ostex’current significant customers will continue to buy products at their current orincreased levels.  Ostex lost a numberof orders from significant customers as a result of manufacturing delays encounteredwith the start-up of Ostex’ point-of-care manufacturing facility in late 2001and early 2002.  Loss of a significantOstex customer or further reduction of the level of orders from a significantOstex customer would have a material adverse effect on Ostex’ operatingresults.

 

**Ostex isdependent on therapeutics developed by others.**

 

Acceptance of anddemand for Ostex’ products will be affected by physicians’ perceived needs totest for bone resorption for the purposes of the prevention, treatment andmonitoring of osteoporosis.  There are currentlya limited number of therapies that are effective in preventing, treating andmonitoring osteoporosis or other bone disorders.  In the event new therapies do not receive regulatory approval orexperience delayed market acceptance, or existing therapies are deemed not tobe as effective or useful as originally suggested, Ostex could be adverselyaffected. Unfavorable publicity or studies concerning an Ostex product ortherapeutic products for osteoporosis could also have an adverse effect onOstex’ ability to obtain regulatory approvals or to achieve market acceptance.

 

**Ostexhas limited sales, marketing and distribution experience and resources.**

 

Ostex has limitedsales, marketing and distribution experience and resources.  To market any of its products directly orindirectly, Ostex must develop and implement a substantial sales and marketingeffort with technical expertise and supporting distribution capability.  Ostex may need to increase its sales andmarketing resources significantly in order for its products to gain relativelysignificant market acceptance.  Ostexintends to continue to market and sell its products in the United Statesthrough research and clinical laboratories and distributors, establish relationshipswith a pharmaceutical company or companies, and to establish businessarrangements to sell its products in other markets through distributors and apharmaceutical company or companies. There can be no assurance that Ostex will be able to establish effectivesales and marketing and distribution capabilities or that its collaboratorswill be successful in gaining market acceptance for Ostex’ products or thatOstex will achieve or maintain significant market share for its products.

 

**Ostexhas limited manufacturing experience.**

 

Ostex has, throughan agreement with Metrika, Inc., developed an adaptation of its core technologyfor use in physicians’ offices, called the Osteomark NTx Point-of-Caredevice.  Until year-end 2001, Ostexdepended upon the efforts of Metrika for the production of the NTxPoint-of-Care device.  In the secondquarter of 2002, Ostex itself began manufacturing the NTx Point-of-Care device,but continues to rely on Metrika for supply of certain components.  Ostex has limited manufacturing experienceand technical

 

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expertise with a productlike the NTx Point-of-Care device. Failure by Ostex to manufacture the NTx Point-of-Care device and otherproducts in significant quantities in a cost-effective manner could adverselyaffect Ostex’ results of operations. Because of delays encountered with the start-up of Ostex’ point-of-caremanufacturing facility, Ostex was unable to deliver NTx Point-of-Care devicesto customers during late 2001 and most of the first half of 2002.  Any similar interruptions in themanufacturing process in the future could have a material adverse effect onOstex’ results of operations.

 

**Ostex isdependent on licensed patents and proprietary rights.**

 

Ostex’ success isdependent in part on obtaining, maintaining and enforcing its patents and otherproprietary rights and its ability to avoid and defend against allegations ofinfringing the proprietary rights of others. Patent law relating to the scope of claims in the biotechnology field inwhich Ostex operates is still evolving and, consequently, patent positions inOstex’ industry may not be as strong as in other better-establishedfields.  Accordingly, the United StatesPatent and Trademark Office, or PTO, and foreign patent offices may not issuepatents from the patent applications owned by or licensed to Ostex.  If issued, the patents may not give Ostex anadvantage over competitors with similar technology.

 

Ostex is theexclusive licensee of 60 patents in North America, Europe, and Asia.  However, the issuance of a patent is notconclusive as to its validity or enforceability and it is uncertain how muchprotection, if any, will be given to Ostex’ patents if it attempts to enforcethem and they are challenged in court or in other proceedings, such as oppositions,which may be brought in foreign jurisdictions to challenge the validity of apatent.  A third party may challenge thevalidity or enforceability of a patent after its issuance by the PTO or aforeign patent office.  It is possiblethat a competitor may successfully challenge Ostex’ patents or that a challengewill result in limiting their coverage. Moreover, the cost of litigation to uphold the validity of patents andto prevent infringement can be substantial. If the outcome of litigation is adverse to Ostex, third parties may beable to use Ostex’ patented invention without payment to Ostex.  Moreover, it is possible that competitorsmay infringe Ostex’ patents or successfully avoid them through designinnovation.  To stop these activities, Ostexmay need to file a lawsuit.  Theselawsuits are expensive and would consume time and other resources, even ifOstex is successful in stopping the violation of its patent rights.  In addition, there is a risk that a courtwould decide that Ostex’ patents are not valid and that Ostex does not have theright to stop the other party from using the inventions.  There is also the risk that, even if thevalidity of Ostex’ patents are upheld, a court would refuse to stop the otherparty on the ground that its activities do not infringe Ostex’ patents.

 

Further, once apatent has expired, the technology is no longer protected.  Ostex’ Type I collagen patents will begin toexpire in late 2007 for the United States and in 2010 for Europe and Japan.  Ostex is the exclusive worldwide licensee ofMetrika’s patents relating to point-of-care devices and subcomponents thereoffor the measurement of NTx and other connective tissue markers.  The Metrika patents will begin to expire in2013.

 

In addition to theintellectual property rights described above, Ostex relies on unpatentedtechnology, trade secrets and confidential information.  Therefore, others may independently developsubstantially equivalent information and techniques or otherwise gain access toor disclose Ostex’ technology.  Ostexmay not be able to effectively protect its rights in unpatented technology,trade secrets and confidential information. Ostex requires each of itsemployees, consultants and advisors to execute a confidentiality agreement atthe commencement of an employment or consulting relationship with Ostex.  However, these agreements may not provideeffective protection of Ostex’ information or, in the event of unauthorized useor disclosure, they may not provide adequate remedies.

 

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**Ostex’patent rights could conflict with the patent rights of others.**

 

Ostex’ competitorsor others may have or acquire patent rights that they could enforce againstOstex.  If they do so, Ostex may berequired to alter its products, pay licensing fees or cease activities.  If Ostex’ products conflict with patentrights of others, third parties could bring legal actions against Ostexclaiming damages and seeking to enjoin manufacturing and marketing and sales ofthe affected products.  If these legalactions are successful, in addition to any potential liability for damages,Ostex could be required to obtain a license in order to continue to manufactureor market the affected products.  Ostexmay not prevail in any legal action and a required license under the patent maynot be available on acceptable terms or at all.

 

In December 2001,Osteometer Biotech A/S, also known as Nordic Bioscience A/S, and its licenseeRoche Diagnostics GmbH sent Ostex two notification letters concerningOsteometer’s European Patent No. 0742902 which issued November 21, 2001.  The patent claims synthetic NTx peptides inassays for bone resorption.  Ostexbelieves that its Osteomark products do not infringe upon the Osteometer patentand that the patent is invalid in light of prior art that was not taken intoconsideration by the issuing European Patent Office.  In January 2002, Ostex filed an action in the Court of Monza,Italy, seeking a pan-European declaration of noninfringement.  This action included a request to stay anysuch noninfringement determination pending the outcome of an oppositionproceeding that Ostex initiated on August 20, 2002, in the European PatentOffice against this patent.  By letterdated October 24, 2002, Nordic Bioscience A/S informed Ostex that it had filedinfringement proceedings in July 2002 against Ostex before the District Courtof Düsseldorf, Germany.  Ostex wasserved notification on December 12, 2002 of the German proceeding.  On January 9, 2003, Ostex filed anotification of appearance in Germany and indicated that it will contest thematter.

 

**Ostexmay be subject to significant costs of litigation relating to Ostex’intellectual property.**

 

The cost to Ostexof any litigation or other proceedings relating to intellectual propertyrights, even if resolved in Ostex’ favor, could be substantial.  Some of Ostex’ competitors may be betterable to sustain the costs of complex patent litigation because they havesubstantially greater resources.  Ifthird parties file patent applications, or are issued patents claimingtechnology also claimed by Ostex in pending applications, Ostex may be requiredto participate in interference proceedings in the Patent Trademark Office, oropposition proceedings abroad, to determine priority of invention.  Ostex may be required to participate ininterference or opposition proceedings involving its issued patents and pendingapplications.  Ostex may be required tocease using the technology or license rights from prevailing third parties as aresult of an unfavorable outcome in an interference proceeding.  Such a prevailing party may not offer Ostexa license on commercially acceptable terms.

 

**Ostex issubject to lengthy regulatory processes and the uncertainty of regulatoryapprovals.**

 

The manufactureand marketing and sales of Ostex’ products and research and developmentactivities are subject to regulation for safety and quality by the FDA in theUnited States and comparable authorities in other countries.

 

The process ofobtaining FDA and other required regulatory approvals can be lengthy andexpensive.  The time required forapprovals is uncertain, and often depends on the type, complexity and noveltyof the product.  There can be noassurance that regulatory agencies will act favorably or quickly in theirreview of any submission by Ostex. Significant difficulties or costs may be encountered by Ostex in itsefforts to obtain approvals that could delay or preclude Ostex from marketingand selling its products.  The FDA mayrequest the development of additional data following original submissions,causing Ostex to incur further cost and delay. Additionally, the FDA may restrict the intended use of a submittedproduct as a condition for clearance.

 

The requirementsgoverning the conduct of clinical studies, manufacturing and marketing andselling of Ostex’ products outside the United States can vary widely fromcountry to country.  Foreign approvalsmay take longer than FDA approvals and can involve additional testing.  Foreign regulatory approval processes

 

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involve similar risksassociated with the FDA approval processes. Also, approval of a product by the FDA does not ensure approval of thesame product by health authorities of other countries.

 

Ostex hascompleted an EC Declaration of Conformity, permitting the sale of its NTxPoint-of-Care device in the European Union. Ostex’ other products sold in the European Union will be required tomeet this regulation as well by December 31, 2003.  Ostex is in the process of preparing an EC Declaration ofConformity for these products.  For theproducts currently sold in Canada, Ostex is in the process of fulfilling thequality system requirements and submitting the quality system certificaterequired by Health Canada by November 1, 2003. If Ostex does not meet these deadlines, it will not be able to continueto sell these products in the respective markets.

 

**Ostex issubject to extensive continuing government regulation.**

 

The research,development, manufacturing, marketing and sales of Ostex’ products are subjectto extensive continuing regulation by numerous governmental authorities in theUnited States and certain other countries, and Ostex, its products, and itsmanufacturing facilities are subject to continual review and periodicinspection.  The regulatory standardsfor manufacturing are applied stringently by the FDA.  Discovery of previously unknown problems with a product,manufacturer, or facility may result in restrictions on such product,manufacturer or facility, including warning letters, fines, suspensions ofregulatory approvals, product recalls, operating restrictions, delays inobtaining new product approvals, withdrawal of the product from the market, andcriminal prosecution.  Other violationsof FDA requirements can result in similar penalties.  Ostex is also subject to numerous environmental, health andworkplace safety laws and regulations, including those governing laboratoryprocedures, exposure to blood-borne pathogens, and the handling of biohazardousmaterials.  Any violation of, and thecost of compliance with, these laws and regulations could adversely impactOstex’ operations.  Ostex is unable topredict the extent or likelihood of adverse government regulation that mightarise from future U.S. or foreign government action.

 

**Themarket for Ostex’ products is subject to intense competition.**

 

Competition frombiotechnology companies, diagnostics companies, pharmaceutical companies, andresearch and academic institutions is intense and is based on price as well asproduct performance. Ostex’ main competitors are Osteometer Biotech A/S, alsoknown as Nordic Bioscience A/S, and Quidel Corporation and licensees anddistributors of their technologies and products. A number of tests andprocedures for the detection of osteoporosis and other bone disorders currentlyexist and others are in development, and the manufacturers of these tests willcontinue to improve them.  In addition,the diagnostics industry is subject to rapid technological change.  Ostex’ competitors may succeed in developingproducts which are more effective or less expensive than those that have beenor are being developed by Ostex or which would render Ostex’ core technologyobsolete, uneconomical or non-competitive. Many of Ostex’ competitors have, or have access to substantially greaterfinancial, technical and human resources than Ostex.  In addition, many of these competitors have significantly greaterexperience and resources than Ostex in undertaking clinical trials and otherregulatory approval procedures, as well as in marketing and sales and achievingmanufacturing efficiencies.  There arealso small companies, academic institutions, governmental agencies and otherresearch organizations that are conducting research in the area of osteoporosisand other collagen-related diseases. These entities are becoming increasinglyaware of the commercial value of their findings and more active in seekingpatent and other proprietary rights, as well as licensing revenues.

 

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**Ostex isdependent on its core technology and may not be able to adapt this technologyto different formats.**

 

Ostex currentlyrelies exclusively upon its core technology for the development of productsassociated with osteoporosis and other collagen-related diseases.  Ostex’ Type I collagen patents will begin toexpire in late 2007 for the United States and in 2010 for Europe and Japan.  Ostex is the exclusive worldwide licensee ofMetrika’s patents relating to point-of-care devices and subcomponents thereoffor the measurement of NTx and other connective tissue markers.  The Metrika patents will begin to expire in2013.  Competitors of Ostex may succeedin developing new or more efficient or cost effective tests that are morereadily accepted than Ostex’ products. Ostex may require additional development work to adapt its coretechnology to different, additional or more cost-effective formats, instrumentsand other delivery platforms that currently exist or may be developed.  In particular, additional research anddevelopment will be required to adapt its core technology to high-speed,high-volume automated instruments typically used in large clinical laboratoriesor companies through which Ostex may seek to expand the market for itsproducts. In addition, further research and development will be required tolower the cost of the NTx Point-of-Care device beyond volume considerations andto enhance its performance. Ostex may not be successful in adapting and furtherdeveloping its core technology to meet such needs.  Additionally, technological changes or medical advancements coulddiminish or eliminate the commercial viability of the Osteomark tests or futureproducts based upon Ostex’ core technology. The failure to adapt Ostex’ core technology to different or more costeffective formats, instruments, and other delivery platforms, or otherwise tocommercialize such core technology, could have a material adverse effect onOstex’ results of operations.

 

**Ostex isreliant on collaborative agreements and other relationships.**

 

Ostex has enteredinto collaborative, distribution or co-promotional agreements, arrangements, orprograms with several partners, including, among others, Johnson & JohnsonClinical Diagnostics, Inc., Mochida Pharmaceutical Co., Ltd., Procter &Gamble, Aventis Pharmaceuticals and Quest Diagnostics Incorporated.  The level of each collaborator’s involvementand support and the amount and timing of resources it will give or the amountof product it will purchase from Ostex under these agreements, arrangements, orprograms are not within the control of Ostex and can significantly impactOstex’ ability to achieve its objectives. There can be no assurance that these collaborators will perform theircontractual obligations or intentions as expected or that Ostex will deriverevenue from such arrangements. Moreover, the agreements or business could be terminated.  Ostex expects to rely on these andadditional agreements, arrangements, or programs to develop, commercialize,promote and sell its present and future products.  Ostex may not be able to negotiate acceptable agreements in thefuture.  Moreover, new agreements orexisting agreements may not be successful. If any collaborator breaches orterminates its agreement, or fails to conduct its collaborative activities in atimely manner, the commercialization of existing and future products could beslowed down or blocked completely. Disputes may arise between Ostex and its collaborators on a variety ofmatters, including financial or other obligations under the businessrelationships and arrangements between the companies.  These disputes may be both expensive and time consuming and mayresult in delays in the development and commercialization of Ostex’ products.

 

**Productliability claims with respect to Ostex’ products in excess of the amount ofinsurance could adversely affect Ostex’ financial condition.**

 

The testing,manufacturing, marketing and sale of Ostex’ products may subject Ostex toproduct liability claims.  Ostexmaintains coverage against product liability risks up to a $2,000,000 aggregatelimit.  However, continuing insurancecoverage may not be available at an acceptable cost, if at all.  Ostex may not be able to obtain insurancecoverage that will be adequate to satisfy any liability that may arise.  Regardless of merit or eventual outcome,product liability claims may result in decreased demand for a product, injuryto its reputation, withdrawal of clinical trial volunteers and loss ofrevenues.  As a result, regardless ofwhether Ostex is insured, a product liability claim or product recall mayresult in losses that could be material to Ostex.

 

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**Ostexhas limited suppliers.**

 

The majority ofthe raw materials, technologies and purchased components used to manufactureOstex’ products are readily available. However, certain of these materials, technologies and related supportsuch as solid phase membranes and electronics modules for Ostex’ NTxPoint-of-Care device, are from a sole supplier or a limited group of suppliers.Metrika is the sole supplier of certain critical components for Ostex’ NTxPoint-of-Care device and any issues with their ability to supply criticalcomponents could interrupt the supply of these components for the device. Therecan be no assurance that Ostex’ reliance on these suppliers will not result inproblems with product supply. Interruptions in the availability of products could have a materialadverse effect on Ostex’ results of operations.

 

**Thehealthcare reimbursement for Ostex’ products is uncertain.**

 

Ostex’ ability tocommercialize its products will depend in part on the extent to whichreimbursement for the cost of such products and related treatment will beavailable from third-party payors, such as government health administrationauthorities, private health coverage insurers and other organizations, and theamount of such reimbursement.  Thestatus of the scope of healthcare programs worldwide is uncertain and there canbe no assurance that adequate third-party coverage will be available for Ostexto maintain price levels sufficient for realization of an appropriate return onits investment in product development. Third-party payors are increasingly challenging the price and costeffectiveness of medical products and services.  There can be no assurance that Ostex’ existing or any futureproducts will provide sufficient value or be considered cost effective and thatreimbursement to the consumer will be available or sufficient to allow Ostex tosell its products on a competitive basis. The U.S. Department of Health and Human Services Centers for Medicare& Medicaid Services issued its Final Rule for National Medicare Coverage inNovember 2001.  The Rule establishedmandatory national Medicare coverage for the use of the Osteomark NTx Urinetest. The implementation date for this coverage was January 1, 2003.  However, because the Rule was negotiatedbased on earlier clinical studies with urine tests, the rulemaking did notextend to the Osteomark NTx Serum test. In the absence of a national coverage decision, Medicare contractorswill have local discretion in deciding whether the Osteomark NTx Serum test is reimbursableas a medically necessary procedure for assessing and monitoring bone lossresorption.

 

**Ostexhas experienced volatility in its stock price**

 

The volatility of Ostex’ stock price has been significant since it firstbecame publicly traded in January 1995. The stock market may experience significant price and volumefluctuations unrelated to the operating performance of particularcompanies.  Factors such as any loss ofkey management, the status of the merger between Ostex and Inverness, the potentialdelisting of Ostex Common Stock from The Nasdaq National Market, the results ofOstex’ clinical trials or those of its competitors, adverse regulatory actionsor decisions, evidence regarding the safety or efficacy of Ostex’ products orthose of its competitors, announcements of technological innovations or newproducts by Ostex or its competitors, governmental regulation, developmentswith respect to patents or other proprietary rights, product or patentlitigation or public concern as to the safety of products developed by Ostexmay have a volatile effect on the market price of Ostex’ stock.  The realization of any of the risksdescribed in this report, as well as other factors, could have a materialadverse impact on the market price of Ostex’ Common Stock and may result inloss of some or all of your investment.

 

In the past, securities class action litigation has often been broughtagainst companies following periods of volatility in their stock prices.  Ostex may in the future be the target ofsimilar litigation.  Securitieslitigation could result in substantial costs and divert management’s time andresources, which could cause Ostex’ business to suffer.

 

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**Item 2.****        Properties**

 

Ostex’ research laboratories, manufacturing operations, and administrativeoffices are located in Seattle, Washington. Ostex leases approximately 46,000 square feet of space under twoseparate lease agreements that expire in 2005 and 2010, respectively.  The Seattle facilities have adequatecapacity for Ostex’ present needs.

 

**Item 3.****        LegalProceedings**

 

Informationregarding legal proceedings is contained in Item 8 of this Annual Report onForm 10-K in the section entitled “Notes to Financial Statements,” under Note 9- Litigation.

 

**Item 4.****        Submission of Matters to a Vote ofSecurity Holders**

 

Not applicable.

 

 

**PART II**

 

**Item 5.****        Market for Registrant’s Common Equityand Related Shareholder Matters**

 

**MarketPrice of Common Stock**

 

Ostex’ Common Stock is traded on The Nasdaq National Market under thesymbol “OSTX.”   The followingtable lists the high and low trading prices for Ostex’ Common Stock as reportedon the Nasdaq National Market.

 
| **2002**    |   | **High** |   | **Low** |   |
|-------------|--------|----------|--------|---------|--------|
| 1st quarter |   | $        | 3.15   |    | $      | 2.00 |   |
| 2nd quarter |   | 2.50     |   | 1.37    |   |
| 3rd quarter |   | 2.10     |   | 1.04    |   |
| 4th quarter |   |     | 2.32   |    |   | 1.11 |   |

 
| **2001**    |   | **High** | ** ** | **Low** | ** ** |
|-------------|--------|----------|------------|---------|------------|
| 1st quarter |   | $        | 1.94       |    | $          | 1.03 |   |
| 2nd quarter |   | 1.95     |       | 1.06    |       |
| 3rd quarter |   | 3.15     |       | 1.22    |       |
| 4th quarter |   |     | 3.35       |    |       | 1.76 |   |

 

The closing price of the Common Stock on December 31, 2002 was$1.76.  The closing price of the CommonStock on March 12, 2003 was $1.80.

 

On November 22, 2002, Nasdaq notified Ostex that the Nasdaq Staff wasreviewing Ostex’ eligibility for continued listing on The Nasdaq NationalMarket in light of Ostex’ failure to satisfy the $10,000,000 minimumshareholders’ equity requirement set forth in Marketplace Rule 4450(a)(3).  After reviewing information concerning theproposed merger with Inverness submitted by Ostex, Nasdaq granted Ostex anextension.  Under the terms of theextension, if the merger with Inverness is not consummated by February 28, 2003or Ostex does not apply for transfer to The Nasdaq SmallCap Market, Nasdaq willprovide formal written notification that Ostex’ securities will bedelisted.  On March 18, 2003, Ostexreceived formal written notice of the Nasdaq Staff’s determination that Ostex’securities should be delisted from The Nasdaq National Market.  On March 21, 2003, Ostex requested ahearing before a Nasdaq Listing Qualifications Panel to review the Staffdelisting determination.  At thehearing, Ostex intends to request continued listing on The Nasdaq NationalMarket pending completion of the merger with Inverness.  If Ostex’ appeal fails or if the merger isnot consummated, Ostex may seek to list its Common Stock on The Nasdaq SmallCapMarket.  If Ostex does not qualify forlisting on The Nasdaq SmallCap Market, its Common Stock would be listed on theover-the-counter bulletin board or another quotation system or exchange onwhich Ostex would qualify.  If Ostex’Common Stock is delisted, the delisting could have a material adverse effect onthe trading price and liquidity of the stock, and shareholders’ ability to sellshares of Ostex stock would be severely limited.  Among other things, if not listed on The Nasdaq National Marketor The Nasdaq SmallCap Market,

 

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Ostex’ Common Stock maythen constitute “penny stock” which would place increased regulatory burdens onbrokers, making them less likely to make a market in Ostex stock.  Loss of Ostex’ Nasdaq National Market statuscould also make it more difficult for Ostex to raise capital and would alsocomplicate compliance with state “blue sky” laws.

 

**Holdersof Common Stock**

 

As of March 12, 2003, there were 12,583,745 shares of Common Stockoutstanding held of record by approximately 121 shareholders.

 

**DividendPolicy**

 

Ostex has never paid cash dividends and has no present intention ofpaying dividends in the foreseeable future.

 

**Transfer Agent and Registrar**

 

The transfer agentand registrar for the Common Stock is Mellon Investor Services, LLC, RidgefieldPark, New Jersey.

 

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**Item 6.****        Selected Financial Data**

 

*(in thousands,except per share amounts)*

 
| **FISCAL YEAR ENDED DECEMBER 31,**                                 |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| **PRODUCT SALES AND OTHER REVENUE**                                |   | $        | 5,428  |     | $      | 5,734    |   | $        | 5,552  |     | $      | 4,732 |   | $ | 3,047 |   |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| **COST OF PRODUCTS SOLD**                                          |   | 2,484    |   | 2,278    |   | 1,858    |   | 1,130    |   | 814      |   |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| **GROSS PROFIT**                                                   |   | 2,944    |   | 3,456    |   | 3,694    |   | 3,602    |   | 2,233    |   |
| (Percentage  of revenue)                                           |   | 54       | %      | 60       | %      | 67       | %      | 76       | %      | 73       | %      |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| **OPERATING EXPENSES:**                                            |   |     |   |     |   |     |   |     |   |     |   |
| POC  facility start-up costs                                       |   | 569      |   | 872      |   | 80       |   | —   |   | —   |   |
| Research  and development                                          |   | 1,757    |   | 1,834    |   | 1,611    |   | 1,734    |   | 2,901    |   |
| Selling,  general and administrative                               |   | 4,156    |   | 3,932    |   | 4,568    |   | 3,831    |   | 8,122    |   |
| Total  operating expenses                                          |   | 6,482    |   | 6,638    |   | 6,259    |   | 5,565    |   | 11,023   |   |
| Loss  from operations                                              |   | (3,538   | )      | (3,182   | )      | (2,565   | )      | (1,963   | )      | (8,790   | )      |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| **OTHER (EXPENSE) INCOME:**                                        |   |     |   |     |   |     |   |     |   |     |   |
| Impairment  of investment                                          |   | (599     | )      | —   |   | —   |   | —   |   | —   |   |
| Proceeds  from legal settlement                                    |   | —   |   | —   |   | 152      |   | —   |   | —   |   |
| Interest  (expense) income, net                                    |   | (188     | )      | 83       |   | 396      |   | 393      |   | 695      |   |
| Total  other (expense) income                                      |   | (787     | )      | 83       |   | 548      |   | 393      |   | 695      |   |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Loss  before income taxes                                          |   | (4,325   | )      | (3,099   | )      | (2,017   | )      | (1,570   | )      | (8,095   | )      |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Income  taxes                                                      |   | 75       |   | —   |   | —   |   | —   |   | —   |   |
| Net  loss                                                          |   | $        | (4,400 | )        | $      | (3,099   | )      | $        | (2,017 | )        | $      | (1,570 | ) | $ | (8,095 | ) |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Basic  and diluted net loss per common and common equivalent share |   | $        | (0.35  | )        | $      | (0.25    | )      | $        | (0.16  | )        | $      | (0.13 | ) | $ | (0.64 | ) |
|                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Weighted  average shares used in calculation of net loss per share |   | 12,571   |   | 12,516   |   | 12,504   |   | 12,522   |   | 12,696   |   |

 

*(in thousands)*

 
| **FISCAL YEAR ENDED DECEMBER 31,**                 |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| **BALANCE SHEET DATA:**                            |   |     |   |     |   |     |   |     |   |     |   |
| Cash,  cash equivalents and short-term investments |   | $        | 1,330  |     | $      | 3,827    |   | $        | 6,578  |     | $      | 8,400 |   | $ | 10,979 |   |
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| Working  capital                                   |   | 597      |   | 4,104    |   | 6,600    |   | 9,205    |   | 10,624   |   |
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| Total  assets                                      |   | 6,838    |   | 9,635    |   | 12,311   |   | 12,297   |   | 15,065   |   |
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| Noncurrent  liabilities                            |   | 937      |   | 1,138    |   | 768      |   | —   |   | 117      |   |
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| Accumulated  deficit                               |   | (43,309  | )      | (38,909  | )      | (35,810  | )      | (33,793  | )      | (32,223  | )      |
|                                               |   |     |   |     |   |     |   |     |   |     |   |
| Total  shareholders' equity                        |   | $        | 2,581  |     | $      | 6,932    |   | $        | 9,906  |     | $      | 11,709 |   | $ | 13,488 |   |

 

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**Item 7.****        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Results Of Operations**

 

*Years Ended December 31, 2002, 2001, 2000*.  Total revenues were $5,428,000 for the yearended December 31, 2002 as compared to $5,734,000 and $5,552,000 for the yearsended December 31, 2001 and 2000, respectively. Revenues in 2002 included$62,000 related to Ostex’ recognition of a portion of the $750,000 paymentreceived from Mochida in 2002 for the license of Ostex’ NTx Serum test which isbeing amortized over the remaining term of the patent. Revenue is primarilycomprised of sales of the Ostex’ products that are recognized only uponshipment.  The decrease in revenue of$306,000 in 2002 as compared to 2001 was primarily due to lower shipments ofOstex’ NTx Point-of-Care device, partially offset by the sales of the NTx Serumkits. The lower sales of the point-of-care device was due primarily tomanufacturing delays in the first quarter of 2002 related to the validation ofthe point-of-care manufacturing facility. These delays caused Proctor &Gamble and Aventis to cancel a portion of their orders and, as a result, salesof point-of-care devices in 2002 were lower than in 2001.  The increase of $182,000 in 2001 revenuecompared to 2000 revenue is attributable to an increase in sales for theOsteomark NTx Point-of-Care device.

 

Ostex’ cost of productssold totaled $2,484,000 for the year ended December 31, 2002, as compared to$2,278,000 and $1,858,000 for the same periods in 2001 and 2000,respectively.  The gross margin onproduct sales for the year ended 2002 was 54% as compared to 60% and 67% in2001 and 2000. The decrease in the gross margin from 2001 to 2002 was due tothe excess capacity of the point-of-care manufacturing facility, which wasvalidated to produce a high volume of devices. Point-of-care productioncapacity will continue to exceed the production plan for devices in thenear-term future and may exceed the production plan for devices in thelong-term.  The resulting excesscapacity will have a negative impact on Ostex’ gross profit margins unless anduntil demand increases.  The decrease ingross margin from 2000 to 2001 was due in part to increased sales of the NTxPoint-of-Care device, which has a lower margin than the NTx Urine and Serumkits. In addition, there were certain inventory adjustments made in the firstquarter of 2000, which resulted in a 91% margin in that quarter that affectedthe annual margin.

 

Ostex alsoincurred start-up costs for its new point-of-care manufacturing facility thattotaled $569,000 in 2002 as compared to $872,000 and $80,000 in 2001 and 2000,respectively. This expense relates to the facility operating costs, labor andmaterial costs to validate the facility, and production validation runs forpilot lots of the NTx Point-of-Care device prior to the production of sellabledevices. The expense decreased by $303,000 from 2001 to 2002 due to thesuccessful validation of the facility in May of 2002. Ostex is now producingand shipping devices out of its own facility, and the cost of those devices isbeing expensed through cost of goods sold. Prior to manufacturing sellabledevices on its own, Ostex purchased finished devices from Metrika.

 

Ostex’ researchand development expenditures totaled $1,757,000, $1,834,000, and $1,611,000 in2002, 2001, and 2000, respectively.  The$77,000 decrease from 2001 to 2002 was primarily related to personnel costs.The $223,000 increase from 2000 to 2001 was driven by personnel costs andprofessional fees associated with the NTx Point-of-Care device, includingclinical trials related to seeking approval for CLIA Waiver and Rx Home-Use.

 

Selling, generaland administrative expenses totaled $4,156,000, $3,932,000, and $4,568,000 in2002, 2001, and 2000, respectively. Expenses increased by $224,000 in 2002 over2001 due to legal and investment banker fees and expenses in connection withthe proposed merger of Ostex with Inverness, which merger related fees andexpenses totaled approximately $1,000,000 for the year 2002. The increase inexpenses was partially offset by a business and occupancy tax refund in thethird quarter of 2002, from the Washington Department of Revenue for researchand development tax credits not taken in six prior years. In addition, salesand marketing had lower personnel costs and a lower level of expenditures in2002 as compared 2001. Expenses decreased by $636,000 in 2001 from 2000 primarilydue to the reduction of the sales force and marketing related expenditures forthe urine and serum products.

 

Other expenses in2002 includes an impairment of Ostex’ $599,000 preferred stock investment inMetrika. In the fourth quarter, Ostex management determined that there had beenan other than temporary decline in the value of Ostex’ investment in Metrikabased on recent financial information obtained from Metrika, including

 

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its cash balance,cash expenditure rate, and immediate need for financing. Management believesthat these factors are a strong indicator that the fair value of Ostex’preferred stock holdings in Metrika are substantially near zero and hasadjusted the cost basis accordingly.

 

Interest (expense)income, net was ($188,000) in 2002 as compared to interest income of $83,000and $396,000 in 2001 and 2000, respectively. The $271,000 decrease in 2002 as compared to 2001 and the $313,000decrease from 2000 as compared to 2001 resulted from less interest income fromlower balances of cash and short-term investments and higher interest expenserelated to Ostex’ debt for both periods. Ostex borrowed $2,316,000 fromTransamerica Business Credit Corporation during 2000 and 2001 for the point-of-carefacility build-out. Ostex started repaying the loans during 2001.

 

Proceeds fromlegal settlement were $152,000 in 2000 and resulted from a one-time settlementfee paid by Osteometer Biotech A/S related to the settlement of the lawsuitbetween Osteometer and Ostex in 2000 (see Note 9 - Litigation, to theaccompanying financial statements).

 

At December 31,2002, Ostex had tax net operating loss carryforwards of approximately$45,977,000, which will begin to expire in 2004.  Income taxes are provided in the Statements of Operations asrequired by Statement of Financial Accounting Standards No. 109, “AccountingFor Income Taxes” (SFAS No. 109).  UnderSFAS No. 109, deferred taxes are determined using an asset and liabilityapproach.  Ostex has determined that thetax assets do not satisfy the realization criteria set forth in SFAS No.109.  Accordingly, a valuation allowancehas been recorded against the applicable deferred tax assets, and therefore notax benefit has been recorded. In 2002, Ostex recorded $75,000 of foreign taxexpense for the tax paid in Japan in connection with the lump sum paymentsreceived from Mochida under the Serum Osteomark License Agreement.

 

Net operating losscarryforwards are subject to review and possible adjustment by the InternalRevenue Service and may be limited in the event of certain cumulative changesin excess of 50% in ownership interests of significant shareholders over athree-year period.

 

**Recently Issued Accounting Pronouncements**

 

InJune 2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (SFAS No. 143), which provides the accounting requirements forretirement obligations associated with tangible long-lived assets. Thisstatement requires entities to record the fair value of a liability for anasset retirement obligation in the period in which it is incurred. Theprovisions of SFAS No. 143 are effective for fiscal years beginning after June15, 2002. Ostex is currently assessing the impact of implementing thisstatement on our results of operations and financial position.

 

InJune 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities” (SFAS No. 146). This statement addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” This statement requiresthat a liability for a cost associated with an exit or disposal activity berecognized at fair value when the liability is incurred. This statement will beeffective for Ostex' 2003 fiscal year, and early adoption is permitted.  The adoption of SFAS No. 146 is not expectedto have a material impact on Ostex’ results of operations or financial position.

 

InNovember 2002, the FASB issued the FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which elaborates on the disclosures tobe made by a guarantor about its obligations under certain guarantees that ithas issued, if any. Ostex has reviewed the Interpretation and has concludedthat it does not need to make any additional disclosures in this filing anddoes not expect this interpretation to have a material impact on its results ofoperations or financial position in 2003.

 

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InDecember 2002, the FASB issued the Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation - Transition andDisclosure, an amendment of FASB Statement 123” (SFAS 148). SFAS 148 providesnew transition alternatives for companies adopting the fair value method ofaccounting for stock-based compensation prescribed by SFAS 123 and changescertain disclosure requirements for companies electing to continue applying theAPB 25 intrinsic value method. Ostex has no current plans to adopt the fairvalue method of accounting but has revised its disclosure accordingly.

 

**Critical Accounting Policies**

 

Ostex has identified the most critical accountingpolicies used in the preparation of its financial statements by consideringaccounting policies that involve the most complex or subjective decisions orassessments.  Ostex’ most criticalaccounting policies relate to revenue recognition, products returns, thecarrying value of the investment in Metrika, and the carrying value of Ostex’property, plant and equipment for our manufacturing operations.

 

Ostex’ revenue recognition policies are based on therequirements of Staff Accounting Bulletin No. 101, “Revenue Recognition inFinancial Statements.”  Revenue isrecorded when earned, which for product sales occurs upon shipment.  Anypayments received prior to meeting the criteria for revenue recognition aredeferred until such criteria are met. Research and development payments andlicense fees are recognized upon attainment of the agreed upon milestones andratably over the term of the agreement, respectively.  The 2002 license payments from Mochida, totaling $750,000,related to the NTx Serum kit will be recognized ratably over the period Ostexis obligated to provide finished products as specified in the agreement.

 

Returns of product to date have been warranty relatedand insignificant; however, with the ramp up in our new manufacturing facilityfor the NTx Point-of-Care devices, there is a risk that returns in the futurecould increase.  Should this occur, ourrevenues could be impacted by an increase in the return provision.

 

Ostex has historicallyrecorded its investment in Metrika at the lower of cost or market andperiodically assessed the value of the investment and compared it to the costbasis to determine whether the investment is impaired. Ostex’ assessment of thevaluation of this asset was based on historical financial data, assumed valuationsof Metrika, relevant liquidation preferences made during additional investmentrounds, future projections, Metrika’s performance and the general changes inthe U.S. equity markets.  In the fourthquarter of 2002, Ostex management determined that there had been an other thantemporary decline in the value of its investment in Metrika based on recentfinancial information obtained from Metrika including its cash balance, cashexpenditure rate and immediate need for financing. Ostex believes that thesefactors are a strong indicator that the fair value of its preferred stockholdings in Metrika are substantially near zero and has adjusted the cost basisaccordingly.

 

Ostex has adopted theprovisions of the Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144)(effective for Ostex on January 1, 2002).  This statement supersedesStatement of Financial Accounting Standards No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf”.  Ostex has assessed its long-lived assets to see if any impairmentshould be recognized, paying particular attention to our NTx Point-of-Caredevice manufacturing assets. Ostex determined that these assets were notimpaired at December 31, 2002. This assessment was conducted using Ostex’ mostrecent projections over the expected life of the underlying assets. Theadoption of SFAS No. 144 did not have any effect on Ostex’ financialstatements.

 

**Liquidity And Capital Resources**

 

As of December 31,2002, Ostex had $1,330,000 in cash and cash equivalents, working capital of$597,000 and total shareholders’ equity of $2,581,000. As a result of fundingoperating losses during 2002, cash and cash equivalents and short-terminvestments decreased by $2,497,000, working capital decreased by $3,507,000,and shareholders’ equity decreased by $4,351,000.

 

Ostex used$2,659,000 of cash for operating activities in 2002.  Ostex used $271,000 in 2002 and $582,000 in 2001 to purchaseproperty, plant, and equipment. In 2002, these purchases were primarily forcomputer

 

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upgrades andR&D equipment and in 2001 the purchases were for manufacturing and officeequipment, primarily for the point-of-care manufacturing facility. Inventoryincreased to $1,468,000 in 2002, up $474,000 from 2001, primarily due to themanufacturing activities associated with producing and stocking finished NTxPoint-of-Care devices and the purchase in 2002 of component parts for thedevice.  Inventories are stated at thelower of cost or market.  Also during2002, Ostex issued 25,000 shares of common stock related to the exercise ofstock options, receiving $20,000 in proceeds.

 

In 2000, Ostex enteredinto an agreement with Transamerica Business Credit Corporation, which providedup to $2,800,000 in debt financing for the new manufacturing facility.  During 2000 and 2001, Ostex borrowed a totalof $2,316,000 under this agreement at an annual interest rate of approximately14.5%.  The indebtedness is evidenced bya series of notes and is secured by all equipment financed with the borrowedfunds.  There are no further fundsavailable to Ostex under this financing arrangement. As of December 31, 2002,the principal balance remaining under the notes was $1,138,000.  Each note is payable in 36 monthlyinstallments with a balloon payment at the end of the term.  The notes have due dates ranging fromNovember 2003 to January 2005.

 

On September 6, 2002,Ostex entered into an agreement to merge with Inverness Medical Innovations,Inc. The merger agreement was amended as of February 18, 2003 to, among otherthings, reduce the aggregate number of shares of Inverness common stockissuable in the merger.  The transactionis expected to close in the second quarter of 2003. Inverness’ acquisition ofOstex is subject to certain closing conditions, including Inverness obtainingconsent of certain of its lenders to the merger and approval of the merger byOstex’ shareholders. Some of the closing conditions to the merger are outsidethe control of Ostex and Inverness, and there can be no assurance that themerger will occur.

 

Ostex has incurredsubstantial expenses in connection with the proposed merger.  If the merger does not occur, Ostexcurrently expects to incur a total of approximately $1.5 million to $1.7million in merger related expenses, excluding any termination fees, ifapplicable.  These expenses would have amaterial adverse effect on the results of operations and financial condition ofOstex because Ostex will have not realized the expected benefits of the merger.As a result of the delay and the renegotiation of the merger agreement, Ostexwill incur more expenses than originally anticipated due to additional legal, accountingand investment banking costs and the cost of extending the term of Ostex’current directors’ and officers’ insurance coverage.

 

In connection with themerger agreement, as amended, Inverness and Ostex also entered into an amendedand restated loan agreement.  Under theloan agreement, Inverness has agreed to make, or arrange for one of itsaffiliates to make, loans of up to an aggregate of $2,000,000 to Ostex.  The annual interest rate of each loan is anamount equal to LIBOR for one-year loans as published in the Wall StreetJournal on the date of each loan, plus four and one-half percent. Ostexborrowed $334,000 under the loan agreement on October 10, 2002 at an interestrate of 6.27%, borrowed $433,000 on November 12, 2002 at an interest rate of6.04%, and borrowed $233,000 on December 9, 2002 at an interest rate of 6.16%.As of December 31, 2002, the total amount borrowed under the Inverness loanagreement was $1,000,000.  Ostex isentitled to borrow the remaining $1,000,000 under the loan agreement at anytime on or after January 2, 2003, provided that certain conditions are met, inorder to maintain sufficient cash, cash equivalents and short-term investmentsto fund six-months of its budgeted working capital needs. On January 9, 2003,Ostex borrowed an additional $379,000 at an interest rate of 6.02%. On February25, 2003, Ostex borrowed an additional $246,158 at an interest rate of 5.90%.

 

The loans must berepaid at the earliest of:

 

•                the first business day after theeffective time of the merger;

 

•                acceleration upon an event of default;

 

•                the termination of the merger agreementin specified circumstances related to Ostex’ breach of the terms of the mergeragreement or stock option agreement or Ostex’ board’s approval of anacquisition proposal or withdrawal of its approval or recommendation of themerger agreement;or

 

•                December 31, 2003.

 

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If, during the loanperiod, the merger agreement is terminated in circumstances that would not bean event of default under the loan agreement, Ostex may borrow a maximum of$1,750,000 from Inverness under the loan agreement, assuming satisfaction ofcertain conditions.  If the merger isnot consummated and $1,750,000 of the loan funds are received, Ostex believesit will be able to fund its operations through July 2003, based on currentprojections.  Such loan liability,however, may have a material impact on the results of operations and financialcondition of Ostex because Ostex will not have realized the expected benefitsof the merger.

 

Until the merger becomeseffective, and with some exceptions, Ostex is prohibited from entering into orsoliciting, initiating or encouraging any inquiries or proposals that may leadto an acquisition proposal from any person other than Inverness.  Ostex also agreed to pay a termination feeto Inverness of $1.8 million if the merger agreement is terminated in specifiedcircumstances, including circumstances in which Ostex takes any of theseprohibited actions or fails to obtain the approval of its shareholders after aproposal from an eventual third party acquiror is received by Ostex or publiclyannounced.  In addition, Ostex hasgranted Inverness an option to purchase up to 19.9% of Ostex’ outstandingshares of common stock at an exercise price of $2.39 per share.  Inverness may exercise this option upon theoccurrence of specified events that ordinarily would be associated with anacquisition or potential acquisition of Ostex by a third party.  If the option becomes exercisable inspecified circumstances in connection with an acquisition proposal, Invernessmay also cancel the option, or any portion of the option, in exchange for anamount of cash equal to the product of (a) the excess of the per share exerciseprice over the highest per share purchase price proposed to be paid pursuant toan acquisition proposal that caused, or would cause, the option to becomeexercisable, or the current average market price per share, if higher,multiplied by (b) the number of shares subject to the portion of the optionthat is canceled.  These provisionscould discourage other companies from trying to acquire Ostex even though thoseother companies might be willing to offer greater value to Ostex shareholdersthan Inverness has offered in the merger. The payment of the termination fee or cash upon an exercise of the stockoption could also have a material adverse effect on Ostex’ financial condition.

 

If the proposed merger isnot consummated, Ostex may seek to raise additional capital by sales of equityor debt securities in the public equity markets or through privateplacements.  There can be no assurancethat additional funds will be available on favorable terms, if at all. Ostexalso may be required to delay, scale back or eliminate some or all of ourmarketing and sales and research and development programs, sell assets, licenseto third parties rights to commercialize products or technologies that it wouldotherwise seek to develop on its own, or seek bankruptcy protection.  Ostex has agreed that, except ascontemplated or permitted by the merger agreement or otherwise consented to byInverness in writing, Ostex will, during the pendency of the merger and, if theloan is still in effect in certain circumstances after termination of themerger agreement, comply with restrictions relating to the operation of itsbusiness, including, but not limited to, acquiring or issuing any securities,incurring indebtedness for borrowed money, making any loans, advances orcapital contributions, encumbering any of its assets, settling materiallitigation, making capital expenditures other than in the ordinary course ofbusiness and consistent with past practice and in an amount in excess of$50,000, entering into any material agreement, and licensing, transferring ormaterially amending any of its intellectual property.  These restrictions may limit severely Ostex’ ability to raiseoperating capital in a timely manner.

 

In addition, if themerger is not consummated, Ostex will not be able to satisfy ongoing listingrequirements and there is at substantial risk that its Common Stock will bedelisted from The Nasdaq National Market. Such delisting would most likely havea material adverse effect on the trading price and liquidity of Ostex’securities and would further compound the difficulty of raising capital.

 

Ostex’ future capitalrequirements depend upon many factors, including the proposed merger withInverness and the realization of the benefits expected from the proposedmerger; effectiveness of the Osteomark NTx Serum, Urine, and Point-of-Carecommercialization activities and arrangements; market demand for Ostex’products; continued scientific progress in research and development programs;the costs involved in filing, prosecuting, enforcing and defending patentclaims; the manufacturing needs for new and existing products; relationshipswith existing and future corporate collaborators; and the time and costsinvolved in obtaining regulatory approvals.

 

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The following tablesummarizes our contractual obligations and other commercial commitments as ofDecember 31, 2002, and the effect such obligations and commitments are expectedto have on liquidity for future periods. Long-term debt payments are principalportions only.

 
| **Contractual obligations** |   | **Total** |      | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |      | **After 5  years** |   |
|-----------------------------|--------|-----------|-----------|-----------------------|--------|---------------|--------|---------------|-----------|--------------------|--------|
| Long-term  debt             |   | $         | 2,193,000 |                  | $      | 1,855,000     |   | $             | 338,000   |               | $      | — |   | $ | — |   |
| Operating  leases           |   | 2,315,000 |      | 629,000               |   | 1,279,000     |   | 217,000       |      | 190,000            |   |
| Total  cash obligations     |   | $         | 4,519,000 |                  | $      | 2,495,000     |   | $             | 1,617,000 |               | $      | 217,000 |   | $ | 190,000 |   |

 

Ostex’ financialstatements are presented on a going concern basis and assume that assets willbe realized in the normal course of business. If Ostex is forced to liquidate its assets, Ostex may not recover thecarrying amount of such assets.

 

KPMG LLP, Ostex’independent auditors, has included a going concern uncertainty paragraph in itsaudit report on Ostex’ financial statements for the year ended December 31, 2002,which states that Ostex’ recurring losses from operations and need to raiseadditional capital to meet its operating and debt requirements if the proposedmerger with Inverness is unsuccessful, raise substantial doubt about Ostex’ability to continue as a going concern.

 

**OtherFactors That May Affect Operating Results**

 

Ostex’ operating resultsmay fluctuate due to a number of factors including, but not limited to, cost,volume and timing of product sales, pricing, market acceptance of Ostex’products, changing economic conditions, actions of competitors, delays andincreased costs of product and technology development, manufacturingperformance, Ostex’ ability to develop and maintain collaborative arrangements,the outcome of litigation, the pending merger with Inverness and the associatedcosts, and the effect of Ostex’ accounting policies and other risk factorsdetailed in this report and other Securities and Exchange Commissionfilings.  All of the foregoing factorsare difficult for Ostex to predict and could materially and adversely affectour business and operating results.

 

**Item 7A.****     Quantitativeand Qualitative Disclosures About Market Risk**

 

*Interest rate risk.* Ostex’ exposure to market rate risk, as a result of changes in interestrates, relates primarily to its investment portfolio. At December 31, 2002,Ostex held $1,330,000 in cash and cash equivalents and no fixed or adjustablerate investments that would carry any significant degree of interest rate risk.Additionally, at December 31, 2002 Ostex had $2,193,000 of notes payable. Whilefluctuations in interest rates may affect the fair value of this debt, Ostex’debt payments will not be affected due to fixed interest rates on this debt.

 

*Currency risk.* Ostex conducts all financialtransactions in U.S. currency.  However,currency fluctuations may impact a foreign customer’s ability to meet itspayment obligations and/or future product pricing to that customer.  Based upon Ostex’ credit authorizationpolicy, current economic conditions in countries in which Ostex doessignificant business, and the level of outstanding foreign receivables, Ostexdoes not consider this risk to be material.

 

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**Item 8.****        FinancialStatements and Supplementary Data**

 

**Report of Independent PublicAccountants**

 

INDEPENDENT AUDITORS’REPORT

 

To the Board of Directors and Shareholders:

 

We have audited the accompanying balance sheet ofOstex International, Inc. as of December 31, 2002 and the related statements ofoperations, shareholders’ equity and cash flows for the year then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit. The accompanying financial statements of Ostex International, Inc.as of December 31, 2001 and 2000 and for the years then ended were audited byother auditors who have ceased operations. Those auditors expressed anunqualified opinion on those financial statements in their report dated January31, 2002.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of OstexInternational, Inc. as of December 31, 2002, and the results of its operationsand its cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financialstatements, the Company has suffered recurring losses from operations and needsto raise significant additional capital to meet its operating and debtrequirements if the proposed merger is unsuccessful.  These factors raise substantial doubt about its ability tocontinue as a going concern. Management’s plans in regard to these matters are also described in Note1.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 
| /s/ KPMG LLP        |
|---------------------|
|                |
| Seattle, Washington |
| January 24, 2003    |

 

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**Report of Independent PublicAccountants**

 

To theShareholders of Ostex International, Inc.:

 

We have auditedthe accompanying balance sheets of Ostex International, Inc. (a Washingtoncorporation) as of December 31, 2001 and 2000, and the related statements ofoperations, shareholders’ equity and cash flows for each of the three years inthe period ended December 31, 2001. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

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

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Ostex International, Inc. as of December31, 2001 and 2000 and the results of its operations and its cash flows for eachof the three years in the period ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States.

 
|                |   | /s/ ARTHUR ANDERSEN LLP |   |
|---------------------|--------|-------------------------|--------|
|                |   |                    |
| Seattle, Washington |   |                    |
| January 31, 2002    |   |                    |

 

 

***This audit reportof Arthur Andersen LLP, Ostex' former independent public accountants, is a copyof the original report dated January 31, 2002 rendered by Arthur Andersen LLPon Ostex' financial statements included in Ostex' Form 10-K filed on March 29,2002, and has not been reissued by Arthur Andersen LLP since that date. Ostexis including this copy of the Arthur Andersen LLP audit report pursuant to Rule2-02(e) of Regulation S-X under the Securities Act of 1933.***

 

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**OSTEX INTERNATIONAL, INC.**

 

**BALANCE SHEETS**

 

*(in thousands, except share and per share amounts)*

 
| **December 31,**                                                                                                                                    |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                                |   |     |   |     |   |
| **ASSETS**                                                                                                                                          |   |     |   |     |   |
| **Current Assets:**                                                                                                                                 |   |     |   |     |   |
| Cash and cash  equivalents                                                                                                                          |   | $        | 1,330  |     | $      | 1,284 |   |
| Short-term investments                                                                                                                              |   | —   |   | 2,543    |   |
| Trade receivables, net  of allowance of $70 in 2002 and $54 in 2001                                                                                 |   | 944      |   | 815      |   |
| Inventory                                                                                                                                           |   | 1,468    |   | 994      |   |
| Other current assets                                                                                                                                |   | 175      |   | 33       |   |
| Total current assets                                                                                                                                |   | 3,917    |   | 5,669    |   |
|                                                                                                                                                |   |     |   |     |   |
| Property, plant and  equipment, net                                                                                                                 |   | 2,832    |   | 3,272    |   |
|                                                                                                                                                |   |     |   |     |   |
| Other assets                                                                                                                                        |   | 89       |   | 694      |   |
|                                                                                                                                                |   |     |   |     |   |
| Total assets                                                                                                                                        |   | $        | 6,838  |     | $      | 9,635 |   |
|                                                                                                                                                |   |     |   |     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                       |   |     |   |     |   |
| **Current Liabilities:**                                                                                                                            |   |     |   |     |   |
| Accounts payable                                                                                                                                    |   | $        | 622    |     | $      | 279 |   |
| Customer deposits                                                                                                                                   |   | 99       |   | 156      |   |
| Accrued liabilities                                                                                                                                 |   | 655      |   | 495      |   |
| Current portion of  deferred revenue                                                                                                                |   | 89       |   | —   |   |
| Current portion of  notes payable                                                                                                                   |   | 1,855    |   | 635      |   |
|                                                                                                                                                |   |     |   |     |   |
| Total current  liabilities                                                                                                                          |   | 3,320    |   | 1,565    |   |
|                                                                                                                                                |   |     |   |     |   |
| **Noncurrent Liabilities**                                                                                                                          |   |     |   |     |   |
| Deferred revenue, net  of current portion                                                                                                           |   | 599      |   | —   |   |
| Notes payable, net of  current portion                                                                                                              |   | 338      |   | 1,138    |   |
| Total noncurrent  liabilities                                                                                                                       |   | 937      |   | 1,138    |   |
|                                                                                                                                                |   |     |   |     |   |
| Commitments and  Contingencies                                                                                                                      |   |     |   |     |   |
|                                                                                                                                                |   |     |   |     |   |
| **Shareholders’ Equity:**                                                                                                                      |   |     |   |     |   |
| Common stock, $.01 par  value, 50,000,000 authorized; 12,583,435 and 12,558,174 issued and  outstanding at December 31, 2002 and 2001, respectively |   | 126      |   | 126      |   |
| Additional paid-in  capital                                                                                                                         |   | 45,764   |   | 45,709   |   |
| Accumulated other  comprehensive income                                                                                                             |   | —   |   | 6        |   |
| Accumulated deficit                                                                                                                                 |   | (43,309  | )      | (38,909  | )      |
| Total shareholders’  equity                                                                                                                    |   | 2,581    |   | 6,932    |   |
| Total liabilities and  shareholders’ equity                                                                                                    |   | $        | 6,838  |     | $      | 9,635 |   |

 

The accompanying notesare an integral part of these financial statements.

 

25

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**OSTEX INTERNATIONAL, INC.**

 

**STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

 
| **YEAR ENDED DECEMBER 31,**                                        |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                               |   |     |   |     |   |     |   |
| **REVENUE**                                                        |   |     |   |     |   |     |   |
| Product sales and other   revenue                             |   | $        | 5,428  |     | $      | 5,734    |   | $ | 5,552 |   |
| Cost of products sold                                              |   | 2,484    |   | 2,278    |   | 1,858    |   |
| Gross profit                                                       |   | 2,944    |   | 3,456    |   | 3,694    |   |
|                                                               |   |     |   |     |   |     |   |
| **OPERATING  EXPENSES:**                                           |   |     |   |     |   |     |   |
| POC facility start-up  costs                                       |   | 569      |   | 872      |   | 80       |   |
| Research and  development                                          |   | 1,757    |   | 1,834    |   | 1,611    |   |
| Selling, general and  administrative                               |   | 4,156    |   | 3,932    |   | 4,568    |   |
| Total operating  expenses                                          |   | 6,482    |   | 6,638    |   | 6,259    |   |
|                                                               |   |     |   |     |   |     |   |
| Loss from operations                                               |   | (3,538   | )      | (3,182   | )      | (2,565   | )      |
|                                                               |   |     |   |     |   |     |   |
| **OTHER  (EXPENSE) INCOME:**                                       |   |     |   |     |   |     |   |
| Impairment of investment                                           |   | (599     | )      | —   |   | —   |   |
| Proceeds from legal  settlement                                    |   | —   |   | —   |   | 152      |   |
| Interest income                                                    |   | 61       |   | 295      |   | 433      |   |
| Interest expense                                                   |   | (249     | )      | (212     | )      | (10      | )      |
| Other expense                                                      |   | —   |   | —   |   | (27      | )      |
| Total other (expense)  income                                      |   | (787     | )      | 83       |   | 548      |   |
| Loss before income  taxes                                          |   | (4,325   | )      | (3,099   | )      | (2,017   | )      |
| Income taxes                                                       |   | 75       |   | —   |   | —   |   |
| Net loss                                                           |   | $        | (4,400 | )        | $      | (3,099   | )      | $ | (2,017 | ) |
| Basic and diluted net  loss per common and common equivalent share |   | $        | (0.35  | )        | $      | (0.25    | )      | $ | (0.16 | ) |
| Weighted average shares  used in calculation of net loss per share |   | 12,571   |   | 12,516   |   | 12,504   |   |

 

The accompanying notesare an integral part of these financial statements.

 

26

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**OSTEX INTERNATIONAL, INC.**

 

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

 

*(in thousands)*

 
|                                                               |       | **Common Stock** |       | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Accumulated  Deficit** |   | **Compre-  hensive  Loss** |   | **Total  Shareholders’  Equity** |   |
|--------------------------------------------------------------------|------------|------------------|------------|----------------------------------|--------|------------------------------------------------------|--------|--------------------------|--------|----------------------------|--------|---------------------------------------|--------|
|                                                               |       |             |
|                                                               |       |             |
|                                                               | **Shares** |             | **Amount** |                             |   |
|                                                               |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| **Balance, December 31, 1999**                                     |       | 12,469           |       | $                                | 125    |                                                 | $      | 45,494                   |   | $                          | (117   | )                                     | $      | (33,793 | ) |   |   | $ | 11,709 |   |
|                                                               |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Warrants issued to  outside consultants                            |       | —           |       | —                           |   | 105                                                  |   | —                   |   | —                     |   | —                                |   | 105 |   |
| Stock options exercised                                            |       | 61               |       | 1                                |   | 125                                                  |   | —                   |   | —                     |   | —                                |   | 126 |   |
| Stock repurchases                                                  |       | (43              | )          | (1                               | )      | (73                                                  | )      | —                   |   | —                     |   | —                                |   | (74 | ) |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Unrealized gain on  short-term investments                         |       | —           |       | —                           |   | —                                               |   | 57                       |   | —                     |   | 57                                    |   | 57 |   |
| Net loss                                                           |       | —           |       | —                           |   | —                                               |   | —                   |   | (2,017                     | )      | (2,017                                | )      | (2,017 | ) |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   | (1,960                                | )      |   |   |
| **Balance, December 31, 2000**                                     |       | 12,487           |       | $                                | 125    |                                                 | $      | 45,651                   |   | $                          | (60    | )                                     | $      | (35,810 | ) |   |   | $ | 9,906 |   |
|                                                               |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Warrants issued to  outside consultants                            |       | —           |       | —                           |   | 19                                                   |   | —                   |   | —                     |   | —                                |   | 19 |   |
| Stock options exercised                                            |       | 85               |       | 1                                |   | 58                                                   |   | —                   |   | —                     |   | —                                |   | 59 |   |
| Stock repurchases                                                  |       | (14              | )          | —                           |   | (19                                                  | )      | —                   |   | —                     |   | —                                |   | (19 | ) |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Unrealized gain on  short-term investments                         |       | —           |       | —                           |   | —                                               |   | 66                       |   | —                     |   | 66                                    |   | 66 |   |
| Net loss                                                           |       | —           |       | —                           |   | —                                               |   | —                   |   | (3,099                     | )      | (3,099                                | )      | (3,099 | ) |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   | (3,033                                | )      |   |   |
| **Balance, December 31, 2001**                                     |       | 12,558           |       | $                                | 126    |                                                 | $      | 45,709                   |   | $                          | 6      |                                  | $      | (38,909 | ) |   |   | $ | 6,932 |   |
|                                                               |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Warrants issued to  outside consultants                            |       | —           |       | —                           |   | 35                                                   |   | —                   |   | —                     |   | —                                |   | 35 |   |
| Stock options exercised                                            |       | 25               |       | —                           |   | 20                                                   |   | —                   |   | —                     |   | —                                |   | 20 |   |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   |                                  |   |   |   |
| Reclassification  adjustment for unrealized gains included in loss |       | —           |       | —                           |   | —                                               |   | (6                       | )      | —                     |   | (6                                    | )      | (6 | ) |
| Net loss                                                           |       | —           |       | —                           |   | —                                               |   | —                   |   | (4,400                     | )      | (4,400                                | )      | (4,400 | ) |
| Comprehensive loss                                                 |       |             |       |                             |   |                                                 |   |                     |   |                       |   | (4,406                                | )      |   |   |
| **Balance, December 31, 2002**                                     |       | 12,583           |       | $                                | 126    |                                                 | $      | 45,764                   |   | $                          | — |                                  | $      | (43,309 | ) |   |   | $ | 2,581 |   |

 

The accompanying notesare an integral part of these financial statements.

 

27

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**OSTEX INTERNATIONAL, INC.**

 

**STATEMENTS OF CASH FLOWS**

 

*(In thousands)*

 
| **YEAR ENDED DECEMBER 31,**                                                 |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                        |   |     |   |     |   |     |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                   |   |     |   |     |   |     |   |
| Net loss                                                                    |   | $        | (4,400 | )        | $      | (3,099   | )      | $ | (2,017 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |   |     |   |     |   |     |   |
| Depreciation and  amortization                                              |   | 712      |   | 721      |   | 496      |   |
| Loss on disposal of property,  plant and equipment                          |   | —   |   | 2        |   | 27       |   |
| Expense from issuance  of warrants                                          |   | 35       |   | 19       |   | 105      |   |
| Impairment of  investment                                                   |   | 599      |   | —   |   | —   |   |
| Changes in current  assets and current liabilities                          |   |     |   |     |   |     |   |
| Trade receivables                                                           |   | (129     | )      | 257      |   | (114     | )      |
| Inventory                                                                   |   | (474     | )      | (529     | )      | (214     | )      |
| Other current assets                                                        |   | (142     | )      | 56       |   | —   |   |
| Accounts payable                                                            |   | 343      |   | (709     | )      | 710      |   |
| Customer deposits                                                           |   | (57      | )      | 156      |   | —   |   |
| Deferred revenue                                                            |   | 688      |   | —   |   | —   |   |
| Accrued liabilities                                                         |   | 160      |   | 131      |   | 169      |   |
| Other assets                                                                |   | 6        |   | —   |   | —   |   |
| Net cash used in  operating activities                                      |   | (2,659   | )      | (2,995   | )      | (838     | )      |
|                                                                        |   |     |   |     |   |     |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                   |   |     |   |     |   |     |   |
| Purchases of short-term  investments                                        |   | —   |   | (1,213   | )      | (5,288   | )      |
| Proceeds from sales and  maturities of short-term investments               |   | 2,537    |   | 3,966    |   | 6,953    |   |
| Purchase of property,  plant and equipment                                  |   | (272     | )      | (582     | )      | (2,031   | )      |
| Net cash provided by  (used in) investing activities                        |   | 2,265    |   | 2,171    |   | (366     | )      |
|                                                                        |   |     |   |     |   |     |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                   |   |     |   |     |   |     |   |
| Net proceeds from  issuance of common stock and exercise of stock options   |   | 20       |   | 59       |   | 126      |   |
| Stock repurchases                                                           |   | —   |   | (19      | )      | (74      | )      |
| Proceeds from note  payable                                                 |   | 1,000    |   | 1,228    |   | 1,088    |   |
| Payments on note  payable                                                   |   | (580     | )      | (508     | )      | (150     | )      |
| Net cash provided by  financing activities                                  |   | 440      |   | 760      |   | 990      |   |
|                                                                        |   |     |   |     |   |     |   |
| **NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                    |   | 46       |   | (64      | )      | (214     | )      |
|                                                                        |   |     |   |     |   |     |   |
| **CASH AND CASH EQUIVALENTS**, beginning of  period                         |   | 1,284    |   | 1,348    |   | 1,562    |   |
|                                                                        |   |     |   |     |   |     |   |
| **CASH AND CASH EQUIVALENTS**, end of period                                |   | $        | 1,330  |     | $      | 1,284    |   | $ | 1,348 |   |
|                                                                        |   |     |   |     |   |     |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:**                       |   |     |   |     |   |     |   |
| Interest paid on notes  payable                                             |   | $        | 248    |     | $      | 212      |   | $ | 10 |   |
| **SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITES:**                 |   |     |   |     |   |     |   |
| Warrants issued to  lender                                                  |   | $        | — |     | $      | —   |   | $ | 62 |   |

 

The accompanying notesare an integral part of these financial statements.

 

28

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**Notes toFinancial Statements**

 

**Note 1 - Organization And Summary Of Significant AccountingPolicies**

 

**Organization**

Ostex International, Inc.(Ostex), a Washington corporation incorporated in May 1989, develops andcommercializes products to make “disease management a reality,” withosteoporosis being the first area of focus. Ostex’ lead product, the Osteomark® NTx test, which is available inmultiple formats, incorporates breakthrough and patented technology for themanagement of osteoporosis.  Ostex hascollaborative relationships with leading reference laboratories anddistributors and markets its Osteomark NTx Point-of-Care device primarily topharmaceutical companies to aid in the commercialization of its Osteomarktechnology.

 

On September 9, 2002,Ostex announced that it had entered into an agreement and plan of mergerwhereby Ostex would be acquired by and become a wholly owned subsidiary ofInverness Medical Innovations, Inc. The agreement and plan of merger wasamended in certain respects effective as of February 18, 2003. In connectionwith the merger agreement, as amended, Inverness and Ostex also entered into anamended and restated loan agreement. Under the loan agreement, Inverness has agreed to make, or arrange forone of its affiliates to make, loans of up to an aggregate of $2,000,000 toOstex. The loans must be repaid on the first business day after the effectivetime of the merger, upon an event of a default or a breach of the terms of themerger agreement by Ostex, or, in the case where the merger agreement isterminated and it is not an event of default under the loan agreement, onDecember 31, 2003.

 

Until the merger becomeseffective, and with some exceptions, Ostex is prohibited from entering into orsoliciting, initiating or encouraging any inquiries or proposals that may leadto an acquisition proposal from any person other than Inverness.  Ostex also agreed to pay a termination feeto Inverness of $1.8 million if the merger agreement is terminated in specifiedcircumstances, including circumstances in which Ostex takes any of theseprohibited actions or fails to obtain the approval of its shareholders after aproposal from an eventual third party acquiror is received by Ostex or publiclyannounced.  In addition, Ostex hasgranted Inverness an option to purchase up to 19.9% of Ostex’ outstandingshares of common stock at an exercise price of $2.39 per share.  Inverness may exercise this option upon theoccurrence of specified events that ordinarily would be associated with anacquisition or potential acquisition of Ostex by a third party.  If the option becomes exercisable inspecified circumstances in connection with an acquisition proposal, Invernessmay also cancel the option, or any portion of the option, in exchange for anamount of cash equal to the product of (a) the excess of the per share exerciseprice over the highest per share purchase price proposed to be paid pursuant toan acquisition proposal that caused, or would cause, the option to becomeexercisable, or the current average market price per share, if higher,multiplied by (b) the number of shares subject to the portion of the optionthat is canceled.  These provisionscould discourage other companies from trying to acquire Ostex even though thoseother companies might be willing to offer greater value to Ostex shareholdersthan Inverness has offered in the merger. The payment of the termination fee or cash upon an exercise of the stockoption could also have a material adverse effect on Ostex’ financial condition.

 

These financialstatements have been prepared assuming that Ostex will continue as a goingconcern. Ostex’ future capital requirements depend upon many factors, includingthe proposed merger with Inverness and the realization of the benefits expectedfrom the proposed merger; effectiveness of its Osteomark NTx Serum, Urine, andPoint-of-Care commercialization activities and arrangements; market demand forOstex’ products; continued scientific progress in research and developmentprograms; the costs involved in filing, prosecuting, enforcing and defendingpatent claims; the manufacturing needs for new and existing products;relationships with existing and future corporate collaborators; and the timeand costs involved in obtaining regulatory approvals.  Because of near-term cash requirements, if the merger is notconsummated, Ostex will seek to raise additional capital through public orprivate sales of its equity or debt securities.  There can be no assurance that additional funds will be availableon favorable terms, if at all.  In thecircumstance that the merger is not consummated, Ostex could draw up to amaximum of $1,750,000 in loan funds from Inverness (including funds drawn throughDecember 31, 2002 and subject to satisfaction of certain conditions) under theloan agreement. Ostex believes that its existing available cash, the proceedsfrom the loan from Inverness, future license and research revenues fromexisting collaboration agreements, and our current level of product sales willbe adequate to fund operations through July 2003.  If funding is insufficient at any time in the

 

29

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future, Ostex may berequired to:  delay, scale back oreliminate some or all of its marketing and sales and research and developmentprograms; sell assets; license to third parties rights to commercializeproducts or technologies that Ostex would otherwise seek to develop on its own;or seek bankruptcy protection.

 

**EstimatesAnd Uncertainties**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**RevenueRecognition**

Product sales arerecognized when pervasive evidence of an arrangement exists, delivery hasoccurred, the fee is fixed and collection is probable.  Research testing fees are recognized whenthe services are substantially complete. License fees and research and development payments are recognized uponattainment of the agreed upon milestones or ratably over the term of theagreement.  Cash payments received inadvance of meeting the revenue recognition criteria are deferred and stated ascustomer deposits.  Returns of productto date have been warranty related and insignificant. Deferred revenuerepresents license payments received from Mochida for Ostex’ NTx Serum kitproduct which will be recognized ratably over the term of the period Ostex isobligated to provide finished products as specified in the agreement.

 

**ResearchAnd Development Expenses**

Research and developmentcosts are expensed as incurred.

 

**Point-of-CareFacility Start-up Costs**

Point-of-Care facilitystart-up costs are related to the operation and validation of the new facility,tooling, and production prior to the production of sellable devices. Thesecosts were expensed as incurred.

 

**Cash AndCash Equivalents**

Ostex considers allhighly liquid instruments with original maturities of three months or less tobe cash equivalents.  The carryingamount approximates fair value due to the short maturities of theseinvestments.

 

**Segments**

Management has determinedthat Ostex has one operating segment – the manufacturing and distribution oftest products used in the treatment of osteoporosis.

 

**ConcentrationOf Credit Risk**

Trade receivablespotentially subject Ostex to credit risk. We extend credit to our customers based upon an evaluation of thecustomer’s financial condition and credit history and we generally do notrequire collateral. Ostex historically has incurred minimal credit losses.  In 2002, domestic product sales accountedfor 60% of total revenue and product sales to customers in foreign countries accountedfor 40% of total revenue. Sales to Japan accounted for 23% of totalrevenue.  Accounts receivable for thesame year is comprised of 62% domestic and 38% foreign receivables. In 2001,domestic product sales accounted for 65% of total revenue and product sales tocustomers in foreign countries accounted for 35% of total revenue with sales toJapan accounting for 10% of total revenue. Accounts receivable for 2001 was comprised of 63% domestic and 37%foreign receivables. In 2000, domestic product sales accounted for 70% of totalrevenue and product sales to customers in foreign countries accounted for 30%of total revenue with sales to Japan accounting for 10% of total revenue.  All sales are denominated in U.S. dollars.

 

The following tablesummarizes the number of customers that individually comprise greater than 10%of total revenues in each of the years listed and their aggregate percentage ofOstex’ total revenues  (an “—%” meansthat for that year, the customers’ percentage went below 10%):

 

30

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| **Year ended December 31,** |   | **Number of  Significant  Customers** |   | **Percentage  of Total Revenues** |   |
|-----------------------------|--------|---------------------------------------|--------|-----------------------------------|--------|
|                        |   |
|                        | **A**  |                                  | **B**  |                              | **C**  |   | **D** |   |
| 2002                        |   | 2                                     |   | —                            | %      | 15 | % | 23 | % | — | % |
| 2001                        |   | 3                                     |   | 16                                | %      | 11 | % | 10 | % | — | % |
| 2000                        |   | 3                                     |   | —                            | %      | 14 | % | 10 | % | 10 | % |

 

The following tablesummarizes the number of customers that individually comprise greater than 10%of net receivables and their aggregate percentage of Ostex’ total netreceivables:

 
| **As of December 31,** |   | **Number of  Significant Customers** |   | **Percentage  of Net Receivables** |   |
|------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                   |   |                                 |
|                   |   | **A**                                |   | **B**                              |   | **C** |   | **D** |   | **E** |   |
| 2002                   |   | 3                                    |   | —                             | %      | 21 | % | 17 | % | — | % | 14 | % |
| 2001                   |   | 2                                    |   | 30                                 | %      | — | % | 13 | % | — | % | — | % |

 

**TradeReceivables**

Trade receivables arestated at the net amount Ostex expects to collect for outstanding receivablesafter application of an allowance for doubtful accounts.  Trade receivables are written-off when Ostexdeems specific customer amounts to be uncollectible.  The activity in the allowance for doubtful accounts consisted ofadditional provisions of $16,000, $0, and $21,000 in 2002, 2001, and 2000,respectively, and write-offs of $0, $1,000, and $0 in 2002, 2001 and 2000,respectively.

 

**Warranty/ProductLiability Accruals**

Warranty and productliability accruals are established to provide for estimated future expenses asa result of construction and product defects. Ostex recorded expenses to increase the warranty accrual of $10,000,$10,000, and $0 in 2002, 2001, and 2000, respectively.  There were no warranty claims in 2002, 2001,and 2000.  Liability estimates aredetermined based on management judgment considering such factors as historicalexperience, the likely current cost of corrective action, manufacturers’ andsubcontractors’ participation in sharing the cost of corrective action, andconsultations with third party experts such as engineers.

 

**Inventory**

Inventory consists principallyof raw materials and work in process. Inventories are stated at the lower of cost (first-in, first-out) ormarket.  Cost is computed using standardcosts that approximate actual cost plus certain manufacturing overheadamounts.  Our entire finished goodsinventory has a limited shelf life and we regularly make estimates of inventoryamounts which will not be sold within the appropriate time frame and charge offsuch amounts to cost of products sold.

 

The components ofinventory are:

 
|            |   | **December 31, 2002** |      | **December 31, 2001** |   |
|-----------------|--------|-----------------------|-----------|-----------------------|--------|
| Raw materials   |   | $                     | 971,000   |                  | $      | 340,000 |   |
| Work in process |   | $                     | 437,000   |                  | $      | 585,000 |   |
| Finished goods  |   | $                     | 60,000    |                  | $      | 69,000 |   |
| Total inventory |   | $                     | 1,468,000 |                  | $      | 994,000 |   |

 

**Property,Plant And Equipment**

Property, plant andequipment are stated at cost and depreciated using the straight-line methodover the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their usefullives or the lease term.  Estimatedlives range from five to ten years.  Depreciationand amortization expense during 2002, 2001, and 2000 was $712,000, $721,000,and $496,000, respectively.  We assessthe potential impairment of our long-lived assets when there is evidence thatevents or changes in circumstances have made recovery of the assets’ carryingvalue unlikely. No such impairment charges have been recorded in theaccompanying financial statements.

 

31

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**FairValue of Financial Instruments**

The carrying value ofOstex’ financial instruments, including cash and cash equivalents, short-terminvestments, and trade receivables approximate fair value due to theirshort-term nature or variable interest rates. Ostex also believes that the carrying value of debt approximates its fairvalue.

 

**Loss PerShare**

Basic and diluted netloss per share is computed using the weighted average number of sharesoutstanding during the period.  Dilutednet loss per share excludes the impact of dilutive, potential common sharesoutstanding (consisting of stock options and warrants) as their effect would beantidilutive in all periods presented. The number of stock options outstandingat December 31, 2002 was 2,684,597 and the number of warrants outstanding was85,600. The number of stock options outstanding at December 31, 2001 was2,755,004 and the number of warrants outstanding was 116,504. The number ofstock options outstanding at December 31, 2000 was 2,524,910 and the number ofwarrants outstanding was 102,504. These were excluded from the loss per sharecalculation as their effect would be antidilutive.

 

**StockOption Plans**

Ostex has adopted thedisclosure-only provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and has appliedthat method in all years presented. Accordingly, no compensation cost has been recognized for stock optionsissued at market value on the date of grant. Had compensation cost for Ostex’ Stock Option Plans been determinedbased on the fair value of the options at the grant date for awards in 2002,2001, and 2000 consistent with the provisions of SFAS No. 123, Ostex’ net lossand net loss per common equivalent share would have changed to the pro formaamounts indicated below:

 
|                                                                                        |   | **2002** |       | **2001** |   | **2000**   |   |
|---------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
| Net loss – as reported                                                                 |   | $        | (4,400,000 | )        | $      | (3,099,000 | )      | $ | (2,017,000 | ) |
| Stock based employee compensation - included in the  determination of net loss as reported: |   | —   |       | —   |   | —     |   |
| Stock based employee compensation assuming  application of fair value method to all awards: |   | 544,000  |       | 605,000  |   | 453,000    |   |
| Net loss – pro forma                                                                   |   | $        | (4,944,000 | )        | $      | (3,704,000 | )      | $ | (2,470,000 | ) |
| Basic and diluted net loss per common  and common equivalent share – as reported  |   | $        | (0.35      | )        | $      | (0.25      | )      | $ | (0.16 | ) |
| Basic and diluted net loss per common  and common equivalent share – pro forma    |   | $        | (0.39      | )        | $      | (0.30      | )      | $ | (0.20 | ) |

 

**RecentlyIssued Accounting Pronouncements**

InJune 2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (SFAS No. 143), which provides the accounting requirements forretirement obligations associated with tangible long-lived assets. Thisstatement requires entities to record the fair value of a liability for anasset retirement obligation in the period in which it is incurred. Theprovisions of SFAS No. 143 are effective for fiscal years beginning after June15, 2002. We are currently assessing the impact of implementing this statementon our results of operations and financial position.

 

InJune 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities” (SFAS No. 146). This statement addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” This statement requiresthat a liability for a cost associated with an exit or disposal activity berecognized at fair value when the liability is incurred. This statement will beeffective for our 2003 fiscal year, and early adoption is permitted.  The adoption of SFAS No. 146 is not expectedto have a material impact on our results of operations or financial position.

 

InNovember 2002, the FASB issued the FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” which elaborates on the disclosures to bemade by a guarantor about its obligations under certain guarantees that it

 

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hasissued, if any. Ostex has reviewed the Interpretation and has concluded that itdoes not need to make any additional disclosures in this filing and does notexpect his interpretation to have a material impact on its results ofoperations or financial position in 2003.

 

InDecember 2002, the FASB issued the Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,an amendment of FASB Statement 123” (SFAS 148). SFAS 148 provides newtransition alternatives for companies adopting the fair value method ofaccounting for stock-based compensation prescribed by SFAS 123 and changescertain disclosure requirements for companies electing to continue applying theAPB 25 intrinsic value method. Ostex has no current plans to adopt the fair valuemethod of accounting but has revised its disclosure accordingly.

 

**Reclassification**

Certain reclassificationshave been made to prior year amounts to conform to the current presentation.

 

**Note 2 -Short-Term Investments**

 

Ostex’ short-terminvestments at December 31, 2002 and 2001 consisted of the following:

 
|                           |   | **2002** |   | **2001** |    |
|--------------------------------|--------|----------|--------|----------|---------|
| Federal  agency obligations    |   | $        | — |     | $       | 1,580,000 |   |
| Government  agency obligations |   | $        | — |     | 963,000 |   |
|                           |   | $        | — |     | $       | 2,543,000 |   |

 

**Note 3 -Property, Plant And Equipment**

 

Property, plant and equipmentat December 31, 2002 and 2001 consisted of the following:

 
|                                       |   | **2002**   |      | **2001**   |   |
|--------------------------------------------|--------|------------|-----------|------------|--------|
| Leasehold  improvements                    |   | $          | 4,058,000 |       | $      | 4,058,000 |   |
| Laboratory  and manufacturing equipment    |   | 2,072,000  |      | 1,909,000  |   |
| Computers  and office equipment            |   | 1,473,000  |      | 1,370,000  |   |
| Construction-in-progress                   |   | 5,000      |      | —     |   |
|                                       |   | 7,608,000  |      | 7,337,000  |   |
| Accumulated  depreciation and amortization |   | (4,776,000 | )         | (4,065,000 | )      |
| Net  property, plant and equipment         |   | $          | 2,832,000 |       | $      | 3,272,000 |   |

 

**Note 4 -Impairment Of Investment In Metrika**

 

AtDecember 31, 2001, other assets primarily consisted of a $599,000 investment inthe preferred stock of Metrika. Ostex has historically recorded itsinvestment in Metrika at the lower of cost or market and periodically assessedthe value of the investment and compared it to the cost basis to determinewhether it is impaired or not. Our assessment of the valuation of this assetwas based on historical financial data, assumed valuations of Metrika, relevantliquidation preferences made during additional investment rounds, futureprojections, and Metrika’s performance and the general changes in the U.S.equity markets.  In the fourth quarterof 2002, management determined that there had been an other than temporarydecline in the value of its investment in Metrika based on financialinformation obtained from Metrika including its cash balance, cash expenditurerate, and immediate need for financing. Management believes that these factorsare a strong indicator that the fair value of its preferred stock holdings inMetrika is substantially near zero and has adjusted the cost basis accordingly.

 

**Note 5 -Note Payable**

 

On October 2, 2000, Ostexand Transamerica Business Credit Corporation (Transamerica) signed a letter ofcommitment whereby Transamerica provided debt financing for our manufacturingexpansion plan.  Each draw down was on aseparate note, secured by equipment, payable in 36 monthly installments with aballoon payment at the end of the term. These notes have due dates ranging fromNovember 2003 to January 2005.  As ofDecember 31, 2002, Ostex has received $2,316,000 in proceeds under six separatenote agreements, with a balance due of $1,138,000.  The annual interest rate under the six notes is fixed atapproximately

 

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14.5%.  There is no further availability of fundsunder this financing. We believe that the carrying value of the debtapproximates the fair value of this debt.

 

Ostex also entered intoan amended and restated loan agreement with Inverness in connection with themerger agreement, as amended, between the two companies.  Under the loan agreement, Inverness hasagreed to make, or arrange for one of its affiliates to make, loans of up to anaggregate of $2,000,000 to Ostex.  Theannual interest rate of each loan is an amount equal to LIBOR for one-yearloans as published in the Wall Street Journal on the date of each loan, plusfour and one-half percent. Ostex borrowed $334,000 under the loan agreement onOctober 10, 2002 at an interest rate of 6.27%, borrowed $433,000 on November12, 2002 at an interest rate of 6.04%, and borrowed $233,000 on December 9,2002 at an interest rate of 6.16%. As of December 31, 2002, the total amountborrowed under the Inverness note was $1,000,000.  Ostex is entitled to borrow the remaining $1,000,000 under theloan agreement at any time on or after January 2, 2003, provided that certainconditions are met, in order to maintain sufficient cash, cash equivalents andshort-term investments to fund six-months of its budgeted working capitalneeds. On January 9, 2003, Ostex borrowed an additional $379,000 at an interestrate of 6.02%.  On February 25, 2003,Ostex borrowed an additional $246,158 at an interest rate of 5.90%.

 

The loans from Invernessmust be repaid at the earliest of:

 

a.               thefirst business day after the effective time of the merger;

 

b.              accelerationupon an event of default;

 

c.               thetermination of the merger agreement in specified circumstances related toOstex’ breach of the terms of the merger agreement or stock option agreement orOstex’ board’s approval of an acquisition proposal or withdrawal of itsapproval or recommendation of the merger agreement; or

 

d.              December31, 2003.

 

If, during the loanperiod, the merger agreement is terminated in circumstances that would not bean event of default under the loan agreement, Ostex may borrow a maximum ofonly $1,750,000 compared to the $2,000,000 that would otherwise be availablefrom Inverness under the loan agreement, assuming satisfaction of certainconditions. Ostex believes that the carrying value of the debt approximates thefair value of this debt due to its short-term nature.

 

As of December 31, 2002,the principal payments under all of Ostex notes are as follows:

 
| 2003                         |   | $       | 1,855,000 |   |
|------------------------------|--------|---------|-----------|--------|
| 2004                         |   | 293,000 |      |
| 2005                         |   | 37,000  |      |
| 2006                         |   | 8,000   |      |
| Total principal due on notes |   | $       | 2,193,000 |   |

 

Interest expense on allof Ostex’ notes combined was $251,000 in 2002, $212,000 in 2001, and $10,000 in2000.

 

**Note 6 -Shareholders’ Equity**

 

**StockOption Plans**

Ostex has three stock optionplans: the Amended and Restated Stock Option Plan (the Old Plan), the 1994Stock Option Plan (the 1994 Plan), both administered by the CompensationCommittee of the Board of Directors, and the Directors’ Nonqualified StockOption Plan (the Directors’ Plan), (collectively, the Stock Option Plans).  The Old Plan no longer permits additionalstock option grants.

 

Shares of common stockreserved for issuance to employees and directors under the 1994 Plan and theDirectors’ Plan were 3,750,000 and 600,000, respectively.  Shares available for future grants under the1994 Plan and the Directors’ Plan at December 31, 2002 were 1,419,000 and180,000, respectively.  These optionsgenerally vest ratably over three to four years.  All options granted under the Stock Option Plans expire upon

 

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the earlier of 90 daysafter termination of employment or ten years from date of grant.  Options are granted with exercise pricesequal to or greater than fair market value at grant date.

 

Information relating tostock options outstanding and stock options exercisable at December 31, 2002 isas follows:

 
|                                    |   | **OPTIONS OUTSTANDING** |   | **OPTIONS EXERCISABLE**                             |   |
|-----------------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|
| **RANGE OF EXERCISE PRICES**            |   | **NUMBER OF  SHARES**   |   | **WEIGHTED   AVERAGE   REMAINING  LIFE IN   YEARS** |   | **WEIGHTED  AVERAGE   EXERCISE   PRICE** |   | **NUMBER OF  SHARES** |   | **WEIGHTED  AVERAGE   EXERCISE   PRICE** |   |
| $   0.08 - $   1.90 |   | 951,500                 |   | 7                                                   |   | $ | 1.35 |   | 577,245 |   | $ | 1.28 |   |
| $   2.00 - $   4.75 |   | 1,688,970               |   | 6                                                   |   | $ | 2.84 |   | 1,409,606 |   | $ | 2.93 |   |
| $   5.00 - $ 17.13            |   | 44,487                  |   | 1                                                   |   | $ | 5.85 |   | 44,487 |   | $ | 5.85 |   |
|                                    |   | 2,684,957               |   | 6                                                   |   | $ | 2.36 |   | 2,031,338 |   | $ | 2.53 |   |

 

Information relating tostock option activity is as follows:

 
|                                           |   | **2002**   |       | **2001**                             |       | **2000**   |       |
|------------------------------------------------|--------|------------|------------|--------------------------------------|------------|------------|------------|
|                                           |   | **SHARES** | ** ** | **WEIGHTED AVGERAGE EXERCISE PRICE** | ** ** | **SHARES** | ** ** | **WEIGHTED AVGERAGE EXERCISE PRICE** | ** ** | **SHARES** | ** ** | **WEIGHTED AVGERAGE EXERCISE PRICE** | ** ** |
| Outstanding at beginning of period             |   | 2,775,004  |       | $                                    | 2.37       |       | 2,524,910  |   | $ | 2.58 |   | 1,992,395 |   | $ | 2.68 |   |
| Granted                                        |   | 116,450    |       | 2.41                                 |       | 662,950    |       | 1.62 |   | 656,780 |   | 2.33 |   |
| Exercised                                      |   | (25,261    | )          | 0.80                                 |       | (84,827    | )          | 0.70 |   | (10,797 | ) | 2.45 |   |
| Canceled                                       |   | (181,236   | )          | 2.51                                 |       | (328,029   | )          | 3.00 |   | (113,468 | ) | 2.91 |   |
| Outstanding at end of period                   |   | 2,684,957  |       | $                                    | 2.36       |       | 2,775,004  |   | $ | 2.37 |   | 2,524,910 |   | $ | 2.58 |   |
| Exercisable at end of period                   |   | 2,031,338  |       | $                                    | 2.53       |       | 1,797,979  |   | $ | 2.70 |   | 1,555,048 |   | $ | 2.83 |   |
| Weighted average fair value of options granted |   | $ 1.84     |       | $ 1.43                               |       | $ 2.06     |       |

 

The fair value of eachoption grant is established on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used fornew grants in 2002: zero dividend yield; expected volatility of 102%; averagerisk free rate of interest of 3.5% and expected lives of five years.Assumptions for options granted in 2001 were: zero dividend yield; expectedvolatility of 135%; average risk-free interest rate of 3.5%****and expected lives of fiveyears.  Assumptions for options grantedin 2000 were: zero dividend yield; expected volatility of 134%; averagerisk-free interest rate of 5.5%****and expected lives of five years.

 

**CommonStock Warrants**

During 2002, Ostex issuedwarrants to two outside consultants for the purchase of 38,000 shares of commonstock, with exercise prices ranging from $1.256 - $2.53, in exchange forservices provided to Ostex. The warrants vest upon issuance and expire twoyears from the date of grant. Ostex recorded these warrants in accordance withthe provisions of SFAS No. 123 and Emerging Issues Task Force Issue 98-16,which require that the fair value of the warrant be recognized as expense.  Total expense recognized in 2002 related tothese warrants was approximately $35,000. The fair value of these warrantgrants were established on the date of grant using the Black-Scholesoption-pricing model with the following average assumptions: zero dividendyield; expected volatility of 97%; average risk free rate of interest of 1.5%and contractual lives of two years.

 

During 2001, Ostex issuedwarrants to one outside consultant for the purchase of 14,000 shares of commonstock, with exercise prices ranging from $1.46 - $2.85, in exchange forservices provided to Ostex. The warrants vest upon issuance and expire in twoyears from the date of grant.  Totalexpense recognized in 2001 related to these warrants was approximately $19,000.

 

During 2000, Ostex issuedwarrants to two outside consultants for the purchase of 6,000 and 12,904 sharesof common stock, each at exercise prices ranging from $1.73 - $1.86, inexchange for services provided to

 

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Ostex.  Both warrants vest upon issuance and expirefive years and two years, respectively, from the grant date.  Total expense recognized in 2000 related tothese warrants was approximately $20,000.

 

Also during 2000, Ostexissued a warrant to Transamerica for the purchase of 33,600 shares of commonstock at an exercise price of $3.00 related to the debt financing agreementreferenced in Note 5 above.  Thiswarrant is fully vested and expires in October 2005.  Ostex has provided for this warrant in accordance with theprovisions of SFAS No. 123 and has recorded the fair value of the warrant as anasset to be amortized to interest expense.

 

**Note 7 -Licensing Agreements**

 

Under Ostex’ licenseagreements with the Washington Research Foundation (WRF), Ostex has theworldwide exclusive right to commercialize technology developed from certainresearch conducted by the University of Washington (UW).  As consideration for the licenses acquiredand for the attainment of certain milestones, Ostex paid the WRF certainnonrefundable fees and issued common stock to the WRF and the UW**. **In addition, future cash paymentsand common stock grants may be due upon attainment, by Ostex, of certain othermilestones.****  All legal costsincurred by the WRF in connection with the filing, prosecution, and maintenanceof certain defined patent rights are paid by Ostex.   Ostex must also pay the WRF royalties on net sales of  licensed products from the WRF which areincluded in cost of goods sold.

 

On March 5, 2002, Ostexannounced that it had entered into a Serum Osteomark License Agreement with itsJapanese partner, Mochida Pharmaceutical Co. Ltd., under which Ostex will sellthe Osteomark NTx Serum test, in the microtiter format, exclusively to Mochidafor distribution in Japan.  Under theterms of the agreement, Mochida paid Ostex $750,000, $500,000 of which was paidupfront as a nonrefundable license fee and $250,000 of which was paid in August2002.  Mochida’s payments were subjectto a 10% Japanese withholding tax. Ostex recorded this $75,000 tax expense in the third quarter of2002.  Ostex is recording license feerevenue under the Serum Osteomark License Agreement as earned ratably over thenine-year license period and recognized $62,000 in 2002.  Deferred revenue related to this agreementwas $688,000 at December 31, 2002. During the third quarter of 2002, Mochida began purchasing and payingfor finished Osteomark NTx Serum kits manufactured by Ostex.

 

**Note 8 -Related Party Transactions**

 

**ResearchAgreements**

In the past, Ostex hadentered into research agreements with the UW, one of which was extended throughDecember 31, 2001 at which time the agreement was terminated. Ostex no longerhas any agreements in place with the UW. Total expense related to theseagreements was $150,000 during 2001 and 2000 and is included in research anddevelopment expense for those periods.

 

**ManufacturingAgreement**

Ostex, through anagreement with Metrika, developed the NTx Point-of-Care device.  Along with the agreement, Ostex acquiredpreferred stock of Metrika (see Note 4). Ostex paid approximately $561,000, $1,276,000 and $677,000 in 2002, 2001and 2000, respectively, to Metrika related to purchases of critical componentsfor the development and production of the NTx Point-of-Care device.  Metrika has been and continues to be acritical supplier of certain components of the NTx Point-of-Care device toOstex. Ostex pays Metrika a royalty based on the sales of the NTx Point-of-Caredevice. In the event of Metrika’s inability to continue as a going concern,Ostex has contractual remedies that allow it access to tooling and third partysuppliers for these critical components.

 

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**Note 9 -Commitments And Contingencies**

 

**Leases**

Ostex has entered intononcancelable operating leases for office space and certain equipment.  Future minimum payments under these leasesare as follows:

 
| 2003       |   | $       | 629,000   |   |
|------------|--------|---------|-----------|--------|
| 2004       |   | 629,000 |      |
| 2005       |   | 541,000 |      |
| 2006       |   | 109,000 |      |
| 2007       |   | 109,000 |      |
| Thereafter |   | 298,000 |      |
| Total      |   | $       | 2,315,000 |   |

 

Total rent expense wasapproximately $514,000, $442,000, and $444,000 in 2002, 2001, and 2000,respectively.

 

**Litigation**

In December 2001,Osteometer Biotech A/S, also known as Nordic Bioscience A/S, and its licenseeRoche Diagnostics GmbH sent Ostex two notification letters concerningOsteometer’s European Patent No. 0742902 which were issued November 21,2001.  The patent claims synthetic NTxpeptides in assays for bone resorption. Ostex believes that its Osteomark products do not infringe upon theOsteometer patent and that the patent is invalid in light of prior art that wasnot taken into consideration by the issuing European Patent Office.  In January 2002, Ostex filed an action inthe Court of Monza, Italy, seeking a pan-European declaration ofnoninfringement.  This action included arequest to stay any such noninfringement determination pending the outcome ofan opposition proceeding that Ostex initiated on August 20, 2002, in theEuropean Patent Office against this patent. By letter dated October 24, 2002, Nordic Bioscience A/S informed Ostexthat it had filed infringement proceedings in July 2002 against Ostex beforethe District Court of Düsseldorf, Germany. Ostex was served notification on December 12, 2002 of the Germanproceeding. On January 9, 2003, Ostex filed a notification of appearance inGermany and indicated that it will contest the matter.  Ostex does not believe that theseproceedings will have a material adverse effect on its financial position orresults of operations.

 

Effective August 1, 2000,Ostex, Osteometer, Diagnostics Systems Laboratories (DSL), and the WRF, enteredinto an agreement settling a lawsuit brought against Osteometer and DSL forinfringements of patents exclusively licensed by the WRF to Ostex and directedto C-telopeptide markers of bone resorption. Under the settlement agreement, Osteometer could sell the CrossLapsTMELISA urine kits in the United States until August 2002, paid Ostex a lump sumsettlement fee of approximately $200,000 for past sales and would pay royaltieson future sales.  Approximately $48,000of the settlement fee was considered 2000 activity and was recorded underRevenues.

 

On November 19, 1999,Roche Diagnostics GmbH (Roche) filed a lawsuit against Ostex in Belgium seekingto invalidate Ostex’ European patents as they cover the Belgium territory.  The lawsuit also sought a declaration thatRoche is not infringing on Ostex’ patents in all the European countriesdesignated under the patents and where Roche markets or plans to market theirElecsys ß-Crosslaps Serum diagnostic test. In February 2000, this case was stayed indefinitely, pending theoutcomes of opposition proceedings in the European Patent Office. Ostex  believes that this lawsuit will not lead toan award of damages against Ostex.

 

**Note 10- Federal Income Taxes**

 

There was no income taxbenefit attributable to net operating losses for 2002, 2001 and 2000. Thedifference between taxes computed by applying the U.S. federal corporate taxrate of 34% and the actual income tax provision in 2002, 2001 and 2000 is primarilythe result of establishing a full valuation allowance on Ostex’ deferred taxassets and, in 2002, relating to foreign taxes paid in connection with theMochida agreement (see Note 7).

 

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The tax effects oftemporary differences and tax loss and credit carryforwards that give rise tosignificant portions of deferred tax assets at December 31 are comprised of thefollowing:

 
|                                 |   | **2002**    |       | **2001**    |   |
|--------------------------------------|--------|-------------|------------|-------------|--------|
| Net operating loss carryforward      |   | $           | 15,632,000 |        | $      | 14,458,000 |   |
| Research and experimentation credits |   | 816,000     |       | 806,000     |   |
| Depreciation and amortization        |   | 547,000     |       | 408,000     |   |
| Investment impairment                |   | 204,000     |       | —      |   |
| Deferred revenue                     |   | 234,000     |       | —      |   |
| Other                                |   | 78,000      |       | 78,000      |   |
| Gross deferred tax asset             |   | 17,511,000  |       | 15,750,000  |   |
| Less: Valuation allowance            |   | (17,511,000 | )          | (15,750,000 | )      |
| Net deferred tax asset               |   | $           | *—*   |        | $      | *—* |   |

 

The increase in thevaluation allowance for deferred tax assets for 2002, 2001, and 2000 of ****$1,761****,000, ****$1****,141,000 and ****$665****,000, respectively, was dueprimarily to the inability to utilize net operating losses and research anddevelopment credits.

 

At December 31, 2002,Ostex had net operating loss carryforwards of approximately ****$45****,977,000 and unused researchand development tax credits of approximately ****$816****,000available to offset future taxable income and income taxes, respectively,expiring from 2004 through 2022. Ostex’ ability to utilize net operating lossand credit carryforwards might be limited pursuant to the Internal RevenueCode, due to cumulative changes in stock ownership of Ostex in excess of 50%.

 

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**Note11 - Unaudited Quarterly Information**

 

The followingtable sets forth certain unaudited quarterly statements of operations for theeight quarters ended December 31, 2002. In the opinion of management, this information has been preparedsubstantially on the same basis as the audited consolidated financialstatements and all necessary adjustments, consisting only of normal recurringadjustments, have been included in the amounts stated below to present fairlythe unaudited quarterly results of operations. The quarterly data should beread in conjunction with our audited consolidated financial statements and thenotes thereto. The operating results for any quarter are not necessarilyindicative of the operating results for any future period.

 
|                                                                  |   | **Three-Month  Periods Ended** |       |
|-----------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                  |   | **Dec. 31,  2002**             |       | **Sept. 30,  2002** |   | **June 30,  2002** |   | **March 31,  2002** |   | **Dec. 31,  2001** |   | **Sept. 30,  2001** |   | **June 30,  2001** |   | **March 31,  2001** |   |
| Revenue                                                               |   | $                              | 1,278,000  |   | $ | 1,655,000 |   | $ | 1,572,000 |   | $ | 923,000 |   | $ | 1,426,000 |   | $ | 1,286,000 |   | $ | 1,492,000 |   | $ | 1,529,000 |   |
| Cost of products sold                                                 |   | 660,000                        |       | 805,000 |   | 726,000 |   | 293,000 |   | 585,000 |   | 487,000 |   | 590,000 |   | 614,000 |   |
| Gross profit                                                          |   | 618,000                        |       | 850,000 |   | 846,000 |   | 630,000 |   | 841,000 |   | 799,000 |   | 902,000 |   | 915,000 |   |
| (Percentage of revenue)                                               |   | 48                             | %          | 51 | % | 54 | % | 68 | % | 62 | % | 60 | % | 60 | % | 91 | % |
|                                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Expenses:                                                   |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| POC facility start-up costs                                           |   | —                         |       | — |   | 138,000 |   | 431,000 |   | 354,000 |   | 268,000 |   | 170,000 |   | 80,000 |   |
| Research and development                                              |   | 460,000                        |       | 426,000 |   | 408,000 |   | 463,000 |   | 368,000 |   | 470,000 |   | 427,000 |   | 569,000 |   |
| Selling, general and administrative                                   |   | 893,000                        |       | 1,425,000 |   | 839,000 |   | 999,000 |   | 1,064,000 |   | 828,000 |   | 858,000 |   | 1,182,000 |   |
| Total operating expenses                                              |   | 1,353,000                      |       | 1,851,000 |   | 1,385,000 |   | 1,893,000 |   | 1,786,000 |   | 1,566,000 |   | 1,455,000 |   | 1,831,000 |   |
| Loss from operations                                                  |   | (735,000                       | )          | (1,001,000 | ) | (539,000 | ) | (1,263,000 | ) | (945,000 | ) | (767,000 | ) | (553,000 | ) | (916,000 | ) |
|                                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  (expense) income:                                              |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impairment  of investment                                             |   | (599,000                       | )          | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest income                                                       |   | —                         |       | 9,000 |   | 19,000 |   | 35,000 |   | 19,000 |   | 90,000 |   | 91,000 |   | 94,000 |   |
| Interest expense                                                      |   | (67,000                        | )          | (58,000 | ) | (62,000 | ) | (64,000 | ) | (77,000 | ) | (60,000 | ) | (39,000 | ) | (36,000 | ) |
| Total other (expense) income                                          |   | (666,000                       | )          | (49,000 | ) | (43,000 | ) | (29,000 | ) | (58,000 | ) | 30,000 |   | 52,000 |   | 58,000 |   |
|                                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss  before income taxes                                             |   | $                              | (1,401,000 | ) | $ | (1,050,000 | ) | $ | (582,000 | ) | $ | (1,292,000 | ) | $ | (1,003,000 | ) | $ | (737,000 | ) | $ | (501,000 | ) | $ | (858,000 | ) |
| Income  taxes                                                         |   | —                         |       | 75,000 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Net loss                                                              |   | $                              | (1,401,000 | ) | $ | (1,125,000 | ) | $ | (582,000 | ) | $ | (1,292,000 | ) | $ | (1,003,000 | ) | $ | (737,000 | ) | $ | (501,000 | ) | $ | (858,000 | ) |
|                                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per common and common  equivalent share(1) |   | $                              | (0.11      | ) | $ | (0.09 | ) | $ | (0.05 | ) | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.07 | ) |
|                                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares used in calculation of net  loss per share    |   | 12,582,000                     |       | 12,581,000 |   | 12,562,000 |   | 12,558,000 |   | 12,553,000 |   | 12,540,000 |   | 12,484,000 |   | 12,485,000 |   |
|                                                                       |        |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)Loss per share is computed independently for each of the periods presented.Therefore, the sum of the quarterly per share amounts will not necessarilyequal the total amount for the year.

 

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**Item 9.****        Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure**

 

**PreviousIndependent Accountant**

Ostex dismissed ArthurAndersen LLP as its independent auditor on May 22, 2002.  The decision to dismiss Arthur Andersen wasrecommended by the Audit Committee of the Ostex Board of Directors and approvedby the Ostex Board of Directors.

 

During Ostex’ two most recent fiscal years andthrough May 22, 2002, there were no disagreements with Arthur Andersen on anymatter of accounting principles or practices, financial statement disclosure,or auditing scope or procedure which, if not resolved to Arthur Andersen’ssatisfaction, would have caused Arthur Andersen to make reference to thesubject matter in connection with its report on the Ostex financial statementsfor such years; and there were no reportable events as defined inItem 304(a)(1)(v) of Regulation S-K. Arthur Andersen’s reports on thefinancial statements of Ostex for 2000 and 2001 did not contain any adverseopinions or disclaimers of opinions, nor were they qualified or modified as touncertainty, audit scope, or accounting principles.

 

ArthurAndersen furnished Ostex a letter dated June 10, 2002, stating that it agreedwith the above statements.  A copy ofsuch letter was filed with the SEC as Exhibit 16 to Ostex’ Form 8-K/A datedJune 10, 2002. Ostex requested that Arthur Andersen provide a currently datedletter confirming its agreement with the above statements.  Arthur Andersen has informed Ostex that,because of Arthur Andersen’s current situation, it is unable to provide suchletter.

 

**NewIndependent Accountant**

On May 22, 2002,Ostex engaged KPMG LLP  as the firm ofindependent auditors to audit Ostex’ financial statements for the fiscal yearending December 31, 2002.  The decisionto engage KPMG was recommended by the Ostex Audit Committee and approved by theOstex Board of Directors.  During theperiod from January 2000 to May 22, 2002, Ostex did not consult KPMG regarding(i) the application of accounting principles to a specified transaction, eithercompleted or proposed, that was an important factor Ostex considered inreaching a decision on an accounting, auditing, or financial reporting issue,or the type of audit opinion that might be rendered on Ostex' financialstatements, or (ii) any matter that was the subject of either a disagreement orreportable event.

 

 

**PART III**

 

**Item 10.****     Directorsand Executive Officers of the Registrant**

 

**a.Directors of the Registrant**

 

Ostex’ Articles ofIncorporation divide the Board of Directors into three classes, each classconsisting, as nearly as possible, of one-third of the total number ofdirectors.  The members of each classare elected to serve for a three-year term and until the election andqualification of their successors.  Ateach annual meeting of shareholders, one class of the Board of Directors iselected and directors in the other classes remain in office until theirrespective three-year terms expire. Under Ostex’ Amended Bylaws, the Board of Directors is to be comprisedof no more than ten members and no fewer than three members, the exact numberof which shall be set by the Board of Directors from time to time.  The Board of Directors currently consists ofsix directors.

 

**Class 1 Directors**  (terms expire 2003)

 

**David R. Eyre,Ph.D.,**age 58, is afounder of Ostex and has been a director since Ostex’ formation in May1989.  His major research interests includecollagen biochemistry, inborn skeletal diseases, cartilage pathology,biochemistry of the intervertebral disc, bone metabolism and osteoporosis.Since 1985, Dr. Eyre has served as the Burgess Professor of Orthopaedicsat the University of Washington, where he is also an Adjunct Professor ofBiochemistry and Oral Biology and a director of the Orthopaedic ResearchLaboratories. Dr. Eyre has previously served as a research scientist atChildren’s Hospital Medical Center in Boston, Massachusetts, and as a facultymember in the department of biological chemistry at Harvard Medical School. Inaddition, from 1973 to 1976, Dr. Eyre served on the permanent scientificstaff of the Kennedy Institute of Rheumatology in

 

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London, England, and as aResearch Fellow at Massachusetts General Hospital and Harvard MedicalSchool.  Dr. Eyre has publishednumerous articles on the biochemistry of connective tissue.  Dr. Eyre earned his Ph.D. and B.S. inbiochemistry from the University of Leeds, England.

 

**Fredric J. Feldman, Ph.D**.,age 63, has been a director with Ostex since April 1997 and currently serves onthe Audit Committee of the Board of Directors. Dr. Feldman has served as thePresident of FJF Associates since 1992, a firm providing management andinvestment consulting services to venture capital and emerging growth companiesin the health care industry.  From 1995to 1996 and from 1999 to 2000, Dr. Feldman has served and is serving as ChiefExecutive Officer of Biex, Inc., a biotechnology company; from 1992 to 1995,Dr. Feldman served as the Chairman of the Board of Directors and ChiefExecutive Officer of Oncogenetics, Inc., a genetic cancer diagnostic company;and from 1988 to 1992, he was President and Chief Executive Officer ofMicrogenic Corporation, a biotechnology diagnostic company.  Dr. Feldman serves on the Board of Directorsof Orthologic Corp. and SangStat Medical Corp. Dr. Feldman received a Ph.D. and M.S. in chemistry from the Universityof Maryland and a B.S. in chemistry from Brooklyn College of City University ofNew York.

 

**Class 2 Directors **(termsexpire 2005)

 

**Thomas J. Cable**, age 63,has been a director of Ostex since 1989and currently serves on the Compensation Committee of the Board of Directors.  Mr. Cable was co-founder and partner ofCable & Howse Ventures, Inc., a venture management company founded in1979.  Mr. Cable was also co-founderand, from 1982 to 1985, a partner in Cable Howse & Ragen, a Seattleinvestment banking and brokerage firm now known as Ragen MacKenzie GroupIncorporated.  Mr. Cable is a founderand current Chairman of the Washington Research Foundation and serves on theBoard of Directors of Therus Corporation,Omeros Medical Systems, Inc., and Stellar One Corporation.  Mr. Cable received an M.B.A. from StanfordUniversity and a B.A. from Harvard College.

 

**John H. Trimmer**, age 50, has been a director of Ostexsince June 1997 and currently serves on the Audit and Compensation Committeesof the Board of Directors.  Mr. Trimmer presentlyserves as President and Chief Executive Officer of CallTower, Inc., atelecommunications company.  From 1992to 1994, Mr. Trimmer served as Chairman, President and Chief Executive Officerof National Diagnostic Systems, Inc., a managed care company focused on themanagement of clinically appropriate diagnostic imaging services; from 1985 to1989 as President and Chief Operating Officer of American Biodyne, Inc., amanaged care company focused on the delivery and management of clinicallyappropriate mental health services; and from 1984 to 1985 as President of TMS,Inc., a private management consulting firm providing services to health careventure businesses.  Mr. Trimmer alsoheld positions with American Medical Systems, Inc., Hospital Business, andBooz, Allen & Hamilton.  Mr. Trimmerreceived an M.B.A. from the University of Chicago and a B.A. from HarvardUniversity.

 

**Class 3 Directors**(terms expire 2004)

 

**Thomas A. Bologna**, age 54,****joined Ostex in July 1997 asthe President and Chief Executive Officer and as a member of the Board ofDirectors and in April 1999, he was appointed Chairman of the Board ofDirectors.  From January 1996 to July1997, Mr. Bologna was a principal in Healthcare Venture Associates, aconsulting firm.  From January 1994 toJanuary 1996, Mr. Bologna was President and Chief Executive Officer forScriptgen Pharmaceuticals, Inc., a biotechnology company with proprietary drugscreening technology that is developing orally active drugs to regulate geneexpression, and from July 1987 to January 1994, Mr. Bologna was Chairman of theBoard of Directors, President and Chief Executive Officer of Gen-ProbeIncorporated, a biotechnology company commercializing genetic-probe-basedtechnology for diagnostic and therapeutic applications. Prior to Gen-Probe, Mr.Bologna held several senior level positions with Becton, Dickinson and Companyand Warner-Lambert Company.  At Becton,Dickinson and Company, he served as President of the Diagnostic InstrumentSystems Division, President of the Johnston Laboratories Division, and VicePresident and General Manager of the Hynson, Wescott & Dunningbiotechnology unit.  At Warner-LambertCompany, he served as a Vice President responsible for the marketing, sales andR&D functions, as well as the Asia/Pacific profit center for the ScientificInstrument Division.  Mr. Bologna serveson the Board of Directors for LeonardoMD Corporation.  Mr. Bologna received an M.B.A. and a B.S. from New YorkUniversity.

 

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**Elisabeth L. Evans, M.D.**, age 55,****has been a director of Ostexsince June 1997 and currently serves on the Audit Committee of the Board ofDirectors.  Since 1987, Dr. Evans hasbeen in private practice in obstetrics and gynecology at Overlake Obstetriciansand Gynecologists, and from 1997 to 2000 served as Chief of Medical Staff atOverlake Hospital Medical Center.  Dr.Evans previously served as Section Chief, Department of Obstetrics andGynecology at Overlake Hospital Medical Center, a Staff Physician, Departmentof Obstetrics and Gynecology, Kaiser Permanente, Portland, Oregon; as theSenior Staff and Division Head, Department of Gynecology and Obstetrics, HenryFord Hospital, Detroit, Michigan; and as a Clinical Instructor at theUniversity of Michigan Medical Center, Ann Arbor, Michigan.  Dr. Evans received an M.D. from theUniversity of Washington School of Medicine and a B.A. from Wellesley College.

 

**b. Executive Officers of the Registrant**

 

**Thomas A. Bologna**, age 54,****joined Ostex in July 1997 asthe President and Chief Executive Officer and as a member of the Board ofDirectors and in April 1999, he was appointed Chairman of the Board ofDirectors.  From January 1996 to July1997, Mr. Bologna was a principal in Healthcare Venture Associates, a consultingfirm.  From January 1994 to January1996, Mr. Bologna was President and Chief Executive Officer for ScriptgenPharmaceuticals, Inc., a biotechnology company with proprietary drug screeningtechnology that is developing orally active drugs to regulate gene expression,and from July 1987 to January 1994, Mr. Bologna was Chairman of the Board ofDirectors, President and Chief Executive Officer of Gen-Probe Incorporated, abiotechnology company commercializing genetic-probe-based technology fordiagnostic and therapeutic applications. Prior to Gen-Probe, Mr. Bologna heldseveral senior level positions with Becton, Dickinson and Company andWarner-Lambert Company.  At Becton,Dickinson and Company, he served as President of the Diagnostic InstrumentSystems Division, President of the Johnston Laboratories Division, and VicePresident and General Manager of the Hynson, Wescott & Dunningbiotechnology unit.  At Warner-LambertCompany, he served as a Vice President responsible for the marketing, sales andR&D functions, as well as the Asia/Pacific profit center for the ScientificInstrument Division.  Mr. Bologna serveson the Board of Directors for LeonardoMD Corporation.  Mr. Bologna received an M.B.A. and a B.S. from New YorkUniversity.

 

**Thomas F. Broderick**, age 54,****wasnamed the Vice President, Patent and General Counsel in November 1997. Mr.Broderick was Vice President, Intellectual Property from March 1997 to November1997 and was Patent Counsel for Ostex from April 1996 to March 1997. From 1989to March 1996, Mr. Broderick was a partner at the patent law firm ofChristensen, O’Connor, Johnson & Kindness in Seattle, Washington.

 

**J. Daniel Clemens**, age 46, was named the VicePresident, Product Development and Operations in February 2003.  Mr. Clemens was Vice President, ProductDevelopment for Ostex from September 1998 to February 2003, Director ofResearch & Development from May 1992 to September 1998, and Manager ofProduct Development from October 1990 to May 1992.  Prior to joining Ostex, Mr. Clemens was Senior Research &Development Scientist from February 1987 to October 1990 at Genetic SystemsCorporation/Sanofi.

 

**Michael C. Perry**, age 58,****joined Ostex in February2000 as Vice President, Sales. Prior to joining Ostex, Mr. Perry was NationalSales Manager for Sarstedt, Inc., a manufacturer of high quality plasticproducts for the clinical and research markets, from September 1996 to January2000. Prior to Sarstedt, Mr. Perry was with Organon Teknika Corporation forover 20 years.

 

Effective February28, 2003, Johannes (Hans) van Houte, resigned as Vice President, Finance ofOstex International, Inc. to accept a position with another company.  Mr. van Houte joined Ostex in 2001 andserved as Ostex’ principal accounting and financial officer.  Thomas A. Bologna, the Chairman, Presidentand Chief Executive Officer of Ostex, will serve as Ostex’ principal accountingand financial officer until the earlier of the consummation or termination ofOstex’ agreement to merge with Inverness. At the time of his resignation, Mr. van Houte provided Ostex acertification representing that (i) he is not aware of any significantdeficiencies or material weaknesses in the design or operation of Ostex’internal controls that could adversely affect Ostex’ ability to record, process,summarize and report financial data, (ii) he is not aware of any fraud, whetheror not material, that involves management or other employees who have asignificant role in Ostex’ internal controls, and (iii) he reviewed  the financial statements and otherinformation to be included in this Annual Report on Form 10-K and, based on hisknowledge, such financial statements and other

 

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financial informationfairly present in all material respects the financial condition, results ofoperations and cash flows of Ostex as of and for the periods presented.

 

Reed W. Simmons,who served as Vice President, Operations of Ostex, resigned effectiveFebruary 14, 2003.

 

There are nofamily relationships between any executive officers of Ostex.

 

**c.****               Compliance WithSection 16(a)**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires Ostex’ officers and directors, andpersons who own more than 10% of the Common Stock, to file reports of ownershipand change in ownership with the SEC. Officers, directors and greater than 10% shareholders are required bySEC regulations to furnish Ostex with copies of all Section 16(a) reportsthat they file.

 

To Ostex’knowledge, based solely on its review of the copies of such reports furnishedto the Company and written representations that no other reports were required,all Section 16(a) filing requirements applicable to its officers, directors andgreater than 10% shareholders were satisfied during the fiscal year ended December31, 2002.

 

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**Item 11.****     ExecutiveCompensation**

 

The following table sets forth certain information regardingcompensation awarded to, earned by, or paid to Ostex’ Chief Executive Officerand each of Ostex’ four most highly compensated executive officers (other thanthe Chief Executive Officer) who earned more than $100,000 in 2002 (the “NamedExecutive Officers”), during the years ended December 31, 2002, 2001 and2000.

 

**SUMMARYCOMPENSATION TABLE**

 
|                             |   |     |       | **Annual Compensation** |       | **Long Term  Compensation** |       |                               |       |
|----------------------------------|--------|----------|------------|-------------------------|------------|-----------------------------|------------|------------------------------------|------------|
|                             |   |     |       |                    |       |                        |       |                               |       | **Awards** |   |   |   |
| **Name and  Principal position** |   | **Year** |       | **Salary ($)**          |       | **Bonus ($)**               |       | **Other annual  compensation ($)** |       | **Securities Underlying  Options (#)** |   | **All other  compensation ($)** |   |
| Thomas A. Bologna,               |   | 2002     |       |                    | 391,000    |                        |       | 0                                  |       |   | 37,406 | (1) | 0 |   |   | 52,993 | (2) |
| Chairman, President &        |   | 2001     |       |                    | 373,000    |                        |       | 0                                  |       |   | 28,000 |   | 300,000 |   |   | 40,409 |   |
| Chief Executive Officer          |   | 2000     |       |                    | 345,000    |                        |       | 60,000                             |       |   | 25,000 |   | 258,000 |   |   | 36,000 |   |
|                             |   |     | ** ** |                    | ** ** |                        | ** ** |                               | ** ** |   | ** ** |   | ** ** |
| Thomas F. Broderick,             |   | 2002     |       |                    | 202,000    |                        |       | 0                                  |       |   | 0 |   | 0 |   |   | 0 |   |
| Vice President, Patent &     |   | 2001     |       |                    | 194,000    |                        |       | 0                                  |       |   | 0 |   | 20,000 |   |   | 0 |   |
| General Counsel & Secretary  |   | 2000     |       |                    | 184,000    |                        |       | 11,000                             |       |   | 0 |   | 60,000 |   |   | 0 |   |
|                             |   |     |       |                    |       |                        |       |                               |       |   |   |   |   |
| Michael C. Perry, Vice           |   | 2002     |       |                    | 134,000    |                        |       | 0                                  |       |   | 0 |   | 0 |   |   | 0 |   |
| President, Sales                 |   | 2001     |       |                    | 127,000    |                        |       | 0                                  |       |   | 0 |   | 23,000 |   |   | 0 |   |
|                             |   | 2000     |       |                    | 109,000    |                        |       | 6,000                              |       |   | 0 |   | 48,000 |   |   | 25,000 | (3) |
|                             |   |     |       |                    |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Reed W. Simmons,                 |   | 2002     |       |                    | 130,000    |                        |       | 0                                  |       |   | 0 |   | 50,000 |   |   | 0 |   |
| Vice President,                  |   | 2001     |       |                    | —     |                        |       | —                             |       |   | — |   | — |   |   | — |   |
| Operations (4)                   |   | 2000     |       |                    | —     |                        |       | —                             |       |   | — |   | — |   |   | — |   |
|                             |   |     |       |                    |       |                        |       |                               |       |   |   |   |   |
| Hans van Houte, Vice             |   | 2002     |       |                    | 121,000    |                        |       | 0                                  |       |   | 0 |   | 0 |   |   | 0 |   |
| President, Finance (5)           |   | 2001     |       |                    | 50,000     |                        |       | 0                                  |       |   | 0 |   | 41,000 |   |   | 0 |   |
|                             |   | 2000     |       |                    | —     |                        |       | —                             |       |   | — |   | — |   |   | — |   |

 

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(1)                      Representsgross up to compensate for income taxes with respect to living and travelingexpenses.

(2)                      Representsliving and traveling expenses and insurance premiums paid on behalf of Mr.Bologna..

(3)                      Representsrelocation expenses paid to or on behalf of Mr. Perry.

(4)                      Mr.Simmons joined Ostex in 2002.  Heresigned as Vice President, Operations effective February 14, 2003.

(5)                      Mr.van Houte joined Ostex in 2001.  Heresigned as Vice President, Finance effective February 28, 2003.

 

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**Option Grants in2002**

 

The following table sets forthcertain information regarding stock options granted to the Named ExecutiveOfficers during the year ended December 31, 2002.

 
| **Name**        |                                                    | **Individual Grants** |                                                       | **Potential realizable  value at assumed  annual rates of stock  price appreciation for  option term(4)** |                              |
|-----------------|---------------------------------------------------------|-----------------------|------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|-----------------------------------|
|            | **Number of  securities  underlying  options  granted** |                  | **Percentage of  total options  granted to  employees(1)** |                                                                                                      | **Exercise  price per  share(2)** |   | **Expiration  Date(3)** |   |   |
|            |                                                    |                  |                                                       |                                                                                                      |                              |
|            |                                                    |                  |                                                       |                                                                                                      |                              |
|            |                                                    |                  |                                                       |                                                                                                      |                              |
|            |                                                    |                  |                                                       |                                                                                                      | **5%**                            |   | **10%** |   |
| Reed W. Simmons |                                                    | 50,000                | (5)                                                        | 42.94                                                                                                     | %                                 | $ | 2.63 |   | 1/2/2012 |   | $ | 82,700 |   | $ | 209,577 |   |
|                 |                                                         |                       |                                                            |                                                                                                           |                                   |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                      Basedon a total of 116,450 shares subject to options granted to employees during2002.

(2)                      Theexercise price equals the fair market value on the date of grant based on theclosing price of the Common Stock as reported on The Nasdaq National Market.

(3)                      Optionshave terms of ten years from the date of grant and become exercisable generallyover a period of four years.  Upon theoccurrence of certain business transactions, including a change in control ofOstex, the exercisability of the options is accelerated.

(4)                      Assumesall options are exercised at the end of their respective 10-year terms.  The dollar amounts under these columns arethe result of calculations at the 5% and 10% rates required by applicableregulations of the SEC and, therefore, are not intended to forecast possiblefuture appreciation, if any, of the Common Stock price.  Actual gains, if any, on stock optionexercises depend on the future performance of the Common Stock and overallstock market conditions, as well as the option holders’ continued employmentthrough the vesting period.  The amountreflected in this table may not necessarily be achieved.

(5)                      Relatesto a stock option granted upon the commencement of employment in January 2002.

 

**AggregateOption Exercises and Year-End Option Values for 2002**

 

The following table sets forthcertain information regarding the exercise of stock options by Ostex; NamedExecutive Officers during the last fiscal year and the value of the NamedExecutive Officers’ unexercised options as of December 31, 2002.  No options were exercised by the NamedExecutive Officers during the year ended December 31, 2002.

 
|                |   | **Number of shares underlying  unexercised options at fiscal  year end** |   | **Value of unexercised  in-the-money options at fiscal  year end(1)** |   |
|---------------------|--------|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Name**            |   | **Exercisable**                                                          |   | **Unexercisable**                                                     |   | **Exercisable** |   | **Unexercisable** |   |
| Thomas A.  Bologna  |   | 1,225,250                                                                |   | 322,750                                                               |   | $ | 211,683 |   | $ | 85,717 |   |
| Thomas F. Broderick |   | 225,729                                                                  |   | 34,271                                                                |   | $ | 24,379 |   | $ | 3,271 |   |
| Michael C. Perry    |   | 43,021                                                                   |   | 27,979                                                                |   | $ | 2,424 |   | $ | 3,536 |   |
| Reed W. Simmons     |   | 0                                                                        |   | 50,000                                                                |   | $ | 0 |   | $ | 0 |   |
| Hans van Houte      |   | 14,548                                                                   |   | 26,452                                                                |   | $ | 5,888 |   | $ | 3,536 |   |

 

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(1)                      Basedon the $1.76 closing price of Ostex’ Common Stock on December 31, 2002, asreported by The Nasdaq National Market, minus the per-share exercise price,multiplied by the number of shares underlying the option.

 

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**CompensationCommittee Interlocks and Insider Participation**

 

During 2002, Ostex’ Compensation Committee consistedof Messrs. Cable and Trimmer, both of whom are nonemployee directors. To Ostex’knowledge, no member of the Compensation Committee has a relationship thatwould constitute an interlocking relationship with executive officers ordirectors of another entity.

 

Mr. Cable is Chairman of theBoard of Trustees of the Washington Research Foundation (the “WRF”), anot-for-profit licensing agency dedicated to the transfer to the private sectorof technology developed at the University of Washington.  During the year ended December 31,2002, Ostex incurred $247,000****in royalty expense for OSTEOMARK® kitrevenue in accordance with Ostex’ worldwide exclusive license agreements withthe WRF for the bone resorption test and osteoclast colony stimulating factortechnologies.

 

**Reportof the Compensation Committee of the Board of Directors on ExecutiveCompensation**

 

The Compensation Committee of theBoard of Directors (the “Committee”) is responsible for determining thecompensation of the executive officers of Ostex.  During 2002, the Committee was comprised of two directors who arenot employees of Ostex.  In making itsdeterminations, the Committee relies on input from compensation consultants andindustry surveys and reviews appropriate decisions with all nonemployeedirectors, who constitute a majority of the full Board of Directors.

 

*Executive Compensation Policy*.  Ostex’executive compensation program reflects the policy that executives’ rewardsshould be structured to closely align their interests with those of theshareholders.  The program emphasizesstock-based incentives, and extends these concepts beyond the executive officerpopulation to all of Ostex’ full-time employees in the interest of motivation,teamwork, and fairness.  Ostex’ executivecompensation programs are designed to attract and retain experienced andwell-qualified executive officers who will enhance the performance of Ostex andbuild shareholder value.  Ostex’executive compensation program generally includes three components:  base salary, bonuses and stock options.

 

In setting thecompensation level for executive officers, the Committee is guided by thefollowing considerations:

 

•            Compensation levels should be competitive withcompensation generally being paid to executives in the biotechnology anddiagnostic industries to ensure Ostex’ ability to attract and retain superior executives;

•            A significant portion of executive officercompensation should be paid in the form of equity-based incentives to linkclosely shareholder and executive interests and to encourage stock ownership byexecutive officers; and

•            Each individual executive officer’s compensationshould reflect the performance of Ostex as a whole and the individualperformance of the executive officer.

 

*Base Salary*.  Anexecutive officer’s base salary is determined by Ostex’ overall performance,the responsibility of the particular position, and an assessment of theperson’s performance against individual responsibilities and objectives,including, where appropriate, the impact of such performance on the businessresults of Ostex.  The Committee alsomay consider nonfinancial indicators including, but not limited to, strategicdevelopments for which an executive officer has responsibility, intangibleelements of managerial performance and levels of compensation to maintaincompetitive levels with similar companies in the biotechnology and diagnosticindustries.  The companies surveyed forcompensation levels include some of the companies in the Nasdaq PharmaceuticalIndex included in the performance graph below. Generally, unless special circumstances apply, the Committee setsexecutive salaries at or near the midpoint of the range indicated by thesurveys, depending on the applicable experience level of the executive officerand subject to minimum salaries established in an employment agreement with theexecutive.  See “Employment, Terminationand Change In Control Agreements” of this Report for further information.  Executive officer salaries are reviewedannually and adjusted each January based on the above factors and taking intoconsideration industry compensation based on a survey report published byRadford and Associates, an independent consulting group.

 

*Bonus*.  Executive officers of Ostex,including the Chief Executive Officer, are eligible for annual bonuses. Theamount, if any, of each executive officer’s bonus is determined by theCommittee based on the Committee’s subjective assessment of a variety offactors, including Ostex’ overall performance, Ostex’ financial ability to paybonuses, and the executive officer’s individual performance and contributionsto Ostex.  In 2002, at

 

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the recommendation ofOstex’ Chief Executive Officer, no executive bonuses were awarded for 2002performance.

 

*Stock Options*.** **Ostexgrants a stock option in connection with an executive’s initial employment withthe Company.  In making such grants theCommittee evaluates the long-term incentive packages offered to Ostex’executives in relation to the long-term incentive packages offered by otherbiotechnology and diagnostic companies that the Committee considers to be inOstex’ peer group. These option grants reflect the Committee’s policy ofencouraging long-term performance and promoting executive retention whilefurther aligning management’s and shareholders’ interests in the performance ofOstex’ Common Stock.  Through 1996, itwas Ostex’ policy to grant stock options annually to executives and otheremployees.  Ostex ended this policy in1997 but may, from time to time, grant stock options to executives other thanin connection with their initial employment.

 

*Compensation ofthe Chief Executive Officer*.  Mr. Bologna’s employment with Ostex began inJuly 1997.  The Compensation Committeeset Mr. Bologna’s compensation to be competitive with base salaries paid toother executives in the biotechnology industry with similar responsibilitiesand seniority.  In 2002, Mr. Bologna’sannual base salary was increased to $391,000.

 

*Compliance WithInternal Revenue Code Section 162(m)*.** **Section 162(m) of the InternalRevenue Code generally disallows a tax deduction to publicly held companies forannual compensation in excess of $1 million earned by the chief executiveofficer or any of the other four most highly compensated officers.  The deduction limit does not apply, however,to performance-based compensation that satisfies certain requirements.  The Committee’s policy is generally toprovide executive compensation that is fully deductible by Ostex for income taxpurposes.  No executive officer of Ostexearned or is expected to earn compensation in excess of $1 million in 2002 thatwould not qualify as performance-based compensation.  Ostex’ stock option program is qualified as performance-based forfuture option grants.

 
|   | Compensation  Committee of the Board of Directors |
|--------|---------------------------------------------------|
|   |                                              |
|   | Thomas  J. Cable, Chairman                        |
|   | John  H. Trimmer                                  |

 

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**Stock Performance Graph**

 

The following graph compares the cumulative total return on Ostex CommonStock during the period from December 31, 1997 to December 31, 2002 to theNasdaq US Stock Market Index and the Nasdaq Pharmaceutical Index.  The graph assumes $100 invested on January1, 1998 in Ostex Common Stock, the Nasdaq US Stock Market and the NasdaqPharmaceutical Index, with all dividends reinvested.  Ostex used the Nasdaq Pharmaceutical Index this year in lieu ofthe JP Morgan H&Q Healthcare Index used in prior years because Ostex wasadvised that the JP Morgan H&Q Healthcare Index is no longeravailable.  The stock performance shownon the graph is historical and not necessarily indicative of future priceperformance.

 

 
|                            |   | **12/97** |   | **6/98** |   | **12/98** |   | **6/99** |   | **12/99** |   | **6/00** |   | **12/00** |   | **6/01** |   | **12/01** |   | **6/02** |   | **12/02** |   |
|---------------------------------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|
| Ostex  International, Inc.      |   | $         | 100.00 |     | 57.14  |      | 15.48  |     | 50.00  |      | 114.29 |     | 83.33  |      | 47.62  |     | 68.61  |      | 95.24  |     | 52.19  |      | 67.05  |   |
| Nasdaq  U.S. Stock Market Index |   | $         | 100.00 |     | 123.53 |      | 152.49 |     | 186.62 |      | 285.18 |     | 284.15 |      | 174.55 |     | 153.23 |      | 137.34 |     | 106.50 |      | 96.30  |   |
| Nasdaq  Pharmaceutical Index    |   | $         | 100.00 |     | 103.08 |      | 133.58 |     | 158.99 |      | 272.47 |     | 371.93 |      | 334.38 |     | 309.92 |      | 284.00 |     | 176.61 |      | 174.64 |   |

 

**Employment,Termination and Change in Control Agreements**

 

*EmploymentAgreement with the Chief Executive Officer.*  In July1997, Mr. Bologna entered into an employment agreement with Ostex that providesfor an initial annual base salary of $275,000 and the grant of a stock optionfor 700,000 shares of Common Stock vesting over four years.  The base salary will be increased effectiveon the first anniversary of employment by not less than 10% of the initial basesalary and, thereafter, further increases to the base salary will be determinedby the Board of Directors.  In addition,the employment agreement authorized a $50,000 bonus for Mr. Bologna forservices rendered through December 1997, of which $25,000 was to be paid uponexecution of the agreement and $25,000 was to be paid in January 1998.

 

Ostex has obtained term life insurance on Mr. Bologna, which providesfor payment to Mr. Bologna’s family in the event of his death of an amountequal to his annual base salary.  Duringthe term of Mr. Bologna’s employment, Ostex will also reimburse Mr. Bologna foror pay directly the reasonable expense of (i) recurring travel from WashingtonState to California and (ii) expenses associated with living inWashington.  To the extent thereimbursement for living expenses or direct payment is treated as taxableincome, Mr. Bologna is entitled to a gross up to compensate for any and allincome taxes that Mr. Bologna may be required to pay with respect to suchreimbursement and gross up.

 

48

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The employment agreement is terminable at will by either party.  In the event that the Board of Directorsterminates Mr. Bologna’s employment without cause, Mr. Bologna will be entitledto all accrued compensation and Company benefits as well as the then existingbase salary Mr. Bologna would have received if his employment had continued for12 months from the date of termination. If such termination occurs without cause in connection with or at anytime following a change in control (as defined in Ostex’ 1994 Amended andRestated Stock Option Plan), Mr. Bologna shall be entitled to a lump sumpayment equal to two years’ base salary, plus a bonus of 30% of such amount andcontinuation of benefits for a period of 24 months following such termination.

 

*Change In Control Agreements. *Pursuant to the OstexAmended and Restated Stock Option Plan (the “Old Plan”), the Ostex Amended andRestated 1994 Stock Option Plan (the “1994 Plan”) and the Ostex Amended andRestated Directors’ Nonqualified Stock Option Plan (“the Directors Plan”), inthe event of a change in control of Ostex, any outstanding option granted undereither plan will become fully vested and immediately exercisable.  A “change in control” is defined under bothplans as (i) the acquisition by any person (other than a shareholder on thedate of the plan, Ostex or a subsidiary or employee benefit plan of Ostex) ofbeneficial ownership of 50% or more of the voting power of Ostex’ outstandingsecurities or (ii) the occurrence of a transaction requiring shareholderapproval and involving the sale of all or substantially all of the assets ofOstex or the merger of Ostex with or into another corporation.  In addition, upon the liquidation ordissolution of Ostex, all outstanding options will terminate; provided,however, that prior to such liquidation or dissolution, an option holder hasthe right to exercise his or her options in whole or in part whether or not thevesting requirements set forth in the option agreement have been satisfied.

 

**Compensationof Directors**

 

Ostex pays aretainer of $1,875 to each director on a quarterly basis and an additional$1,000 for each Board of Directors meeting attended and $500 for each committeemeeting attended.  Each director isreimbursed actual travel expenses for attendance at regular Board of Directorsand committee meetings.  Additionally,Ostex’ nonemployee directors participate in the Directors Plan.  Upon election or appointment to the Board ofDirectors, nonemployee directors receive a one-time stock option grant topurchase 25,000 shares of Common Stock under the Directors Plan.  In addition, each nonemployee director who isin office the day following an annual meeting of shareholders of Ostex (atwhich meeting such director was re-elected or continued in office) and who hasbeen in office for at least five months prior to such annual meeting, receivesan option to purchase 10,000 shares of Common Stock.

 

Options grantedunder the Directors Plan vest in equal annual installments over a three-yearperiod with the first vesting event occurring on the one-year anniversary ofthe grant date.  Options will beaccelerated and vest immediately if a director is terminated by reason of deathor disability.  Options granted underthe Directors Plan have a term of ten years from the date of grant.  Vested options may be exercised for 90 daysafter a director’s termination as a director of Ostex for any reason other thandeath or disability, and one year after termination upon death or disabilityunless the option expires according to its terms prior to the end of the 90 dayor one year post-termination exercise period, as the case may be.  The exercise price of options granted underthe Directors Plan is the fair market value of the Common Stock on the date ofgrant.  Upon exercise, the exerciseprice may be paid immediately in cash, by delivering to Ostex shares of CommonStock previously held by such director, by having shares withheld from theamount of shares of Common Stock to be received by the director, or bydelivering an irrevocable subscription agreement obligating the director totake and pay for the shares of Common Stock to be purchased within one year ofthe date of exercise.

 

**Item 12.****     SecurityOwnership of Certain Beneficial Owners and Management**

 

The followingtable sets forth certain information regarding the beneficial ownership ofOstex Common Stock as of December 31, 2002, by (i) each person who is known byOstex to own beneficially more than 5% of the Common Stock; (ii) each directorand nominee for director; (iii) Ostex’ Chief Executive Officer and each of itsfour most highly compensated executive officers (other than Ostex’ ChiefExecutive Officer) who earned more than $100,000 in 2002; and (iv) alldirectors and executive officers of Ostex as a group.

 

49

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The term“beneficial ownership” includes shares over which the indicated beneficialowner exercises voting and/or investment power.  The rules of the SEC also deem common stock subject to options orwarrants currently exercisable, or exercisable within 60 days, to beoutstanding for the purposes of computing the percentage of ownership of theperson holding the options or warrants, but they do not deem that stock to beoutstanding for the purposes of computing the percentage ownership of any otherperson.

 

Unless otherwiseindicated, the address for each of the individuals listed below is c/o OstexInternational, Inc., 2203 Airport Way South, Suite 400, Seattle, Washington98134.

 

 
| **Name and Address of  Beneficial Owner**                                                     |   | **Amount and  Nature of  Beneficial Ownership (1)** |       | **Percent of  Class (2)** |       |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|---------------------------|------------|
|                                                                                          |   |                                                | ** ** |                      | ** ** |
| Inverness Medical  Innovations, Inc. (3)  51 Sawyer Road, Suite 200  Waltham, MA 02453        |   | 3,989,320                                           |       | 31.7                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| CH Partners IV Limited  Partnership (3)  1615 72nd Ave. SE  Mercer Island, WA  98040     |   | 977,070                                             |       | 7.76                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Wisconsin Investment  Board (4)  P.O. Box 7842  Madison, WI  53707                       |   | 829,000                                             |       | 6.59                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Mochida Pharmaceutical,  Co., Ltd.  Y.S. Building  9 San-Eicho, Shinjuku-ku  Tokyo 160, Japan |   | 736,842                                             |       | 5.86                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Thomas A. Bologna  (3),(5)                                                                    |   | 1,278,417                                           |       | 9.24                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Thomas J. Cable (3),(6)                                                                       |   | 1,088,570                                           |       | 8.59                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Elisabeth L. Evans,  M.D. (3),(7)                                                             |   | 58,083                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| David R. Eyre, Ph.D.  (3),(8)                                                                 |   | 1,507,500                                           |       | 11.92                     | %          |
|                                                                                          |   |                                                |       |                      |       |
| Fredric J. Feldman,  Ph.D. (3),(7)                                                            |   | 57,000                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| John H. Trimmer (3),(9)                                                                       |   | 55,000                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| Thomas F. Broderick  (10)                                                                     |   | 293,688                                             |       | 2.29                      | %          |
|                                                                                          |   |                                                |       |                      |       |
| Michael C. Perry (9)                                                                          |   | 45,979                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| Reed W. Simmons (11)                                                                          |   | 13,542                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| Hans van Houte (12)                                                                           |   | 16,167                                              |       | *                         |       |
|                                                                                          |   |                                                |       |                      |       |
| All directors and  executive officers as a group (eight people) (13)                          |   | 4,384,237                                           |       | 30.38                     | %          |

 

*   Less than 1 %

 

50

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(1)                      Unlessotherwise indicated in the footnotes to this table, each of the shareholdersnamed in this table has sole voting and investment power with respect to the,shares of Common Stock shown as beneficially owned.

(2)                      Percentagebeneficially owned is calculated based on 12,583,435 shares of Common Stockoutstanding as of December 31, 2002, together with any applicable options andwarrants for each shareholder.

(3)                      Based onpublicly available information filed with the SEC on Schedule 13D filed onSeptember 16, 2002, as amended by Schedule 13D/A filed on February 19,2003.  Inverness reported sole votingpower with respect to certain matters and no dispositive power over all sharesof Ostex common stock beneficially owned by CH Partners IV Limited Partnership,Thomas A. Bologna, Thomas J. Cable, Elisabeth L. Evans, MD, David R. Eyre,Ph.D., Fredric J. Feldman, Ph.D., and John H. Trimmer (collectively, the“Shareholders”).  Inverness has the powerto vote these shares pursuant to the Voting Agreement, as amended, betweenInverness and the Shareholders, in connection with the proposed merger of Ostexinto a wholly owned subsidiary of Inverness. Additionally, Inverness may be deemed to beneficially own, and have solevoting and dispositive power of, 2,504,103 shares of common stock (calculatedbased on Ostex’ shares outstanding as of December 31, 2002) under a StockOption Agreement dated as of September 6, 2002, entered into by Inverness andOstex in connection with the merger. Because Inverness’ ability to acquireOstex common stock pursuant to the Stock Option Agreement is subject to certainmaterial contingencies, Inverness has expressly disclaimed beneficial ownershipof the shares of Ostex common stock subject to the Stock Option Agreement.  Including the shares of Ostex common stocksubject to the Stock Option Agreement (of which shares Inverness disclaimsbeneficial ownership), Inverness may be deemed to beneficially ownapproximately 6,493,423 shares of Ostex common stock, constitutingapproximately 51.6% of the total issued and outstanding shares of Ostex commonstock on December 31, 2002.  Seeadditional discussion under the Section entitled “Changes in Control-ProposedMerger with Inverness” below.

(4)                      Basedon publicly available information filed with the SEC on Amendment No. 6 toSchedule 13G on February 13, 2003.

(5)                      Includes6,000 shares held in trust for the benefit of one of Mr. Bologna’schildren.  In addition, the number ofshares includes 1,251,417 shares subject to stock options that are exercisablewithin 60 days of December 31, 2002.

(6)                      Includes977,070 shares held by CH Partners IV Limited Partnership (“CH IV”), a venturecapital fund of which Mr. Cable is a general partner.  Under federal securities laws, Mr. Cable may be deemed to ownbeneficially all the shares held by CH IV. In addition, the number of sharesincludes 90,000 shares subject to stock options that are exercisable within 60days of December 31, 2002.

(7)                      Includes55,000 shares subject to stock options that are exercisable within 60 days ofDecember 31, 2002.

(8)                      Includes560,000 shares held in trust for the benefit of Dr. Eyre’s children and 65,000shares subject to stock options that are exercisable within 60 days of December31, 2002.

(9)                      Representsshares subject to stock options that are exercisable within 60 days of December31, 2002.

(10)                Includes229,688 shares subject to stock options that are exercisable within 60 days ofDecember 31, 2002.

(11)                Resignedas Vice President, Operations effective February 14, 2003.  Represents shares issuable pursuant tovested options exercisable within 90 days of the date of Mr. Simmons’resignation.

(12)                Resignedas Vice President, Finance effective February 28, 2003.  Represents shares issuable pursuant to vestedoptions exercisable within 90 days of the date of Mr. van Houte’s resignation.

(13)                Includes1,847,084 shares subject to stock options that are exercisable within 60 daysof December 31, 2002.

 

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**Changes in Control—Proposed Merger with Inverness**

 

On September 9, 2002,Ostex announced that it had entered into an agreement and plan of merger withInverness Medical Innovations, Inc. and Geras Acquisition Corp., a wholly-ownedsubsidiary of Inverness.  Certain termsof the merger agreement were amended as of February 18, 2003.  Under the terms of the merger agreement, asamended on February 18, 2003, Geras Acquisition Corp. will be merged with andinto Ostex, Ostex will become a wholly owned subsidiary of Inverness, and eachoutstanding share of Ostex Common Stock will be converted into the right toreceive common stock, par value $.001 per share, of Inverness based on aconversion ratio that will be determined immediately prior to the closing ofthe merger.  The per share conversionratio is designed to provide that an aggregate of approximately 1.9 millionshares of Inverness common stock will be issued in exchange for all outstandingOstex Common Stock and reserved for issuance upon exercise of the outstandingstock options and warrants to be assumed by Inverness in the merger.

 

The merger cannot becompleted unless certain conditions are satisfied, including Invernessobtaining the consent of certain of its lenders to the merger and Ostexreceiving approval of the merger by the affirmative vote of two-thirds of theoutstanding shares of Ostex’ Common Stock. Ostex’ directors and their affiliates, who collectively own an aggregateof approximately 19.8% of the total outstanding Common Stock of Ostex, have enteredinto a voting agreement, as amended, with Inverness, which provides that theywill vote, and granted Inverness an irrevocable proxy and power of attorney tovote all of his, her or its shares of Ostex Common Stock:

 

•                       infavor of the adoption of the merger agreement and the approval of the mergerand other transactions contemplated by the merger agreement;

•                       againstany acquisition proposal (as defined in the merger agreement) and any actionthat could reasonably be expected to impact, interfere with, delay, postpone ormaterially adversely affect completion of the transactions contemplated by themerger agreement; and

•                       infavor of any other matter reasonably necessary for the completion of thetransactions contemplated by the merger agreement.

 

In the voting agreement,each of Ostex’ directors and their affiliates also agreed not to dispose of orencumber his, her or its shares of Ostex Common Stock and not to enter into anyother voting agreement or arrangement or grant any other proxy or power of attorneywith respect to his, her or its shares of Ostex Common Stock.  The voting agreement terminates immediatelyupon the earlier of the effective time of the merger or the termination of themerger agreement in accordance with its terms.

 

Until the merger becomeseffective, and with some exceptions, Ostex is prohibited from entering into orsoliciting, initiating or encouraging any inquiries or proposals that may leadto an acquisition proposal from any person other than Inverness.  Ostex also agreed to pay a termination feeto Inverness of $1.8 million if the merger agreement is terminated in specifiedcircumstances, including circumstances in which Ostex takes any of theseprohibited actions or fails to obtain the approval of its shareholders after aproposal from an eventual third party acquirer is received by Ostex or publiclyannounced.  In addition, Ostex hasgranted Inverness an option to purchase up to 19.9% of Ostex’ outstandingshares of common stock at an exercise price of $2.39 per share.  Inverness may exercise this option upon theoccurrence of specified events that ordinarily would be associated with anacquisition or potential acquisition of Ostex by a third party.  If the option becomes exercisable in specifiedcircumstances in connection with an acquisition proposal, Inverness may alsocancel the option, or any portion of the option, in exchange for an amount ofcash equal to the product of (a) the excess of the per share exercise priceover the highest per share purchase price proposed to be paid pursuant to anacquisition proposal that caused, or would cause, the option to becomeexercisable, or the current average market price per share, if higher,multiplied by (b) the number of shares subject to the portion of the optionthat is canceled.

 

52

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**Equity Compensation Plan Information**

 

The following tableprovides certain information about Ostex’ equity compensation plans in effectas of the end of fiscal year 2002, including the Ostex Amended and RestatedStock Option Plan (the “Old Plan”), the Ostex Amended and Restated 1994 StockOption Plan (the “1994 Plan”) and Ostex Amended and Restated Nonqualified StockOption Plan (the “Directors Plan”).

** **
|                                                        |   | **(a)**                                                                                                |   | **(b)**                                                                                    |   | **(c)**                                                                                                                                                |   |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Plan Category**                                           |   | **Number of  Securities to be  Issued Upon  Exercise of  Outstanding  Options,  Warrants and  Rights** |   | **Weighted-  Average Exercise  Price of  Outstanding  Options,  Warrants and**

**Rights** |   | **Number of  Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans  (excluding securities  reflected in column  (a)** |   |
| Equity  Compensation Plans Approved by Shareholders (1)     |   | 2,635,970                                                                                              |   | $ 2.33                                                                                     |   | 1,598,520                                                                                                                                              |   |
| Equity  Compensation Plans Not Approved by Shareholders (2) |   | 134,587                                                                                                |   | $ 2.97                                                                                     |   | 0                                                                                                                                                      |   |
| Total                                                       |   | 2,770,557                                                                                              |   | $ 2.36                                                                                     |   | 1.598,520                                                                                                                                              |   |

 

----

(1) Includes the 1994 Plan and Directors Plan.

(2) Includes the Old Plan and warrants granted to consultants.

 

**Item 13.**     **CertainRelationships and Related Transactions**

 

In connection with themerger agreement, as amended, among Inverness Medical Innovations, Inc., Ostexand a wholly owned subsidiary of Inverness, Inverness and Ostex entered into ana loan agreement dated September 6, 2002, which was amended and restated as ofFebruary 18, 2003.  Under the loanagreement (as amended and restated), Inverness has agreed to make, or arrangefor one of its affiliates to make, loans of up to an aggregate of $2,000,000 toOstex.  The annual interest rate of eachloan is an amount equal to LIBOR for one-year loans as published in the WallStreet Journal on the date of each loan, plus four and one-half percent. Ostexborrowed $334,000 under the loan agreement on October 10, 2002 at an interestrate of 6.27%, borrowed $433,000 on November 12, 2002 at an interest rate of6.04%, and borrowed $233,000 on December 9, 2002 at an interest rate of6.16%.  As of December 31, 2002, thetotal amount borrowed under the Inverness loan agreement was $1,000,000.  Ostex is entitled to borrow the remaining $1,000,000under the loan agreement at any time on or after January 2, 2003, provided thatcertain conditions are met, in order to maintain sufficient cash, cashequivalents and short-term investments to fund six-months of its budgetedworking capital needs. On January 9, 2003, Ostex borrowed an additional$379,000, at an interest rate of 6.02% and on February 25, 2003, borrowed anadditional $246,159, at an interest rate of 5.90%.

 

The loans must be repaidat the earliest of:

 

• the first business day after theeffective time of the merger;

 

• acceleration upon an event ofdefault;

 

• thetermination of the merger agreement in specified circumstances related toOstex’ breach of the terms of the merger agreement or stock option agreement orOstex’ board’s approval of an acquisition proposal or withdrawal of itsapproval or recommendation of the merger agreement; or

 

• December 31, 2003.

 

53

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If, during the loanperiod, the merger agreement is terminated in circumstances that would not bean event of default under the loan agreement, Ostex may borrow a maximum of$1,750,000 from Inverness under the loan agreement, assuming satisfaction ofcertain conditions.

 

Thomas A. Bologna, Ostex’Chairman, President and Chief Executive Officer, entered into an employmentagreement with Ostex dated as of July 16, 1997.  Under the agreement, if Mr. Bologna’s employment is terminatedwithout cause after the merger with Inverness, Mr. Bologna is entitled to alump sum payment equal to two years’ base salary, plus a bonus of 30% of suchlump sum, and continuation of benefits for a period of 24 months following histermination.  Mr. Bologna’s current basesalary is $412,000 and the current term of the employment agreement, asamended, extends through July 15, 2006.

 

On September 6, 2002, Mr.Bologna entered into a consulting agreement with Geras Acquisition Corp., awholly owned subsidiary of Inverness. The consulting agreement provides that, immediately following theeffective time of the merger, Ostex will terminate Mr. Bologna’s employmentwithout cause and Mr. Bologna will be entitled to the termination paymentsdescribed above.  In addition,immediately following the effective time of the merger, Ostex will retain Mr.Bologna as a consultant for a term of one year under the consulting agreement.Ostex will pay Mr. Bologna a fee of $16,833 per month during this term, whichfee is subject to adjustment.  Thisagreement also provides that Mr. Bologna will be reimbursed for reasonablecosts and expenses incurred in performing the consulting services, and legal expensesup to $5,000 incurred in preparation of the agreement.

 

Thomas J.  Cable, adirector of Ostex, is Chairman of the Board of Trustees of the WashingtonResearch Foundation (the “WRF”), a not-for-profit licensing agency dedicated tothe transfer to the private sector of technology developed at the University ofWashington.  During the year endedDecember 31, 2002, Ostex incurred $247,000****in royalty expense forOSTEOMARK® kit revenue in accordance with Ostex’ worldwide exclusive licenseagreements with the WRF for the bone resorption test and osteoclast colonystimulating factor technologies.

 

**Item 14.**     **Controls andProcedures**

 

Within the 90-day periodprior to the filing of this report, an evaluation was carried out under thesupervision and with the participation of Ostex’ management, including itsChief Executive Officer and its Vice President, Finance (prior to hisresignation on February 28, 2003), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-14(c) under the Securities Exchange Act of 1934).  Based upon that evaluation, Ostex’ management concluded that thedesign and operation of these disclosure controls and procedures wereeffective.  No significant changes weremade in Ostex’ internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

54

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**PART IV**

 

**Item 15.****     FinancialStatements, Financial Statement Schedules, Exhibits, and Reports on Form 8-K**

 

**a.       Financial Statements, Financial StatementSchedules and Exhibits**

 

(1)    FINANCIALSTATEMENTS

 

The following financialstatements are included in Item 8:

 

Balance Sheets - December 31, 2002 and 2001

Statements of Operations - Years ended December 31, 2002, 2001, and 2000

Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000

Statements of Shareholders’ Equity - Years ended December 31, 2002,2001, and 2000

Notes to Financial Statements - December 31, 2002

 

(2)    FINANCIALSTATEMENT SCHEDULES

 

Financial Statement Scheduleshave been omitted because of the absence of conditions under which they arerequired or because the required information is included in the financialstatements or notes thereto.

 

(3)    EXHIBITINDEX (see note (1) below)

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                |   | **Notes** |
|---------------------|--------|--------------------------------------------------------------------------------|--------|-----------|
|                |   | Agreements with Inverness Medical Innovations, Inc.                            |   |      |
| 2.1                 |   | Agreement and Plan of Merger dated as of September 6, 2002                     |   | (15)      |
| 2.1A                |   | Amendment to Agreement and Plan of Merger dated as of February 18,  2003       |   | (17)      |
| 2.2                 |   | Voting Agreement dated as of September 6, 2002                                 |   | (15)      |
| 2.2A                |   | Letter Agreement dated as of February 18, 2003, amending the Voting  Agreement |   | (17)      |
| 2.3                 |   | Stock Option Agreement dated as of September 6, 2002                           |   | (15)      |
| 2.3A                |   | Second Amended and Restated Loan Agreement dated as of  February 18, 2003 |   | (17)      |
|                |   |                                                                           |   |      |
| 3.1                 |   | Articles of Incorporation, as amended, dated January 1997                      |   | (2)       |
|                |   |                                                                           |   |      |
| 3.2                 |   | Bylaws, as restated                                                            |   | (16)      |
|                |   |                                                                           |   |      |
| 4.1                 |   | Specimen Common Stock Certificate                                              |   | (3)       |
|                |   |                                                                           |   |      |
| 10.1A               |   | Amended and Restated Stock Option Plan*                                        |   | (3)       |
| 10.1B               |   | Amended and Restated 1994 Stock Option Plan*                                   |   | (4)       |
| 10.1C               |   | Amended and Restated Directors’ Nonqualified Stock Option Plan*           |   | (5)       |
|                |   |                                                                           |   |      |
| 10.5                |   | Form of Indemnification Agreement with officers and directors*                 |   | (3)       |
|                |   |                                                                           |   |      |
|                |   | Agreements with Thomas A. Bologna                                              |   |      |
| 10.7                |   | Executive Employment Agreement dated July 16, 1997*                            |   | (6)       |
| 10.7A               |   | Amendment Agreement dated February 10, 1998*                                   |   | (16)      |
| 10.7B               |   | Amendment No. 2 to Employment Agreement dated January 16, 2002*                |   | (16)      |
| 10.7C               |   | Amendment No. 3 to Employment Agreement dated July 9, 2002*                    |   | (16)      |

 

55

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|   |   | Agreements with Mochida Pharmaceutical Co., Ltd.                                                                                        |   |    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------|
| 10.12A |   | Research and Development Agreement dated August 1992                                                                                    |   | (3)     |
| 10.12B |   | Osteomark License Agreement dated August 1992                                                                                           |   | (3)     |
| 10.12D |   | Second Amendment to Osteomark License Agreement dated December 24,  1997                                                                |   | (6) (7) |
| 10.12E |   | Serum Osteomark License Agreement                                                                                                       |   | (14)    |
|   |   |                                                                                                                                    |   |    |
|   |   | Agreements with the Washington Research Foundation                                                                                      |   |    |
| 10.13A |   | Restated Exclusive License Agreement effective June 19, 1992 (Urinary  Assay for Measuring Bone Resorption)                             |   | (3)     |
| 10.13B |   | Amendment to Restated Exclusive License Agreement effective January 1,  1993                                                            |   | (3)     |
| 10.13C |   | Second Amendment effective June 2, 1994                                                                                                 |   | (3)     |
| 10.14  |   | Exclusive License Agreement dated February 10, 1994 (O-CSF)                                                                             |   | (3)     |
| 10.14A |   | Amendment to Exclusive License Agreement effective September 5, 2002                                                                    |   | (16)    |
|   |   |                                                                                                                                    |   |    |
|   |   | Agreements with the University of Washington                                                                                            |   |    |
| 10.15A |   | Research Agreement dated July 1, 1996 (Molecular Markers of Connective  Tissue Degradation)                                             |   | (7)(8)  |
| 10.15B |   | Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast  Regulation)                                                      |   | (7)(8)  |
|   |   |                                                                                                                                    |   |    |
|   |   | Agreements with David R. Eyre, Ph.D.                                                                                                    |   |    |
| 10.16A |   | Know-How Transfer and Consulting Agreement dated September 18, 1989*                                                                    |   | (3)     |
| 10.16B |   | Extension and Amendment dated May 1, 1992*                                                                                              |   | (3)     |
|   |   |                                                                                                                                    |   |    |
|   |   | Lease Agreements                                                                                                                        |   |    |
| 10.27A |   | Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra  L. Sabey                                                         |   | (9)     |
| 10.27B |   | First Amendment of Lease dated October 15, 1996, with the City of  Seattle, successor-in-interest to David A. Sabey and Sandra L. Sabey |   | (2)     |
|   |   |                                                                                                                                    |   |    |
|   |   | Agreements with Johnson & Johnson Clinical Diagnostics, Inc.                                                                        |   |    |
| 10.28A |   | Distribution Agreement dated June 7, 1995                                                                                               |   | (10)    |
| 10.28B |   | Research, Development, License and Supply Agreement dated June 7, 1995                                                                  |   | (10)    |
|   |   |                                                                                                                                    |   |    |
| 10.29  |   | Clinical Laboratory Services License and Supply Agreement dated  October 25, 1995, with SmithKline Beecham Clinical Laboratories, Inc.  |   | (9)     |
|   |   |                                                                                                                                    |   |    |
| 10.35  |   | Shareholder Rights Agreement dated January 21, 1997, as amended onFebruary 18, 2003                                                     |   | (11)    |
|   |   |                                                                                                                                    |   |    |
| 10.37  |   | Metrika Manufacturing and License Agreement dated March 10, 2000                                                                        |   | (12)    |
|   |   |                                                                                                                                    |   |    |
| 10.38  |   | Transamerica Business Credit Corporation Master Loan and Security  Agreementdated October 23,  2000                                |   | (13)    |
|   |   |                                                                                                                                    |   |    |
| 16     |   | Letter of Arthur Andersen dated June 10, 2002**                                                                                         |   | (18)    |
|   |   |                                                                                                                                    |   |    |
| 23     |   | Consent of KPMG LLP                                                                                                                     |   | (19)    |
|   |   |                                                                                                                                    |   |    |
| 99.1   |   | Certification of Periodic Report                                                                                                        |   | (19)    |

 

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*******                            **Management contract or compensatory plan oragreement.

********                     **Ostex requestedthat Arthur Andersen provide a currently dated letter in accordance with Item601(b)(16) of Regulation S-K.  ArthurAndersen has informed Ostex that, because of Arthur Andersen’s currentsituation, it is unable to provide such letter.

**(1)**                     Copies of exhibits may be obtained at prescribedrates from the Public Reference Section of the Commission at 450 5th Street NW,Room 1024, Washington, D.C. 20549, or through the Commission’s Edgar systemlocated on the internet at www.sec.gov.

**(2)**                     Incorporated herein by reference to exhibit of thesame number filed with Form 10-K with the Commission for the year endedDecember 31, 1996.

**(3)**                     Incorporated herein by reference from Item 16(a)of Registrant’s Form S-1 Registration Statement as declared effectiveJanuary 24, 1995 (No. 33-86118).

 

56

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**(4)**                     Incorporated herein by reference to Appendix B ofthe Registrant’s Proxy Statement on schedule 14A filed on March 22, 2001.

**(5)**                     Incorporated herein by reference to Appendix B ofthe Registrant’s Proxy Statement on schedule 14A filed on March 30, 2000.

**(6)**                     Incorporated herein by reference to exhibits ofthe same number filed with Form 10-K with the Commission for the year endedDecember 31, 1997.

**(7)**                     Confidential treatment requested.  Exhibit omits information that has beenfiled separately with the Commission.

**(8)**                     Incorporated herein by reference to exhibits ofthe same number filed with Form 10-K with the Commission for the year endedDecember 31, 1996, and as amended with Form 10-K/A on October 17, 1997.

**(9)**                     Incorporated herein by reference to exhibit of thesame number filed with Form 10-K with the Commission for the year endedDecember 31, 1995.

**(10)**              Incorporated herein by reference to exhibit of thesame number filed with Form 10-Q with the Commission for the quarter endedJune 30, 1995.

**(11)**              Incorporated herein by reference to exhibit number4.5 filed with Form 8-A with the Commission in January 1997, as amended byForm 8-A/A filed on February 21, 2003.

**(12)**              Incorporated herein by reference to exhibit of thesame number filed with Form 10-Q with the Commission for the quarter endedJune 30, 2000.  Confidentialtreatment has been granted or requested with respect to portions of thisexhibit.

**(13)**              Incorporated herein by reference to the exhibit ofthe same number filed with Form 10-K with the Commission for the year endedDecember 31, 2000.

**(14)**              Incorporated herein by reference to the exhibit ofthe same number filed with Form 10-Q with the Commission for the quarter endedMarch 31, 2001.

**(15)**              Incorporated herein by reference to the exhibit ofthe same number filed with Form 8-K dated September 10, 2002 with theCommission.

**(16)**              Incorporated herein by reference to exhibit of thesame number filed with Form 10-Q with the Commission for the quarter endedSeptember 30, 2002.

**(17)**              Incorporated herein by reference to exhibit of thesame number filed with Form 8-K dated February 20, 2003 with theCommission.

**(18)**              Incorporated by referenced to exhibit of the samenumber filed with Form 8-K/A dated June 10, 2002 with the Commission

**(19)**              Included with this Form 10-K as exhibit of thesame number.

 

**(b)   Reports on Form 8-K**

 

None

 

57

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized, on March 21, 2003.

 
|     | OSTEX INTERNATIONAL, INC.                |
|----------|------------------------------------------|
|     |                                     |
| By  |   /s/  Thomas A.  Bologna |   |
|     |   Thomas A. Bologna            |   |
|     |                                     | Chairman, President and Chief  Executive Officer and Director(principal executive officer and principal financial and accounting  officer) |
|          |                                          |  |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Signature**                                    |   | **Capacities**                                   |   | **Date**       |   |
|--------------------------------------------------|--------|--------------------------------------------------|--------|----------------|--------|
|                                             |   |                                             |   |           |   |
| /s/    Thomas A.  Bologna         |   | Chairman, President and  Chief Executive Officer |   | March 21, 2003 |   |
| Thomas A. Bologna                                |   |                                             |   |           |
|                                             |   |                                             |   |           |   |
| /s/    Thomas J.  Cable           |   | Director                                         |   | March 21, 2003 |   |
| Thomas J. Cable                                  |   |                                             |   |           |   |
|                                             |   |                                             |   |           |   |
| /s/    Elisabeth  L. Evans        |   | Director                                         |   | March 21, 2003 |   |
| Elisabeth L. Evans                               |   |                                             |   |           |   |
|                                             |   |                                             |   |           |   |
| /s/      David  R. Eyre |   | Director                                         |   | March 21, 2003 |   |
| David R. Eyre                                    |   |                                             |   |           |   |
|                                             |   |                                             |   |           |   |
| /s/    Fredric  J. Feldman        |   | Director                                         |   | March 21, 2003 |   |
| Fredric J. Feldman                               |   |                                             |   |           |   |
|                                             |   |                                             |   |           |   |
| /s/    John H.  Trimmer           |   | Director                                         |   | March 21, 2003 |   |
| John H. Trimmer                                  |   |                                             |   |           |   |

 

58

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**CERTIFICATIONS**

I,Thomas A. Bologna, certify that:

 

1.       I have reviewed this annual report onForm 10-K of Ostex International, Inc.;

 

2.       Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.       I am responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and I have:

 

a)          designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to me by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)         evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)          presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on my evaluation as of the Evaluation Date;

 

5.       I have disclosed, based on my most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)          all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)         any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.       I have indicated in this annual reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of my most recent evaluation, including any corrective actions with regardto significant deficiencies and material weaknesses.

 
| Date:  | March  21, 2003                                                                         |   |
|--------|-----------------------------------------------------------------------------------------|--------|
|   |                                                                                    |   |
|   | /s/ Thomas A. Bologna                                                                   |   |
|   | Thomas A. Bologna                                                                       |
|   | Chairman, President and Chief Executive Officer                                         |
|   | (sole principal executive officer and sole principal  financial and accounting officer) |

 

59

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