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

                                    FORM 10-K

(Mark One)

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

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

                                       OR

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

    For the transition period from                             to

                         Commission file number 0-26154


                                  EXOGEN, INC.
             (Exact name of registrant as specified in its charter)


         Delaware                                             22-3208468
--------------------------------------------------------------------------------
(State or other jurisdiction of                           (I.R.S. Employer 
 incorporation or organization)                          Identification No.)

     10 Constitution Avenue
     P. O. Box 6860, Piscataway  NJ                             08855
--------------------------------------------------------------------------------
(Address of principal executive offices)                      (Zip Code)

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


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


        Title of each class          Name of each exchange on which registered
        -------------------          -----------------------------------------
                                     
               None                                         None

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

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

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

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

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


                       DOCUMENTS INCORPORATED BY REFERENCE

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

                          1998 Form 10-K Annual Report

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

                                     PART II

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

                                    PART III

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

                                     PART IV

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


Item 1.  Business

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

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

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

         o    Domestic.  In August 1998, Exogen and Smith & Nephew, Inc. entered
              into  multi-year  agreements  under which Smith & Nephew  obtained
              exclusive  rights to market  Exogen's  SAFHS devices in the United
              States.

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

Industry Overview

Background

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

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

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

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

Methods of Treating Fractures

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

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

         o    bone grafts using human bone or synthetic bone; and

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

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

Osteoporosis Background

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

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

Sonic Accelerated Fracture Healing System ("SAFHS")

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

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

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

Mechanical-Stress Device

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

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

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

Agreements with Smith & Nephew, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

United States

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

         Smith & Nephew is responsible for the following principal activities:

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

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

         o    maintaining certain minimum levels of units shipped.

         Exogen is responsible for the following principal activities:

         o    marketing to third-party payors;

         o    marketing to the medical community;

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

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

         o    providing a limited quantity of promotional devices to physicians;

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

         o    paying Smith & Nephew a commission on revenues.

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

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

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

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

International

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

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

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

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

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

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

Third-Party Reimbursement

United States

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

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

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

         o    workers' compensation insurers;

         o    HMO and managed care organizations;

         o    automobile insurers; and

         o    third-party administrators.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Research and Development

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

         o    development of new SAFHS devices and expansion of SAFHS therapy to
              other applications:
              
              o   other long-bone fractures;

              o   lower-spine fusion; and

              o   cartilage repair; and

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

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

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

Lower-Spine Fusion

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

Cartilage Repair

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

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

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

Intellectual Property

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

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

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

Intense Competition

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

Product Liability and Insurance

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

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


Item 2.  Properties

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


Item 3.  Legal Proceedings

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


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

         None.

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

         The executive officers of Exogen are as follows:

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

Common Stock Warrants

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

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

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

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

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

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

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

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

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

         This  Annual  Report  on Form 10-K  contains  certain  statements  of a
forward-looking  nature  relating  to  future  events  or the  future  financial
performance  of Exogen.  Such  statements are only  predictions,  and the actual
events or results  may  differ  materially  from the  results  discussed  in the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  include those discussed below under  "Business  Considerations"  as
well as those  discussed in other filings made by Exogen with the Securities and
Exchange Commission.

Results of Operations

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

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

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

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

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

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

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

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

         o    savings from a workforce reduction in fiscal 1997;

         o    a reduction in consulting fees for marketing;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         o    increased activities relating to reimbursement efforts; and

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

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

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

Liquidity and Capital Resources

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

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

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

         Exogen  believes its  accounts  receivable,  net of  reserves,  of $2.7
million as of September 30, 1998, properly reflected anticipated collections. Of
the net accounts receivable at September 30, 1998, $382,000 represented European
accounts  receivable.  The European accounts  receivable was net of a March 1998
nonrecurring   write-down   of   $800,000   to   reflect   anticipated   reduced
collectibility.   Although  Exogen  continues  to  pursue  collection  of  these
written-down European receivables  case-by-case,  collections have been limited,
and Exogen is not relying on the  collection of these  receivables  to meets its
liquidity requirements.

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

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

Agreements with Smith & Nephew, Inc.

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

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

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

         Purchase of Common  Stock.  Smith & Nephew paid $4.1  million (or $5.00
per share) to purchase  820,000 shares of Exogen's  common stock at the closing.
On the closing date,  the fair market value of Exogen's  common stock was $3.625
per share. A registration  statement is pending with the Securities and Exchange
Commission to register these shares. The aggregate net proceeds of the sale were
$4.0 million, which will be used for general corporate purposes.
<PAGE>
         Worldwide  Distribution Option. Smith & Nephew has an option to acquire
exclusive  worldwide  distribution  rights  (except  Japan) to the SAFHS device.
Smith & Nephew  has a  three-year  period  in which to  exercise  its  worldwide
distribution option. If this option is exercised,  Smith & Nephew is required to
make  certain  payments  to  Exogen  during  the  first  year  of the  worldwide
distribution agreement.

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

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

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

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

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

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

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

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

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

If Exogen  desires to enter into an  agreement of any kind with a third party in
connection  with such areas,  Exogen must give Smith & Nephew notice of Exogen's
intent to enter into such an agreement.  After  receiving  such notice,  Smith &
Nephew  has the  nonexclusive  right to  negotiate  with  Exogen  regarding  the
proposed transaction for a period of 45 days. During that period,  Exogen cannot
execute  a letter of intent or  definitive  agreement  with any other  person or
entity.  If Smith & Nephew  does not issue a letter  of  intent on the  proposed
transaction within that 45-day period, Exogen can proceed with the third party.
<PAGE>
Year 2000 Compliance

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

State of Readiness

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

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

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

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

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

         Third-Party Business Software. Exogen uses various third-party software
to perform certain business processes (including purchasing,  payroll, and stock
administration)  and certain business functions  (including  spreadsheets,  word
processing,  and graphics). Many of these vendors have informed Exogen that they
are addressing the Year 2000 issue.  In some cases,  these vendors are upgrading
their  current  software.  In other  cases,  Exogen  will need to  purchase  new
software.  Since Exogen regularly  upgrades its software to the latest versions,
the  costs  associated  with  certain  of  these  upgrades  are  part of  normal
operations.  Other  software,  if its  functionality  no longer  meets  business
requirements, would also be replaced as part of normal operations.

         Other Equipment Using Computer Programs.  Exogen uses various equipment
to  handle   functions   performed  within  Exogen,   including   manufacturing,
telecommunications,  photocopying, and faxing. Some of the equipment is not Year
2000 compliant, and Exogen will replace such equipment during fiscal 1999.

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

         o    supplies, raw materials, and finished goods;

         o    payroll services;

         o    banking/financial services;

         o    distribution services; and

         o    utilities/communications services.

Exogen has received  information  from some suppliers  regarding their Year 2000
preparedness.  These  suppliers  are  either  compliant  or claim  they  will be
compliant  prior to the year 2000. In other cases,  where possible and critical,
Exogen plans to  investigate  the  suppliers'  Year 2000  compliance.  Where the
supplier is critical  and it is  reasonably  likely  that the  supplier  will be
affected  by the Year 2000 issue,  Exogen  plans to stock  additional  inventory
and/or  qualify  other  suppliers  to mitigate  any  disruption  to  operations.
However,  Exogen cannot guarantee the  availability of additional  supply or the
Year 2000 compliance of alternative  vendors. The failure of key suppliers to be
Year 2000 compliant,  on a timely basis or at all, could have a material adverse
effect on Exogen's business,  results of operations,  financial  condition,  and
cash flows.
<PAGE>

         Customers.  Exogen's customer base includes physicians,  patients,  and
third-party  payors.  The Year 2000 issue is not  expected to affect the flow of
prescriptions for the device from physicians,  nor the use of the product by the
patient.  However, Exogen relies on third-party  reimbursement  organizations at
the state,  federal,  and private levels to pay for Exogen's device.  Exogen has
received reimbursement from over 800 third-party payors, although there is not a
significant  concentration  with any  particular  payor.  Exogen will attempt to
assess the impact of the Year 2000 issue on  certain  payors.  If a  significant
percentage  of payors do not  address  the Year  2000  issue on a timely  basis,
Exogen's cash flow could be materially  reduced until such issues are corrected.
Exogen may consider  financing  alternatives  if it is reasonably  likely that a
significant  portion of its cash flows could be impacted and existing  resources
are not  sufficient to cover such  exposure.  The inability of payors to achieve
Year 2000  compliance  could affect their ability to make timely,  accurate,  or
complete  payments,  which  could have a  material  adverse  effect on  Exogen's
business, results of operations, financial condition, and cash flows.

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

Risks

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

         o    information systems hardware and software;

         o    custom-developed applications;

         o    general business software; and

         o    other equipment that uses computer programs.


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

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

         o    equipment, goods, and services;

         o    reimbursement for the SAFHS device; and

         o    marketing and distribution support for the SAFHS device.

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

Costs

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

Contingency Plan

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

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

Business Considerations

History of Losses and Expectation of Continued Losses

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

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

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

         o    obtaining FDA approval of the SAFHS device;

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

         o    expanding   our   reimbursement    activities   domestically   and
              internationally; and

         o    expanding in-house manufacturing capability.

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

Substantial Dependence on the SAFHS Device; Uncertainty of Market Acceptance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         o    fluctuations in currency exchange rates;

         o    regulatory and product approval requirements;

         o    tariffs and other trade barriers;

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

         o    reimbursement approvals (both government and private);

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

         o    potentially adverse tax consequences;

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

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

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

         o    political and economic instability; and

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

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

Quarterly Operating Results Are Subject to Significant Fluctuations

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

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

         o    the timing of sales of the SAFHS device;

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

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

         o    new product introductions by us or our competitors;

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

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

         o    timing of regulatory actions;

         o    general economic and market conditions;

         o    the Asian economic crisis and instability; and

         o    currency fluctuations.

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

Dependence on Third-Party Reimbursement

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

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

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

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

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

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

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

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

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

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

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

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

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

Extensive Government Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

Uncertainty of New Product Development

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

         o    meet applicable regulatory standards;

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

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

         o    be successfully marketed; or

         o    achieve market acceptance.

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

Risks Associated with Intense Competition

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

Risks Associated with Rapid Technological Change

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Manufacturing and Related Risks

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

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

Royalty Payment Obligations; Potential Loss of Exclusive License

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

Reliance on Key Personnel

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

Possible Volatility of Stock Price

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

Risks Associated With Low-Priced Stocks

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

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

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

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

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

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

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

Year 2000 Risks

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

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

         o    the SAFHS devices;

         o    our information systems' hardware and software;

         o    our custom-developed business applications;

         o    third-party business software; and

         o    other equipment using computer programs.

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

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

         o    equipment, goods, and services;

         o    reimbursement for the SAFHS devices; and

         o    marketing and distribution support for the SAFHS device.

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

Possible Adverse Effect of the Euro Conversion

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

Certain Anti-Takeover Provisions

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

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

Product Liability and Insurance

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

Shares Eligible for Future Sale

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

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

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

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

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

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

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

No Intention to Pay Dividends

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


Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

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

Currency Rate Fluctuations

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

Market Risk

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

Interest Rate Risk

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

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


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

         None.
<PAGE>
                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

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


Item 11.  Executive Compensation

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


Item 12.  Security Ownership of Certain Beneficial Owners and Management

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


Item 13.   Certain Relationships and Related Transactions

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


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

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

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

                  Consolidated Balance Sheets as of September 30, 1998 and 1997

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

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

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

                  Notes to Consolidated Financial Statements

         (2)  Financial Statement Schedules.

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

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

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

                    3.2    Amended and Restated  Bylaws of Exogen.  Incorporated
                           by  reference  to Exhibit  3.3 to  Exogen's  Form S-1
                           Registration Statement (Registration No. 33-92740).

                    4.1    See  Exhibits  3.1  and  3.2  for  provisions  of the
                           Certificate  of  Incorporation  and  Bylaws of Exogen
                           defining rights of holders of common stock of Exogen.

                   10.1    Amended  and  Restated  Investors'  Rights  Agreement
                           dated as of November  14,  1994,  among  Exogen,  the
                           investors  listed  on  Schedule  A  thereto,  and the
                           individuals    listed   on    Schedule   B   thereto.
                           Incorporated by reference to Exhibit 10.1 to Exogen's
                           Form S-1  Registration  Statement  (Registration  No.
                           33-92740).
<PAGE>
                   10.2    Asset Purchase  Agreement  dated as of March 1, 1993,
                           among Applied  Epigenetics,  Inc. ("AEI"),  Interpore
                           International, Inc., and Interpore Orthopaedics, Inc.
                           Incorporated by reference to Exhibit 10.2 to Exogen's
                           Form S-1 Registration Statement (Registration No. 33-
                           92740).

                  10.3     [RESERVED]

                  10.4     [RESERVED]

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

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

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

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

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

                  10.10    [RESERVED]

                  10.11    [RESERVED]

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

                  10.13    License  Agreement dated March 26, 1992,  between AEI
                           and Drs. McLeod and Rubin.  Incorporated by reference
                           to Exhibit  10.14 to Exogen's  Form S-1  Registration
                           Statement (Registration No. 33-92740).
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                  23.1*    Consent of Arthur Andersen LLP.

                  27*      Financial Data Schedule.
<PAGE>

                  99.1     Preferred Shares Rights Agreement,  dated December 6,
                           1996,  between  Exogen  and  Registrar  and  Transfer
                           Company,  including the Certificate of Determination,
                           the Form of Rights  Certificate,  and the  summary of
                           Rights  attached  thereto  as  Exhibits  A, B, and C,
                           respectively.  Incorporated  by  reference to Exhibit
                           99.1  to  Exogen's  Form  10-K  for  the  year  ended
                           September 30, 1996.

                  +  Confidential treatment has been granted.

                  *  This exhibit is filed herewith.

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

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

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

(b)      Reports on Form 8-K:

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

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

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

EXOGEN, INC.


By:   /s/ Patrick A. McBrayer                                  December 28, 1998
      --------------------------------------------------------------------------
      Patrick A. McBrayer, Chief Executive Officer, President, and Director


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
              Signature                                                                             Date
              ---------                                                                             ----
<S>                                                                                          <C>
By:  /s/ John P. Ryaby                                                                       December 28, 1998
    ----------------------------------------------------------------------------
    John P. Ryaby, Chairman of the Board, Vice President, and Chief Scientific
    Officer

By:     /s/ Patrick A. McBrayer                                                              December 28, 1998
    ----------------------------------------------------------------------------
      Patrick A. McBrayer, Chief Executive Officer, President, and Director
      (Principal Executive Officer)

By:     /s/ Richard H. Reisner                                                               December 28, 1998
    ----------------------------------------------------------------------------
      Richard H. Reisner, Vice President, Chief Financial Officer, and Secretary
      (Principal Financial and Accounting Officer)

By:     /s/ Buzz Benson                                                                      December 28, 1998
    ----------------------------------------------------------------------------
      Buzz Benson, Director

By:     /s/ Donald J. Lothrop                                                                December 28, 1998
    ----------------------------------------------------------------------------
      Donald J. Lothrop, Director

By:     /s/ Peter C. Madeja                                                                  December 28, 1998
    ----------------------------------------------------------------------------
      Peter C. Madeja, Director

By:     /s/ David J. Ottensmeyer                                                             December 28, 1998
    ----------------------------------------------------------------------------
      David J. Ottensmeyer, Director

By:     /s/ Terence D. Wall                                                                  December 28, 1998
    ----------------------------------------------------------------------------
      Terence D. Wall, Director
</TABLE>
<PAGE>
                                  EXOGEN, INC.

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


1. FINANCIAL STATEMENTS

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

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

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

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

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

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


2. FINANCIAL STATEMENT SCHEDULES

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

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Exogen, Inc.:

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

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

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

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


                                                             ARTHUR ANDERSEN LLP

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

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


<PAGE>
                                         EXOGEN, INC.

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

Commitments and contingencies (Note 8)

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

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

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

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

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

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

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

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

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

<CAPTION>

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

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

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

</TABLE>


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

<PAGE>
<TABLE>
                                                   EXOGEN, INC.

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

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

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

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

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

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

<PAGE>
                                                EXOGEN, INC.

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

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

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Description of Business

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

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

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

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2.   Significant Accounting Policies

   Consolidated Financial Statements

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

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

   Translation of Foreign Currency

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

   Revenue Recognition and Cost of Sales

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

         o    allowances for returns of unused devices and

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

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

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

   Cash and Cash Equivalents and Investments

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

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

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

   Accounts Receivable

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

   Inventories

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

   Furniture, Fixtures and Equipment

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

   Patent Costs

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

   Advertising Costs

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

   Income Taxes

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

   Net Loss Per Common Share

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

   Stock-Based Compensation

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

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

   Management's Use of Significant Estimates

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

   Recent Pronouncements

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

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

   Reclassification

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


3.   Segment Information

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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


4.   Development Agreement Revenues

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

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

         The  mechanical-stress  agreement provides for nonrefundable  milestone
payments to Exogen that will support,  in part,  Exogen's clinical trials in the
United  States in exchange  for a first option in favor of Teijin to negotiate a
development and distribution agreement for this device for the Japanese market.
<PAGE>
5.   Inventories

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


6.   Furniture, Fixtures and Equipment, Net

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7.   Accrued Liabilities

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


8.   Commitments and Contingencies

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

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

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

   Litigation Settlement

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

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

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

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


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

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

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

         Payment of License Fee.  Smith & Nephew paid to Exogen a  nonrefundable
fee of $1 million that granted Smith & Nephew (i) the exclusive marketing rights
in the  United  States  and  (ii) a  nonexclusive  license  to the  intellectual
property rights that cover the SAFHS technology.  This license also allows Smith
& Nephew to  manufacture  the SAFHS  device  should  Exogen  fail to supply  the
device,  subject  to certain  terms and  conditions.  Because  the  payment  was
nonrefundable,  and because there are no further obligations on behalf of Exogen
with regard to the payment,  Exogen recorded the entire $1 million fee in fiscal
1998 as "License fee."
<PAGE>
                                  EXOGEN, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         Purchase of Common  Stock.  Smith & Nephew paid $4.1  million (or $5.00
per share) to purchase  820,000 shares of Exogen's  common stock at the closing.
On the closing date,  the fair market value of Exogen's  common stock was $3.625
per share. A registration  statement is pending with the Securities and Exchange
Commission to register these shares.

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

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

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

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

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

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

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

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

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

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

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


10.   Nonrecurring Charge for International Doubtful Accounts

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11.   Stock Option Plans and Stockholders' Equity

   Stock Option / Stock Issuance Plans

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

         The 1995 Plan is divided into four separate components:

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

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

   Employee Stock Purchase Plan

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

         o    the last business day in July 2005;

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

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

   Stock Warrants

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

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

   Fair Value Disclosures

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

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

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

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

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

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

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

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

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

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

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

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

   Restricted Stock Agreements

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

   The Stockholder Rights Plan

         Exogen's  Second  Amended and Restated  Certificate  of  Incorporation,
dated July 25, 1995,  grants the Board of Directors the authority to issue up to
3,000,000 shares of preferred stock of Exogen,  $0.0001 par value per share (the
"Preferred  Stock"),  in one or more series and to fix the rights,  preferences,
privileges, and restrictions thereof, including dividend rights, dividend rates,
conversion  rights,  voting  rights,  terms of  redemption,  redemption  prices,
liquidation preferences, and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


12.  Income Taxes

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

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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13.  Supplemental Disclosure of Cash Flow Information

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

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

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


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

Allow. for returns, bad debt,
   and pricing adjustments ............  $     198         $ 1,667       $  -             $ 1,519 (a)          $     346
                                                                                        
Year ended September 30, 1997 (b)
                                                                                        
Allowance for returns .................  $     -           $   563       $ 49  (c)        $   426 (d)          $     186
Allow. for bad debt....................  $     -           $   250       $(51) (c)      
                                                                         $  1  (e)        $    -               $     200
Allow. for pricing adjustments (b).....  $     346         $ 2,998       $  2  (c)     
                                                                         $(59) (e)        $ 1,887 (f)          $   1,400
                                                                                        
Year ended September 30, 1998
                                                                                        
Allowance for returns..................  $     186         $   676       $ -              $   558 (d)          $     304
Allow. for bad debt....................  $     200         $ 1,104       $ 69  (e)        $   257 (f)          $   1,116
Allow. for pricing adjustments ........  $   1,400         $ 2,768       $ 26  (e)        $ 1,265 (f)          $   2,929
</TABLE>

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

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

(d)      Returns.

(e)      Foreign currency translation adjustments.

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

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

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

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

3.2               Amended  and  Restated  Bylaws  of  Exogen.   Incorporated  by
                  reference  to Exhibit  3.3 to Exogen's  Form S-1  Registration
                  Statement (Registration No. 33-92740).

4.1               See Exhibits 3.1 and 3.2 for provisions of the  Certificate of
                  Incorporation  and Bylaws of Exogen defining rights of holders
                  of common stock of Exogen.

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

10.2              Asset  Purchase  Agreement  dated as of March 1,  1993,  among
                  Applied Epigenetics,  Inc. ("AEI"),  Interpore  International,
                  Inc.,  and  Interpore   Orthopaedics,   Inc.  Incorporated  by
                  reference  to Exhibit 10.2 to Exogen's  Form S-1  Registration
                  Statement (Registration No. 33-92740).

10.3              [RESERVED]

10.4              [RESERVED]

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

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

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

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

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

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

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

10.10             [RESERVED]

10.11             [RESERVED]

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

10.13             License  Agreement dated March 26, 1992,  between AEI and Drs.
                  McLeod and Rubin.  Incorporated  by reference to Exhibit 10.14
                  to Exogen's Form S-1 Registration Statement  (Registration No.
                  33-92740).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23.1*             Consent of Arthur Andersen LLP.

27*               Financial Data Schedule.

99.1              Preferred  Shares Rights  Agreement,  dated  December 6, 1996,
                  between Exogen and Registrar and Transfer  Company,  including
                  the   Certificate  of   Determination,   the  Form  of  Rights
                  Certificate,  and the  summary of Rights  attached  thereto as
                  Exhibits A, B, and C, respectively.  Incorporated by reference
                  to  Exhibit  99.1 to  Exogen's  Form  10-K for the year  ended
                  September 30, 1996.


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