OSTEX INTERNATIONAL, INC.

SELECTED FINANCIAL DATA

FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------

1998 1997 1996 1995 1994
-------- -------- -------- -------- --------

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Revenues:
Product sales and research testing
services............................ $ 3,047 $ 3,658 $ 2,860 $ 1,830 $ 1,152
License fees and research and
development payments................ -- 450 1,087 1,495 630
-------- -------- -------- -------- --------
Total revenues.................... 3,047 4,108 3,947 3,325 1,782
-------- -------- -------- -------- --------

Operating Expenses:
Cost of products sold................. 814 899 926 603 517
Research and development.............. 2,901 4,470 3,163 3,200 3,308
Selling, general and administrative... 8,122 8,031 9,201 6,583 2,222
-------- -------- -------- -------- --------
Total operating expenses.......... 11,837 13,400 13,290 10,386 6,047
-------- -------- -------- -------- --------
Loss from operations.............. (8,790) (9,292) (9,343) (7,061) (4,265)

Other Income:
Proceeds from legal settlement........ -- 6,200 -- -- --
Interest income, net.................. 695 828 1,273 1,684 194
-------- -------- -------- -------- --------
Net loss.......................... $ (8,095) $ (2,264) $ (8,070) $ (5,377) $ (4,071)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

Basic and diluted net loss per common
and common equivalent share........... $ (0.64) $ (0.18) $ (0.65) $ (0.45) $ (0.47)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

Shares used in calculation of net
loss per share........................ 12,696 12,574 12,441 11,929 8,737
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

DECEMBER 31,
------------------------------------------

1998 1997 1996 1995 1994
------- ------- ------- ------- ------

(IN THOUSANDS)

BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments........................... $10,979 $18,965 $21,229 $27,794 $3,668
Working capital......................... 10,624 18,368 20,901 28,361 3,172
Total assets............................ 15,065 24,112 25,691 32,841 5,590
Accumulated deficit..................... (32,223) (24,128) (21,864) (13,794) (8,417)
------- ------- ------- ------- ------
Total shareholders' equity.............. $13,488 $21,644 $23,526 $31,518 $4,698
------- ------- ------- ------- ------
------- ------- ------- ------- ------

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

OVERVIEW

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

This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. Words used herein such
as "believes," "anticipates," "expects," "intends," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. In addition, the disclosures on page 19 under
the caption "Other Factors that May Affect Operating Results," consist
principally of a brief discussion of risks which may affect future results and
are thus, in their entirety, forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission (the "SEC"), including the Company's Annual Report on Form
10-K for fiscal year ended December 31, 1998, that attempt to advise interested
parties of the risks and factors that may affect the Company's business.

On May 8, 1995, the Osteomark NTx Urine test first became commercially
available in the United States as a urinary test that provides a quantitative
measure of the excretion of cross-linked N-telopeptides of type I collagen
("NTx") as an indicator of human bone resorption. Prior to becoming commercially
available, the Osteomark urine test was available in the United States only for
research purposes. On February 2, 1999, the Company received clearance to market
the Osteomark NTx Serum test. Osteomark NTx Serum is the first and only
commercially available test in the United States that measures specific bone
breakdown by osteoclasts using a blood sample.

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

Expenses incurred have been primarily for selling, administrative, and
research and development activities and have exceeded revenues in each year
since the Company's inception. As of December 31, 1998, the Company had an
accumulated deficit of $32,223,000. Successful future operations depend upon the
Company's ability to effectively commercialize and market its products. The
Company will require additional funds to develop new products and to fund the
level of selling, general and administrative expenses that the Company expects
to incur in connection with its product commercialization efforts in the next
several years.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996. The Company had total
revenues of $3,047,000 for the year ended December 31, 1998, compared to
$4,108,000 and $3,947,000 for the years ended December 31, 1997 and 1996,
respectively.

Revenue from product sales and research testing services for the year ended
December 31, 1998 was $3,047,000, compared to $3,658,000 and $2,860,000 in the
years ended December 31, 1997 and 1996, respectively. The decrease of $611,000
in 1998 compared to 1997 revenue is attributable to slightly lower volumes of
Osteomark kits sold to laboratories and distributors worldwide. Some of the
Company's customers have gone to testing each patient sample only once rather
than in duplicate. Higher volume resulted in a $798,000 increase in 1997
compared to 1996 revenue.

No license and research and development payments were received during 1998.
In 1997, $450,000 in license and research and development fees was received from
Mochida, while the fees in 1996 totaled $1,087,000, primarily from Mochida. The
decreases in 1998 and 1997 were expected and are due to attainment of scheduled
milestones.

The Company's cost of products sold totaled $814,000 for the year ended
December 31, 1998, compared to $899,000 and $926,000 for the same periods in
1997 and 1996, respectively. The gross profit rate on product sales for the year
ended 1998 was 73%, compared to 75% for 1997 and 68% for 1996. The slight
decrease in gross profit rate from 1997 to 1998 was due to lower manufacturing
volume while the increase from 1996 to 1997 was a function of increased
manufacturing volume and overall efficiency gains made in part by improvements
in the production process. Increased manufacturing volume reduces unit cost by
spreading certain fixed overhead expenses over a higher number of units
produced.

The Company's research and development expenditures totaled $2,901,000,
$4,470,000, and $3,163,000, in 1998, 1997, and 1996, respectively. The
$1,569,000 decrease from 1997 to 1998 was primarily attributable to the
Company's decision to reduce the level of funding to outside companies for the
NTx point-of-care development programs. Research and development expenses
increased in 1997 over 1996 due to the cost of clinical studies commenced at the
end of 1996 and during 1997 and expenses to outside companies associated with
the NTx point-of-care development programs. Included in 1997 was a study for the
determination of the NTx reference range in males, a study to complement
physician interpretation of NTx results in postmenopausal women, and preliminary
studies for the use of the Osteomark test in helping to identify bone
metastases. Additionally, research and development expenditures included
research grants to the University of Washington ("UW") in 1998, 1997 and 1996.

Selling, general and administrative expenses totaled $8,122,000, $8,031,000,
and $9,201,000, in 1998, 1997 and 1996, respectively. The slight increase from
1997 to 1998 was due to the implementation of expanded and new marketing
programs including direct mail and advertising activities, and the Company's
physician education program. The $1,170,000 decrease from 1996 to 1997 was
primarily due to the completion of the Company's free testing program in 1996
and the completion of a hearing before the American Arbitration Association
against Boehringer Mannheim GmbH ("Boehringer Mannheim") in September 1996,
partially offset by increased cost of litigation in connection with the
Osteometer Biotech A/S lawsuit (see Note number 10 on page 28 in the Notes to
Financial Statements).

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

Interest income totaled $747,000, $901,000, and $1,317,000 for the years
ended December 31, 1998, 1997, and 1996, respectively. The decreases in 1998 and
1997 were primarily due to lower average invested balances resulting from using
cash to fund the Company's operating losses.

At December 31, 1998, the Company had tax net operating loss carryforwards
of $31,779,000, which will begin to expire in 2004. Income taxes are provided in
the Statements of Operations as required by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, deferred taxes are determined using an asset and liability approach.
The Company has determined that the tax assets do not satisfy the recognition
criteria set forth in SFAS No. 109.

Accordingly, a valuation adjustment has been recorded against the applicable
deferred tax assets, and therefore no tax benefit has been recorded.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998 the Company had $10,979,000 cash and cash
equivalents and short-term investments, working capital of $10,624,000 and total
shareholders' equity of $13,488,000. During 1998, cash, cash equivalents and
short-term investments decreased by $7,986,000, working capital decreased by
$7,744,000 and shareholders' equity decreased by $8,156,000. The decreases were
primarily the result of the net loss incurred during 1998.

The Company used $7,638,000 of cash for operating activities in 1998 and
$102,000 for the purchase of laboratory, manufacturing and office equipment. In
1996, the Company entered into a note agreement that provides up to $1,500,000
for expansion of manufacturing and administrative facilities and has borrowed
$746,000 against the note. The note is repayable in 48 equal monthly
installments of principal and interest of $20,000. As of December 31, 1998,
outstanding borrowings under this agreement were $324,000. The Company does not
anticipate additional borrowings during 1999 and has no material capital
purchase commitments.

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

OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS

The Company's operating results may fluctuate due to a number of factors
including, but not limited to, volume and timing of product sales, pricing,
market acceptance of the Company's products, changing economic conditions in the
healthcare industry, activities of competitors, delays and increased costs of
product and technology development, the Company's ability to develop and
maintain collaborative arrangements, the outcome of litigation, and the effect
of the Company's accounting policies and other risk factors detailed in the
Company's 1998 Form 10-K and other SEC filings. All of the foregoing factors are
difficult for the Company to predict and can materially adversely affect the
Company's business and operating results.

The Company is currently upgrading its financial and manufacturing
information system software to a Year 2000 compliant version. The Company is in
the process of testing this system upgrade and expects it to be fully implement
by December 31, 1999. The Company has assessed the Year 2000 compliance of its
other computer system software and manufacturing equipment and expects to
complete all necessary upgrades to be Year 2000 compliant no later than December
31, 1999. In addition, the Company has contacted all key vendors and suppliers
regarding Year 2000 compliance and has received no responses indicating that any
vendor or supplier will not be Year 2000 compliant. The Company has also created
a Year 2000 project team that periodically reviews relevant issues regarding
compliance. The costs of Year 2000 initiatives have primarily been incurred and
are not expected to be material to the Company's results of operations or
financial position in future periods. Failure to timely complete the Company's
Year 2000 initiatives could result in the Company's software being rendered
inoperative. Although the company has

no formal contingency plans in place, in such event, the Company would attempt
to perform its MIS functions, and other functions currently implemented by
software, manually through the dedication of additional personnel to performing
such functions. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no assurance that the systems and
products of other companies of which the Company's operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company's results of operations.

OSTEX INTERNATIONAL, INC.

BALANCE SHEETS

DECEMBER 31,
------------------
1998 1997
-------- --------

(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 2,744 $ 2,201
Short-term investments................................................... 8,235 16,764
Trade receivables and other current assets, net of allowance of $80 in
1998 and $25 in 1997................................................... 858 1,344
Inventory, at cost....................................................... 247 201
-------- --------
Total current assets................................................. 12,084 20,510
-------- --------

Property, Plant and Equipment, net......................................... 2,382 2,965
Other Assets............................................................... 599 637
-------- --------
Total assets......................................................... $ 15,065 $ 24,112
-------- --------
-------- --------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 557 $ 1,429
Accrued expenses......................................................... 696 530
Current portion of note payable.......................................... 207 183
-------- --------
Total current liabilities............................................ 1,460 2,142
-------- --------
Noncurrent Liabilities
Note payable, net of current portion..................................... 117 326
-------- --------
Commitments and Contingencies

Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 authorized;
12,696,250 issued and outstanding in 1998 and 1997..................... 127 127
Additional paid-in capital............................................... 45,642 45,642
Accumulated items of comprehensive income (loss)......................... (58) 3
Accumulated deficit...................................................... (32,223) (24,128)
-------- --------
Total shareholders' equity........................................... 13,488 21,644
-------- --------
Total liabilities and shareholders' equity........................... $ 15,065 $ 24,112
-------- --------
-------- --------

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

F-1

OSTEX INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------

(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
Revenues:
Product sales and research testing services.............................. $ 3,047 $ 3,658 $ 2,860
License fees and research and development payments....................... -- 450 1,087
-------- -------- --------
Total revenues....................................................... 3,047 4,108 3,947
-------- -------- --------

Operating Expenses:
Cost of products sold.................................................... 814 899 926
Research and development................................................. 2,901 4,470 3,163
Selling, general and administrative...................................... 8,122 8,031 9,201
-------- -------- --------
Total operating expenses............................................. 11,837 13,400 13,290
-------- -------- --------
Loss from operations................................................. (8,790) (9,292) (9,343)

Other Income (Expense):
Proceeds from legal settlement........................................... -- 6,200 --
Interest income.......................................................... 747 901 1,317
Interest expense......................................................... (52) (73) (44)
-------- -------- --------
Net loss............................................................. $ (8,095) $ (2,264) $ (8,070)
-------- -------- --------
-------- -------- --------

Basic and diluted net loss per common and
common equivalent share.................................................. $ (0.64) $ (0.18) $ (0.65)
Shares used in calculation of net loss per share........................... 12,696 12,574 12,441

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

F-2

OSTEX INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (8,095) $ (2,264) $ (8,070)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.......................................... 685 651 504
Expense from stock awards and grants................................... -- 197 33
(Increase) decrease in receivables and other current assets............ 486 (183) 493
(Increase) decrease in inventory....................................... (46) (48) 83
Decrease in other assets............................................... 38 -- --
Increase (decrease) in accounts payable................................ (872) 170 104
Increase in accrued expenses........................................... 166 296 66
-------- -------- --------
Net cash used in operating activities................................ (7,638) (1,181) (6,787)
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................................... (31,606) (20,426) (22,958)
Proceeds from sales and maturities of short-term investments............. 40,074 23,535 24,575
Purchase of property, plant and equipment................................ (102) (1,105) (495)
-------- -------- --------
Net cash provided by investing activities............................ 8,366 2,004 1,122
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and exercise of stock
options................................................................ -- 252 41
Proceeds from borrowings on note payable................................. -- -- 746
Payments on note payable................................................. (185) (163) (74)
-------- -------- --------
Net cash provided by (used in) financing activities.................. (185) 89 713
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 543 912 (4,952)

CASH AND CASH EQUIVALENTS, beginning of period............................. 2,201 1,289 6,241
-------- -------- --------

CASH AND CASH EQUIVALENTS, end of period................................... $ 2,744 $ 2,201 $ 1,289
-------- -------- --------
-------- -------- --------

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock granted for research and development services...................... $ -- $ 191 $ --
-------- -------- --------
-------- -------- --------

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

F-3

OSTEX INTERNATIONAL, INC.

STATEMENTS OF SHAREHOLDERS EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------- PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT LOSS EQUITY
------ ------ ---------- ------------- ----------- ------------- -------------

Balance, December 31, 1995......... 12,433 $125 $45,121 $ 66 $(13,794) $31,518
Compensation expense for stock
option grants.................... -- -- 33 -- -- -- 33
Stock options exercised............ 9 41 -- -- -- 41
Comprehensive loss
Unrealized gain on short-term
investments.................... -- -- -- 4 -- 4 4
Net loss......................... -- -- -- -- (8,070) (8,070) (8,070)
-------------
Comprehensive loss................. (8,066)
-------------
-------------
Balance, December 31, 1996......... 12,442 125 45,195 70 (21,864) 23,526
Expense for stock and option
grants........................... 70 -- 197 -- -- -- 197
Stock options exercised............ 184 2 250 -- -- -- 252
Comprehensive loss
Unrealized loss on short-term
investments.................... -- -- -- (67) -- (67) (67)
Net loss......................... -- -- -- -- (2,264) (2,264) (2,264)
-------------
Comprehensive loss................. (2,331)
-------------
-------------
Balance, December 31, 1997......... 12,696 127 45,642 3 (24,128) 21,644
Comprehensive loss
Unrealized loss on short-term
investments.................... -- -- -- (61) -- (61) (61)
Net loss......................... -- -- -- -- (8,095) (8,095) (8,095)
-------------
Comprehensive loss................. (8,156)
-------------
-------------
Balance, December 31, 1998......... 12,696 $127 $45,642 $(58) $(32,223) $13,488

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

F-4

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Ostex International, Inc. (the "Company"), a Washington Corporation
incorporated in May 1989, is engaged in the discovery and commercialization of
products associated with osteoporosis and other collagen-related diseases. The
Company's lead product, the Osteomark NTx test, incorporates breakthrough and
patented technology in the area of bone resorption measurement. The Company
markets the Osteomark NTx Serum and Urine tests through distributors and medical
laboratories.

ESTIMATES AND UNCERTAINTIES

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

REVENUE RECOGNITION

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

RESEARCH AND DEVELOPMENT EXPENSES

Research and development costs are expensed as incurred.

CASH AND CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

The Company considers all of its investments as "available for sale,"
reporting them at fair market value with unrealized gains and losses included as
a component of comprehensive income (loss) in shareholders' equity. Realized
gains and losses and declines in value of securities judged to be other than
temporary are included in interest income.

CONCENTRATION OF CREDIT RISK

Trade receivables potentially subject the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses.

The Company's range of customers includes research and clinical laboratories
and other companies, of which one customer (Johnson & Johnson Clinical
Diagnostics, Inc.) accounted for approximately 16%, 22% and 13% of total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.

F-5

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of useful lives or the lease term.
Estimated lives range from five to eight years. Depreciation and amortization
expense charged to operations during 1998, 1997 and 1996 was $685,000, $614,000
and $502,000, respectively.

COMPREHENSIVE INCOME

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and disclosure of comprehensive income
(loss). Disclosure has been made for all years presented in the statements of
shareholders' equity.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year presentation.

2. SHORT-TERM INVESTMENTS

The Company's short-term investments at December 31, 1998 and 1997,
consisted of the following:

1998 1997
---------- -----------

United States treasury obligations................ $ 0 $ 7,955,000
Federal agency obligations and discount notes..... 3,418,000 2,686,000
Government agency obligations..................... 2,935,000 3,389,000
Corporate and municipal bonds..................... 1,882,000 2,734,000
---------- -----------
$8,235,000 $16,764,000
---------- -----------
---------- -----------

The maturities of all classes of the Company's assets were less than two
years at December 31, 1998 and 1997.

F-6

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY, PLANT & EQUIPMENT

Property, plant & equipment at December 31, 1998 and 1997 consisted of the
following:

1998 1997
----------- -----------

Leasehold improvements............................ $ 2,426,000 $ 2,426,000
Laboratory and manufacturing equipment............ 1,304,000 1,277,000
Computers and office equipment.................... 1,050,000 975,000
----------- -----------
4,780,000 4,678,000
Accumulated depreciation and amortization......... (2,398,000) (1,713,000)
----------- -----------
Net property, plant & equipment................... $ 2,382,000 $ 2,965,000
----------- -----------
----------- -----------

4. OTHER ASSETS

Other assets represent a $599,000 investment in preferred stock of Metrika,
Inc., a privately held development stage, medical device company. The investment
is recorded in the accompanying financial statements at cost and represents an
ownership interest of less than 10%.

5. NOTE PAYABLE

In July 1996, the Company borrowed $746,000 under a secured promissory note
agreement. The note is secured by real property and equipment and is payable in
equal monthly installments of principal and interest of $20,000. The interest
rate is 12.5% and the note agreement allows the Company to make additional
borrowings, up to a maximum of $1,500,000 for future capital needs.

Minimum principal payments are as follows:

1999.............................................. 207,000
2000.............................................. 117,000
--------
$324,000
--------
--------

6. SHAREHOLDERS' EQUITY

STOCK OPTION PLANS

The Company has three stock option plans; the Amended and Restated Stock
Option Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both
administered by the Compensation Committee of the Board of Directors, and the
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively
the "Stock Option Plans"). The Old Plan no longer permits additional stock
option grants. Shares of common stock reserved for issuance to the Company's
employees and directors under the 1994 Plan and the Directors' Plan are
1,750,000 and 350,000, respectively, and shares available for grant under the
1994 Plan and the Directors' Plan at December 31, 1998 are 354,900 and 110,000,
respectively. These options generally vest ratably over three to four years. All
options granted under these plans expire upon the earlier of 90 days after
termination of employment or 10 years from the date of grant. Options are
granted with exercise prices equal to fair market value.

F-7

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
Information relating to stock options outstanding and stock options
exercisable at December 31, 1998 is as follows:

OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISEABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING LIFE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
- - ---------------- --------- ----------------- -------------- --------- --------------

$ .08 - $ 1.75 207,050 7 $ .81 78,750 $ .42
$2.10 - $ 5.00 1,596,287 9 $ 3.17 671,856 $ 3.26
$5.63 - $17.13 32,750 7 $10.87 29,032 $11.45
--------- --------- ------
1,836,087 9 $ 3.04 779,638 $ 3.28
--------- --------- ------
--------- --------- ------

Information relating to stock options activity is as follows:

1998 1997 1996
-------------------- --------------------- --------------------
WTD AVG WTD AVG WTD AVG
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
--------- --------- ---------- --------- --------- ---------

Outstanding at beginning of period...... 1,962,301 $3.34 1,827,626 $6.61 1,431,279 $4.51
Granted................................. 338,500 1.91 2,227,925 3.76 446,000 12.30
Exercised............................... -- -- (184,000) 1.37 (8,950) 4.56
Canceled................................ (464,714) 3.47 (1,909,250) 7.14 (40,703) 9.64
--------- ---------- ---------
Outstanding at end of period............ 1,836,087 $3.04 1,962,301 $3.34 1,827,626 $6.61
--------- ---------- ---------
--------- ---------- ---------
Exerciseable at end of period........... 779,638 $3.28 481,451 $3.34 914,029 $4.03
Weighted average fair value of options
granted............................... $ 1.36 $ 2.24 $ 7.00

Options outstanding have weighted average remaining contractual lives of
nine and eight years at December 31, 1998 and 1997.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for stock options issued at market value on the date of grant. Had compensation
cost for the Company's stock option plans been determined based on the fair
value of the options at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common equivalent share would have changed to the pro forma amounts
indicated below:

1998 1997 1996
----------- ----------- -----------

Net loss--as reported.............. $(8,095,000) $(2,264,000) $(8,070,000)
Net loss--pro forma................ $(8,513,000) $(2,222,000) $(8,729,000)
Basic and diluted net loss per
common and common equivalent
share--as reported............... $ (.64) $ (.18) $ (.65)
Basic and diluted net loss per
common and common equivalent
share--pro forma................. $ (.67) $ (.18) $ (.70)

F-8

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is established on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for new grants in 1998: zero dividend yield; expected
volatility of 88%; average risk-free interest rate of 5.0%; and expected lives
of five years. Assumptions for options granted in 1997 were: zero dividend
yield; expected volatility of 85%; average risk-free interest rates of 6.8%; and
expected lives of five years. Assumptions for options granted in 1996 were: zero
dividend yield; expected volatility of 59%; average risk-free interest rates of
6.1%; and expected lives of five years. The difference between reported and pro
forma net loss in 1997 was a $42,000 credit to income as the model recognizes
canceled options in the period they occur. The SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, therefore the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.

7. LICENSING AGREEMENTS

Under the Company's license agreements with the Washington Research
Foundation ("WRF"), the Company has the worldwide exclusive right to
commercialize technology developed from certain research by the University of
Washington ("UW"). As consideration for the licenses acquired and for the
attainment of certain milestones, the Company paid WRF certain nonrefundable
fees and issued common stock to the WRF and UW. In addition, future cash
payments and common stock grants may be due upon attainment of certain other
milestones. All legal costs incurred by WRF in connection with the filing,
prosecution, and maintenance of certain defined patent rights are paid by the
Company. During 1998, 1997 and 1996, the Company incurred approximately
$150,000, $123,000 and $154,000 of patent expenses. The Company is obligated to
pay WRF royalties on net sales of any licensed products.

8. REVENUES

The Company has a sublicense agreement and a research and development
agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"). Under the
sublicense agreement, the Company granted exclusive manufacturing, marketing and
distribution rights to certain of the Company's products in Japan. Through
December 31, 1998, the Company had earned fees and milestone payments of
$2,000,000, including $450,000 in 1997 and none in 1998 and 1996. The Company
has received all milestone payments to be earned in connection with the license
agreement for the urine test. Mochida has an option to license the Company's
serum test. Under the research and development agreement, the Company earned no
payments during 1998 and 1997 and $1,080,000 during 1996.

9. RELATED PARTY TRANSACTIONS

RESEARCH AGREEMENTS

The Company has entered into two research agreements with the University of
Washington which extend through December 31, 2000. Total expense was $367,000,
$499,000 and $304,000 during 1998, 1997 and 1996, respectively. Minimum payments
in 1999 and 2000 under these agreements will be $160,000 and $150,000,
respectively.

F-9

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES

LEASES

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

1999.............................................. $501,000
2000.............................................. 494,000
2001.............................................. 496,000
2002.............................................. 527,000
2003.............................................. 527,000
----------
$2,545,000
----------
----------

Total rent expense was approximately $481,000, $584,000 and $538,000 in
1998, 1997 and 1996, respectively.

LITIGATION

In June 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Osteometer Biotech A/S, a
medical technology company based in Denmark ("Osteometer"), and Diagnostic
Systems Laboratories Inc. for patent infringement. The Company believes
Osteometer's bone resorption immunoassay incorporates technology which infringes
patented Ostex technology. The lawsuit is currently scheduled for trial
commencing August, 1999. At the present time management cannot predict the
outcome of the lawsuit but intends to continue to vigorously assert its
position.

11. OTHER INCOME--PROCEEDS FROM LEGAL SETTLEMENT

On November 4, 1997, the Company announced settlement with Boehringer
Mannheim GMBH ("Boehringer Mannheim") under which the Company received a lump
sum payment of $6,200,000. The settlement between the two parties was the result
of a ruling by the American Arbitration Association awarding damages to the
Company in connection with a dispute between the Company and Boehringer
Mannheim.

12. FEDERAL INCOME TAXES

Deferred taxes are determined using an asset and liability approach.

The Company has incurred operating losses since inception and accordingly
has determined that the net deferred tax assets do not satisfy recognition
criteria. Therefore, a valuation allowance has been recorded against the net
deferred tax assets and no tax benefit has been recorded in the accompanying

F-10

OSTEX INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. FEDERAL INCOME TAXES (CONTINUED)
statement of operations. The change in the valuation allowance during 1998 and
1997 was $2,966,000 and $586,000, respectively. The Company's deferred tax
assets (liabilities) are as follows:

DECEMBER 31,
--------------------------
1998 1997
------------ ------------

Net operating loss carryforward................... $ 12,512,000 $ 10,039,000
Research and experimentation credits.............. 588,000 363,000
Excess of market value over the exercise price of
common stock options............................ -- 77,000
Property, plant and equipment..................... 145,000 (47,000)
Other............................................. 221,000 68,000
------------ ------------
Gross deferred tax asset.......................... 13,466,000 10,500,000
Valuation allowance............................... (13,466,000) (10,500,000)
------------ ------------
Net deferred tax asset............................ $ -- $ --
------------ ------------
------------ ------------

At December 31, 1998, the Company had tax net operating loss carryforwards
of $36,800,000 which expire between 2004 and 2018.

13. SUBSEQUENT EVENT

In January 1999, the Board of Directors approved a plan to repurchase up to
1,000,000 shares of the Company's common stock.

F-11

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Ostex International, Inc.:

We have audited the accompanying balance sheets of Ostex International, Inc.
(a Washington corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ostex International, Inc. as
of December 31, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Seattle, Washington,
January 29, 1999

SHAREHOLDER INFORMATION

CORPORATE HEADQUARTERS

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

INDEPENDENT ACCOUNTANTS

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

LEGAL COUNSEL

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

TRANSFER AGENT AND REGISTRAR

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

INVESTOR RELATIONS

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

SEC FORM 10-K

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

SHAREHOLDERS OF RECORD

As of December 31, 1998, the Company had 133 registered shareholders of record
of its common stock.

SHAREHOLDER INQUIRIES

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

INFORMATION SERVICE

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

PRICE RANGE OF COMMON STOCK

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

1998 HIGH LOW
- - ----------------------------------------------------------------------- --------- ---------

1st quarter............................................................ $ 3.06 $ 1.88
2nd quarter............................................................ 3.00 1.25
3rd quarter............................................................ 2.00 0.31
4th quarter............................................................ $ 1.00 $ 0.34

1997 HIGH LOW
- - ----------------------------------------------------------------------- --------- ---------

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

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

ANNUAL MEETING

The Annual Meeting of Shareholders will be held Thursday, June 3, 1999, at 9:00
am at the Sheraton Seattle Hotel & Towers, Seattle, Washington.

OSTEX WEBSITE

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

Osteomark and Ostex are registered trademarks of Ostex International, Inc.
Nasdaq National Market is a registered trademark of the National Association of
Securities Dealers, Inc.