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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

For the Fiscal Year Ended: June 30, 2006

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: 0-27120



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KENSEY NASH CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 36-3316412                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

735 Pennsylvania Drive, Exton, Pennsylvania 19341

(Address of principal executive offices and zip code)

Registrants telephone number, including area code: (484) 713-2100

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



|                                        |  |                                     
|--------------------------------------- |  | ------------------------------------
|Title of each class                     |  | Name of exchange on which registered
|Common Stock, par value $.001 per share |  | NASDAQ Global Select Market         

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



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Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark whether the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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.  x

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes ̈No  x

The aggregate market value of the registrants Common Stock held by non-affiliates of the registrant as of December 31, 2005 (the last business
day of the registrants most recently completed second fiscal quarter) was $252,576,990, based on the closing price per share of Common Stock of $22.03 as of such date reported by the NASDAQ Global Select Market. Shares of the registrants
Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrants Common Stock, par
value $.001 per share, as of August 31, 2006 was 11,627,977.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrants definitive Proxy Statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, in connection with the
registrants 2006 Annual Meeting of Stockholders scheduled to be held on December 6, 2006, are incorporated by reference into Part III of this report.



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FORWARD LOOKING STATEMENTS

This report contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We have based these forward looking statements largely on our current expectations and
projections about future events and trends affecting our business. In this report, the words believe, may, will, estimate, continue, anticipate, intend,
forecast, expect, plan, should, is likely and similar expressions, as they relate to Kensey Nash, our business or our management, are intended to identify forward looking statements, but
they are not exclusive means of identifying them.

The forward looking statements in this report are only predictions and actual events or results
may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause our actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those
expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of this Annual Report on Form 10-K.

Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward looking statements, whether as a
result of new information, future events or otherwise after the date of this report. Our results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results
may also result in fluctuations in the price of our common stock.

PART I

ITEM 1. BUSINESS

Overview

Kensey Nash Corporation is a leading medical technology company providing innovative solutions and technologies for a wide range of medical procedures. The company was incorporated in 1984 as a Delaware corporation.
We have expanded well beyond our beginnings in vascular puncture closure and today provide an extensive range of products into multiple medical markets, primarily in the cardiovascular, sports medicine and spine markets. As the inventor of the
Angio-Seal Vascular Closure Device (Angio-Seal), a device designed to seal and close femoral artery punctures made during diagnostic and therapeutic cardiovascular catheterizations, we were the first company to place an absorbable biomaterial
device into the human vascular system. As pioneers in this field of absorbable biomaterials, we have developed significant expertise in the design, development, manufacture and processing of absorbable biomaterials for medical applications. Outside
of the biomaterials market, our most recent advance into the cardiovascular market is our endovascular product platform, including the TriActiv FX® Embolic Protection System (TriActiv FX System), the TriActiv® ProGuard System (the ProGuard System), the QuickCat Extraction Catheter (QuickCat) and ThromCat Thrombectomy Catheter System (ThromCat) devices for embolic protection and thrombus removal in the coronary and peripheral vascular markets. We have
created a new endovascular division responsible for the direct sales and marketing of these products in the U.S. and are developing additional applications in both thrombus removal and embolic protection, as part of our direct marketing strategy. We
believe our direct strategy in the endovascular markets will allow us to maximize our return on current and future technologies in this platform.

We have
expanded from an Angio-Seal derived revenue base of $3.0 million in the year of our initial public offering (IPO) (fiscal year ended June 30, 1996) to $60.4 million in total revenue in the fiscal year ended June 30, 2006 (fiscal 2006),
diversified across three primary markets (shown below). This increase in revenue represents a compound annual growth rate (CAGR) of 35% and has been driven by our commitment to research and development of new solutions to existing and evolving
medical problems. The following chart details our total revenues of $60.4 million for fiscal 2006 by market. Total revenues include net sales, research and development revenue and royalty income.



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LOGO

Our initial success was with the Angio-Seal, which we invented and developed and subsequently licensed. St. Jude Medical,
Inc. (St. Jude Medical) acquired the worldwide license to the Angio-Seal device in March of 1999. St. Jude Medical has the worldwide exclusive rights for the development, manufacturing and sales and marketing of the Angio-Seal. The Angio-Seal was
commercialized in the U.S. in 1996 and is currently the leading product in the vascular closure device market with end-user product sales by St. Jude Medical of $322 million in our fiscal 2006, up 6% from $304 million in our fiscal 2005. The
vascular puncture closure market is estimated to have a potential $1 billion annual worldwide market with current penetration of approximately 45% to 50%. We receive a 6% royalty on all end-user Angio-Seal sales. In addition, we exclusively
manufacture one of the key absorbable components of the Angio-Seal, the collagen plug, and also manufacture a minimum of 30% of the absorbable polymer anchors for St. Jude Medical under a five and one half year supply agreement that expires in 2010.
Royalties and the sale of components contributed $19.6 million and $14.7 million of our total royalty income and net sales, respectively, for fiscal 2006, or a total of $34.2 million of our total revenues. Our Angio-Seal licensing agreement with St.
Jude Medical continues until the expiration of the last expiring Angio-Seal patent, which was issued in July 2000 with an expiration date in 2017. While cardiovascular disease treatment market trends and techniques may change over the next several
years, including the further development and commercialization of non-invasive diagnostic imaging techniques, we believe the current methodology for diagnostic cardiovascular catheterizations will remain the standard of care for the near and
mid-term. In addition, we believe the penetration of vascular closure devices in conjunction with cardiovascular catheterizations will continue to grow and the Angio-Seal will continue to play a dominant role in the vascular closure market resulting
in continued growth of our Angio-Seal related revenues.

We have leveraged our knowledge gained during the development process of the absorbable
biomaterials components of the Angio-Seal, the anchor and the collagen plug, as a springboard into the application of absorbable biomaterials in multiple medical markets. Our extensive experience and knowledge with these biomaterials has enabled us
to become experts in the design, development, manufacture and processing of proprietary biomaterials products. We have since applied this expertise into the fields of orthopaedics (including sports medicine and spine), cardiology, drug/biologics
delivery, periodontal and general surgery. We have several strategic partnerships and alliances through which our biomaterials products are developed and marketed. We intend to continue to leverage our proprietary knowledge and expertise in each of
these markets to develop new products and technologies and to explore additional applications for our existing products. Total sales of our biomaterials products in fiscal 2006 were $36.7 million. We expect growth in sales of biomaterials products
in fiscal 2007 as we continue to add new customers in all markets, primarily spine, as sales of our sports medicine and spine product lines return to growth, and as cardiovascular product sales, primarily Angio-Seal components, continue on an upward
ramp.

Outside of biomaterials, we have developed an endovascular product platform including the TriActiv FX® Embolic Protection System (TriActiv FX System), the TriActiv® ProGuard System (ProGuard System), the QuickCat Extraction Catheter (QuickCat) and ThromCat Thrombectomy Catheter System (ThromCat) devices for embolic protection and thrombus
removal in the coronary and peripheral vascular markets. The TriActiv® FX System is our second-generation, enhanced ease-of-use, embolic protection device and is a device designed to provide embolic protection during the treatment of diseased vessels, with an initial application in
diseased coronary saphenous vein grafts (SVG) (the use of the saphenous vein, a vein in the leg, as a bypass to a native coronary artery). The saphenous vein graft market opportunity is currently estimated at $100 - $200 million annually. The
TriActiv FX device is a balloon embolic protection device in a market addressed by both balloon and filter devices. While both approaches have pros and cons, we believe the unique design of the TriActiv FX



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device as a system offering three key features - an embolic protection balloon, a flush catheter and an active, controlled extraction system- offers the most
complete and effective solution for embolic protection. The original TriActiv System was commercially launched in Europe in May 2002 using a direct sales force in Germany and distributors throughout the rest of Europe. In the United States the
TriActiv device was launched in April 2005, following March 2005 receipt of FDA clearance. The TriActiv FX device was launched in Europe in April 2005 and, most recently, in the U.S in July 2006. The TriActiv FX is sold in the U.S. through our newly
formed endovascular direct sales force, which currently includes 27 sales representatives and clinical support staff strategically located throughout the U.S.

The ProGuard System is the third generation of our embolic protection technology platform which incorporates several important design enhancements to the TriActiv® FX System. These include Local Flush and eXtraction (LFX) technology that allows the system to better address branched arteries, such as those
of the carotid blood vessels and a new, smaller 6F compatible size, which is generally preferred by physicians. The system has been studied and can be used in combination with any approved stent in the marketplace. The pilot clinical study of the
ProGuard device was completed in April of 2006 and data from the study will be used to submit an Investigational Device Exemption (IDE) to the FDA to begin a larger, 300 to 400 patient pivotal study in pursuit of U.S. marketing clearance of the
ProGuard System for the treatment of carotid artery disease. In addition, the data from the study will support a CE Mark application for use of the ProGuard System during carotid stenting procedures in Europe. We anticipate approval in Europe by
December 2006.

Our QuickCat catheter and ThromCat system were two additional new products in the endovascular product line during fiscal 2006, both in the
thrombus removal market. The Quickcat catheter is an aspiration catheter for the removal of fresh soft emboli and thrombi (blood clots) from vessels in the arterial system. The QuickCat catheter is an easy-to-use, fully disposable aspiration system
that rapidly removes thrombus from the body. We received U.S. FDA clearance to market the QuickCat in March 2006 and immediately launched the product at the American College of Cardiology meeting in Atlanta, Georgia. We have also just begun selling
the QuickCat catheter in the European Union following July 2006 CE Mark approval. The ThromCat system is a more powerful mechanical thrombectomy catheter designed to remove more organized thrombus or blood clots from a patient, with an initial
indication for use in Arteriovenous (AV) grafts and fistulas. The ThromCat system received FDA clearance in April 2006 for mechanical removal of thrombus in synthetic hemodialysis access grafts and native fistulae. The ThromCat device is a fully
disposable system that incorporates HeliFlexTMtechnology to flush, macerate, and extract thrombus. An internal
rotating helix creates a powerful vacuum to draw thrombus into the catheter and then macerates it, while simultaneously flushing the vessel to aid in the thrombus removal. The Company plans to conduct studies for additional indications in the coming
year. According to industry sources, the current market for thrombectomy catheter systems approximates $100 million worldwide, including the coronary market. The Company believes that the worldwide market could expand with the offering of a simple
and effective device and believes the ThromCat system offers these key features. We are currently awaiting CE Mark approval, for coronary and peripheral indications, which is anticipated during the first half of fiscal 2007. Both the QuickCat and
ThromCat devices are also sold or will be sold through our direct sales forces in the U.S. and throughout Europe.

It is anticipated that future
generations of the TriActiv platform, currently in development, will be designed to address additional markets. These future applications will potentially include the treatment of lower extremities and native coronary arteries as well as acute
myocardial infarction (AMI) (a heart attack). Industry estimates indicate that the addition of these applications broadens the potential market for the endovascular product platform to a range of $500 million to $1 billion. As we have little
experience with our new direct sales and marketing efforts on the endovascular product platform, it is difficult to forecast sales for fiscal 2007 and beyond. However, we believe our products may have distinct competitive advantages over the
existing balloon and filter embolic protection devices currently in the market and over competing technologies in the thrombus removal markets.

To add to
our future endovascular product line, in May 2006, we acquired the assets of IntraLuminal Therapeutics, Inc. (ILT), a company focused on the emerging market opportunity of chronic total occlusion (CTO) (a complete vessel
blockage common in both coronary and peripheral vessels), for $8 million in cash. ILTs lead product, the Safe-Cross® System, a device designed to treat a CTO, was cleared in 2004 in the U.S. and also has CE Mark approval.



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The Safe-Cross System combines optical guidance and radiofrequency energy in a guidewire system to help physicians
penetrate a CTO that might otherwise be untreatable. It has been shown that if CTOs can be opened, the survival rates and quality of life for the patient are significantly enhanced. Currently, most CTOs are not treated interventionally because of
the extremely challenging nature of the cases. The CTOs are either ignored, or the patient is sent to surgery. Statistics show that over one-third of patients diagnosed with coronary artery disease have at least one CTO, yet the treatment rates are
significantly lower at between two and eight percent. This translates to a very large unmet market opportunity estimated to exceed 1.5 million people with an existing untreated CTO and translates to a potential future market opportunity of
approximately $2 billion. We had previously identified this CTO market as an area of high strategic interest and we plan to invest money in certain internally developed product concepts to improve upon the acquired technology. We believe the
acquisition of the ILT assets was instrumental in gaining a foothold in this growing market place and that the product line offered cross-selling opportunities with our other endovascular products now being sold via our direct endovascular sales
force.

As a result of the growth of all of the above detailed product lines as well as our plans for the future growth of such product lines and new
additions to our portfolio, such as the Safe-Cross®
System, we found that the facilities previously being utilized would not support the near and long-term facility requirements for manufacturing and continued development. In August 2004, we started construction of a new facility in Exton,
Pennsylvania, two miles from our previous location. The new facility is a 202,500 square foot shell and has 175,500 square feet of interior fit-out. Over the past eight months all employees have transitioned to the new facility. We abandoned all
leasehold improvements at our previous facilities at the time of transition and had total charges related to such abandonment of $5.0 million. We began recording this charge as an acceleration of deprecation on the related assets on May 1, 2005
and continued to do so through June 30, 2006. In addition, we incurred moving costs of approximately $540,000 during fiscal 2006 related to the transition.

For financial information regarding the Company, see the Consolidated Financial Statements of the Company and the Notes thereto, which are included in Part IV, Item 15 of this Annual Report on Form 10-K. The Company has a single
reportable segment for all of its operations and products. Financial information about geographic areas is found in Note 18 to the Consolidated Financial Statements of the Company.

Biomaterials

Biomaterials  Market Overview

Biomaterials, which are substances that treat, augment, or replace tissue, organs or body functions, are used regularly as components and elements in a wide variety of
absorbable and permanent implants. Advances in materials technology and a better understanding of the biological processes involved in tissue formation and remodeling have led to the rapid introduction of absorbable biomaterials-based products to
address long-standing deficiencies of traditional products and therapies. This trend has been observed in many markets, including orthopaedic, general, urological, cosmetic, and dental surgeries and in increased opportunities for drug and biologics
delivery. Absorbable biomaterials-based products have proven attractive solutions in these markets for a number of reasons. First, physicians prefer to have natural tissue instead of artificial tissue when healing is completed. Absorbable
biomaterials offer this possibility. Second, in certain reparative procedures, physicians generally prefer to use an implant that will not require a second surgery to remove the device. Third, the rate of absorption of products can be carefully
engineered to promote healing as the biomaterials-based products work with and assist the bodys natural healing response. Additionally, absorbable biomaterials offer potential for drug delivery specific to the clinical situation. The ability
to provide staged and sustained release of drugs and biologics offers significant potential for growth in the use of absorbable biomaterials-based products.

Our Biomaterials Business, Technology and Products

We have grown our biomaterials business from just $247,000 in fiscal 1996 (the year of
our IPO) to $36.7 million in fiscal 2006, representing 65% CAGR. Not only have we grown the business in terms of revenue generated, we have diversified our products across multiple markets from a base consisting entirely of cardiology products in
fiscal 1996. The chart below shows our biomaterials sales of $36.7 million by market for fiscal 2006:



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LOGO

Biomaterials continue to be a source of new emerging technologies and opportunities for our company. Alongside our Angio-Seal
and endovascular product platforms, we have built a solid reputation and significant market presence in the development of biomaterials-based medical implants. The technological challenges involved in developing biomaterials products are
substantial. Developing products made from absorbable biomaterials, such as polymers, collagen, polysaccharides and ceramics, requires an understanding of mechanical integrity, biocompatibility and absorption rates, as well as the ability to
sterilize these products without jeopardizing their material properties. Our expertise in biomaterials enables us to design, develop and manufacture proprietary biomaterials products to achieve the desired clinical outcomes. These products are
characterized by their ability to be absorbed or incorporated in the bodys own tissue. Our particular expertise is in the properties, usage and processing of synthetic polymers and natural polymers such as collagen, ceramics and other
absorbable materials. We believe that our diverse platforms in, and significant experience with, biomaterials technology give us a competitive advantage because many participants in the market specialize in only non-absorbable biomaterials, only one
absorbable biomaterial or have far less breadth of experience in biomaterials. Our background with multiple materials enables us to provide essential biomaterials building blocks across multiple biomaterials platforms to address specific product
needs in a wide variety of markets.



| |  |  | Synthetic Polymers. We were pioneers in the design, development and manufacture of absorbable polymer medical devices. We use many different types of polymers, in
combination, as single entities or with ceramics, to achieve the desired properties in a particular product. We have developed several unique polymer-based materials, products and processes, which have a variety of applications in implantable
absorbable medical devices. We offer our customers and partners a complete solution, including product design and engineering, regulatory filings, tool design, process development packaging design and commercial manufacture.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our polymer technology platform includes a porous tissue matrix (PTM) technology which allows us to create porous implants
which support cell growth, tissue regeneration and the delivery of biologics, growth factors and drugs. The implants are designed to facilitate wound healing in both bone and soft tissue and are bioabsorbable at controlled rates for specific
functions and tissues. We have a series of products and development programs underway utilizing intellectual property related to our porous biodegradable regeneration matrices. Specifically, we are researching applications for articular cartilage
regeneration, spinal disc repair, spinal fusion, vascular grafts, and bone growth scaffolds for spinal and trauma indications. Many of these programs incorporate the delivery of drugs and growth factors. We are also able to improve certain strength
characteristics of these polymers, removing a significant barrier to their use over traditional metallic devices.



| |  |  | Collagen and Other Naturally-Occurring Materials. We design, develop and manufacture products using naturally-occurring materials such as collagen, elastin,
hyaluronic acid and alginate, which have applications in a wide variety of absorbable medical devices. We have significant experience and expertise in processing collagen into diverse product formulations, including powders, gels, pastes, sponges
and structural matrices. We combine collagen and other naturally occurring materials using our proprietary processes, thereby creating new materials with unique characteristics and diverse product applications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ceramic Products.We have significant experience using various ceramic materials, primarily with calcium salts such as hydroxyapatite, Beta
Tri-Calcium Phosphate, DiCalcium Phosphate
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| | and others. These materials naturally help to replicate bone structure and support new bone growth as part of osteoconductive implants (implants which
promote bone regrowth) through the cells natural affinity for calcium-based materials, one of the major components of bone. Ceramics are also useful for enhancing the material properties of products, such as strength, when used in combination
with other biomaterials. We have expertise in the compounding of ceramic materials with various absorbable polymers to enhance strength characteristics, primarily for orthopaedic applications. We are currently working with select orthopaedic
customers to incorporate various bio-active ceramics into their existing products or to develop new products and properties. In addition, we are independently developing blended materials, using ceramics in combination with other biomaterials such
as collagen, for applications in filling of bone defects and fracture repair and spinal fusion.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
participate in the biomaterials market in several ways:



| |  |  | We manufacture biomaterials products as raw materials for our customers who incorporate them into their products;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | We manufacture complete products incorporating our biomaterials and provide the finished products to our customers for distribution;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We provide our customers with a variety of proprietary products ranging from components to final packaged products, which are then marketed and sold to end users;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We independently design and develop biomaterials based products that may more effectively solve clinical problems and offer strategic market advantage for our customers; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We design and develop potential enhancements to our customers products.
| | - |  | ------------------------------------------------------------------------

A majority of our biomaterials sales are currently concentrated among a few strategic customers and partners although this number is expanding. The relationship with these customers and partners is generally long-term and contractual in
nature, with contracts specifying development responsibilities, the characteristics of the product to be supplied, and pricing. Our products often represent a key strategic source for these customers and partners. In many cases, the technology
incorporated in the product is our proprietary technology. As a result, we view our customer relationships as a long-term sustainable competitive advantage.

We have established several strategic partnerships with companies selling biomaterials based products. We act as a strategic partner and are often the exclusive supplier of certain biomaterials technology to our customers. Our largest
biomaterials customers include St. Jude Medical, to whom we supply Angio-Seal components, Arthrex, Inc. (Arthrex), to whom we supply a broad range of sports medicine products, and Orthovita, Inc. (Orthovita), to whom we supply bone healing and
repair products for use in repair of the spine, osteoporotic fractures and trauma injuries. We also supply biomaterials products and development expertise to multiple other leading orthopaedic companies including Medtronic, Inc. (Medtronic), Zimmer,
Inc. (Zimmer), and BioMimetic Therapeutics, Inc. (BioMimetic), amongst others.

We continue to independently develop new proprietary products, to pursue
other strategic partnerships in multiple fields of use, including spine and sports medicine, cardiology, wound repair, aesthetics and drug delivery, among others. We also continue to work with both leading and emerging companies to commercialize
biomaterials-based technology to maximize our return on our increased investment in these products. As we continue to increase our investment in the development of new biomaterials and products, we believe we will be able to increase our margins on
commercialized products through efficiencies using our biomaterials technology.

We have products that are commercially available for sale in the U.S. and
international markets, and products that are in various stages of development, clinical trials or regulatory review. Additionally, we have biomaterials research programs, which we believe will provide us with opportunities to expand our product
offerings and strategic alliances.

The following are descriptions of the markets into which our biomaterials products are being placed, as well as the
applications for which our products and technology are currently being used or have future potential use.



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Orthopaedic Products.

Nowhere is the transition to biomaterials based products more evident than in the orthopaedic market where absorbable biomaterials have reduced healing times, improved patient outcomes and lessened or eliminated
morbidity issues related to the use of autologous tissue as graft material. While traditional surgical methodologies continue to be utilized, the trend toward new biomaterial-based products is driving innovation and growth in the orthopaedic
industry.

Orthopaedic applications of biomaterials include repair, regeneration or augmentation of musculoskeletal tissues, including bone, cartilage,
ligaments, spinal discs and tendons. Companies in this market often look to third parties to develop and manufacture their product concepts into marketable products as their traditional expertise is in metallic devices. Our capabilities and
expertise have enabled us to develop relationships with several major orthopaedic companies, to which we provide our biomaterials products. The orthopaedic portion of our biomaterials business represented 56% of our total biomaterials sales for
fiscal 2006. Applications in the orthopaedic market for our biomaterials products include sports medicine, spinal fusion, intervertebral disc repair (repair of the discs between the bones of the spine) and trauma. Many of our biomaterials products
manufactured from absorbable materials are designed to replace metallic devices used in the fixation and repair of musculoskeletal tissues. Use of absorbable biomaterials eliminates the need for a second surgery, which is frequently necessary to
remove non-absorbable metallic implants like bone screws, plates and pins. This benefit provides our customers and their surgeons with a cost-effective alternative to traditional non-absorbable based products.

Sports Medicine.Sports medicine is a broad area of healthcare that includes medical management and treatment of injury in persons
engaged in sports and exercise. Sports injuries, once most commonly associated with professional athletes, are becoming commonplace in our increasingly active population. This trend, in conjunction with an increasingly active and growing elderly
population and increasing patient demand for continued athletic performance, is driving the discovery of new products and technologies.

Soft Tissue Fixation.The primary application for our biomaterials in the sports medicine segment is soft tissue fixation. Soft tissue fixation includes the repair of tendons and ligaments in the knee, such as the
anterior cruciate ligament, and in the shoulder, such as the rotator cuff. We manufacture products such as suture anchors, interference screws and reinforcement materials for all of these applications.

Cartilage Regeneration and Repair. Articular cartilage covers the opposing surfaces of all moving joints in the body.
Significant debilitation can result from even minor injury to articular cartilage. U.S. physicians perform over 500,000 procedures each year to repair damaged cartilage in the knee. A majority of these are repeat procedures, illustrating the
ineffectiveness of current therapeutic approaches. Over time, debilitating osteoarthritis may develop in the afflicted joint, ultimately requiring joint replacement or other invasive treatment.

The healing and growth properties of absorbable biomaterials make them ideal for use as the foundation for cartilage regeneration and repair, as they are
bioabsorbable at controlled rates for specific tissues. We recently completed research of a novel device utilizing our collagen and PTM technology under a grant from the National Institute of Standards and Technologies (NIST) as well as through our
own funding. This research culminated in the performance of two large pre-clinical studies. In late fiscal 2005 we engaged in a formal development program with key surgical opinion leaders in the field to take this research into further pivotal
pre-clinical studies and ultimately into human clinical studies.

Trauma.Trauma is an important segment of
orthopaedics and generally refers to those conditions where bones of the musculoskeletal system are broken whether due to motor vehicle accidents, falls, blunt force trauma assaults with a firearm, or other causes. Trauma injuries can vary in
severity and treatment modality and are generally some of the more demanding orthopaedic procedures to treat as they may involve soft tissue loss, typically involve bone loss and injuries may involve other organ systems. Traumatic injuries can
include those to the long bones, the spine and the extremities and must be anatomically repaired and



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adequately stabilized in order to facilitate appropriate healing. Trauma to the musculoskeletal system can employ not only our synthetic polymer technologies
for stabilization devices but natural polymer/ceramic devices to aid in bone regeneration and repair.

Trauma Fixation
Devices.These devices are used to mechanically stabilize broken bones in order to allow healing to take place. The most commonly used devices are plates and screws, intramedullary nails and external fixation devices. Increased focus
has recently been seen in the extremity (hand, forearm, foot and ankle) segment of this market, an ideal place for bioresorbable fixation devices due to low mechanical loads and thin soft tissue coverage. We currently manufacture pins and screws of
various designs for repair of the small bones of the extremities.

Traumatic Bone Repair. As previously noted, traumatic
injury to the long bones generally results in bone loss, in both the dense cortical and spongy cancellous regions of the bone. Repair of the bone defect is as critical as stabilization of the broken bone fragments as it enhances the stability of the
fixation as the bone heals. Most commonly, autograft, harvested from an uninjured area of the patient, is used to fill the bone defect, but results in significant morbidity in an already compromised patient. More recently, surgeons have begun to use
synthetic bone graft materials to reduce this morbidity and speed healing. We currently make several forms of natural polymer based synthetic bone graft materials.

Sports medicine and trauma products represented 39% of our total biomaterials product sales in fiscal 2006.

Spine.The application of biomaterials is playing an increasingly important role in the spinal surgery market. The spinal surgery market includes both repair and fusion of the vertebrae, the bones of the spinal column,
as well as treatment of degenerated intervertebral discs, the soft, gel-like cushions between each vertebra. In each of these indications, biomaterials have unique properties that enhance treatment of spinal disease.

Spinal Fusion.Spinal fusion procedures are performed when conservative treatment for back pain fails and where intervertebral discs have
become so degenerated that the resultant anatomy causes pressure on the nerve and pain. Surgery is performed to fuse two or more of the vertebrae together to stabilize the spinal column and maintain normal anatomical relationships surrounding the
nerves. A trend that is garnering significant attention is the introduction of growth factors delivered via biomaterial matrices into the spinal fusion market. These materials speed the fusion process and result in a more predictable bone healing
process. In addition, synthetic bone void fillers as alternatives to autograft or allograft (bone harvested from cadavers) are increasingly being used in conjunction with interbody spacers (metal or polymer cages) in spinal fusion procedures.

In March 2003, we entered an agreement with Orthovita to commercialize new products based on Orthovitas proprietary Vitoss bone graft
substitute material in combination with our proprietary biomaterials. The new products build upon the Vitoss technology, a unique resorbable porous calcium phosphate scaffold that allows for resorption, cell seeding and rapid in-growth of host bone.
The products are directed toward the spinal surgery market, which we believe to be the fastest growing market in orthopaedics, estimated at $3.5 billion on a worldwide basis. Under the agreement, we manufacture the products and Orthovita markets and
sells the products worldwide. The first products under this agreement, Vitoss Foam STRIPS and CYLINDERS, which are synthetic bone substitutes, were launched in March 2004. Vitoss Foam FLOW, a flowable version of the STRIPS and CYLINDERS, was
launched in July of 2004 while Vitoss Foam SHAPES and Vitoss Foam PACK were launched in October 2004 and May 2005, respectively. Many of these products, specifically Foam SHAPES, have applications in general orthopaedic repair, as well as in the
spine market.

In our fiscal 2006, we embarked on a development program to further bioabsorbable technology in fusion procedures of the
spine. Most interbody spacers utilized in the spine are made from titanium or non-resorbable PEEK polymer. PEEK devices have the advantage of allowing better



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visibility of the fusion for the surgeon, but by not resorbing, maintain the disadvantage of titanium devices by remaining in the patients body for
life. Some positive steps have been made to develop bioabsorbable polymer interbody spacers for spine fusion to allow for visualization of the fusion, but also to ultimately degrade and provide only a bony fusion. Products are now commercialized in
the U.S. and in Europe for these indications. We have developed a unique device utilizing our proprietary PTM technology to make devices of adequate strength for cervical fusion applications. These devices, unlike a solid polymer device utilize less
total polymer and provide an interconnected porosity that can smooth the degradation of the polymer and act as a reservoir for local growth factors and potentially synthetic growth factors. Development will continue on these devices with animal
studies and further activities planned in fiscal 2007.

Spinal Non-Fusion An increasingly important segment of spine
surgery is the development of non-fusion alternatives to treat certain spine conditions. Specifically, surgeons are investigating the use of polymers to replace the nucleus, increase disc height and return it to its normal mechanical function. Also
being investigated are novel fixation devices which retain stability in a non-rigid manner, allowing some flexibility to the affected segment of the spine. We have developed a unique technology to allow surgeons to repair the annulus or outer ring
portion of the disc. This technology could be utilized to facilitate repair of the defect created in the treatment of herniated discs and of the defect that is often created in many of the newer nucleus replacement technologies currently being
developed. During fiscal 2006 we made significant advancements in our proof of principle experiments and will advance to pre-clinical evaluation of the technology in the coming year.

Spine products represented 17% of total biomaterials product sales in fiscal 2006.

Bone.Next to blood, bone is the most commonly transplanted tissue in humans. It is estimated that more than 500,000 bone-grafting
procedures are performed annually in the U.S. Surgeons today have few choices for materials used in bone grafting. Therefore, the need for an improved alternative to currently available materials remains an important issue in orthopaedics, including
spine, trauma, sports medicine, and maxillofacial surgery.

We are developing several different bone graft substitutes fabricated from
collagen, ceramic synthetic polymers or composite biomaterials. We also manufacture, for a strategic partner, a resorbable growth factor delivery matrix. Extensive pre-clinical study of our synthetic polymer bone graft substitute has shown it to be
an excellent carrier of biologically active agents as well as a suitable substrate for bone formation and healing. However, we cannot give any assurances that our products in development will result in a successful commercial product in the U.S. or
in Europe.

Cardiology Products.

Our
biomaterials are used in vascular puncture closure products and coatings for synthetic vascular grafts. These cardiology products represented 40% of our total biomaterials sales in fiscal 2006. In addition, we have examined the feasibility of an
absorbable polymer matrix to deliver angiogenic growth factors to promote the growth of new blood vessels for use in myocardial revascularization procedures and are exploring the use of our biomaterials in an arterial stent. Further, we are
developing a synthetic vascular graft utilizing our PTM technology.

Vascular.Medical options for resolving arterial
blockage include vessel replacement or bypass surgery to divert blood flow around an obstruction. Over 1.7 million surgical procedures are performed annually worldwide that employ some type of arterial graft; nearly 900,000 of them require
grafts of a very small diameter. Vein grafts or mammary arteries, taken from the patients leg or chest, respectively, are the only reliable choice available for those small diameter-grafting procedures. Although the standard of care today,
these grafts have significant issues related to availability, performance, trauma and expense.

Recognizing this significant medical need,
we are developing a synthetic technology that incorporates multiple biomaterials into an off-the-shelf implantable graft. In fiscal 2005, we concluded a three-year, $1.9 million award from the Advanced Technology Program (ATP) of NIST to
support development of this technology. Under this grant, we performed small animal studies, demonstrating 180-day graft patency.



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Drug/Biologics Delivery Products.

Biomaterials are particularly useful for the controlled release of drugs and other biologically active agents such as growth factors. In these applications, the drug is deposited or incorporated into a biomaterials
delivery matrix. As the matrix dissolves or is degraded by the body, the drug is gradually released. The use of a biomaterials matrix for drug delivery permits a locally targeted, low-dose release profile, improving the delivery of the drug. The PTM
technology provides benefits that traditional biomaterials do not offer, as the porosity of the material provides additional release capabilities. Utilizing our PTM technology, we are researching sustained or controlled release of chemotherapeutic
drugs for the treatment of breast cancer. We began this research under a National Institute of Health (NIH) grant received in fiscal 2003.

During fiscal
2006, we entered into a joint development, manufacturing and supply agreement with BioMimetic Therapeutics, Inc. (BioMimetic). Under the agreement, we will develop biomaterial matrices for delivering BioMimetics recombinant human
Platelet-derived Growth Factor (PDGF) molecule for orthopaedic applications. Under the agreement we will utilize our proprietary technologies to create appropriate scaffolds to deliver the PDGF molecule for orthopaedic fracture, spine and select
sports injury applications. We will exclusively manufacture and supply all matrices developed under the agreement while BioMimetic will be responsible for all regulatory activities and final packaging of the matrix and PDGF. The agreement includes
milestone payments based upon developmental achievements and commercialization, as well as royalties for commercialized product.

Periodontal
Products.

Biomaterials are commonly used in the periodontal segment of the dentistry market. In fiscal 2006, we had two commercialized
products in the periodontal field, the Drilac®
product, which prevents dry socket following tooth extraction, and the Epi-Guide® barrier membrane, used in periodontal restorative procedures to prevent soft tissue cells from growing into space reserved for bone. The Epi-Guide product is distributed in the U.S. and Europe by Curasan, Inc. In
fiscal 2007, we will introduce an enhanced version of the Epi-Guide to provide better contourability and ease of placement for the surgeons. These two products together accounted for approximately 1% of our total biomaterials sales in fiscal 2006.

Our Strategy for Growth of Our Biomaterials Business.

We intend to utilize our experience and expertise in the design, development and processing of the above materials to expand our market penetration in biomaterials products and technology. Our strategy to accomplish this expansion is as
follows:



| |  |  | Develop New Proprietary Biomaterials Products.We continue to leverage our technology and expertise in polymers, collagen and other absorbable and nonabsorbable
materials to develop new proprietary biomaterials products. We are using this expertise to develop new biomaterials products, new formulations and applications of existing materials and products. We are in the final phases of pre-clinical
development of a cartilage regeneration product which utilizes our PTM technology, and have significant market opportunity if proven in clinical settings. We have received two new regulatory clearances for our proprietary BioBlanket surgical
mesh technology, which has led to clinical use.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand Our Existing Biomaterials Business. We intend to aggressively work to increase sales to our current customers and attract new customers by providing
proprietary, technologically superior biomaterials products. We offer a complete range of services including design, development, regulatory consulting, manufacturing and package engineering. We also intend to continue to invest in new manufacturing
technology and processes to meet our customers requirements, support product launches and increase the demand for our biomaterials products. Additionally, we will expand our marketing efforts to broaden our customer base in the orthopaedic,
cardiology, drug/biologics delivery, general surgery and wound care markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Pursue Strategic Acquisitions and Alliances. We continually seek strategic acquisitions and alliances that add complementary technologies and expertise, broaden our
intellectual property portfolio and strengthen our competitive position in our biomaterials business. We believe that our expertise in biomaterials allows us to identify and attract these opportunities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Endovascular Business, Technology and Products

Our
TriActiv® Embolic Protection Platform

Embolic Protection  Market Overview

Embolic protection systems are designed to provide protection during the treatment of diseased vessels (arteries or veins). Vessels become diseased when deposits of cholesterol and other fatty materials (plaque) on the walls of the vessels
cause narrowing or blockage of the vessel and reduce the blood supply to a vital organ. Embolic protection systems are designed to capture debris dislodged from the wall of a vessel during balloon angioplasty or the placement of a stent. This
debris, left uncaptured, might otherwise be released into the vascular system and result in complications such as a heart attack or stroke. Current approaches to embolic protection include distal balloons and filters. The balloon or filter is placed
distal (on the far side) to the area of the vessel to be treated to capture debris loosened during the procedure. Existing worldwide commercial applications for embolic protection devices include the treatment of diseased saphenous vein grafts
(SVGs) and carotid and peripheral arteries. These protection devices have been clinically proven to reduce complication rates associated with device-based treatment of diseased vessels. Applications are under clinical investigation for the treatment
of diseased native coronary arteries, the removal of thrombus and acute myocardial infarction (AMI) (a heart attack). Our original TriActiv System, with an indication for the treatment of diseased SVGs, received FDA clearance in March 2005. Our
second generation TriActiv FX System, also for the treatment of diseased SVGs, was just recently cleared by the FDA in July 2006 and is commercially available in the U.S. and European Union. The ProGuard System is the third generation of our embolic
protection technology platform and incorporates features designed to better address branched arteries, such as those of the carotid blood vessels. We completed a pilot clinical study of the ProGuard System in April 2006, the results of which will
support a CE Mark approval submission for a carotid indication and the commencement of our large, pivotal clinical study in the U.S. in pursuit of FDA clearance for the same indication. Both European approval and the commencement of the U.S. pivotal
study are anticipated during the second quarter of fiscal 2007.

Saphenous Vein Graft Market

Due primarily to the availability of drug eluting stents and changing surgical practices, the number of coronary bypass surgeries which use saphenous
veins has been decreased in recent years. The market, however, remains large due to the number of bypass procedures that were performed in the last decade. In 2001, there were approximately 500,000 coronary bypass surgeries performed annually
worldwide and approximately half of all these bypass grafts become diseased or occluded within ten years of surgery, resulting in a pipeline of patients who will eventually require treatment of one or more diseased grafts. During many coronary
bypass procedures, the saphenous vein is removed from the patients leg and is surgically implanted to bypass a diseased or occluded native coronary artery. The SVG is used as a replacement for the diseased or occluded native coronary artery to
restore blood flow. Current treatment options for diseased SVGs include drug therapy, device-based therapies (including angioplasty and the placement of stents) or repeat bypass surgery. There are significant risks involved with these treatments
ranging from continued progression of disease, heart attack and possible death. Specifically, during the treatment of diseased SVGs via device-based therapy, the rate of major complication (known as the MACE (major adverse cardiac event) rate)
without embolic protection is approximately 15 to 20%. These complications occur primarily because the material clogging the SVG is dislodged during the treatment and released into the vasculature causing clots or heart attack. Embolic protection is
a method of preventing this debris from going downstream during device-based therapy procedures. Current devices in the SVG embolic protection market, which have been clinically proven to reduce the complication rates during device-based therapy,
include balloon (devices which completely occlude the artery to prevent the passage of debris) and filter-based (devices which allow the continued flow of blood but also the passage of small-sized debris) therapies.



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Carotid Artery Market

The number of people with carotid artery disease is thought to be well in excess of 500,000 people worldwide. The standard of care to treat the most
serious of cases is endarterectomy, a procedure which is performed over 200,000 times per year. Other patients are generally managed medically or undiagnosed. An endarterectomy is an open invasive surgical procedure performed to remove debris from
the carotid artery. It is also known that a significantly larger number of patients are affected by carotid artery disease, with many going untreated due to the invasiveness of the surgical endarterectomy procedure. With the advent of carotid
stenting in combination with embolic protection devices continuing to show promising results, it is believed that carotid stenting with embolic protection could become the standard of care for the treatment of carotid artery disease and limit the
number of patients who go untreated.

Native Coronary Arteries and AMI Markets

Distal embolization of plaque is increasingly recognized as a contributor to complication rates in common percutaneous coronary intervention (PCI) and
stent placement procedures. This seems to be particularly apparent in AMI or heart attack patients where a significant amount of blood clot or thrombus is often present. If the thrombus embolizes (goes downstream), it generally leads to adverse
short-term and/or long-term outcomes for the patients. Embolic protection and thrombus removal devices have been studied as tools for lowering complication rates in these patients but have not yet proven clinical benefit.

The TriActiv® FX System

We designed the TriActiv FX System, a balloon based embolic
protection therapy, to provide distal embolic protection during the treatment of diseased arteries or vessels. In addition to the balloon protection, the TriActiv FX System utilizes active flushing and extraction to remove debris from the vessel
after a treatment procedure. The initial application for the TriActiv FX System is the treatment of diseased SVGs.

We believe the TriActiv
FX System is currently the only device which offers all three of the following features:



| |  |  | an embolic protection balloon placed beyond the treatment area to prevent debris from flowing downstream and potentially causing a heart attack;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a flush catheter advanced over a guidewire that delivers fluid to the vessel; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | an active, controlled extraction system, which removes the debris.
| | - |  | ------------------------------------------------------------------

To operate the TriActiv FX System, a guiding catheter is positioned at the entrance to the graft. The guidewire, containing the embolic protection balloon, is advanced through the SVG beyond the occlusion. The embolic protection balloon is
inflated and a stent is placed in the vessel at the occlusion. Following stent placement, saline and contrast media are delivered into the graft from the flush catheter to dislodge the occlusive material. The particles and debris that are dislodged
by the flush system are extracted through the lumen of the guiding catheter.

In Europe, we received initial CE Mark approval for the
TriActiv FX System in December 2003 and for a revised FX system in March 2005. The CE Mark is an international symbol of adherence to quality assurance standards established by the European Union and compliance with applicable European medical
device directives. The European commercial launch of the revised TriActiv FX System occurred in April 2005. Our sales team at our subsidiary in Germany, Kensey Nash Europe GmbH, sells this product as well as all products in our endovascular product
line directly to the German market and supports our distributor relationships in the rest of Europe.

In the U.S., the FX system was FDA
cleared in July 2006 based on data from our ASPIRE clinical trial, completed in March of 2006. The ASPIRE (Angioplasty in SVGs with Post Intervention Removal of
Embolic Debris) trial was a multi-center, prospective registry which studied the effectiveness of the new TriActiv FX® System in the reduction of major adverse cardiac event (MACE) rates during the treatment of diseased SVGs and enrolled over 100 patients. The ASPIRE
trial demonstrated a low MACE rate of only 3.2%. Prior to the advent of embolic protection systems, MACE rates in the SVG patient population



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were routinely 15 to 20%. The use of embolic protection systems had helped reduce MACE rates to the 7 to 10% range in most previous studies. We believe that
the 3.2% rate is the lowest recorded to date from a sizable multi-center study of the SVG population, and is less than half of the next best data set widely quoted by the cardiology community.

The TriActiv® ProGuard System

The ProGuard System is the third generation of our embolic protection technology platform which,
like the TriActiv FX System, incorporates three features designed to reduce the incidence of embolic stroke during carotid stenting procedures  a balloon protection guidewire, a flush catheter, and an automated extraction system to remove
debris and has several important design enhancements to the TriActiv® FX System. These include Local Flush and eXtraction (LFX) technology that allows the system to better address branched arteries, such as those of the carotid blood vessels and a new, smaller 6F compatible size, which is generally preferred by
physicians. The system can be used and has been studied in combination with any approved stent in the marketplace. The pilot clinical study of the ProGuard device was completed in April of 2006 and enrolled 50 patients at five sites in the U.S. and
Europe. We plan to present the data from the study at the Transcathether Cardiovascular Therapeutics Conference (TCT) in October 2006 and will be used to submit an Investigational Device Exemption (IDE) to the FDA to begin a larger, 300 to 400
patient pivotal study in pursuit of U.S. marketing clearance of the ProGuard System for the treatment of carotid artery disease. In addition, the data from the study will support a CE Mark application for use of the ProGuard System during carotid
stenting procedures in Europe. We anticipate approval in Europe by December 2006.

Our Thrombus Removal Product Platform

Thrombus Removal  Market Overview

Thrombus removal
products are designed to remove blood clots (thrombus), either fresh or mature, from blood vessels of the anatomy. Although historically, thrombolytics (drug treatments to thin the clots), angioplasty and stenting have shown success in the treatment
of thrombus, mechanical thrombectomy is often required to create rapid reperfusion (renewed blood flow) in occluded vessels. There are three types of mechanical thrombectomy procedures being performed today: balloon thrombectomy, mechanical
thrombectomy and simple aspiration thrombectomy. Our devices in this market fall into the mechanical and aspiration arenas. Mechanical thrombectomy uses mechanical means to disrupt and remove more mature thrombus from a vessel. According to industry
sources, the current market for thrombectomy catheter systems approximates $100 million worldwide, including the coronary market. We believe that the worldwide market could expand with the offering of a simple and effective device and believe our
ThromCat System offers these key features. Aspiration thrombectomy is the simple removal of fresh thrombus from a vessel using a vacuum source (typically a syringe). Devices in this market are showing tremendous value in the endovascular arena due
to their effectiveness, simplicity and low cost. Our QuickCat device is one of five currently available devices in the aspiration market.

The ThromCat Thrombectomy Catheter
System

The ThromCat Thrombectomy Catheter System (the Thromcat) is a powerful mechanical thrombectomy catheter designed to remove more
organized thrombus or blood clots from a patient, with an initial indication for mechanical removal of thrombus in synthetic hemodialysis access grafts and native fistulae. The ThromCat device is a fully disposable system that incorporates
HeliFlexTMtechnology to flush, macerate, and extract thrombus. An internal rotating helix creates a powerful vacuum
to draw thrombus into the catheter and then macerates it, while simultaneously flushing the vessel to aid in the thrombus removal. The Company plans to study the utility of the device for application in vessels in addition to AV grafts and fistulas
in the coming year. We received U.S. FDA clearance for the ThromCat system in April 2006 and await CE Mark approval, for coronary and peripheral indications, which is anticipated during the first half of fiscal 2007. U.S. launch of the ThromCat
device is planned for October 2006.

The QuickCat Extraction Catheter

The QuickCat
Extraction Catheter (the QuickCat) is an aspiration catheter for the removal of fresh soft emboli and thrombi (blood clots) from vessels in the arterial system. The device is an easy to use, fully disposable aspiration system that rapidly removes
thrombus from the body. We received U.S. FDA 510(k) clearance for the QuickCat in March 2006 and CE Mark approval for the device in July 2006.

Our
Endovascular Business

We are commercially marketing and selling the entire endovascular product platform through our direct sales forces in the U.S and
in Germany as well as supporting distributor relationships throughout Europe via our European sales and clinical team. We had worldwide endovascular product sales of $1.2 million for the fiscal year ended June 30, 2006, including U.S. and OUS
product sales of $895,000 and $284,000, respectively.



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Future Generations of Endovascular Products

We have and are currently modifying the design of our embolic protection systems to address additional applications where distal embolization is a concern. These additional applications include the treatment of native
coronary and peripheral arteries and AMI. In addition, we will seek approval for use of our thrombus removal systems outside of the initial indication.

We
cannot make any assurances as to the successful completion of future clinical trials or regulatory approvals for future applications in the U.S. or in Europe.

Chronic Total Occlusion

Chronic total occlusion (CTO) procedures make up 2 to 8% of all percutaneous coronary intervention (PCI)
procedures, although CTOs are present in up to one-third of all coronary disease patients. Largely, treatment of the CTO is not tackled, and the patient is either treated medically or referred for bypass surgery. The CTO market in peripheral vessels
is also large a very under-treated market. The worldwide patient population of people with CTOs in either coronary or peripheral vessels likely exceeds 1.5 million people.

In general, physicians have advanced methodologies treating patients with CTOs using regular guidewires, but still have relatively low success rates. Success rates in crossing CTOs have generally been increasing over
time with better wires and techniques, but still vary from 50 to 90%. Our acquisition of the assets of ILT, including the Safe-Cross® System, will allow us to bring the CTO market into our sights as part of our future endovascular product platform. We plan to enhance the design and
ease-of-use features of the Safe-Cross® to improve
device success rates in the treatment of CTO and become a leader in the market.

The Angio-Seal Device

Vascular Puncture Closure  Market Overview

Vascular puncture
closure is the closing and sealing of femoral artery punctures made during cardiovascular catheterizations. Current treatment options include manual pressure and device based therapy. Existing device-based treatment options consist of either
biomaterial-based devices or suture-based devices. Leading cardiology industry journals currently estimate that there are approximately 7.3 million cardiovascular catheterization procedures performed annually, which translates to a potential
worldwide vascular puncture closure market of approximately $1 billion annually. The U.S. market represents approximately 70-75% of this total market opportunity. Industry estimates of current market penetration for vascular puncture closure
devices are approximately 53% and 39% for the U.S. and the international markets, respectively, or 49% worldwide.

The Angio-Seal System

The Angio-Seal puncture closure device is a biomaterial-based device, which acts to close and seal femoral artery punctures made during diagnostic and therapeutic
cardiovascular catheterizations. The device consists of four components:



| |  |  | an absorbable polymer anchor seated securely against the inside surface of a patients artery at the point of puncture;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | an absorbable collagen plug applied adjacent to the outside of the artery wall;
| | - |  | -------------------------------------------------------------------------------



| |  |  | an absorbable suture; and
| | - |  | -------------------------



| |  |  | a delivery system consisting of an insertion sheath, puncture locator, guidewire and tamper tube.
| | - |  | -------------------------------------------------------------------------------------------------

The anchor and suture act as a pulley to position the collagen into the puncture tract adjacent to the outside of the artery wall to seal and close the puncture. A tamper tube is used to further position and secure
the closure device. The anchor, collagen and suture are all designed to be absorbed into the patients body within 60 to 90 days after the procedure. We believe that this mechanical (anchor and collagen) and biochemical (collagen) approach
offer physicians a method for sealing and closing punctures with significant advantages over traditional manual or mechanical compression methods, as well as over other competitive products. The Angio-Seal product has been proven to have several
advantages over traditional manual or mechanical



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compression procedures, including: reduced time to ambulation and hemostasis, reduced staffing and hospital time, possible reduction in procedure costs,
increased patient comfort, greater flexibility in post-procedure blood thinning therapy and increased blood flow to the leg.

The Angio-Seal device has
become the leading product in the worldwide vascular puncture closure market. The Angio-Seal has been sold in Europe since 1995, in the U.S. since 1996 and was launched in Japan in late 2003. There have been approximately 7.6 million Angio-Seal
devices sold as of June 30, 2006. Industry estimates show the Angio-Seal market share of the worldwide vascular puncture closure market at June 30, 2006 was approximately 65%. We believe the impact of continued sales and marketing efforts
by St. Jude Medical, along with product enhancements planned by St. Jude Medical, will provide continued growth opportunities into the future.

The
Angio-Seal device is manufactured, marketed, sold and distributed by St. Jude Medical. We receive a 6% royalty on Angio-Seal net sales. Angio-Seal royalty income was $19.6 million in fiscal 2006, a 6% increase from fiscal 2005 of $18.5 million.
Royalty units increased 8%, as approximately 1.7 million Angio-Seal units were sold to end-users during fiscal 2006 compared to approximately 1.6 million units sold during fiscal 2005. In addition to royalty income, we generate sales from
the manufacture of the collagen plug and anchor components for the Angio-Seal device. In June 2005, we entered into a five and one-half year Supply Agreement with St. Jude Medical. Under this agreement, we will be the exclusive supplier of the
collagen plug component as well as a partial supplier of the anchor component.

Patents and Proprietary Rights

Our intellectual property covers many fields and areas of technology including vascular puncture closure, blood vessel location, arterial revascularization and embolic
protection systems, drug/biologics delivery, wound care, periodontics, angiogenesis products and surgical instruments. We protect our technology by, among other things, filing patent applications for the patentable technologies that we consider
material to our business. Our first U.S. patent for arterial revascularization was issued in 1986 and for the concept of sealing vascular punctures, in 1988. As June 30, 2006, we held 134 United States patents and 146 foreign national patents
and had various United States patents and foreign national patent applications pending.

We also rely heavily on trade secrets and unpatented proprietary
know-how which we seek to protect through non-disclosure agreements with corporations, institutions and individuals exposed to the proprietary information. As a condition of employment, we require that all full-time and part-time employees enter
into an invention assignment and non-disclosure agreement. Additionally, non-compete agreements are being utilized for certain employees who are exposed to our most sensitive trade secrets.

We have licensed our United States and foreign patents covering the Angio-Seal device to St. Jude Medical, the license includes improvements for the device. The license
agreements with St. Jude Medical are exclusive and worldwide, with rights to make, use and sell the Angio-Seal device, but are limited to the cardiovascular field of use.

We intend to continue to aggressively protect new manufacturing processes, biomaterials products and technologies and medical products and devices which we have invented or developed. We further intend to broaden the
scope of our intellectual property and consider our core technologies to be critical to our future product development.

Manufacturing

We have developed unique manufacturing and processing capabilities for absorbable collagen and polymers. We manufacture numerous absorbable biomaterials products for
use in applications that include orthopaedics, cardiology, drug/biologics delivery, periodontal, ophthalmology and general surgery. We have also established manufacturing processes and capabilities for our endovascular products, which we currently
manufacture for the U.S. and European commercial markets and for ongoing clinical trials. We have our own capabilities in tool and die making, injection molding, extrusion, compounding, machining, model making and laser welding, which allow us to
manufacture and engineer our developmental products on site.



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Our FDA-registered manufacturing facility in Exton, Pennsylvania contains separate areas for our endovascular products
and for absorbable collagen and polymer manufacturing. We completed the construction of a new facility during fiscal 2006 to facilitate future growth of all product lines (see discussion of our new facility in Item 2 below). Our manufacturing
facility is equipped with multiple ISO class 8 clean room facilities and is certified to international quality standard: ISO 13485:2003. Certification is based on adherence to established standards of design, service, quality assurance and
manufacturing process control. In fiscal 2005 we applied for and received EDQM (European Directorate and Quality of Medicine) certification which ensures the safety of our collagen products. Our manufacturing facility is subject to regulatory
requirements and periodic inspection by regulatory authorities. We have a separate in-house quality assurance department that sets standards, monitors production, creates and reviews operating procedures and protocols and performs in process and
final testing of sample devices and products manufactured by or for us.

We purchase most raw materials, parts and peripheral components used in our
products. Although many of these supplies are off-the-shelf items readily available from several supply sources, others are custom-made to meet our specifications. We maintain safety stock levels of these custom materials to prevent any product
downtime in the case of supply interruption. In addition, we believe that, in most of these cases, alternative sources of supply for custom-made materials are available or could be developed within a reasonable period of time.

Research and Development

Our research and development and regulatory
and clinical staff consisted of 102 individuals as of August 24, 2006. Our research and development efforts are focused on the continued development of our endovascular platform and our biomaterials capabilities. We incurred total research and
development expenses of $19.0 million, $15.1 million, and $16.4 million in fiscal 2006, 2005 and 2004, respectively.

In addition to the resources
dedicated to the product development process, we have an internal regulatory affairs and clinical management staff responsible for managing our clinical trials and obtaining regulatory approvals for our products. Our staff also works closely with
several of our customers to obtain regulatory approvals for their products in the U.S., the European Union and several other countries.

Our
Relationship with St. Jude Medical

The Angio-Seal is licensed to St. Jude Medical, which manufactures, markets and sells the Angio-Seal worldwide.
Under our license agreements, St. Jude Medical has exclusive rights to manufacture, market and distribute all versions of the patented Angio-Seal for hemostatic puncture closure for cardiovascular use worldwide. We retain the rights to use this
technology for other applications. We earn a royalty on Angio-Seal net sales by St. Jude Medical.

The term of the license agreements extends to the
expiration date of the most recently issued licensed patent, including all continuations or supplements. The most recent patent for the Angio-Seal technology was issued in July 2000. St. Jude Medical may terminate the license agreements at any time
after the end of the fifth royalty year, which ended September 30, 2001, for any reason upon 12 months notice. Upon termination, all rights, including sales, marketing, manufacturing and distribution rights would become the exclusive property
of Kensey Nash. The Angio-Seal trademark would be retained by St. Jude Medical.

If a license under any third-party patent is necessary to make, use or
sell the Angio-Seal product licensed to St. Jude Medical, any payments and royalties for such third-party license and any related attorneys fees, will be deducted from payments due to us, on a territory-by-territory basis, in an amount not to
exceed in any one year one-half of any royalties in any such territory for that year. Currently, the Angio-Seal product requires no such license for a third-party patent.

In June 2005, we entered into a five and one-half year Supply Agreement with St. Jude Medical. Under this agreement, we will be the exclusive supplier of the collagen plug component as well as a partial supplier of
the anchor component.



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Sales and Marketing

Endovascular Products

In January 2002, we established Kensey Nash Europe GmbH in Eschborn,
Germany for the purpose of selling and marketing the TriActiv device in Europe. The TriActiv device was commercially launched in Europe in the fourth quarter of the fiscal year ended June 30, 2002. Since then, we have commercially launched the
TriActiv FX System and the QuickCat device and await approval to begin marketing the ThromCat device. We are selling these devices direct to the market in Germany and through distributors for the rest of Europe. We have entered into distribution
agreements for sales in the United Kingdom, Ireland, Switzerland, Austria, Italy and India and are in the process of identifying distributors for the rest of Europe and Asia. At August 24, 2006, we had 5 individuals on the European sales and
marketing team, which includes sales people and clinical specialists.

In the U.S. we have developed a direct sales and marketing team to
market and sell the products within the endovascular platform (the TriActiv FX System, the QuickCat device and the ThromCat device). At August 24, 2006, we had forty-two individuals on the U.S. sales and marketing team, including a seven person
marketing team, eight members of the sales management team and a total of 27 sales representatives and clinical specialists throughout the U.S.

Biomaterials

Sales and marketing efforts for our biomaterials products are primarily conducted by our senior
management team. Sales are concentrated among a few customers and partners and our marketing efforts are focused more on the sale of our technology and expertise than on specific products. When appropriate, we seek to partner with a sales and
marketing organization to commercialize or advance our proprietary products and technologies.

Competition

The markets for our current and proposed products are fragmented, intensely competitive, subject to rapid change and sensitive to new product introductions and
enhancements. We expect that the competitive environment for our products will become more intense as additional companies enter our markets and as new techniques and technologies are adopted. Our biomaterials and medical devices compete directly
and indirectly for customers with a range of products and technologies produced by a wide variety of companies, as well as other processes and procedures which do not require the use of our products or those of our competitors. Many of our existing
competitors, as well as a number of potential new competitors, have longer operating histories in these markets, greater name recognition, larger customer bases and greater financial, technical and marketing resources. Generally, we believe that the
principal competitive factors for our products include:



| |  |  | the ability to obtain regulatory approvals;
| | - |  | -------------------------------------------



| |  |  | safety and effectiveness;
| | - |  | -------------------------



| |  |  | performance and quality;
| | - |  | ------------------------



| |  |  | ease of use;
| | - |  | ------------



| |  |  | marketing;
| | - |  | ----------



| |  |  | distribution;
| | - |  | -------------



| |  |  | pricing;
| | - |  | --------



| |  |  | cost effectiveness;
| | - |  | -------------------



| |  |  | customer service;
| | - |  | -----------------



| |  |  | the development or acquisition of proprietary products and processes;
| | - |  | ---------------------------------------------------------------------



| |  |  | the ability to attract and retain skilled personnel;
| | - |  | ----------------------------------------------------



| |  |  | improvements to existing technologies;
| | - |  | --------------------------------------



| |  |  | reimbursement; and
| | - |  | ------------------



| |  |  | compliance with regulations.
| | - |  | ----------------------------



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Our biomaterials products compete with the products of many of the larger companies in the industry. In the vascular
sealing device market, our products compete with products sold by Datascope Corporation, Abbott Laboratories, Medtronic and Vascular Solutions, Inc., as well as other smaller competitors. While we consider the Angio-Seal and other sealing devices to
be a superior method of vascular sealing, the majority of vascular sealing is still performed through manual compression, which represents our primary competition. Our endovascular products are commercially available in the United States, Europe and
India, where our competitors include Boston Scientific Corporation, Johnson and Johnson, Inc., Medtronic, Inc., Abbott Laboratories, Vascular Solutions, EV3 and Guidant Corporation, among others.

Customers

In fiscal 2006, we had approximately 31 customers for our
biomaterials products, up from 24 customers in fiscal 2005. Three customers each accounted for more than 10% of our total revenues for the fiscal year. Royalty income from and sales of biomaterials to St. Jude Medical, associated with the
Angio-Seal, represented approximately 57% of total revenues. Sales of biomaterials products to Arthrex, a leading orthopaedic products company, represented approximately 22% of total revenues. Royalty income from and sales of Vitoss Foam products to
Orthovita, a publicly held orthopaedic biomaterials company, represented approximately 10% of total revenues. Our endovascular products are being sold to hospitals throughout the U.S. and Europe either through our direct sales force or through
distributors. Endovascular sales represented 2% of total revenues. Following is a chart of our total revenues showing each of our three major customers, the Endovascular sales and all other customers as a percentage of total revenues.

LOGO

Government Regulation

Our medical devices are subject to extensive regulation by the U.S. Food and Drug Administration (FDA) and by foreign governments. The FDA regulates the clinical testing, design, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, seizure of products, total or partial suspension of production, failure to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to recall or request repair, replacement or refund of the cost of any device we manufacture or distribute.

International sales of medical devices are subject to the regulatory agency product registration requirements of each country in which they are sold. The regulatory
review process varies from country to country. Many countries also impose product standards, packaging requirements, labeling requirements, price restraints and import restrictions on devices. Delays in receipt of, or a failure to receive, approvals
or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on our business, financial condition and results of operations. In addition, reimbursement coverage must be obtained in some
countries.

Generally, our biomaterials products are incorporated by our customers into another product which receives FDA and other government approvals.
We maintain device master files for some of our biomaterials products containing information relating to the specifications, manufacturing, biochemical characterization, biocompatibility and viral safety of our biomaterials products. These files, in
addition to our technical expertise, help our clients in their regulatory approval process for products incorporating our biomaterials.



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In January 2002, we received CE Mark approval from the European regulatory authority for the TriActiv device, which
allowed commercial sale of the product in the European Union. In the U.S., we received clearance from the FDA in March 2005, allowing commercial sale of the TriActiv System in the United States. For the TriActiv FX, the second-generation embolic
protection device, we completed a U.S. clinical trial registry, the ASPIRE (Angioplasty in SVGs with Post Intervention Removal of Embolic Debris) in March 2006. Enrollment in the ASPIRE study began in our
third quarter of fiscal 2005 and was completed in November 2005. The data from the study supported U.S. FDA clearance for an SVG indication which was received in July 2006. We received U.S. FDA 510(k) clearance of the QuickCat in March 2006 and for
the ThromCat in April 2006.

The Angio-Seal product line has both CE Mark and FDA approval. St. Jude Medical is responsible for all future international
submissions and FDA pre-market approval application supplements for the Angio-Seal.

When human clinical trials of a device are required in connection with
our new proprietary products and the device presents a significant risk, we must file an investigational device exemption (IDE) application with the FDA in order to commence 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 specific number of patients, as approved by the FDA. The
conduct of human clinical trials is also subject to regulation by the FDA. Sponsors of clinical trials are permitted to sell those devices distributed during the course of the trial provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. Similar approvals are required to conduct clinical trials in foreign countries.

Any products we
manufacture or distribute pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by the FDA, including product validations, recordkeeping requirements, post-market surveillance, and reporting of adverse experiences
with the use of the device. As a device manufacturer, we are required to register our manufacturing facility with the FDA and list our devices with the FDA, and are subject to periodic inspections by the FDA and certain state agencies. The Federal
Food, Drug, and Cosmetic Act requires devices to be manufactured in accordance with Quality System Regulations which impose certain procedural and documentation requirements with respect to design, manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses.

Manufacturers 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 may be required to incur significant costs to comply with such laws and regulations in the future and any failure to comply with such laws or
regulations could have a material adverse effect upon our ability to do business. Currently and for the known future, there are no environmental laws or regulations that will require a significant investment in capital expenditures and therefore we
do not expect our earnings or competitive position to be affected by such laws or regulations.

Employees

As of August 24, 2006, we had 356 employees, including 176 employees in operations, 102 employees in research and development and clinical and regulatory affairs,
31 employees in finance and administration and 47 employees in sales and marketing, including five employees in Europe. All of our U.S. employees are located at our facilities in Exton, Pennsylvania, with the exception of five research clinical
specialists, 21 sales representatives, 11 sales clinical support staff and 2 members of the sales and marketing senior management located elsewhere throughout the country. We believe that our success depends in large part on our ability to attract
and retain employees in all areas of our business.

Corporate Governance and Internet Address

We recognize that good corporate governance is an important means of protecting the interests of our stockholders, employees, customers, and the community. We have
closely monitored and implemented relevant



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legislative and regulatory corporate governance reforms, including provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the rules of the Securities
and Exchange Commission (SEC) interpreting and implementing Sarbanes-Oxley, and the corporate governance listing standards of the NASDAQ Global Select Market (NASDAQ).

Our corporate governance information and materials, including our Code of Business Conduct and Ethics, are posted on the corporate governance section of our website at www.kenseynash.comand are available in
print upon request to our Investor Relations department at our offices in Exton, Pennsylvania. Our Board regularly reviews corporate governance developments and modifies these materials and practices as warranted.

Our website also provides information on how to contact us and other items of interest to investors. We make available on our website, free of charge, our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as soon as practical after we file these reports with the SEC.

ITEM 1A. RISK FACTORS

You should carefully consider the risks, uncertainties and other factors described below,
in addition to the other information set forth in this report, because they could materially and adversely affect our business, operating results, financial condition, cash flows and prospects as well as adversely affect the value of an investment
in our common stock.

Risks Related to Our Business

The TriActiv FX System, the QuickCat catheter and the ThromCat System endovascular products were recently introduced or gained regulatory approval in the United States. If any or all of these three products fail to gain or lose market
acceptance, our business will suffer.

We expect that sales of the TriActiv FX System, the QuickCat catheter and the ThromCat system in the United
States will account for a significant portion of our revenue in the foreseeable future. Because of their recent commercial introduction and/or regulatory approval, these three products have limited product and brand recognition. We do not know if
these products will be successful over the long term. Market acceptance of the three products may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of the products compared to
alternative procedures. We have no current plans to conduct such comparative studies. In addition, demand for the products may not increase as quickly as we expect. Failure of the products to significantly penetrate current or new markets would
negatively impact our business, financial condition and results of operations.

We may not be able to obtain the necessary regulatory approvals for the
TriActiv ProGuard System or any future generations of the endovascular product platform in the United States.

The FDA has not cleared the TriActiv
ProGuard System in carotid stenting procedures for marketing nor have we completed the required clinical trials and/or regulatory submissions. Prior to granting approval for commercial sale or for the commencement of clinical trials on the ProGuard
and other future generations of the device, the FDA may require clarification of information provided in our regulatory submissions, more information or more clinical studies. If granted, FDA approval may impose limitations on the uses for which our
products may be marketed or how our products may be marketed. Should we experience delays or be unable to receive clearance from the FDA, our growth prospects will be diminished.

We may not be successful commercializing current or future generations of our endovascular product platform through a direct sales force.

We will commercialize the TriActiv FX System, which has only recently been approved for sale in the United States, as well as future generations our endovascular product line through a direct sales force. We may not
be able to successfully recruit, develop and train our own sales force to sell and market the TriActiv FX System, the QuickCat catheter, the ThromCat Device, the ProGuard Device or other future generations of the



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endovascular product platform. We began the development of a direct sales and marketing force in fiscal 2005 and must continue to develop and expand this
force. We had no prior experience hiring or training a sales and marketing force and may not be able to expand and maintain such a team with adequate technical expertise and which is capable of supporting distribution. If we are unable to
successfully commercialize current or future generations of our endovascular devices, our growth prospects will be diminished.

We derive a substantial
majority of our revenues from only three customers.

A substantial majority of our total revenues are derived from only three customers. Royalty income
from, and sales of biomaterials to, St. Jude Medical associated with the Angio-Seal represented approximately 57% of our total revenue for fiscal 2006 while sales of biomaterials products to Arthrex, a distributor of orthopaedic products,
represented approximately 22% of total revenues and royalty income from, and sales of biomaterials products to Orthovita represented approximately 10% of total revenue for fiscal 2006. It is not possible for us to predict the future level of demand
for our products that will be generated by these customers or the future demand for the Angio-Seal from customers of St. Jude Medical. Our customer concentration exposes us to the risk of changes in the business condition of any of our major
customers and to the risk that the loss of a major customer would adversely affect our results of operations. Our relationship with these customers is subject to change at any time.

We anticipate that a substantial portion of our revenues will continue to come from the Angio-Seal, which is manufactured, marketed and distributed by St. Jude Medical.

Under our license agreements with St. Jude Medical, the Angio-Seal is manufactured, marketed and sold on a worldwide basis by St. Jude Medical. Two of our
significant sources of revenue for the future are expected to be sales of collagen to St. Jude Medical for use in the Angio-Seal and royalty income from the sale of the Angio-Seal product line. Our success with the Angio-Seal depends in part on
the time, effort and attention that St. Jude Medical devotes to the Angio-Seal product line and on their success in manufacturing, marketing and selling the Angio-Seal product line. Under the terms of our agreements with St. Jude Medical,
we have no control over the pricing and marketing strategy for the Angio-Seal product line. In addition, we depend on St. Jude Medical to successfully maintain levels of manufacturing sufficient to meet anticipated demand, abide by applicable
manufacturing regulations and seek reimbursement approvals. St. Jude Medical can terminate the license agreement for any reason upon 12 months notice. At such time, all sales and marketing, manufacturing and distribution rights to the
Angio-Seal would be returned to us. St. Jude Medical may not successfully pass future inspections of its manufacturing facility or adequately perform its manufacturing, marketing and selling duties. Any such failure by St. Jude Medical may
negatively impact Angio-Seal unit sales and therefore reduce our royalties.

If our biomaterials products are not successful, our operating results and
business may be substantially impaired.

The success of our existing biomaterials products, as well as any we develop in the future, depends on a
variety of factors, including our ability to continue to manufacture, sell and competitively price these products and the acceptance of these products by the medical profession. In addition, we may be required to obtain regulatory approval for any
future biomaterials products. We will require substantial additional funds to develop and market our biomaterials products. We expect to fund the growth of our biomaterials business out of our operating income, but this operating income may not be
sufficient to develop new biomaterials products. To date, we have relied on strategic partners or customers to market and sell our biomaterials products. We cannot assure you that we will commercialize our products successfully through our existing
and developing sales force.

We depend on our customers to market and obtain regulatory approvals for their biomaterials products.

We depend on the efforts of our biomaterials customers in marketing their products that include our biomaterials components. There can be no assurance that our
customers end-use products that include our biomaterials components will be commercialized successfully by our customers or that our customers will otherwise be able to compete effectively in their markets.



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The markets for our products are highly competitive and are likely to become more competitive, and our competitors may
be able to respond more quickly to new or emerging technologies and changes in customer requirements.

The markets for our current and proposed products
are fragmented, intensely competitive, subject to rapid change and sensitive to new product introductions and enhancements. We expect that the competitive environment for our products will become more intense as additional companies enter our
markets and as new techniques and technologies are adopted. Our biomaterials and medical devices compete directly and indirectly for customers with a range of products and technologies produced by a wide variety of companies, as well as other
processes and procedures which do not require the use of our products or those of our competitors. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories in these markets, greater name
recognition, larger customer bases and greater financial, technical and marketing resources.

Our biomaterials products compete with the products of many
of the larger companies in the industry. In the vascular sealing device market, our products compete with products sold by Datascope Corporation, Perclose, Inc. (a subsidiary of Abbott Laboratories) and Vascular Solutions, Inc., amongst other
smaller competitors. The majority of vascular sealing is performed through manual compression, which represents our primary competition. The TriActiv System is currently commercially available in the United Sates and Europe where our competitors
include Boston Scientific Corporation, Johnson and Johnson, Inc., Medtronic, Inc. (which owns Percu-Surge, Inc.) and Abbott Laboratories, among others.

Our competitors may have broader product lines, which allow them to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products. Broader product lines may also provide our competitors with a
significant advantage in marketing competing products to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing. Greater financial resources and product
development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete.

Because a significant portion of our revenue depends on sales of medical devices by our customers to the end-user market, we are also affected by competition within the markets for these devices. Competition within
the medical device market could also have an adverse effect on our business for a variety of reasons, including that our customers may compete directly with larger, dominant manufacturers with extensive product lines and greater sales, marketing and
distribution capabilities. We are also unable to control other factors that may impact the commercialization of our components for end use products, such as marketing and sales efforts and competitive pricing pressures within particular markets.

If our products are not accepted by the medical community or if our products are replaced by new technologies, our business may suffer.

The success of our existing products depends on continued acceptance of these products by the medical community. We cannot predict whether or not our products will
continue to be accepted and if that acceptance will be sustained to over the long term. The success of any products we develop in the future will depend on the adoption of these products by our targeted markets. We cannot predict how quickly, if at
all, the medical community will accept our future products or the extent to which our future products will be used. If we encounter difficulties introducing future products into our targeted markets, our operating results and business may be
substantially impaired. In addition, new technologies and techniques may be developed which may render our current products, along with those under development, obsolete.

The loss of, or interruption of supply from, key vendors could limit our ability to manufacture our products.

We
purchase certain materials and components for our products from various suppliers. Some of these components are custom made for us, including many of our absorbable polymer and suture raw materials which are used in our custom polymer products
across all markets. Any loss of, or interruption of supply from, key vendors may require us to find new vendors. We could experience production or development delays while we seek new vendors.



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We may have problems manufacturing and delivering our biomaterials products in the future.

The biomaterials industry is an emerging area, using many materials which are untested or whose properties are still not known. Consequently, from time to time we may
experience unanticipated difficulties in manufacturing and delivering our biomaterials products to our customers. These difficulties may include an inability to meet customer demand, delays in delivering products or quality control problems with
certain biomaterials products.

Our use of hazardous materials exposes us to the risk of material environmental liabilities.

Because we use hazardous substances in our research and development and manufacturing operations, we are potentially subject to material liabilities related to personal
injuries or property damages that may be caused by hazardous substance releases or exposures at or from our facility. Decontamination costs, other clean-up costs and related damages or liabilities could substantially impair our business and
operating results. We are required to comply with increasingly stringent laws and regulations governing environmental protection and workplace safety, including requirements governing the handling, storage and disposal of hazardous substances.

Our customers, and licensees, including St. Jude Medicals and our international sales are subject to a number of risks that could harm
future international sales of Angio-Seal and our ability to successfully commercialize new products in international markets.

Many of our customers
sell products internationally, additionally St. Jude Medical sells the Angio-Seal product line internationally and pays us a royalty on each unit sold. We also sell the TriActiv device, as well as some of our other products, in the
international markets. Our sales and royalties from international sales of the Angio-Seal product line by St. Jude Medical and our revenues from our other international sales are subject to several risks, including:



| |  |  | the impact of recessions in economies both within and outside the United States;
| | - |  | --------------------------------------------------------------------------------



| |  |  | unexpected changes in regulatory requirements, tariffs or other trade barriers;
| | - |  | -------------------------------------------------------------------------------



| |  |  | weaker intellectual property rights protection in some countries;
| | - |  | -----------------------------------------------------------------



| |  |  | fluctuations in exchange rates;
| | - |  | -------------------------------



| |  |  | potentially adverse tax consequences; and
| | - |  | -----------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------

The
occurrence of any of these events could seriously harm St. Jude Medicals or our future international sales.

Our success depends on key personnel,
the loss of whom could impair our operating results and business.

Our success depends, to a significant extent, upon the efforts and abilities of
Joseph W. Kaufmann, Douglas G. Evans, Wendy F. DiCicco and other members of senior management. The loss of the services of one or more of these key employees could harm our operating results and business. In addition, we will not be successful
unless we can attract and retain skilled personnel, particularly in the areas of research and product development.

Our failure to expand our management
systems and controls to support anticipated growth or integrate future acquisitions could seriously harm our operating results and business.

Our
operations continue to grow and we expect this expansion to continue as we execute our business strategy. Sustaining our growth has placed significant demands on management and our administrative, operational, information technology, manufacturing,
financial and personnel resources. Accordingly, our future operating results will depend on the ability of our officers and other key employees to continue to implement and improve our operational, client support and financial control systems, and
effectively expand, train and manage our employee base. We may not be able to manage our growth successfully.



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Any acquisitions, including our acquisition of IntraLuminal Therapeutics in May 2006, that we undertake could be
difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.

We may acquire or make investments in
complementary businesses, technologies, services or products if appropriate opportunities arise. The process of integrating any acquired business, technology, service or product into our business and operations may result in unforeseen operating
difficulties and expenditures. Integration of any acquired company also may consume much of our managements time and attention that could otherwise be available for ongoing development of our business. Moreover, the anticipated benefits of any
acquisition may not be realized. Furthermore, we may be unable to identify, negotiate or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt,
contingent liabilities or amortization expenses related to goodwill and other intangible assets.

Our future operating results are difficult to predict
and may vary significantly from quarter to quarter.

Our operating results have varied significantly from quarter to quarter in the past and are likely
to vary substantially in the future as a result of a number of factors, some of which are not in our control, including:



| |  |  | market perception and customer acceptance of our products;
| | - |  | ----------------------------------------------------------



| |  |  | market perception and acceptance of our customers products;
| | - |  | ------------------------------------------------------------



| |  |  | our efforts to increase sales of our biomaterials products;
| | - |  | -----------------------------------------------------------



| |  |  | our efforts to commercialize our endovascular products through our existing and developing sales force;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | our efforts to gain CE Mark and FDA approval for future generations of endovascular devices;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the loss of significant orders;
| | - |  | -------------------------------



| |  |  | changes in our relationship with St. Jude Medical;
| | - |  | --------------------------------------------------



| |  |  | our establishment of strategic alliances or acquisitions;
| | - |  | ---------------------------------------------------------



| |  |  | timely implementation of new and improved products;
| | - |  | ---------------------------------------------------



| |  |  | delays in obtaining regulatory approvals;
| | - |  | -----------------------------------------



| |  |  | reimbursement for our products;
| | - |  | -------------------------------



| |  |  | increased competition; and
| | - |  | --------------------------



| |  |  | litigation concerning intellectual property rights in the medical device industry.
| | - |  | ----------------------------------------------------------------------------------

You should not rely upon our results of operations for any particular quarter as an indication of our results for a full year or any other quarter.

Risks Related to Our Intellectual Property

If we are unable to protect our patents and proprietary rights,
our reputation and competitiveness in the marketplace may be materially damaged.

We regard our patents, biomaterials trade secrets and other
intellectual property as important to our success. We rely upon patent law, trade secret protection, confidentiality agreements and license agreements with St. Jude Medical to protect our proprietary rights. Although we have registered certain of
our patents with applicable international governmental authorities, effective patent protection may not be available in every country in which our products are made available, and we have not sought protection for our intellectual property in every
country where our products may be sold. The steps we take to protect our proprietary rights may not be adequate to ensure that third parties will not infringe or otherwise violate our patents or similar proprietary rights.



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We may be accused of infringing upon the proprietary rights of others and any related litigation could materially
damage our operating results and business.

Third parties may claim that we have violated their intellectual property rights. An adverse determination
in any intellectual property litigation or interference proceedings brought against us could prohibit us from selling our products, subject us to significant liabilities to third parties or require us to seek licenses from third parties. The costs
associated with these license arrangements may be substantial and could include ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of key
personnel.

We do not own or control the use of the Angio-Seal device trademark.

The term Angio-Seal is a trademark of St. Jude Medical. All goodwill generated by the marketing and sales of devices bearing the Angio-Seal trademark belongs to St. Jude Medical and not to us. Should the
St. Jude Medical license agreements terminate, we would not have the right to call any of our products Angio-Seal unless we purchase or license the trademark from St. Jude Medical. Without rights to the Angio-Seal trademark, we
would have to market our products under a different trademark. Moreover, upon the termination of the St. Jude Medical license agreements, St. Jude Medical would have the right to compete against us by selling collagen and puncture closure
devices under the Angio-Seal trademark. Thus, purchasers of puncture closure devices may be more likely to recognize and purchase products labeled Angio-Seal regardless of whether those devices originate from us.

Risks Related to Our Industry

We may face product
liability claims that could result in costly litigation and significant liabilities.

The clinical testing, manufacture and sale of medical products
involve an inherent risk that human subjects in clinical testing or consumers of the products may suffer serious bodily injury or death due to side effects or other unintended negative reactions to our products. Accordingly, the clinical testing,
manufacture and sale of our products entail significant risk of product liability claims. The medical device industry in general has been subject to significant product liability litigation. Any product liability claims, with or without merit, could
result in costly litigation, reduced sales, significant liabilities and diversion of our managements time, attention and resources. We cannot be sure that our product liability insurance coverage is adequate or that it will continue to be
available to us on acceptable terms, if at all.

We face uncertainty relating to third party reimbursement for our products.

We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payers, particularly to the extent any changes affect
reimbursement for catheterization procedures in which our Angio-Seal products are used. Physicians, hospitals and other users of our products may fail to obtain sufficient reimbursement from healthcare payers for procedures in which our products are
used or adverse changes may occur in governmental and private third-party payers policies toward reimbursement for these procedures.

Our products
and manufacturing activities are subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new and improved products.

Our products and manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to:



| |  |  | obtain the approval of the FDA and international agencies before we can market and sell new products;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | satisfy these agencies requirements for all of our labeling, sales and promotional materials in connection with our existing products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | comply with all applicable manufacturing regulations; and
| | - |  | ---------------------------------------------------------



| |  |  | undergo rigorous inspections by these agencies.
| | - |  | -----------------------------------------------

Compliance with the
regulations of these agencies may delay or prevent us from introducing any new or improved products, including future generations of the TriActiv System. Furthermore, we may be subject to sanctions, including temporary or permanent suspension of
operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business.

We are also required
to demonstrate compliance with the FDAs Quality System Regulations. The FDA enforces its Quality System Regulations through pre-approval and periodic post-approval inspections. These regulations relate to product testing, vendor qualification,
design control and quality assurance, as well as the maintenance of records and documentation. If we are unable to conform to these regulations, we will be required to locate alternative manufacturers that do conform. Identifying and qualifying
alternative manufacturers may be a long, costly and difficult process and could seriously harm our business.

The FDA and international regulatory agencies
may also limit the indications for which our products are approved. These regulatory agencies may restrict or withdraw approvals we have received if additional information becomes available to support this action.

Risks Related To Our Securities

The trading price of our
common stock is likely to fluctuate substantially in the future.

The trading price of our common stock may fluctuate widely as a result of a number of
factors, some of which are not in our control, including:



| |  |  | our ability to meet or exceed our own forecasts or expectations of analysts or investors;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | quarter to quarter variations in our operating results;
| | - |  | -------------------------------------------------------



| |  |  | announcements regarding clinical activities or new products by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | general conditions in the medical device industry;
| | - |  | --------------------------------------------------



| |  |  | changes in our own forecasts or earnings estimates by analysts;
| | - |  | ---------------------------------------------------------------



| |  |  | our customers and licensees ability to meet or exceed the forecasts or expectations of analysts or investors;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many medical device companies; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------

In addition, the market for our stock has
experienced, and may continue to experience, price and volume fluctuations unrelated or disproportionate to our operating performance. As a result, you may not be able to sell shares of our common stock at or above the price at which you purchase
them. In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been instituted against that company. If any securities litigation is initiated against us, with or
without merit, we could incur substantial costs, and our managements attention and resources could be diverted from our business.

Future sales of
our common stock in the public market by management and other stockholders with significant holdings could cause our stock price to fall.

Sales of a
substantial number of shares of our common stock in the public market by management or other significant stockholders or the perception that such sales could occur, could cause the market price of our common stock to decline or adversely affect our
future ability to raise capital through an offering of equity securities.



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Our second amended and restated certificate of incorporation and Delaware law may discourage an acquisition of our
company.

Provisions of our second amended and restated certificate of incorporation and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

In August 2004, we started construction of a new facility in Exton, Pennsylvania, two miles from our previous location and we completed construction of
the facility in August 2006. The new facility is a 202,500 square foot shell and has 175,500 square feet of interior fit-out. Over the past eight months all employees have transitioned to the new facility. We also lease a small office space in
Eschborn, Germany for our Germany subsidiary. See the discussion of our new facility and charges taken related to the transition to such facility in Item 7, Managements Discussion and Analysis of Financial Conditions and Results of
Operations, Liquidity and Capital Resources.

ITEM 3. LEGAL PROCEEDINGS

From time to time, in the normal course of business, we are a party to various legal proceedings. We do not expect that any currently pending proceedings will have a
material adverse effect on our business, results of operations or financial condition.

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

On June 22, 2006, the Company held a Special Meeting of Stockholders. The purpose of the meeting was to consider and approve the Fifth Amended and
Restated Kensey Nash Corporation Employee Incentive Compensation Plan. The stockholders voted not to approve the Fifth Amended and Restated Kensey Nash Corporation Employee Incentive Compensation Plan. The following summarizes the voting results for
such actions:



|                                                                                                       |  |                    |  |                         |  |                       |  |             |  |                
|------------------------------------------------------------------------------------------------------ |  | ------------------ |  | ----------------------- |  | --------------------- |  | ----------- |  | ---------------
|                                                                                                       |  | Number ofVotes For |  | Number of VotesWithheld |  | Number ofVotesAgainst |  | Abstentions |  | BrokerNon-Votes
|To approve the Fifth Amended and Restated Kensey Nash Corporation Employee Incentive Compensation Plan |  | 3,819,127          |  |                        |  | 6,223,152             |  | 15,256      |  |               



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PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the NASDAQ Global
Select Market of the NASDAQ Stock Market LLC, under the symbol KNSY and has been traded publicly since our initial public offering in December 1995. The following table sets forth the high and low sale prices per share of our common
stock as reported by the NASDAQ system for the periods indicated.



|                                |  |      |       |     |   |      
|------------------------------- |  | ---- | ----- | --- | - | -----
|                                |  | High |       | Low
|Fiscal Year Ended June 30, 2005 |  |      |       |     |   |      
|First Quarter                   |  | $    | 34.71 |     | $ | 22.16
|Second Quarter                  |  |      | 35.54 |     |   | 24.34
|Third Quarter                   |  |      | 34.00 |     |   | 25.65
|Fourth Quarter                  |  |      | 30.97 |     |   | 24.72
|                                |  |     
|Fiscal Year Ended June 30, 2006 |  |      |       |     |   |      
|First Quarter                   |  | $    | 33.26 |     | $ | 28.77
|Second Quarter                  |  |      | 30.22 |     |   | 21.98
|Third Quarter                   |  |      | 28.60 |     |   | 22.66
|Fourth Quarter                  |  |      | 33.02 |     |   | 25.11

On August 31, 2006, the last reported sale price of our common stock in the NASDAQ Global Select Market was
$27.08 per share. As of August 31, 2006, there were 66 record owners of our common stock. There were also approximately 9,000 beneficial owners of the shares of our common stock at that date.

We have not declared or paid cash dividends and do not anticipate declaring or paying any dividends on our common stock in the near future. Any future determination as
to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on the then existing conditions, including our financial conditions, results of operations, contractual restrictions, capital
requirements, business prospects and other relevant factors.

On August 17, 2004, we announced that our Board of Directors had reinstated a program to
repurchase issued and outstanding shares of Common Stock over a six-month period. The reinstated plan called for the repurchase of up to 259,500 shares, the balance under the original plan approved in October 2003. During the six months, we
repurchased and retired 199,867 shares of common stock under the reinstated program at a cost of approximately $5.1 million, or an average market price of $25.68 per share. We financed these repurchases using our available cash. This program expired
in February 2005.

On March 16, 2005, we announced a new program under which an additional 400,000 issued and outstanding shares of our Common Stock
were approved for repurchase by the Board of Directors. As of June 30, 2005, we had repurchased and retired 103,133 shares of Common Stock under this new program at a cost of approximately $2.7 million, or an average market price of $26.58 per
share, using available cash. At June 30, 2005, there were 296,867 shares remaining for repurchase under this program. This plan was scheduled to expire on September 30, 2005, but it has been extended indefinitely until terminated by our
Board of Directors. During the quarter ended December 31, 2005, we repurchased and retired 20,000 shares of Common Stock at a cost of $441,000, or an average market price of $22.05 per share, using available cash. There were no repurchases
under the program during the remaining six months ended June 30, 2006 leaving 276,867 shares remaining for repurchase under this program.



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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated statement of operations and consolidated balance sheet data for the fiscal years ended June 30, 2006, 2005, 2004, 2003, and 2002. The selected financial data
for each such fiscal year listed below has been derived from our consolidated financial statements for those years, which have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report for fiscal years
2006, 2005, and 2004 is included elsewhere herein. The following data for fiscal years 2006, 2005, and 2004 should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and
with our consolidated financial statements and the related notes and other financial information included herein.



|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|-------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                   |  | Fiscal Year Ended June 30,               |        
|                                                   |  | 2006                                     |         |   | 2005     |   |         | 2004 |  |   | 2003    |   |  | 2002 |       
|                                                   |  | (in thousands, except per share amounts) |        
|Statement of Income Data:                          |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Revenues:                                          |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net sales                                          |  | $                                        | 37,878  |   |          | $ | 40,370  |      |  | $ | 36,361  |   |  | $    | 27,072 |   |  | $ | 17,502 |  
|Research and development                           |  |                                          |        |   |          |   | 253     |      |  |   | 688     |   |  |      | 963    |   |  |   | 765    |  
|Royalty income and other                           |  |                                          | 22,519  |   |          |   | 20,753  |      |  |   | 21,166  |   |  |      | 16,317 |   |  |   | 10,761 |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total revenues                                     |  |                                          | 60,397  |   |          |   | 61,376  |      |  |   | 58,215  |   |  |      | 44,352 |   |  |   | 29,028 |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Operating costs and expenses:                      |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Cost of products sold                              |  |                                          | 20,645  |   |          |   | 17,654  |      |  |   | 16,084  |   |  |      | 12,153 |   |  |   | 8,214  |  
|Research and development                           |  |                                          | 18,990  |   |          |   | 15,131  |      |  |   | 16,411  |   |  |      | 14,490 |   |  |   | 10,783 |  
|Selling, general and administrative                |  |                                          | 17,260  |   |          |   | 11,795  |      |  |   | 8,702   |   |  |      | 7,444  |   |  |   | 4,670  |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total operating costs and expenses                 |  |                                          | 56,895  |   |          |   | 44,580  |      |  |   | 41,198  |   |  |      | 34,087 |   |  |   | 23,667 |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Income from operations                             |  |                                          | 3,502   |   |          |   | 16,796  |      |  |   | 17,017  |   |  |      | 10,265 |   |  |   | 5,361  |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Other income (expense):                            |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net interest income                                |  |                                          | 972     |   |          |   | 1,249   |      |  |   | 1,062   |   |  |      | 1,070  |   |  |   | 1,693  |  
|Other non-operating income (loss)                  |  |                                          | 82      |   |          |   | 45      |      |  |   | 16      |   |  |      | 1      |   |  |   | (15    | )
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total other income - net                           |  |                                          | 1,054   |   |          |   | 1,294   |      |  |   | 1,078   |   |  |      | 1,071  |   |  |   | 1,678  |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Income before income tax expense                   |  |                                          | 4,556   |   |          |   | 18,091  |      |  |   | 18,095  |   |  |      | 11,336 |   |  |   | 7,039  |  
|Income tax expense                                 |  |                                          | (838    | ) |          |   | (5,159  | )    |  |   | (5,144  | ) |  |      | (2,549 | ) |  |   | (2,428 | )
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net income                                         |  | $                                        | 3,718   |   |          | $ | 12,931  |      |  | $ | 12,951  |   |  | $    | 8,787  |   |  | $ | 4,611  |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Basic earnings per common share                    |  | $                                        | 0.32    |   |          | $ | 1.13    |      |  | $ | 1.14    |   |  | $    | 0.81   |   |  | $ | 0.43   |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Diluted earnings per common share                  |  | $                                        | 0.30    |   |          | $ | 1.06    |      |  | $ | 1.06    |   |  | $    | 0.76   |   |  | $ | 0.41   |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Weighted average common shares outstanding         |  |                                          | 11,494  |   |          |   | 11,412  |      |  |   | 11,403  |   |  |      | 10,828 |   |  |   | 10,666 |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Diluted weighted average common shares outstanding |  |                                          | 12,319  |   |          |   | 12,185  |      |  |   | 12,168  |   |  |      | 11,498 |   |  |   | 11,256 |  
|                                                   |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                   |  |                                         
|                                                   |  |                                          |         |   | June 30, |  
|                                                   |  | 2006                                     |         |   | 2005     |   |         | 2004 |  |   | 2003    |   |  | 2002 |       
|                                                   |  | (in thousands)                           |        
|Balance Sheet Data:                                |  |                                          |         |   |          |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Cash and short-term investments                    |  | $                                        | 27,128  |   |          | $ | 44,889  |      |  | $ | 61,096  |   |  | $    | 48,412 |   |  | $ | 31,874 |  
|Inventory                                          |  |                                          | 7,198   |   |          |   | 5,658   |      |  |   | 3,482   |   |  |      | 3,481  |   |  |   | 2,519  |  
|Working capital                                    |  |                                          | 44,348  |   |          |   | 58,146  |      |  |   | 72,742  |   |  |      | 59,394 |   |  |   | 41,644 |  
|Total assets                                       |  |                                          | 130,191 |   |          |   | 115,674 |      |  |   | 101,237 |   |  |      | 85,839 |   |  |   | 66,980 |  
|Long-term obligations                              |  |                                          | 8,000   |   |          |   |        |      |  |   |        |   |  |      | 219    |   |  |   | 1,330  |  
|Total stockholders equity                         |  |                                          | 113,192 |   |          |   | 103,853 |      |  |   | 94,424  |   |  |      | 79,550 |   |  |   | 61,567 |  



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Selected Consolidated Financial Data and our financial statements
and the related notes included in this report.

This discussion and analysis below contains forward-looking statements relating to future events or our
future financial performance. These statements are only predictions and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this report which could cause
actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in Risk Factors in this Annual Report on Form 10-K. See Forward-Looking
Statements.

Overview

Revenues

Our revenues consist of three components: net sales, research and development revenue and royalty income.

Net Sales.Net sales is comprised of sales of our biomaterials and endovascular products.

Biomaterials.In the year of our IPO, fiscal 1996, our biomaterials sales were comprised entirely of the absorbable collagen and polymer components
of the Angio-Seal supplied to our strategic alliance partner. Since that time, we have experienced significant sales growth in our biomaterials products as we have expanded our customer base and marketing activities, increased sales to existing
customers and assisted customers in the development of new product offerings.

The biomaterials component of net sales, which comprises 97%
of total net sales, represents the sale of our biomaterials products to customers for use in the following markets: orthopaedics (sports medicine and spine), cardiology, drug/biologics delivery, periodontal and general surgery. The two most
significant components of our biomaterials sales are our orthopaedic product sales and the absorbable components of the Angio-Seal, supplied to St. Jude Medical. Our orthopaedic product sales consist primarily of sales to Arthrex, a privately held
orthopaedics company for which we manufacture a wide array of sports medicine products and Orthovita, a publicly held orthopaedic biomaterials company. We began working with Arthrex in fiscal 1998 and have since provided Arthrex with many varied
sports medicine products for commercial distribution. During fiscal 2004, we sold our first bone grafting and spine products to Orthovita, VITOSS FOAM strips and cylinders, and in fiscal 2005, provided additional product lines for Orthovita (VITOSS
scaffold FOAM Shapes and Pack). Below is a table showing the trends in our Angio-Seal component and orthopaedic sales from fiscal 2005 to fiscal 2006 as a percentage of our total biomaterials sales:



|                      |  |                                       |   |  |             |  
|--------------------- |  | ------------------------------------- | - |  | ----------- | -
|                      |  | Percentage of Total BiomaterialsSales |  
|Product               |  | Fiscal 2006                           |   |  | Fiscal 2005 |  
|Orthopaedic Products  |  | 56                                    | % |  | 53          | %
|Angio-Seal Components |  | 40                                    | % |  | 40          | %

Orthopaedic products sales increased as a percentage of total biomaterials sales to 56% in fiscal
2006 from 53% in fiscal 2005. Arthrex sales increased 5% from fiscal 2005 to fiscal 2006. During fiscal 2006, additional product lines were developed and made commercially available, which increased our sales volume to Arthrex during the fiscal
year. We continue to work with Arthrex in developing new products as well as adding to their current product lines. We expect growth in sales to Arthrex to continue in fiscal 2007. During fiscal 2006, we initiated business with two major orthopaedic
customers, which resulted in product launches during the fiscal year. Sales to these new orthopaedic customers generated $2.3 million in sales during our third and fourth quarters of fiscal 2006. We anticipate continued sales to these new customers
during fiscal 2007.



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Our increase in sales to Arthrex and product launches for two new orthopaedic customers were offset by a
$4.0 million, or 55%, decrease in Orthovita sales in our fiscal 2006 from fiscal 2005. As anticipated and previously reported, this decrease in sales to Orthovita is related to Orthovita Vitoss Foam product launches in fiscal 2004 and fiscal
2005. The large volume of products shipped to Orthovita in the prior years continued to flow through the distribution channels throughout fiscal 2006. Although our sales to Orthovita decreased year over year, Orthovitas end user sales of the
Vitoss Foam products are strong as they increased 45% in fiscal 2006 over fiscal 2005. We are starting to see growth in shipments to Orthovita as evidenced by combined third and fourth quarter fiscal 2006 sales to Orthovita of $2.2 million
compared to combined first and second quarter sales of $1.1 million. We anticipate a return to growth in our Vitoss Foam product sales for fiscal 2007.

Angio-Seal component sales as a percentage of total biomaterials sales are consistent with fiscal 2005 percentages. Sales of the collagen plug component decreased by 1% to $12.7 million dollars for the fiscal year
ended June 30, 2006 as compared to $12.9 million in the fiscal year ended June 30, 2005. The absorbable polymer anchor component decreased 31% to $2.0 million for the fiscal year ended June 30, 2006 as compared to $2.9 million in the
fiscal year ended June 30, 2005. This decline was the result of our supply of prior year increased requirements to St. Jude Medical related to their capacity for a certain new version of the Angio-Seal anchor. Going forward, we anticipate
consistency in the volume of anchor component supply as the supply level has been formalized under our Supply Agreement with St. Jude Medical, which was effective on June 30, 2005. Under the Supply Agreement, St. Jude Medical is required to
purchase at least 30% of their polymer anchor requirements from us.

The future of this portion of our biomaterials sales is dependent upon
the continued success of the Angio-Seal device in the vascular closure market. Today we estimate that the Angio-Seal device has approximately 65% of this market based on end-user sales of approximately $322 million in the fiscal year ended
June 30, 2006. The Angio-Seal market share may be impacted by future competition in this market or new technologies introduced to address diagnostic or therapeutic treatment of diseased coronary arteries.

Overall, with the combination of our Supply Agreement with St. Jude Medical, anticipated continued growth in Angio-Seal end user sales, expected growth in
the Arthrex sports medicine product business, the products launched with our new customers, expected growth in the Orthovita Vitoss Foam sales, and other new business opportunities, we expect growth in our overall biomaterials sales in fiscal
2007. Due to greater market acceptance of biomaterials based products, we have been able to expand our customer and product base by initiating new partnerships within the medical device industry, as well as expanding the product lines for our
current customers.

Endovascular.Our endovascular product line sales began with the TriActiv Embolic Protection System in Europe in
fiscal 2002 and has evolved to include the current product offering of the TriActiv FX system, the QuickCat catheter and the ThromCat device in the U.S. and Europe. We are selling these products in the U.S. through our new endovascular division
responsible for direct sales and marketing. We believe our direct strategy in the endovascular markets will allow us to maximize our return with our TriActiv technology.

In the U.S., we launched the TriActiv System after receiving FDA clearance in March 2005. Late in our third quarter fiscal 2006, we launched another product within our endovascular product line, the QuickCat
catheter, an aspiration catheter indicated for the removal of fresh soft emboli and thrombi (blood clots) from vessels in the arterial system. Sales of these two endovascular products in the U.S. were $895,000 during the year ended June 30,
2006, which included $305,000 of QuickCat Catheter sales alone. Subsequent to year end, in July 2006, we received 510(k) clearance of the TriActiv® FX System, an enhanced design with more ease-of-use features than the previous generation. We launched this product in July 2006. While
we received 510(k) approval for our ThromCat device during the fourth quarter of fiscal 2006, our product launch is anticipated in October of 2006. The ThromCat device is a fully disposable mechanical catheter system that incorporates a
technology to flush, macerate, and extract thrombus.



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We are forecasting significant sales growth for our U.S. endovascular products in fiscal 2007 based on
availability and greater acceptance by the medical community of our new FX system SVG embolic protection product, a continuation of the notable reception of the QuickCat device in our fourth quarter of fiscal 2006, as well as the launch of the
ThromCat device in the first half of fiscal 2007.

In Europe, where we sell direct in Germany and via distributors throughout the rest
of Europe, the TriActiv System was commercially launched in May 2002. We launched the second-generation of the TriActiv System, the TriActiv® FX in Europe in April 2005. We received CE Mark approval for the QuickCat catheter in July 2006 and await ThromCat approval which is anticipated during
the second quarter of fiscal 2007. In addition, the ProGuard System for carotid artery embolic protection is expected to gain CE Mark approval by the end of the second quarter of fiscal 2007. TriActiv sales in Europe were $284,000 for the fiscal
year 2006, a 7% decrease from the prior fiscal year. European interventional procedures in SVGs have been substantially lower than analysts or the companys estimates previously indicated. This has resulted in lower than anticipated
product sales for the TriActiv SVG application in Europe. However, we believe the addition of the three additional products during fiscal 2007, adding thrombus removal as well as a carotid application to the offering, will improve the total sales of
endovascular products in the European community.

Total worldwide endovascular sales were approximately 3% of our total sales in the fiscal
year ended June 30, 2006 compared to 1% in the fiscal year ended June 30, 2005. We anticipate endovascular sales will become a more significant component of net sales during fiscal 2007 and beyond as we increase our sales of the product in
the U.S. market, gain new customers in the European and Asian markets and introduce new versions and applications of the product in both the U.S. and Europe.

Research and Development Revenue.In fiscal 2005, research and development revenue was derived from a three year $1.9 million National Institute of Standards and Technology (NIST) grant received in October 2001. Under this grant we
were researching a synthetic vascular graft, also utilizing our PTM technology. This project concluded in October 2004.

In prior years, research and
development revenue included additional revenue under additional grant programs. In November 1999, we received our first NIST grant. Since that time we were also awarded a second NIST grant and an NIH grant. Under the first NIST grant, a $1.2
million grant over a three-year period, we were researching cartilage regeneration utilizing our porous tissue matrix (PTM) technology. Although we continue to independently develop this technology, we received all remaining funds under this grant
in our second quarter of fiscal 2003. In January 2003, we received from the NIH, $100,000 over a one-year period, under which we were researching sustained or controlled release of chemotherapeutic drugs for the treatment of breast cancer utilizing
our PTM technology. Research under this grant was completed in early fiscal 2004, but we are continuing to independently develop this drug delivery technology for commercial use and expectations of future grant applications.

We had no grant revenue in fiscal 2006 and do not project grant revenue in fiscal 2007.

Royalty Income.Our royalty income primarily consists of royalties received from St. Jude Medical and Orthovita. Royalties from St. Jude Medical are earned on
Angio-Seal worldwide net sales. We anticipate sales of the Angio-Seal device will grow in fiscal 2007, with forecasted continued procedure growth and as St. Jude Medical continues to expand its sales and marketing efforts and launch new generations
of the product. Under our License Agreement with St. Jude Medical, there was a final contractual decrease in the royalty rate, to 6% from 9%, upon reaching four million cumulative units sold. This final rate reduction occurred in April 2004. Royalty
income from St. Jude increased $1.1 million, or 6%, in fiscal 2006 compared to fiscal 2005. We expect that royalty income from the Angio-Seal device will continue to be a significant source of revenue for the foreseeable future. As of June 30,
2006, approximately 7.6 million Angio-Seal units had been sold.

Under our March 2003 agreement with Orthovita to co-develop and commercialize the
Vitoss Foam products, we receive a royalty on Orthovitas end-user sales of all such Vitoss foam products. In addition, in August 2004 we acquired the proprietary rights of a third party, an inventor of the VITOSS technology, for $2.6 million
(the Assignment Agreement). Under the Assignment Agreement, the Company receives an additional royalty from Orthovita on the end-user sales of all Orthovita products containing the VITOSS technology up to a total royalty to be received of $4.0
million, with $3.0 million remaining at June 30, 2006.



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We received our first royalty under these agreements in the third quarter of fiscal 2004, when Orthovita launched its
initial bone grafting and spinal product lines, Vitoss scaffold foam STIRPS and CYLINDERS. Royalty income from Orthovita has increased since that time as Orthovita has launched three additional product lines, Vitoss scaffold foam FLOW, SHAPES and
PACK in June and October of 2004 and May of 2005, respectively. We believe the unique technology associated with the Vitoss Foam products and the growing spine market will result in the Orthovita component of our royalty income becoming more
significant over the next fiscal year and beyond. Total royalty income received from Orthovita in fiscal 2006 was $2.9 million.

Cost of Products Sold.Our gross margin percentage in fiscal 2006 was 45% compared to 56% in fiscal 2005. Cost of goods sold in fiscal 2006 and 2005 included an accelerated depreciation charge of $2.2 million and $440,000, respectively, related to our transition to
our new facility. Fiscal 2006 also includes moving costs of $305,000. Both the accelerated depreciation change and the moving expenses related to the transition to our new facility (see Item 2 above and Liquidity and Capital Resources below).
In addition, we incurred $179,000 in equity compensation expense recorded costs of products sold during fiscal 2006 (see the Consolidated Financial Statements and Note 1 and Liquidity and Capital Resources below). The effect of these
transition and equity compensation expenses on fiscal year 2006 and 2005 was a decrease to our gross margin percentage of approximately 8% and 1% respectively. Excluding the effect of these charges, we would have experienced a decrease in gross
margin during fiscal 2006 of approximately 4%. The decline in our gross margin was directly related to several factors, specifically, obsolescence charges for process and raw material changes on one specific collagen product, unfavorable
manufacturing variances related to production start-up of three new products within the endovascular product line as well as two new orthopaedic product line launches. In addition, there was an increase in personnel expenses in anticipation of the
endovascular product launches. We anticipate the gross margin on our biomaterials products will continue to improve with process improvements and continued increased sales volume. Occasionally offsetting efficiencies gained as products mature, are
the margins achieved on new product launches, which are often minimal related to start-up process inefficiencies and learning curves. We initiated two new product lines during fiscal 2006 in our orthopaedic product line. During the initial phases of
production of these product lines we incurred higher costs due to the learning curve associated with initiating these new products.

While we anticipate
continued improvement in the gross margin on some of our mature biomaterials product lines, these improvements will be offset by initial low margins of approximately 35% to 40% on the endovascular product line, associated with low volumes and
start-up inefficiencies, as we experienced during the fourth quarter of fiscal 2006. Our engineering teams are also working on process improvements and automation of production of the current endovascular products and we anticipate margins will come
in line with our overall product mix during late fiscal 2007 and into fiscal 2008. As a result of our expanding product mix for fiscal 2007, we believe our total gross margin, across all product lines, will be improved over fiscal 2006, although
with enhancements being made to our endovascular products there may be more obsolescence charges incurred during fiscal 2007.

Research and Development
Expense. Research and development expense consists of expenses incurred for the development of our proprietary technologies, such as the endovascular products, absorbable and nonabsorbable biomaterials products and technologies, and other
development programs. Included in fiscal 2006 research and development expenses are an acceleration of depreciation charge of $1.4 million and moving costs of $169,000, both of which were associated with the transition to the new facility (see
Item 2 above and Liquidity and Capital Resources below). In addition, we incurred $853,000 in equity compensation expense recorded as research and development expense during fiscal 2006 (see the Consolidated Financial Statements and Note 1 and
Liquidity and Capital Resources below).

Included in research and development expense for fiscal 2006 were the costs of our completed U.S.
clinical trial registry, the ASPIRE (Angioplasty in SVGs with Post Intervention Removal of Embolic Debris) Clinical Study, on the next generation TriActiv System, the TriActiv FX® System. The study commenced in March 2005 and completed enrollment in November
2005.



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In addition, in November 2005, we commenced a European Pilot Study to support a CE Mark application for a new version of
the TriActiv® Embolic Protection System for carotid
stenting procedures. The trial utilized a new version of the TriActiv® System product line, which incorporates Local Flush and eXtraction (LFX) technology designed for use in branched arteries, such as those of the carotid blood vessels, the TriActiv® ProGuard System. This device incorporates three features designed to
reduce the incidence of embolic stroke during carotid stenting procedures - a balloon protection guidewire, a flush catheter, and an automated extraction system to remove debris.

Clinical efforts in pursuit of FDA approval and continuing development of future generations of our endovascular products, as well as our continued development of proprietary biomaterials products and technologies,
require significant research and development expenditures. We anticipate research and development expense, including additional clinical trials, will increase as we pursue commercialization of future generations of the TriActiv System in the U.S.,
and explore opportunities for other indications related to the TriActiv System, as well as our other technologies, including the continued development of proprietary biomaterials technologies.

While we believe research and development expenditures will increase in dollars, we believe that they will decrease as a percentage of total revenue. Research and
development expense was 31% of total revenues for the fiscal year ended June 30, 2006, or 29% excluding the effect of accelerated depreciation and moving costs, which will not be incurred in fiscal 2007.

Selling, General and Administrative.Selling, general and administrative expenses include the costs of our finance, information technologies, human resource and
business development departments, as well as costs related to the sales and marketing of our products. We also recorded an acceleration of depreciation charge and moving expenses related to the transition to our new facility (see Item 2 above
and Liquidity and Capital Resources below) of $603,000 and $70,000, respectively, in our fiscal year ended June 30, 2006. In addition we incurred $1.3 million in equity compensation expense recorded as selling, general and administrative
expenses during fiscal 2006 (see our Consolidated Financial Statements and Note 1 and Liquidity and Capital Resources below).

The general and
administrative component has increased over the same period in fiscal 2005. This increase is a result of the overall growth of our business and the administrative requirements to support such growth, such as personnel expenses, including an increase
of $725,000 in equity compensation expense due to the adopton of SFAS No. 123(R), Share-Based Payment and expenses incurred related to compliance with new SEC and corporate governance regulations. Growth in the business has increased the
requirements for planning, tracking and administrating sales of the endovascular products direct to the market.

The sales and marketing component of
selling, general and administrative consists of expenses in the U.S. and in Europe related to the direct commercialization efforts for the endovascular products in both locations. We have a forty-two person endovascular sales and marketing team in
the U.S. and a five person sales and marketing team headquartered at our European subsidiary, Kensey Nash Europe GmbH. These teams are selling and marketing the product direct in the U.S. and German markets and, in Europe, the team supports our
distributor relationships in the rest of Europe and in Asia.

Our sales and marketing expenses have increased in fiscal 2006 over the same period in fiscal
2005. This increase related primarily to costs associated with building the new U.S. endovascular direct sales force as well as marketing campaigns for launching our new endovascular products, including the TriActiv FX® and the QuickCat devices. We anticipate sales and marketing expenses
will continue to increase in fiscal 2007 over fiscal 2006 as we expand our sales and marketing efforts of the endovascular product lines, both in the U.S. and in Europe. We are also continuing to expand our marketing efforts for our biomaterials
business.

Income Tax Expense.Our effective income tax rate was approximately 18.4% for fiscal year 2006, 28.5% for the fiscal year 2005 and 28.4%
for the fiscal year 2004. Our fiscal 2006 effective income tax rate includes tax benefits for research and development tax credits and non-taxable interest income (See Note 9 and our consolidated financial statements included in this Form 10-K). We
are forecasting an effective tax rate for fiscal 2007 of approximately 30%.



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Income Before Taxes.Income Before Taxes decreased $13.5 million from $18.1 million in fiscal 2005 to $4.6 million
in fiscal 2006. This large decrease in income related primarily to an increase in expenses, rather than a decrease in revenue. Total revenue only decreased $979,000 in fiscal 2006 from fiscal 2005. A significant portion of the decrease in income was
related to a $3.9 million increase in facility transition charges for the move to the new facility (see Item 2 above and Liquidity and Capital Resources) as well as a $1.6 million dollar increase in equity compensation due to the adoption of
SFAS 123(R) (see Note 1 to the Consolidated Financial Statements of the Company). In addition, excluding the increase in transition costs and equity compensation expense, there was a $3.6 million and $2.0 million increase in sales and marketing and
research and development expenses, respectively. Both of these increases are directly related to our endovascular product line. As stated above, the increase in sales and marketing expense related directly to building the new U.S. endovascular
direct sales force as well as marketing campaigns for launching our new endovascular products. Research and development expense increased primarily due to clinical efforts for and development of products within the endovascular product line. See
Results of Operations - Comparison of Fiscal Years 2006 and 2005 for more details.

Critical Accounting Policies

Our critical accounting policies are those that require application of managements most difficult, subjective or complex judgments, often as a result of
the need to make estimates about matters that are inherently uncertain and may change in future periods. It is not intended to be a comprehensive list of all of our significant accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application. There are also areas in which the selection of an available alternative policy would not
produce a materially different result. We have identified the following as our critical accounting policies: revenue recognition, accounting for stock-based compensation, allowance for doubtful accounts, inventory valuation and income taxes.

Revenue Recognition. We recognize revenue under the provisions of Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB 104), which superseded SAB No. 101. SAB 104s primary purpose was to rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, which was modified as a result of the issuance of Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables(EITF 00-21). The adoption of SAB 104 did not
have a material impact the Companys financial position or results of operations.

Sales Revenue. Sales revenue is recognized when the related product is shipped. Advance payments received for products or services are recorded as deferred revenue and are recognized when the product is shipped or services are
performed. All of our shipments are Free on Board (F.O.B.) shipping point. We reduce sales for estimated customer returns, discounts and other allowances, if applicable. The majority of our products are manufactured according to our customers
specifications and are subject to return only for failure to meet those specifications.

Research and Development Revenue. Revenue
under research and development contracts is recognized as the related expenses are incurred. All revenues recorded on this line item are related to government programs under which the U.S. government funds the research of high risk, enabling
technologies.

Royalty Revenue. Royalty revenue is recognized as the related product is sold. We recognize substantially all of our
royalty revenue at the end of each month, in accordance with our customer agreements. (see Note 1 to the Consolidated Financial Statements of the Company  Revenue Recognition).

Accounting for Stock-Based Compensation. Through the end of fiscal 2005, we accounted for stock-based compensation costs under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation(SFAS 148), which permitted (i) recognition of the fair value of stock-based awards as an expense, or (ii) continued application of the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). We accounted for our stock-based



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employee and director compensation plans under the recognition and measurement principles of APB 25. Under this intrinsic value method, compensation cost
represented the excess, if any, of the quoted market price of our common stock at the grant date over the amount the grantee must pay for the stock. Our policy is to grant stock options at the fair market value at the date of grant. Therefore, we
had not recognized any compensation expense for options granted to employees through June 30, 2005. Options granted to non-employees, as defined under SFAS 123, (as amended by SFAS 148) and EITF 96-18, Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services, were and continue to be recorded as compensation expense over the contractual service period using the fair market value method in accordance
with SFAS 123, which requires using the Black-Scholes option pricing model to determine the fair market value of the option at the original grant date. We granted options to non-employee, outside consultants during fiscal 2003 and 2004 (see Note 10
to the Consolidated Financial Statements of the Company). We account for non-vested shares to non-employee members of the Board of Directors and executive officers using the intrinsic value method in accordance with APB 25. We granted non-vested
shares to members of the Board of Directors and executive officers during fiscal 2004, 2005, and 2006 (see Note 16 to the Consolidated Financial Statements of the Company).

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)) which amended SFAS 123 and APB 25 and requires that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other
equity instruments or by incurring liabilities (1) in amounts based (even in part) on the price of the entitys shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entitys
shares or other equity instruments. This statement was effective for the Company as of the first interim period beginning after June 15, 2005, which was the quarter ended September 30, 2005. Effective July 1, 2005, the Company adopted
the provisions of SFAS 123(R) using the modified prospective approach and now accounts for share-based compensation applying the fair value method for expensing stock options and nonvested stock awards.

Stock Options.Stock options granted to employee and non-employee members of our Board of Directors are recorded as compensation
expense using the fair value method under SFAS 123(R). Fair value is calculated under the Black-Scholes option-pricing model. See Note 15 to the financial statements included in this Form 10-K for additional information.

Nonvested Shares. All nonvested shares granted to executive officers, management and non-employee members of our Board of Directors are recorded as
compensation expense using the fair value method under SFAS 123(R). Fair value is based upon the closing price of our common stock on the date of grant. See Note 16 to the financial statements included in this Form 10-K for a discussion of nonvested
stock awards granted to the non-employee members of our board of directors, our executive officers and certain of our other management. We have implemented a practice of granting nonvested shares to the members of our board of directors as well as
to our executive officers, as permitted under our stock option plans, as a component of board and executive officer compensation arrangements. In response to growing industry concerns related to the effect of expensing stock options, we diversified
our compensation arrangements to reduce the number of total equity shares granted to board members, executive officers and management team. The compensation arrangements now include the granting of nonvested shares as well as, for executive officers
and other management team members, a greater component of incentive cash compensation, with a lesser emphasis on options. The first nonvested shares were granted to our board of directors in December 2003, the first nonvested shares to executive
officers were granted in July of 2004 and the first nonvested shares to other management were granted in September 2005.

Non-Employee
Stock Options.Options granted to non-employee outside consultants, as defined under SFAS 123 (R), are recorded as compensation expense using the fair value method under SFAS 123(R). Fair value is calculated under the Black-Scholes
option-pricing model. See Note 10 to the financial statements included in this Form 10-K for a discussion of options granted to non-employee outside consultants in July 2003 and October 2002.



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Derivative Instruments and Hedging Activities  On May 25, 2006, we entered into a $35 million aggregate
ten-year fixed interest rate swap agreement (the swap), with Citibank, N.A., to manage the market risk from changes in interest rates under a Secured Commercial Mortgage (See Note 7). This Swap is a derivative instrument classified as a cash flow
hedge in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, No. 138 and No. 149 and is recorded in the Consolidated Balance Sheet at fair value. We
recognize all derivatives as either assets or liabilities in the balance sheet, depending on our rights or obligations under the applicable derivative contract, and measure those instruments at fair value. The change in a derivatives fair
value is recorded each period in current earnings or accumulated other comprehensive income (OCI), depending on if the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. The effective portion of the
interest rate swap gains or losses, due to changes in fair value, are recorded as a component of OCI and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. We utilize the
Hypothetical Derivative Method in determining hedge effectiveness each period. Transactions that would cause ineffectiveness and result in reclassifying the ineffective portion into current earnings would include the prepayment of the Secured
Commercial Mortgage and/or our election of the Prime interest rate option. Interest expense is recorded in earnings at the fixed rate set forth in the swap agreement.

Allowance for Doubtful Accounts. Our allowance for doubtful accounts is determined using a combination of factors to ensure that our trade receivables balances are not overstated due to uncollectibility. We
maintain a bad debt reserve for all customers based on a variety of factors, including the length of time receivables are past due, trends in overall weighted average risk rating of the total portfolio, significant one-time events and historical
experience with each customer. Also, we record additional reserves for individual accounts when we become aware of a customers inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the
customers operating results or financial position. If circumstances related to specific customers change, our estimates of the recoverability of receivables would be adjusted. We believe our allowance at June 30, 2006 was sufficient to
cover all existing accounts receivable.

Inventory Valuation. Our inventory is stated at the lower of cost or market. Adjustments to inventory are
made at the individual part level for estimated excess, obsolescence or impaired balances, to reflect inventory at the lower of cost or market. Factors influencing these adjustments include changes in demand, rapid technological changes, product
life cycle and development plans, component cost trends, product pricing, physical deterioration and quality concerns. Revisions to these adjustments would be required if any of these factors differ from our estimates.

Income Taxes. Our estimated effective tax rate includes the impact of certain estimated research and development tax credits and non-taxable interest income.
Material changes in, or differences from, our estimates could impact our estimate of our effective tax rate.

Results of Operations

Comparison of Fiscal Years 2006 and 2005

The following table
summarizes our operating results for the fiscal year ended June 30, 2006 compared to the fiscal year ended June 30, 2005:



|                                          |  |                            |      |                   |                                  |   |                            |   |                   |  |     |   |  |     |   
|----------------------------------------- |  | -------------------------- | ---- | ----------------- | -------------------------------- | - | -------------------------- | - | ----------------- |  | --- | - |  | --- | --
|                                          |  | Fiscal Year Ended          |      |                   | PercentChange fromFY 05 to FY 06 |  
|                                          |  | June 30, 2006 ($ millions) |      | % ofTotalRevenues |                                  |   | June 30, 2005 ($ millions) |   | % ofTotalRevenues |  |    
|REVENUES:                                 |  |                            |      |                   |                                  |   |                            |   |                   |  |     |   |  |     |   
|Total Revenues                            |  | $                          | 60.4 |                   | 100                              | % |                            | $ | 61.4              |  | 100 | % |  | (2  | )%
|Net Sales                                 |  | $                          | 37.9 |                   | 63                               | % |                            | $ | 40.4              |  | 66  | % |  | (6  | )%
|Royalty Income                            |  | $                          | 22.5 |                   | 37                               | % |                            | $ | 20.8              |  | 34  | % |  | 9   | % 
|EXPENSES:                                 |  |                            |      |                   |                                  |   |                            |   |                   |  |     |   |  |     |   
|Cost of Products Sold                     |  | $                          | 20.6 |                   | 34                               | % |                            | $ | 17.7              |  | 29  | % |  | 17  | % 
|Research & Development Expense            |  | $                          | 19.0 |                   | 31                               | % |                            | $ | 15.1              |  | 25  | % |  | 26  | % 
|Selling, General & Administrative Expense |  | $                          | 17.3 |                   | 29                               | % |                            | $ | 11.8              |  | 19  | % |  | 46  | % 
|INTEREST INCOME:                          |  | $                          | 1.0  |                   | 2                                | % |                            | $ | 1.3               |  | 2   | % |  | (17 | )%
|NET INCOME:                               |  | $                          | 3.7  |                   |                                  |   |                            | $ | 12.9              |  |     |   |  | (71 | )%



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Total Revenue and Net Sales.Total revenues decreased 2% to $60.4 million in fiscal 2006 from $61.4 million
in fiscal 2005.

Net sales of products decreased 6% to $37.9 million for fiscal 2006 from $40.4 million for fiscal 2005. Sales of our
biomaterials products decreased 8% in fiscal 2006 over fiscal 2005. The decrease in biomaterials sales was primarily attributable to a 55% decrease in product sales to Orthovita, which were $3.2 million in fiscal 2006 compared to $7.2 million in
fiscal 2005. As anticipated and previously reported, this decrease in sales to Orthovita is related to Orthovita Vitoss Foam product launches in the prior year and in fiscal 2004which continued to flow through the distribution channels
throughout fiscal 2006. Although our sales to Orthovita decreased year over year, Orthovitas end user sales of the Vitoss Foam products are strong as they increased 45% in fiscal 2006 over fiscal 2005. We are also starting to see a
return to growth in shipments to Orthovita as evidenced by combined third and fourth quarter fiscal 2006 sales to Othovita of $2.2 million compared to combined first and second quarter sales for the same year of $1.1 million. Cardiology product
sales to St. Jude Medical, our largest cardiology customer, were $14.7 million compared to $16.3 million in the prior year, due to an $895,000 decrease in polymer anchor sales, a $171,000 decrease in collagen plug sales and a $460,000 decrease in
development revenue related to research and development performed for two new collagen plug product enhancements in the prior year. Offsetting these decreases was a 7% increase, or 889,000, in orthopaedic sports medicine sales from fiscal 2005 to
fiscal 2006 mainly related to sales of sports medicine products to Arthrex, which increased 5%, or $632,000. Additionally, we had $2.3 million in spine product sales to new orthopaedic customers launching new product lines during fiscal 2006. In
addition, endovascular sales of approximately $1.2 million, increased 128% from the prior year. This increase was due to sales in the U.S. of $895,000 and sales in Europe of $284,000. Endovascular sales represented 3% of our total sales in fiscal
2006.

Research and Development Revenue.There were no research and development revenues in fiscal 2006 compared to $253,000 of revenues in fiscal
2005. The research and development revenues for fiscal 2005 consisted of amounts generated under our NIST synthetic vascular graft development grant, which concluded in September 2004.

Royalty Income.Royalty income increased 9% to $22.5 million for fiscal 2006 from $20.8 million for fiscal 2005. Angio-Seal royalty income increased 6% to $19.6 million from $18.5 million in fiscal
year 2006 and 2005, respectively. Royalty units increased 8%, as approximately 1.7 million Angio-Seal units were sold to end-users during fiscal 2006 compared to approximately 1.6 million units sold during fiscal 2005. We believe that the
increase in units is due to St. Jude Medicals continued sales and marketing efforts, including the launch of a new version of the Angio-Seal in March 2006, which are resulting in greater market share and overall increased adoption of vascular
closure devices in the market. St. Jude Medicals market share is estimated at 65% in fiscal 2006 and worldwide market penetration of vascular closure devices is estimated at approximately 49% in fiscal 2006. Additionally, total royalty income
from Orthovita increased 29% to $2.9 million for fiscal 2006 compared to $2.3 million for the fiscal year 2005. These royalties are received under the March 2003 manufacturing, development and supply agreement between our two companies and the
acquisition of the separate VITOSS proprietary rights from a third party inventor of the VITOSS technology, both of which are discussed above. Also see Note 1 to the Consolidated Financial Statements of the Company  Patents and
Proprietary Rights.



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Cost of Products Sold.



|                      |  |                          |            |   |                          |   |            |                                       |  |    |  
|--------------------- |  | ------------------------ | ---------- | - | ------------------------ | - | ---------- | ------------------------------------- |  | -- | -
|                      |  | Fiscal YearEnded 6/30/06 |            |   | Fiscal YearEnded 6/30/05 |   |            | % Change PriorPeriod to CurrentPeriod | 
|Cost of products sold |  | $                        | 20,645,091 |   |                          | $ | 17,654,147 |                                       |  | 17 | %
|Gross Margin          |  |                          | 45         | % |                          |   | 56         | %                                     |  |    |  

Cost of products sold increased 17% to $20.6 million in fiscal 2006 from $17.7 million in fiscal 2005 while
gross margin decreased from 56% in fiscal 2005 to 45% in fiscal 2006. Related to the transition to our new facility, transition costs as a component of cost of goods sold were $2.5 million compared to $440,000 in the prior fiscal year. Also
increasing costs of good sold was equity compensation expense of $179,000 recorded in fiscal 2006, related to the adoption of SFAS 123(R). As mentioned above, gross margin excluding transition and equity compensation expenses was 53% for fiscal 2006
compared to 57% for fiscal 2005, an unfavorable decline of 7% year over year. This trend is partially attributable to decreased volume but also related to late year obsolescence charges for process and raw material changes in one specific collagen
product, unfavorable manufacturing variances related to production start-up of three new products within the endovascular product line as well as two new orthopaedic product line launches and a mid-year increase in personnel expenses in anticipation
of the endovascular product launches. We believe the endovascular product margins, which are partially offsetting the higher biomaterials product margins, will continue to do so until the manufacturing process for the endovascular product line
matures and the start up inefficiencies and learning curve level out.

Research and Development Expenses.



|                       |  |                          |            |   |                          |   |            |                                       |  |    |  
|---------------------- |  | ------------------------ | ---------- | - | ------------------------ | - | ---------- | ------------------------------------- |  | -- | -
|                       |  | Fiscal YearEnded 6/30/06 |            |   | Fiscal YearEnded 6/30/05 |   |            | % Change PriorPeriod to CurrentPeriod | 
|Research & Development |  | $                        | 18,990,302 |   |                          | $ | 15,130,679 |                                       |  | 26 | %
|% of Revenue           |  |                          | 31         | % |                          |   | 25         | %                                     |  |    |  

Research and development expense increased 26% to $19.0 million in fiscal 2006 compared to $15.1 million in fiscal
2005. Research and development expense also increased as a percentage of total revenue to 31% from 25% for the fiscal years ended June 30, 2006 and June 30, 2005, respectively. Included in the research and development expenses was an
increase of $1.2 million related to transition costs for the move to the new facility (see Item 2 above and Liquidity and Capital Resources) as well as a $611,000 increase in equity compensation expense due to the adoption of SFAS 123(R) (see
Note 1 to the Consolidated Financial Statements of the Company). Excluding the effect of the transition and equity compensation expense increases, research and development increased 14% from fiscal 2005 and was 27% of total revenue. The increase in
expenses was primarily due to endovascular spending which increased $2.3 million, or 25%, to $11.3 million in fiscal year 2006 compared to $9.0 million in fiscal 2005. Clinical trial expenses increased 165% to $1.5 million in fiscal 2006 from
$559,000 in fiscal 2005 due to increased clinical activity related to the ASPIRE and the European Carotid Pilot studies. Also increasing were personnel expenses ($837,000) including a $409,000 increase in equity compensation related to the adoption
of SFAS 123(R), and a $175,000 increase in operational and design costs, all of which support the product line expansion for the endovascular platform. Of the $1.2 million in transition costs relating to research and development, $553,000 was
allocated to endovascular research and development.

Biomaterials and other proprietary technologies spending increased $1.6 million to $7.6 million in
fiscal 2006 from $6.1 million in fiscal 2005. Biomaterials spending increased due to increased personnel costs of $927,000, including a $202,000 increase in equity compensation related to the adoption of SFAS 123(R), office and facility costs of
$775,000 including a $693,000 increase in transition costs, and outside services of $36,000. Offsetting these increases was a decrease in consulting services of $174,000. We expect research and development expenses to increase as we investigate and
develop new products, conduct clinical trials and seek regulatory approvals for our proprietary products.



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Selling, General and Administrative Expense.



|                                          |  |                          |            |   |                          |   |            |                                       |  |    |  
|----------------------------------------- |  | ------------------------ | ---------- | - | ------------------------ | - | ---------- | ------------------------------------- |  | -- | -
|                                          |  | Fiscal YearEnded 6/30/06 |            |   | Fiscal YearEnded 6/30/05 |   |            | % Change PriorPeriod to CurrentPeriod | 
|Selling, general & administrative expense |  | $                        | 17,259,160 |   |                          | $ | 11,794,730 |                                       |  | 46 | %
|% of Revenue                              |  |                          | 29         | % |                          |   | 19         | %                                     |  |    |  

Selling, General and Administrative Expense.Selling, general and administrative expense increased 46% to
$17.3 million in fiscal 2006 from $11.8 million in fiscal 2005. This increase includes $804,000 in equity compensation expense related to the adoption of SFAS 123(R) (see Note 1 to the Consolidated Financial Statements of the Company) as well as
$603,000 in transition costs (see Item 2 above and Liquidity and Capital Resource below).

Sales and marketing expenses increased $3.9
million to $9.4 million in fiscal 2006 from $5.5 million in fiscal 2005. This increase was the result of our U.S. commercial launch efforts for the endovascular product line, which increased $4.6 million in fiscal 2006 from fiscal 2005. Personnel
expenses for the U.S. sales and marketing department increased $2.7 million relating to the building of the endovascular direct sales force and including equity compensation expense of $107,000 related to the adoption of SFAS 123(R). As of
June 30, 2006, we had a total of 41 U.S. sales and marketing personnel, including 26 sales representatives and clinical support staff, compared to a total of 24 sales and marketing employees at June 30, 2005 including 12 sales
representatives and clinical support staff. Travel costs increased $502,000 due to recruiting and training conducted for the new sales team as well as travel to current and prospective customers and hospitals. In addition, there was an increase of
$947,000 in marketing expenses and professional fees related to conventions, advertising expense and a Scientific Advisory Board meeting related to strategic marketing campaigns for the endovascular devices in the U.S. Finally there was an increase
in office and facility costs due to an increase in sales and marketing personnel in-house ($432,000) which included $163,000 in facility transition costs.

Offsetting these increased U.S. sales and marketing expenses were our endovascular European sales and marketing costs, which decreased 29%, or $711,000. This decrease was due to a decrease in personnel and related decrease in travel
expenses of $350,000, a decrease in clinical trial expenses of $380,000 due to the conclusion of the FIRST Study in December 2004 offset by an increase in marketing efforts of $72,000. The FIRST Study was a study to examine cost effectiveness of the
TriActiv System in saphenous vein graft patients to support reimbursement of the product in Europe. Also affecting expenses was a 4% decrease in the foreign currency exchange rate.

General and administrative expenses increased $1.6 million to $7.9 million in fiscal 2006 from $6.3 million in fiscal 2005. This was attributable to increases of $874,000 in personnel costs, including $725,000 in
equity compensation expense related to the adoption of SFAS 123(R), $650,000 in facility costs, including rent, electric, and depreciation and $440,000 in transition costs, $45,000 in professional services, and $13,000 in public company expenses,
including board compensation and SEC filing fees.Excluding transition costs and equity compensation costs, general and administrative expenses only increased 8%, or $435,000 in fiscal 2006 over fiscal 2005.

Net Interest Income.Interest expense increased $67,000 to $71,000 in fiscal 2006 from $5,000 in fiscal 2005. This was due to the Secured Commercial Mortgage
entered into during fiscal 2006 (see Note 7 to the Consolidated Financial Statements of the Company). Interest income decreased by 17% to $1.0 million in fiscal 2006 from $1.3 million in fiscal 2005. This was due to lower cash and investment
balances in fiscal 2006 then fiscal 2005 offset by rising interest rates. Our average cash and investment balance for fiscal 2006 was $31.3 million compared to $50.3 million in fiscal 2005. The approximate weighted average interest rate on our
portfolio was 3.34% compared to 2.49% in the fiscal years 2006 and 2005, respectively.

Other Non-Operating Income (Expense).Other non-operating
income was $82,000 for fiscal 2006 compared to other non-operating expense of $45,000 for fiscal 2005. This increase related primarily to $81,000 of revenue recognized during fiscal 2006 related to a $500,000 opportunity grant we received from the
Commonwealth of



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Pennsylvania Governors Action Team (see Liquidity and Capital Resources below, and Note 20 to the Consolidated Financial Statements of the
Company) compared to $54,000 recognized in fiscal 2005. The remainder was due to net loss or gain on the sale of fixed assets.

Comparison of Fiscal
Years 2005 and 2004

The following table summarizes our operating results for the fiscal year ended June 30, 2005 compared to the fiscal year ended
June 30, 2004:



|                                          |  |                            |      |                   |                                  |                           |   |                   |  |     |   |  |     |   
|----------------------------------------- |  | -------------------------- | ---- | ----------------- | -------------------------------- | ------------------------- | - | ----------------- |  | --- | - |  | --- | --
|                                          |  | Fiscal Year Ended          |      |                   | PercentChange fromFY 04 to FY 05 |                          
|                                          |  | June 30, 2005 ($ millions) |      | % ofTotalRevenues |                                  | June 30,2004 ($ millions) |   | % ofTotalRevenues |  |    
|REVENUES:                                 |  |                            |      |                   |                                  |                           |   |                   |  |     |   |  |     |   
|Total Revenues                            |  | $                          | 61.4 |                   | 100%                             |                           | $ | 58.2              |  | 100 | % |  | 5   | % 
|Net Sales                                 |  | $                          | 40.4 |                   | 66%                              |                           | $ | 36.4              |  | 62  | % |  | 11  | % 
|Research & Development Revenue            |  | $                          | 0.3  |                   | 0%                               |                           | $ | 0.7               |  | 1   | % |  | (63 | )%
|Royalty Income                            |  | $                          | 20.8 |                   | 34%                              |                           | $ | 21.2              |  | 36  | % |  | (2  | )%
|EXPENSES:                                 |  |                            |      |                   |                                  |                           |   |                   |  |     |   |  |     |   
|Cost of Products Sold                     |  | $                          | 17.7 |                   | 29%                              |                           | $ | 16.1              |  | 28  | % |  | 8   | % 
|Research & Development Expense            |  | $                          | 15.1 |                   | 25%                              |                           | $ | 16.4              |  | 28  | % |  | (8  | )%
|Selling, General & Administrative Expense |  | $                          | 11.8 |                   | 19%                              |                           | $ | 8.7               |  | 15  | % |  | 36  | % 
|INTEREST INCOME:                          |  | $                          | 1.3  |                   | 2%                               |                           | $ | 1.1               |  | 2   | % |  | 11  | % 
|NET INCOME:                               |  | $                          | 12.9 |                   |                                  |                           | $ | 13.0              |  |     |   |  |    |   

Total Revenue and Net Sales.Total revenues increased 5% to $61.4 million in fiscal 2005 from $58.2
million in fiscal 2004.

Net sales of products increased 11% to $40.4 million for fiscal 2005 from $36.4 million for fiscal 2004. The increase in
net sales was primarily attributable to sales of our biomaterials products, specifically our cardiology products, which grew 30% in fiscal 2005 over fiscal 2004. Cardiology product sales to St. Jude Medical, our largest cardiology customer, were
$16.3 million compared to $12.8 million in the prior year, due to increased collagen plug revenues, including $540,000 related to the development of two new collagen plug product enhancements. Sales of anchors to St. Jude Medical decreased $282,000
from the prior year. As previously discussed, orthopaedic sales decreased 4%, or $974,000, from fiscal 2004 mainly related to sales of sports medicine products to Arthrex, which decreased 27%, or $4.7 million. This was almost entirely offset by
product sales to Orthovita that increased $4.2 million, or 142%, to $7.2 million from $3.0 million in fiscal 2004. In addition, TriActiv sales of approximately $515,000, increased 137% from the prior year. This increase was due to sales in the U.S.
of $213,000, following the Companys April launch of the TriActiv System and first quarter of direct commercial sales in the U.S., and sales in Europe of $303,000, which included sales of the new TriActiv FX, which launched in late March 2005.
The TriActiv sales represented just over 1% of our total sales in fiscal 2005.

Research and Development Revenue.Research and development revenues
decreased 63% to $253,000 for fiscal 2005 from $688,000 for fiscal 2004. Fiscal 2005 revenues were generated under the NIST synthetic vascular graft development grant, which concluded in September 2004. In the prior fiscal year, revenues were
generated under the NIST synthetic vascular graft development grant and the NIH breast cancer drug delivery grant, which concluded in September 2003 and October 2003, respectively. The decrease from the prior fiscal year reflects the conclusion of
the NIST vascular graft development grant in October 2004, which provided $634,000 of revenue in fiscal 2004 and only $253,000 in fiscal 2005.



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Royalty Income.Royalty income decreased 2% to $20.8 million for fiscal 2005 from $21.2 million for
fiscal 2004. Angio-Seal royalty income decreased 12% to $18.5 million from $20.9 million in fiscal year 2005 and 2004, respectively. The decrease in Angio-Seal royalty income was primarily due to a 33% decline, from 9% to 6%, in the contracted
royalty rate which occurred in April 2004. The original rate of 12% was contractually reduced from 12% to 9%, in accordance with our License Agreements, during the fiscal quarter ended December 31, 2000 when a cumulative one million Angio-Seal
units had been sold. One final contracted decrease in the royalty rate, to 6%, occurred upon reaching four million cumulative units sold in April 2004 and was the effective royalty rate at June 30, 2005. The decrease in royalty rate was
partially offset by a greater number of units sold. Royalty units increased 19%, as approximately 1.6 million Angio-Seal units were sold to end-users during fiscal 2005 compared to approximately 1.3 million units sold during fiscal 2004.
We believe that the increase in units is due to St. Jude Medicals continued sales and marketing efforts, which are resulting in greater market share and overall increased adoption of vascular closure devices in the market. St. Jude
Medicals market share is estimated at 65% in fiscal 2005 up from 60% in fiscal 2004 and worldwide market penetration of vascular closure devices is estimated at approximately 47% in fiscal 2005 up from approximately 40% in fiscal 2005 and
2004, respectively. Partially offsetting the Angio-Seal royalty income decrease were royalties from Orthovita on the Vitoss and Vitoss FOAM product lines. Total royalty income from Orthovita was approximately $2.3 million for fiscal 2005 compared to
$288,000 for the fiscal year 2004. These royalties are received under the March 2003 manufacturing, development and supply agreement between our two companies and the acquisition of the separate VITOSS proprietary rights from a third party inventor
of the VITOSS technology, both of which are discussed above. Also see Note 1 to the Condensed Consolidated Financial Statements  Patents and Proprietary Rights.

Cost of Products Sold.Cost of products sold increased 10% to $17.7 million in fiscal 2005 from $16.1 million in fiscal 2004 while gross margin was 56% for both periods. Due to our plans to transition
to a new facility, an acceleration of depreciation charge (described above) was recorded for $440,000 as a component of cost of goods sold. Offsetting this charge in cost of goods sold were higher margins on our biomaterials products attributable to
higher volumes of cardiology product sales, which resulted in manufacturing efficiencies, increased volume in and additional experience on our spine product manufacturing processes, and continued allocation of overhead across greater sales volumes,
resulting in a decrease in per unit costs. The higher margins on biomaterials products were slightly offset by lower margins on the TriActiv device related to low volume and the early stage of the manufacturing process. We expect that the TriActiv
System margins will continue to be lower than our biomaterials product margins until our manufacturing process matures and volumes increase.

Research
and Development Expense.Research and development expense decreased 8% to $15.1 million in fiscal 2005 compared to $16.4 million in fiscal 2004. Research and development expense also decreased as a percentage of total revenue to 25%
from 28% for the fiscal years ended June 30, 2005 and June 30, 2004, respectively. The expense reductions were primarily due to the TriActiv System on which spending decreased $1.2 million, or 12%, to $8.9 million in fiscal year 2005
compared to $10.1 million in fiscal 2004. Clinical trial expenses of $557,000 were $2.4 million less in fiscal 2005 than in fiscal 2004, due to the conclusion of the PRIDE clinical trial in March 2004. Clinical trial expenses in fiscal 2005 related
to the TriActiv FX ASPIRE study. This decrease was offset by increases in personnel costs, including travel expenses, restricted share and incentive compensation expense ($894,000), facility and office costs, including the acceleration of
depreciation charge ($350,000), legal and consulting expenses ($156,000) and operational and design costs ($725,000) associated with new products, specifically the TriActiv ProGuard System and the ThromCat device.

Biomaterials and other proprietary technologies spending decreased $72,000 to $6.2 million in fiscal 2005 from $6.3 million in fiscal 2004. The primary reason for the
decrease were the efforts of several research and development personnel throughout fiscal 2005 on work performed for and reimbursed by St. Jude Medical, resulting in the salaries and personnel costs of such employees being recorded as a component of
cost of products sold as the related revenue was recorded as a component of sales. This work included the development of three new product enhancements to the Angio-Seal collagen plug. The total of all applicable personnel costs related to this
effort was $346,000 and was recorded as cost of products sold. In addition, depreciation expense, excluding the acceleration of depreciation related to the facility transition, decreased $99,000 related to the conclusion of the NIST grant.
Depreciation on assets purchased for our NIST grant were fully depreciated as of the conclusion of the grant in October 2004, thereby reducing our biomaterials depreciation expense in fiscal 2005 as compared to fiscal 2004. Offsetting these
decreases, were legal fees which were higher related to a greater number of patent



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filings and increased patent maintenance fees of $112,000 and additional operational and design development costs of $278,000 related to development of new
products and processes for our current and prospective customers. We expect research and development expenses to increase as we investigate and develop new products, conduct clinical trials and seek regulatory approvals for our proprietary products.

Selling, General and Administrative Expense.Selling, general and administrative expense increased 36% to $11.8 million in fiscal 2005 from $8.7
million in fiscal 2004.

General and administrative expenses increased $1.8 million to $6.3 million in fiscal 2005 from $4.5 million in fiscal 2004. This
was attributable to increases of $372,000 in personnel costs, including restricted stock expense, $216,000 in facility costs, including rent, electric, but primarily depreciation which increased $170,000 (including a $64,000 acceleration of
depreciation charge  described above), $415,000 in professional services, $132,000 in public company expenses, including board compensation and SEC filing fees and $170,000 in bad debt expense. In addition, general and administrative expense
for fiscal 2005 includes $477,000 related to the amortization of intellectual proprietary rights acquired in August 2004 (see Note 1Patents and Proprietary Rights).

Personnel expense has increased primarily due to the issuance of restricted shares and the related expense which was $581,000 in fiscal 2005 compared to $258,000 in fiscal 2004. Professional service fees, which
include audit and tax fees and Sarbanes-Oxley consulting fees increased primarily as a result of the Sarbanes-Oxley Act of 2002, for which the Company expensed $412,000 in fees related to compliance for the fiscal year ended 2005. Bad debt expense
increased due to a prior year collection of a previously reserved amount of $116,000. In the current period bad debt expense was $54,000, resulting in a $170,000 cumulative increase from the prior year comparable period.

Sales and marketing expenses increased $1.3 million to $5.5 million in fiscal 2005 from $4.2 million in fiscal 2004. This increase was primarily the result of our U.S.
commercial launch efforts for the TriActiv System, which increased $1.4 million in fiscal 2005 from fiscal 2004. Personnel expenses for the U.S. sales and marketing department increased $957,000 relating to the expenses of the Endovascular direct
sales force. As of June 30, 2005, we had a total of 24 sales and marketing personnel, including 12 sales representatives, compared to a total of three sales and marketing employees at June 30, 2004. Travel costs increased $241,000 due to
recruiting and training conducted for the new sales team as well as post-launch travel to prospective customers/hospitals. In addition, there was an increase of $91,000 in marketing expenses related to pre-launch and post-launch activities such as
product training for the new sales team and the creation of marketing materials.

The TriActiv System European sales and marketing costs decreased 4%, or
$91,000. This was due to the conclusion of the FIRST study, a study to examine cost effectiveness of the TriActiv System in saphenous vein graft patients, to support reimbursement of the product in Europe. This study concluded in December 2004. The
FIRST study results showed that the TriActiv System substantially reduced 30-day MACE compared to a historical control of patients treated with embolic protection. The reductions in complication rates will be used to generate a cost effectiveness
analysis of the TriActiv System which will be important for reimbursement in European countries, expected to be applied in fiscal 2006. FIRST study expenses were $657,000 in fiscal 2004 compared to $359,000 in fiscal 2005, a decrease of $298,000.
This was offset by increases in personnel, marketing and convention expenses of $62,000, $67,000 and $79,000, respectively. This was in part due to a 7% increase in the foreign currency exchange rate as well as the increased marketing efforts
related to the launch of the new TriActiv FX System.

Net Interest Income.Interest expense decreased $61,000, or 93%, to $5,000 in fiscal 2005 from
$66,000 in fiscal 2004. This was due to a lower principal balance on our debt balance as we continued to make our required quarterly payments. Interest income increased by 11% to $1.3 million in fiscal 2005 from $1.1 million in fiscal 2004. Although
our cash and investment balances decreased, this was more than offset by higher interest rates.

Other Non-Operating Income (Expense).Other
non-operating income was $45,000 for fiscal 2005 compared to other non-operating expense of 16,000 for fiscal 2004. This increase related primarily to $54,000 of revenue recognized from a $500,000 opportunity grant we received from the Commonwealth
of Pennsylvania Governors Action Team (see Liquidity and Capital Resources Section and Note 20). The remainder was due to net loss or gain on the sale of fixed assets.



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Liquidity and Capital Resources

Our cash, cash equivalents and investments were $27.1 million at June 30, 2006, a decrease of $17.8 million from our balance of $44.9 million at the end of our prior fiscal year, June 30, 2005. In addition,
our working capital was $44.3 million at June 30, 2006, a decrease of $13.8 million from our working capital of $58.1 million at June 30, 2005.

Operating Activities

Net cash provided by our operating activities was $16.9 million and $12.3 million in the fiscal years ended
June 30, 2006 and 2005, respectively. In the fiscal year ended June 30, 2006, we had net income of $3.7 million, a tax benefit from the exercise of stock options of $1.0 million, non-cash employee stock-based compensation of $2.4
million and non-cash depreciation and amortization of $9.6 million. There was a use of cash of $182,000 for an excess tax benefit from share-based payment arrangements and a $207,000 use of cash to pay for the executive officers tax liability
related to nonvested shares issued. Cash provided as a result of changes in asset and liability balances was $572,000. The increase in cash related to the change in assets and liabilities was primarily due to a decrease in prepaid expenses ($2.1
million) and a decrease in accounts receivable ($1.1 million). This was partially offset by an increase in inventory ($1.4 million) and an increase in deferred tax asset ($633,000) and a decrease in accounts payable and accrued expenses ($630,000).
The decrease in prepaids and other assets primarily related to a decrease in deposits made on equipment ordered for the new facility (see below) in the prior year. The equipment was placed into service during fiscal 2006. The decrease in accounts
receivable was due to more timely payments by key customers throughout fiscal 2006. The increase in inventory related to an increase in the build up of endovascular product component parts inventory in preparation for anticipated market launches as
well as a stocking of components for one of our primary biomaterial products. The decrease in accounts payable and accrued expenses primarily related to fiscal 2006 payments for services related to fiscal 2005 Sarbanes-Oxley requirements and
payments of clinical trial fees in Europe for the FIRST study which was completed in fiscal 2005.

Opportunity Grant

In November 2004, the Company was awarded a $500,000 opportunity grant from the Department of Community and Economic Development of
the Commonwealth of Pennsylvania (DCED). This grant was awarded to the Company in recognition of the potential job-creating economic development opportunities created by the Companys construction of its new facility within the state of
Pennsylvania. The grant is conditioned upon meeting the following three criteria: (1) the Company will create 238 full-time jobs within 5 years, beginning April 1, 2003, the date of the Companys request for the grant, (2) the
Company will invest at least $54,250,000 in total project costs, including, but not limited to, personnel, land, building construction and machinery and equipment within three years, beginning July 19, 2004, the date of the Companys
facility groundbreaking and (3) the Company will operate at its new facility for a minimum of 5 years. The Company received the cash payment of $500,000 in its third fiscal quarter 2005. Revenue will be recognized as earned over the longest
period contained within the grant commitment terms (five years from the date of occupancy of the Companys new facility). This date of satisfaction of the last grant commitment is expected to be in December 2010. As of June 30, 2006
approximately $135,135 of revenue was recognized to date related to this grant as a component of Other Income. During fiscal 2006, $81,081 of revenue was recognized.

Investing Activities

Cash used in investing activities was $26.9 million for the year ended June 30,
2006. This was the result of purchase and redemption activity within our investment portfolio and capital spending related to the construction of our new facility (see below) and ongoing expansion of our manufacturing capabilities. In addition, we
spent $8.1 million for the acquisition of the intellectual property and certain assets of IntraLuminal Therapeutics, Inc., of which $1.0 million has been escrowed (see Note 3 to the Consolidated Financial Statements of the Company) and $25,000 for
the acquisition of patents and proprietary rights complementary to our biomaterials platform.

During the period, investments of $24.5 million matured,
were sold or were called. We subsequently purchased new investments with these proceeds for total investment purchases of $6.5 million, providing net cash through investment activity of $18.0 million. See Note 1 to the Consolidated Financial
Statements of the Company for a description of our available-for sale securities.



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We had a $30.0 million capital spending plan for fiscal 2006, of which up to $20 million was intended for our new
facility (see discussion below) by the end of our fiscal 2006, and the remainder authorized to continue to expand our research and development and manufacturing capabilities and upgrade our management information systems (MIS) technology
infrastructure. Of this total plan, we spent $36.7 million during the year ended June 30, 2006, of which $5.8 million related to ongoing operations of the Company. The remaining $30.9 million was used for the purchase of land and construction
of our new facility. We have a $15.7 million capital spending plan for fiscal 2007, of which approximately $7.0 million is to be expended on our new facility, including the final invoices for completion of construction (see discussion below). The
remainder will be used to continue to expand our research and development and manufacturing capabilities and upgrade our MIS technology.

New Facility

Our new facility is located approximately two miles from the previous leased facilities in Exton,
Pennsylvania. The new building site consolidates all U.S. operations, research and development, and administrative areas into a 202,500 square foot facility and thus provide for our future growth and continued expansion. The construction plan had
three phases. Phase one consisted of land, a building shell of 162,000 square feet and a fit out of 105,000 square feet for the manufacturing and quality assurance operations. This phase was completed in December 2005 at an approximate cost of $27.3
million. The remaining building shell (phases two and three) is now complete and consists of 40,000 square feet and additional fit out of approximately 70,000 square feet. The additional cost of phases two and three was approximately $22 million in
the aggregate, including the purchase of additional land required to complete the expansion. In January 2006, we purchased this additional parcel of land at the existing site for $1.3 million. The total cost of the project is estimated at
approximately $49 million.

Associated with managements April 30, 2005 finalization of the plan for transition of its operations
to the new facility, we recorded acceleration of depreciation charges related to the assets to be abandoned at the time of transition. The total net book value of assets to be abandoned was $4.9 million at April 30, 2005, of which an
acceleration of depreciation charge of $813,000 was recorded in the quarter ended June 30, 2005 and the remainder of $4.2 million during fiscal 2006. In addition, we incurred $543,000 of moving costs during fiscal 2006.

Financing Activities

Cash provided by financing activities
was $10.7 million for the year ended June 30, 2006. This was the result of proceeds from long-term debt related to a mortgage on our new facility ($8.0 million), the exercise of stock options ($3.1 million) and excess tax benefits from
share-based payment arrangements ($182,000). This was partially offset by stock repurchases of $442,000 and deferred financing costs paid of $122,000.

Debt

Secured Commercial Mortgage

On May 25, 2006, we entered into an agreement for a Secured Commercial Mortgage (the Mortgage) with Citibank, F.S.B. (the
Bank). The Mortgage provides us with the ability to take aggregate advances of up to $35 million through November 25, 2007 (the Draw Period) and is secured by our facility located at 735 Pennsylvania Drive, Exton,
Pennsylvania 19341. As of June 30, 2006 we had taken an $8 million advance under the Mortgage (see Note 7 to the Consolidated Financial Statements of the Company).

THM Acquisition Obligation

On September 1, 2000, we incurred an obligation in the amount
of $4.5 million in conjunction with the acquisition of THM Biomedical, Inc. The obligation was due in equal quarterly installments. In September 2004 the entire obligation was paid in full.



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Stock Repurchase Program

On August 17, 2004, we announced that our Board of Directors had reinstated a program to repurchase issued and outstanding shares of our Common Stock
over six months from the date of the board reinstatement. The reinstated plan called for the repurchase of up to 259,500 shares, the balance under the original plan approved in October 2003. We repurchased and retired 199,867 shares of common stock
under the reinstated program at a cost of approximately $5.1 million, or an average market price of $25.68 per share. We financed these repurchases using our available cash. This program expired in February 2005.

On March 16, 2005, we announced a new program under which an additional 400,000 issued and outstanding shares of our Common Stock were approved for
repurchase by the Board of Directors. As of June 30, 2005, we had repurchased and retired 103,133 shares of Common Stock under this new program at a cost of approximately $2.7 million, or an average market price of $26.58 per share, using
available cash. At June 30, 2005, there were 296,867 shares remaining for repurchase under this program. This plan was scheduled to expire on September 30, 2005, but it has been extended indefinitely until terminated by our Board of
Directors. During the quarter ended December 31, 2005, we repurchased and retired 20,000 shares of Common Stock at a cost of $441,000, or an average market price of $22.05 per share, using available cash. There were no repurchases during the
remaining six months ended June 30, 2006 leaving 276,867 shares remaining for repurchase under this program.

Research and Development Tax
Credit

We recorded research and development tax credits of $528,017, $493,536, and $984,817 for the fiscal years ended June 30, 2006, 2005,
and 2004, respectively. We continue to record research and development tax credits as a component of our current tax provision related to our ongoing performance of qualified research and development.

General

We plan to continue to spend substantial amounts to
fund clinical trials, to gain regulatory approvals and to continue to expand research and development activities, particularly for our endovascular products and our biomaterials products. We are marketing and selling the endovascular products in the
U.S. through a direct sales force. We anticipate sales and marketing expenses will increase substantially as we continue to invest in the build of our U.S. sales team and increased marketing efforts toward the success of the endovascular product
platform. We believe our current cash and investment balances, in addition to cash generated from operations, will be sufficient to meet our operating, financing and capital requirements through at least the next 12 months. We also believe our cash
and investment balances will be sufficient on a longer term basis, however, it will depend on numerous factors, including market acceptance of our existing and future products; the successful commercialization of products in development and costs
associated with that commercialization; progress in our product development efforts; the magnitude and scope of such efforts; progress with pre-clinical studies, clinical trials and product clearance by the FDA and other agencies; the cost and
timing of our efforts to expand our manufacturing, sales, and marketing capabilities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competing technological and market developments; and
the development of strategic alliances for the marketing of certain of our products.

The terms of any future equity financing may be dilutive to our
stockholders and the terms of any debt financing may contain restrictive covenants that limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our future business prospects, as well as
conditions prevailing in the relevant capital markets. No assurance can be given that any current or additional financing will be available to us, or will be available to us on acceptable terms should such a need arise.



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Off-Balance Sheet Arrangements

Presented below is a summary of our contractual obligations as of June 30, 2006:



|                                                     |  |                        |            |                  |   |           |  |           |           |                   |   |           |  |   |           
|---------------------------------------------------- |  | ---------------------- | ---------- | ---------------- | - | --------- |  | --------- | --------- | ----------------- | - | --------- |  | - | ----------
|                                                     |  | Payments Due by Period
|Contractual Obligations                              |  | Total                  |            | Less than 1 year |   | 1-3 years |  | 3-5 years |           | More than 5 years
|                                                     |  |                        |            |                  |   |           |  |           |           |                   |   |           |  |   |           
|Long-Term Debt Obligations (1)                       |  | $                      | 63,998,784 |                  | $ | 515,200   |  | $         | 5,893,102 |                   | $ | 6,849,687 |  | $ | 50,740,795
|Purchase Obligations:                                |  |                        |            |                  |   |           |  |           |           |                   |   |           |  |   |           
|Facility Construction (2)                            |  |                        | 2,455,358  |                  |   | 2,455,358 |  |           |          |                   |   |          |  |   |          
|Contractual Commitments for Capital Expenditures (3) |  |                        | 575,440    |                  |   | 575,440   |  |           |          |                   |   |          |  |   |          
|Operating Lease Obligations                          |  |                        | 15,639     |                  |   | 15,639    |  |           |          |                   |   |          |  |   |          
|                                                     |  |                        |            |                  |   |           |  |           |           |                   |   |           |  |   |           
|Total                                                |  | $                      | 67,045,221 |                  | $ | 3,561,637 |  | $         | 5,893,102 |                   | $ | 6,849,687 |  | $ | 50,740,795
|                                                     |  |                        |            |                  |   |           |  |           |           |                   |   |           |  |   |           

These obligations are primarily related to our long-term debt and a facility construction agreement to purchase
goods or services that is enforceable and legally binding.

---

|(1) | Principal and interest on our secured commercial mortgage.
|--- | ----------------------------------------------------------

|(2) | These obligations consist of open purchase orders for capital items primarily for the construction of the new facility.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(3) | In accordance with Generally Accepted Accounting Principles in the United States (GAAP), these obligations are not recorded on our consolidated balance sheet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Our estimate of the time periods for which our cash and cash equivalents will be adequate to fund operations is a forward looking
statement within the meaning of Private Securities Litigation Reform Act of 1995 and is subject to risks and uncertainties. Actual results may differ materially from those contemplated in such forward-looking statements. In addition to those
described above, factors which may cause such a difference are set forth in Item 1A (Risk Factors) of this Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. We have based these forward-looking statements largely on our current expectations and projections about future events and trends affecting our business. In this report, the words believe, may,
will, estimate, continue, anticipate, intend, expect, plan and similar expressions, as they relate to Kensey Nash, our business or our management, are intended to
identify forward-looking statements, but they are not exclusive means of identifying them.

A number of risks, uncertainties and other factors could cause
our actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include, among
other things:



| |  |  | general economic and business conditions, both nationally and in our markets;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the impact of competition;
| | - |  | --------------------------



| |  |  | anticipated trends in our business;
| | - |  | -----------------------------------



| |  |  | existing and future regulations affecting our business;
| | - |  | -------------------------------------------------------



| |  |  | strategic alliances and acquisition opportunities; and
| | - |  | ------------------------------------------------------



| |  |  | other risk factors set forth under Risk Factors above.
| | - |  | --------------------------------------------------------

Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this
report. Our results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our common stock.



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our interest income and expense are sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned on
our cash, cash equivalents and investments.

Investment Portfolio

Our investment portfolio consists primarily of high quality municipal and corporate obligations. The majority of the above investments have maturities ranging from less than one year to four years. In addition, the
Company has one security with a maturity of approximately 10 years. We mitigate default risk by investing in what we believe are safe and high credit quality securities and by monitoring the credit rating of investment issuers. Our portfolio
includes only marketable securities with secondary or resale markets and we have an audit committee approved investment strategy which currently limits the duration of our investments. These available-for-sale securities are subject to interest rate
risk and decrease in market value if interest rates increase. At June 30, 2006, our total portfolio consisted of approximately $22.3 million of investments. While our investments may be sold at anytime because the portfolio includes
available-for-sale marketable securities with secondary or resale markets, we generally hold securities until the earlier of their call date or their maturity. Therefore, we do not expect our results of operations or cash flows to be materially
impacted due to a sudden change in interest rates. Additional information regarding our investments is located in Note 1 to the Consolidated Financial Statements of the Company  Investments.

Debt

On May 25, 2006, we entered into a $35 million
aggregate ten-year fixed interest rate swap agreement (the swap), with Citibank, N.A., to manage the market risk from changes in interest rates under a secured commercial mortgage. As of June 30, 2006 we have taken an $8 million advance under
the Mortgage (see Note 7 to the Consolidated Financial Statements of the Company). Our objective and strategy for undertaking the swap was to hedge our exposure to variability in cash flows and interest expense associated with the future interest
rate payments under the Mortgage and to reduce our interest rate risk in the event of an unfavorable interest rate environment. Therefore, we do not expect our results of operations or cash flows to be materially impacted due to a sudden change in
interest rates. Additional information regarding the swap is located in Note 1  under Derivative Instruments and Hedging Activities and Note 7 to the Consolidated Financial Statements of the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our
financial statements and supplementary data required by this item are set forth in Part IV, Item 15 of this Annual Report on Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and
Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the
end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported accurately and within the time frame specified in the SECs rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is



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accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of fiscal 2006, our disclosure controls and procedures are effective at the reasonable assurance
level.

Changes In Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), during the fiscal year ended June 30, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Managements Report on Internal Control
Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, our management has concluded that, as of June 30, 2006, we did not have any material weaknesses in our internal control over financial reporting and our internal control over financial reporting was effective.

Inherent Limitations on the Effectiveness of Controls

Our management
does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that control issues and instances of fraud, if any, within our company have been
detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our managements assessment of our internal control over financial reporting. This audit report
appears below.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Kensey Nash Corporation

Exton, Pennsylvania

We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Kensey Nash Corporation and subsidiaries (the Company) maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.



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We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a
process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated,
in all material respects, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended June 30, 2006, of the Company and our report dated September 13, 2006 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

September 13, 2006

ITEM 9B. OTHER INFORMATION

Not applicable.



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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the
information under the captions Proposal 1Election of Directors, Nominees, Other Directors, Board Committees, Executive Officers, Corporate
Governance Policies and Procedures, and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement in connection with our 2006 Annual Meeting of Stockholders scheduled to be held on
December 6, 2006 (the 2006 Proxy Statement), which will be filed with the Securities and Exchange Commission no later than 120 days after June 30, 2006, or October 28, 2006, pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this
item is incorporated by reference to the information under the caption Proposal 1Election of DirectorsDirector Compensation and Executive Compensation in the 2006 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the information under the captions Security Ownership of Management and Certain
Stockholders, and Equity Compensation Plan Information in the 2006 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the information under the caption Certain
Transactions in the 2006 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated by reference to the information under the caption Proposal 2Ratification of Appointment of
AuditorsIndependent Auditor Fees in the 2006 Proxy Statement.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15 (a) 1. FINANCIAL STATEMENTS

The following financial statements are
included in this report:



|                                                                                                 |  |   
|------------------------------------------------------------------------------------------------ |  | --
|                                                                                                 | 
|Report of Independent Registered Public Accounting Firm                                          |  | 53
|                                                                                                 | 
|Consolidated Balance Sheets as of June 30, 2006 and 2005                                         |  | 54
|                                                                                                 | 
|Consolidated Statements of Income for the Years Ended June 30, 2006, 2005 and 2004               |  | 55
|                                                                                                 | 
|Consolidated Statements of Stockholders Equity for the Years Ended June 30, 2006, 2005 and 2004 |  | 56
|                                                                                                 | 
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2006, 2005 and 2004           |  | 57
|                                                                                                 | 
|Notes to Consolidated Financial Statements                                                       |  | 58



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of

Kensey Nash Corporation:

Exton, Pennsylvania

We have audited the
accompanying consolidated balance sheets of Kensey Nash Corporation and subsidiaries (the Company) as of June 30, 2006 and 2005, and the related consolidated statements of income, stockholders equity, and cash flows for each
of the three years in the period ended June 30, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of Kensey Nash Corporation and
subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United
States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated September 13, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.



|                          
|--------------------------
|/s/ DELOITTE & TOUCHE LLP 
|Philadelphia, Pennsylvania
|September 13, 2006        



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KENSEY NASH CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                       |  |               |             |   |               |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                       |  | June 30, 2006 |             |   | June 30, 2005 |  
|ASSETS                                                                                                                 |  |               |             |   |               |   |             |  
|CURRENT ASSETS:                                                                                                        |  |               |             |   |               |   |             |  
|Cash and cash equivalents                                                                                              |  | $             | 4,874,466   |   |               | $ | 4,171,913   |  
|Investments                                                                                                            |  |               | 22,253,526  |   |               |   | 40,717,522  |  
|Restricted cash                                                                                                        |  |               | 1,000,809   |   |               |   |            |  
|Trade receivables, net of allowance for doubtful accounts of $8,804 and $8,697 at June 30, 2006 and 2005, respectively |  |               | 6,396,165   |   |               |   | 7,863,940   |  
|Royalties receivable                                                                                                   |  |               | 5,845,484   |   |               |   | 5,520,356   |  
|Other receivables (including approximately $98,000 and $102,000 at                                                     |  |               |             |   |               |   |             |  
|June 30, 2006 and 2005, respectively, due from employees)                                                              |  |               | 1,096,996   |   |               |   | 1,073,884   |  
|Inventory                                                                                                              |  |               | 7,197,868   |   |               |   | 5,657,791   |  
|Deferred tax asset, current portion                                                                                    |  |               | 1,849,513   |   |               |   | 656,047     |  
|Prepaid expenses and other                                                                                             |  |               | 1,427,303   |   |               |   | 3,568,141   |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total current assets                                                                                                   |  |               | 51,942,130  |   |               |   | 69,229,594  |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|PROPERTY, PLANT AND EQUIPMENT, AT COST:                                                                                |  |               |             |   |               |   |             |  
|Land                                                                                                                   |  |               | 4,883,591   |   |               |   | 3,263,869   |  
|Building                                                                                                               |  |               | 39,123,636  |   |               |   |            |  
|Leasehold improvements                                                                                                 |  |               |            |   |               |   | 9,829,592   |  
|Machinery, furniture and equipment                                                                                     |  |               | 26,816,938  |   |               |   | 22,514,785  |  
|Construction in progress - new facility                                                                                |  |               | 3,752,252   |   |               |   | 19,281,491  |  
|Construction in progress                                                                                               |  |               | 1,086,514   |   |               |   | 783,542     |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total property, plant and equipment                                                                                    |  |               | 75,662,931  |   |               |   | 55,673,279  |  
|Accumulated depreciation                                                                                               |  |               | (12,412,405 | ) |               |   | (17,065,638 | )
|                                                                                                                       |  |               |             |   |               |   |             |  
|Net property, plant and equipment                                                                                      |  |               | 63,250,526  |   |               |   | 38,607,641  |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|OTHER ASSETS:                                                                                                          |  |               |             |   |               |   |             |  
|Deferred tax asset, non-current portion                                                                                |  |               |            |   |               |   | 37,347      |  
|Acquired patents and other intangibles, net of accumulated amortization of                                             |  |               |             |   |               |   |             |  
|$3,241,987 and $2,430,783 at June 30, 2006 and 2005, respectively                                                      |  |               | 5,249,379   |   |               |   | 4,515,583   |  
|Goodwill                                                                                                               |  |               | 9,627,200   |   |               |   | 3,284,303   |  
|Other non-current assets                                                                                               |  |               | 122,033     |   |               |   |            |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total other assets                                                                                                     |  |               | 14,998,612  |   |               |   | 7,837,233   |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|TOTAL                                                                                                                  |  | $             | 130,191,268 |   |               | $ | 115,674,468 |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   |  |               |             |   |               |   |             |  
|CURRENT LIABILITIES:                                                                                                   |  |               |             |   |               |   |             |  
|Accounts payable                                                                                                       |  | $             | 3,436,242   |   |               | $ | 5,352,712   |  
|Accrued expenses (See Note 4)                                                                                          |  |               | 2,954,079   |   |               |   | 5,458,718   |  
|Other current liabilities                                                                                              |  |               | 1,000,809   |   |               |   |            |  
|Deferred revenue                                                                                                       |  |               | 203,351     |   |               |   | 271,681     |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total current liabilities                                                                                              |  |               | 7,594,481   |   |               |   | 11,083,111  |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|OTHER LIABILITIES:                                                                                                     |  |               |             |   |               |   |             |  
|Long-term debt                                                                                                         |  |               | 8,000,000   |   |               |   |            |  
|Deferred revenue, non-current                                                                                          |  |               | 795,830     |   |               |   | 738,719     |  
|Deferred tax liability, non-current                                                                                    |  |               | 523,487     |   |               |   |            |  
|Other non-current liabilities                                                                                          |  |               | 85,834      |   |               |   |            |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total liabilities                                                                                                      |  |               | 16,999,632  |   |               |   | 11,821,830  |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                          |  |               |            |   |               |   |            |  
|                                                                                                                       |  |              
|STOCKHOLDERS EQUITY:                                                                                                  |  |               |             |   |               |   |             |  
|Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued or outstanding at June 30, 2006 and 2005 |  |               |            |   |               |   |            |  
|Common stock, $.001 par value, 25,000,000 shares authorized,                                                           |  |               |             |   |               |   |             |  
|11,618,210 and 11,414,607 shares issued and outstanding at                                                             |  |               |             |   |               |   |             |  
|June 30, 2006 and 2005, respectively                                                                                   |  |               | 11,618      |   |               |   | 11,415      |  
|Capital in excess of par value                                                                                         |  |               | 80,664,473  |   |               |   | 74,832,658  |  
|Retained earnings                                                                                                      |  |               | 32,800,281  |   |               |   | 29,082,604  |  
|Accumulated other comprehensive loss                                                                                   |  |               | (284,736    | ) |               |   | (74,039     | )
|                                                                                                                       |  |               |             |   |               |   |             |  
|Total stockholders equity                                                                                             |  |               | 113,191,636 |   |               |   | 103,852,638 |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|TOTAL                                                                                                                  |  | $             | 130,191,268 |   |               | $ | 115,674,468 |  
|                                                                                                                       |  |               |             |   |               |   |             |  
|                                                                                                                       |  |               |             |   |               |   |             |  

See notes to consolidated financial statements.



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KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF INCOME



|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                   |  | Year Ended June 30, |           
|                                                   |  | 2006                |            |   | 2005 |   |            | 2004 | 
|REVENUES:                                          |  |                     |            |   |      |   |            |      |  |   |            |  
|Net sales                                          |  | $                   | 37,878,054 |   |      | $ | 40,369,453 |      |  | $ | 36,360,535 |  
|Research and development                           |  |                     |           |   |      |   | 253,292    |      |  |   | 688,353    |  
|Royalty income                                     |  |                     | 22,518,697 |   |      |   | 20,753,169 |      |  |   | 21,165,911 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|Total revenues                                     |  |                     | 60,396,751 |   |      |   | 61,375,914 |      |  |   | 58,214,799 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|OPERATING COSTS AND EXPENSES:                      |  |                     |            |   |      |   |            |      |  |   |            |  
|Cost of products sold                              |  |                     | 20,645,091 |   |      |   | 17,654,147 |      |  |   | 16,084,377 |  
|Research and development                           |  |                     | 18,990,302 |   |      |   | 15,130,679 |      |  |   | 16,411,081 |  
|Selling, general and administrative                |  |                     | 17,259,160 |   |      |   | 11,794,730 |      |  |   | 8,702,372  |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|Total operating costs and expenses                 |  |                     | 56,894,553 |   |      |   | 44,579,556 |      |  |   | 41,197,830 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|INCOME FROM OPERATIONS                             |  |                     | 3,502,198  |   |      |   | 16,796,358 |      |  |   | 17,016,969 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|OTHER INCOME (EXPENSE):                            |  |                     |            |   |      |   |            |      |  |   |            |  
|Interest income                                    |  |                     | 1,042,981  |   |      |   | 1,253,578  |      |  |   | 1,127,458  |  
|Interest expense                                   |  |                     | (71,496    | ) |      |   | (4,559     | )    |  |   | (65,760    | )
|Other income                                       |  |                     | 82,451     |   |      |   | 45,480     |      |  |   | 16,239     |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|Total other income - net                           |  |                     | 1,053,936  |   |      |   | 1,294,499  |      |  |   | 1,077,937  |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|INCOME BEFORE INCOME TAX                           |  |                     | 4,556,134  |   |      |   | 18,090,857 |      |  |   | 18,094,906 |  
|Income tax expense                                 |  |                     | (838,457   | ) |      |   | (5,159,486 | )    |  |   | (5,144,123 | )
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|NET INCOME                                         |  | $                   | 3,717,677  |   |      | $ | 12,931,371 |      |  | $ | 12,950,783 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|BASIC EARNINGS PER SHARE                           |  | $                   | 0.32       |   |      | $ | 1.13       |      |  | $ | 1.14       |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|DILUTED EARNINGS PER SHARE                         |  | $                   | 0.30       |   |      | $ | 1.06       |      |  | $ | 1.06       |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING         |  |                     | 11,493,558 |   |      |   | 11,412,025 |      |  |   | 11,403,129 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |  |                     | 12,319,341 |   |      |   | 12,184,949 |      |  |   | 12,168,322 |  
|                                                   |  |                     |            |   |      |   |            |      |  |   |            |  

See notes to consolidated financial statements.



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KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|----------------------------------------------------- |  | ------------ | - |  | ------------------------ | ------ | - | ----- | - | ------------------------------- | ----------------- |  | ------------- | ---------- |  | ------------- | -------- | - | ----- | - | ---------- | - |  | - | ----------- | -
|                                                      |  | Common Stock |   |  | Capital in Excess of Par |        |   |       |   | Accumulated Other Comprehensive |                   |  | Comprehensive |            |  |               |         
|                                                      |  | Shares       |   |  | Amount                   |        |   | Value |   |                                 | Retained Earnings |  | Loss          |            |  | Income/(Loss) |          |   | Total |  
|BALANCE, JUNE 30, 2003                                |  | 11,366,975   |   |  | $                        | 11,367 |   |       | $ | 76,356,345                      |                   |  | $             | 3,200,450  |  | $             | (18,374  | ) |       |   |            |   |  | $ | 79,549,788  |  
|Exercise of stock options                             |  | 285,331      |   |  |                          | 286    |   |       |   | 3,386,148                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 3,386,434   |  
|Stock repurchase (See Note 11)                        |  | (140,500     | ) |  |                          | (141   | ) |       |   | (2,998,133                      | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   | (2,998,274  | )
|Tax benefit from exercise of stock options            |  |              |   |  |                          |        |   |       |   | 1,708,479                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 1,708,479   |  
|Stock options granted to non-employee                 |  |              |   |  |                          |        |   |       |   | 11,378                          |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 11,378      |  
|Employee stock-based compensation                     |  |              |   |  |                          |        |   |       |   | 33,255                          |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 33,255      |  
|Net income                                            |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               | 12,950,783 |  |               |          |   |       | $ | 12,950,783 |   |  |   | 12,950,783  |  
|Foreign currency translation adjustment               |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | 68,569   |   |       |   | 68,569     |   |  |   | 68,569      |  
|Change in unrealized loss on investments (net of tax) |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | (286,184 | ) |       |   | (286,184   | ) |  |   | (286,184    | )
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Comprehensive income                                  |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       | $ | 12,733,168 |   |  |   |             |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|BALANCE, JUNE 30, 2004                                |  | 11,511,806   |   |  | $                        | 11,512 |   |       | $ | 78,497,472                      |                   |  | $             | 16,151,233 |  | $             | (235,989 | ) |       |   |            |   |  | $ | 94,424,228  |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Exercise of stock options                             |  | 196,067      |   |  |                          | 196    |   |       |   | 2,515,270                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 2,515,466   |  
|Stock repurchase (See Note 11)                        |  | (303,000     | ) |  |                          | (303   | ) |       |   | (7,886,162                      | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   | (7,886,465  | )
|Tax benefit from exercise of stock options            |  |              |   |  |                          |        |   |       |   | 1,094,466                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 1,094,466   |  
|Employee stock-based compensation                     |  | 9,734        |   |  |                          | 10     |   |       |   | 611,612                         |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 611,622     |  
|Net income                                            |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               | 12,931,371 |  |               |          |   |       | $ | 12,931,371 |   |  |   | 12,931,371  |  
|Foreign currency translation adjustment               |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | 14,347   |   |       |   | 14,347     |   |  |   | 14,347      |  
|Change in unrealized gain on investments (net of tax) |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | 147,603  |   |       |   | 147,603    |   |  |   | 147,603     |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Comprehensive income                                  |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       | $ | 13,093,321 |   |  |   |             |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|BALANCE, JUNE 30, 2005                                |  | 11,414,607   |   |  | $                        | 11,415 |   |       | $ | 74,832,658                      |                   |  | $             | 29,082,604 |  | $             | (74,039  | ) |       |   |            |   |  | $ | 103,852,638 |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Exercise/issuance of:                                 |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Stock options                                         |  | 211,185      |   |  |                          | 211    |   |       |   | 3,089,374                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 3,089,585   |  
|Nonvested stock awards                                |  | 20,434       |   |  |                          | 20     |   |       |   | (20                             | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   |            |  
|Exchange of nonvested shares for taxes                |  | (8,016       | ) |  |                          | (8     | ) |       |   | (206,837                        | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   | (206,845    | )
|Stock repurchase (See Note 11)                        |  | (20,000      | ) |  |                          | (20    | ) |       |   | (441,689                        | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   | (441,709    | )
|Tax benefit/(deficiency) from exercise/issuance of:   |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Stock options                                         |  |              |   |  |                          |        |   |       |   | 1,046,135                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 1,046,135   |  
|Nonvested stock awards                                |  |              |   |  |                          |        |   |       |   | (13,996                         | )                 |  |               |            |  |               |          |   |       |   |            |   |  |   | (13,996     | )
|Employee stock-based compensation:                    |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Stock options                                         |  |              |   |  |                          |        |   |       |   | 960,387                         |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 960,387     |  
|Nonvested stock awards                                |  |              |   |  |                          |        |   |       |   | 1,398,461                       |                   |  |               |            |  |               |          |   |       |   |            |   |  |   | 1,398,461   |  
|Net Income                                            |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               | 3,717,677  |  |               |          |   |       | $ | 3,717,677  |   |  |   | 3,717,677   |  
|Foreign currency translation adjustment               |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | (7,662   | ) |       |   | (7,662     | ) |  |   | (7,662      | )
|Change in unrealized loss on investments (net of tax) |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | (117,201 | ) |       |   | (117,201   | ) |  |   | (117,201    | )
|Interest rate swap unrealized loss                    |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               | (85,834  | ) |       |   | (85,834    | ) |  |   | (85,834     | )
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|Comprehensive income                                  |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       | $ | 3,506,980  |   |  |   |             |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  
|BALANCE, JUNE 30, 2006                                |  | 11,618,210   |   |  | $                        | 11,618 |   |       | $ | 80,664,473                      |                   |  | $             | 32,800,281 |  | $             | (284,736 | ) |       |   |            |   |  | $ | 113,191,636 |  
|                                                      |  |              |   |  |                          |        |   |       |   |                                 |                   |  |               |            |  |               |          |   |       |   |            |   |  |   |             |  

See notes to consolidated financial statements.



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KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                  |  | Year Ended June 30, |            
|                                                                                  |  | 2006                |             |   | 2005 |   |             | 2004 | 
|OPERATING ACTIVITIES:                                                             |  |                     |             |   |      |   |             |      |  |   |             |  
|Net income                                                                        |  | $                   | 3,717,677   |   |      | $ | 12,931,371  |      |  | $ | 12,950,783  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                     |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                     |  |                     | 9,648,895   |   |      |   | 4,503,840   |      |  |   | 4,319,247   |  
|Employee stock-based compensation (See Note 1):                                   |  |                     |             |   |      |   |             |      |  |   |             |  
|Stock Options (See Note 15)                                                       |  |                     | 960,387     |   |      |   |            |      |  |   |            |  
|Nonvested stock awards (See Note 16)                                              |  |                     | 1,398,461   |   |      |   | 611,622     |      |  |   | 33,255      |  
|Tax benefit/(deficiency) from exercise of stock options                           |  |                     |             |   |      |   |             |      |  |   |             |  
|Stock Options                                                                     |  |                     | 1,046,135   |   |      |   | 1,094,466   |      |  |   | 1,708,479   |  
|Nonvested stock awards                                                            |  |                     | (13,996     | ) |      |   |            |      |  |   |            |  
|Excess tax benefits from share-based payment arrangements                         |  |                     | (181,613    | ) |      |   |            |      |  |   |            |  
|Exchange of nonvested shares for taxes                                            |  |                     | (206,845    | ) |      |   |             |      |  |   |             |  
|Loss on retirement of property, plant and equipment                               |  |                     | 189         |   |      |   |            |      |  |   |            |  
|Changes in assets and liabilities which (used) provided cash:                     |  |                     |             |   |      |   |             |      |  |   |             |  
|Accounts receivable                                                               |  |                     | 1,130,070   |   |      |   | (3,519,895  | )    |  |   | (2,039,797  | )
|Deferred tax asset                                                                |  |                     | (1,156,119  | ) |      |   | 1,917,100   |      |  |   | 504,166     |  
|Prepaid expenses and other current assets                                         |  |                     | 2,068,137   |   |      |   | (2,228,063  | )    |  |   | 1,076,230   |  
|Inventory                                                                         |  |                     | (1,352,064  | ) |      |   | (2,176,192  | )    |  |   | (277        | )
|Accounts payable and accrued expenses                                             |  |                     | (629,857    | ) |      |   | (1,774,319  | )    |  |   | 1,445,341   |  
|Deferred revenue                                                                  |  |                     | (68,330     | ) |      |   | 161,908     |      |  |   | (85,287     | )
|Deferred tax liability, non-current                                               |  |                     | 523,487     |   |      |   |            |      |  |   |            |  
|Deferred revenue, non-current                                                     |  |                     | 57,111      |   |      |   | 738,719     |      |  |   |            |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                         |  |                     | 16,941,725  |   |      |   | 12,260,557  |      |  |   | 19,912,140  |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|INVESTING ACTIVITIES:                                                             |  |                     |             |   |      |   |             |      |  |   |             |  
|Purchase of land for new facility                                                 |  |                     | (1,619,722  | ) |      |   | (3,263,869  | )    |  |   |            |  
|Additions to property, plant and equipment                                        |  |                     | (35,106,463 | ) |      |   | (16,043,246 | )    |  |   | (6,100,732  | )
|Acquisition of Intraluminal Therapeutics, Inc. (ILT)                              |  |                     | (7,147,521  | ) |      |   |            |      |  |   |            |  
|Purchase of proprietary rights                                                    |  |                     | (25,000     | ) |      |   | (2,850,000  | )    |  |   |            |  
|Sale of investments                                                               |  |                     | 24,500,000  |   |      |   | 27,130,000  |      |  |   | 13,290,000  |  
|Purchase of investments                                                           |  |                     | (6,533,674  | ) |      |   | (22,104,234 | )    |  |   | (27,146,372 | )
|Restricted cash                                                                   |  |                     | (1,000,809  | ) |      |   |            |      |  |   |            |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                             |  |                     | (26,933,189 | ) |      |   | (17,131,349 | )    |  |   | (19,957,104 | )
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|FINANCING ACTIVITIES:                                                             |  |                     |             |   |      |   |             |      |  |   |             |  
|Proceeds from secured commercial mortgage                                         |  |                     | 8,000,000   |   |      |   |            |      |  |   |            |  
|Deferred financing costs paid                                                     |  |                     | (122,033    | ) |      |   |            |      |  |   |            |  
|Repayments of long term debt                                                      |  |                     |            |   |      |   | (219,147    | )    |  |   | (836,989    | )
|Stock repurchase                                                                  |  |                     | (441,709    | ) |      |   | (7,886,465  | )    |  |   | (2,998,274  | )
|Excess tax benefits from share-based payment arrangements                         |  |                     | 181,613     |   |      |   |            |      |  |   |            |  
|Proceeds from exercise of stock options                                           |  |                     | 3,089,585   |   |      |   | 2,515,466   |      |  |   | 3,386,434   |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) financing activities                               |  |                     | 10,707,456  |   |      |   | (5,590,146  | )    |  |   | (448,829    | )
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|EFFECT OF EXCHANGE RATE ON CASH                                                   |  |                     | (13,439     | ) |      |   | 17,218      |      |  |   | 68,569      |  
|INCREASE (DECREASE) IN CASH                                                       |  |                     | 702,553     |   |      |   | (10,443,720 | )    |  |   | (425,224    | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      |  |                     | 4,171,913   |   |      |   | 14,615,633  |      |  |   | 15,040,857  |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                            |  | $                   | 4,874,466   |   |      | $ | 4,171,913   |      |  | $ | 14,615,633  |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |  |                     |             |   |      |   |             |      |  |   |             |  
|Cash paid for interest                                                            |  | $                   | 71,496      |   |      | $ | 4,559       |      |  | $ | 65,760      |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|Cash paid for income taxes                                                        |  | $                   | 114,138     |   |      | $ | 4,171,567   |      |  | $ | 277,332     |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|Retirement of fully depreciated property, plant and equipment                     |  | $                   | 13,086,975  |   |      | $ |            |      |  | $ |            |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:                            |  |                     |             |   |      |   |             |      |  |   |             |  
|Increase in prepaid expense related to non-employee stock options (See Note 10)   |  | $                   |            |   |      | $ |            |      |  | $ | 11,378      |  
|                                                                                  |  |                     |             |   |      |   |             |      |  |   |             |  

See notes to consolidated financial statements.



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KENSEY NASH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2006, 2005 AND 2004

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation - The consolidated financial statements
include the accounts of Kensey Nash Corporation, Kensey Nash Holding Company and Kensey Nash Europe GmbH. All intercompany transactions and balances have been eliminated. The Company was incorporated in Delaware on August 6, 1984. Kensey Nash
Holding Company, incorporated in Delaware on January 8, 1992, was formed to hold title to certain Company patents and has no operations. Kensey Nash GmbH, incorporated in Germany in January 2002, was formed for the purpose of European sales and
marketing of the TriActiv® Embolic Protection
System (the TriActiv System), which was commercially launched in Europe in May 2002.

The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions. These estimates and assumptions, which may differ from actual results, will affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenue and expense during the periods presented.

Certain reclassifications have been made to prior period balances to conform to the current period presentation.

Cash and Cash Equivalents - Cash and cash equivalents represent cash in banks and short-term investments having an original maturity of less than three
months.

Fair Value of Financial Instruments - The carrying amounts of financial instruments including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and debt approximated fair value as of June 30, 2006 and 2005. The fair value of short-term investments is based on quoted market prices.

Investments - Investments at June 30, 2006 consisted primarily of high quality municipal and corporate obligations. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities(SFAS 115), the Company has classified its entire investment portfolio as available-for-sale marketable securities
with secondary or resale markets. The Companys entire investment portfolio is reported at fair value with unrealized gains and losses included in stockholders equity (see Comprehensive Income) and realized gains and losses in other
income.

The following disclosures are provided in accordance with the Emerging Issues Task Force Issue (EITF) 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments(EITF 03-1), for securities that have a fair value below cost at the balance sheet date but for which an other than temporary impairment has not been recognized for these financial
statements.



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The following is a summary of available-for-sale securities at June 30, 2006 and
2005:



|                                   |  |                          |            |                  |   |        |                      |   |          |   |  |   |           
|---------------------------------- |  | ------------------------ | ---------- | ---------------- | - | ------ | -------------------- | - | -------- | - |  | - | ----------
|                                   |  | Year Ended June 30, 2006
|Description                        |  | Amortized Cost           |            | Gross Unrealized |   |        | Estimated Fair Value
|                                   |  | Gain                     |            | Loss             |   |       
|Municipal Obligations              |  | $                        | 19,595,914 |                  | $ | 8,386  |                      | $ | (264,454 | ) |  | $ | 19,339,846
|U.S. Corporate Obligations         |  |                          | 3,127,732  |                  |   |       |                      |   | (214,052 | ) |  |   | 2,913,680 
|                                   |  |                          |            |                  |   |        |                      |   |          |   |  |   |           
|Total Investments                  |  | $                        | 22,723,646 |                  | $ | 8,386  |                      | $ | (478,506 | ) |  | $ | 22,253,526
|                                   |  |                          |            |                  |   |        |                      |   |          |   |  |   |           
|                                   | 
|                                   |  | Year Ended June 30, 2005
|Description                        |  | Amortized Cost           |            | Gross Unrealized |   |        | Estimated Fair Value
|                                   |  | Gain                     |            | Loss             |   |       
|Municipal Obligations              |  | $                        | 31,972,820 |                  | $ | 31,417 |                      | $ | (128,559 | ) |  | $ | 31,875,678
|U.S. Government Agency Obligations |  |                          | 5,971,714  |                  |   |       |                      |   | (4,054   | ) |  |   | 5,967,660 
|U.S. Corporate Obligations         |  |                          | 3,065,528  |                  |   |       |                      |   | (191,344 | ) |  |   | 2,874,184 
|                                   |  |                          |            |                  |   |        |                      |   |          |   |  |   |           
|Total Investments                  |  | $                        | 41,010,062 |                  | $ | 31,417 |                      | $ | (323,957 | ) |  | $ | 40,717,522
|                                   |  |                          |            |                  |   |        |                      |   |          |   |  |   |           

The majority of the above investments have maturities ranging from approximately less than one year to four years.
In addition, the Company has one security with a maturity of approximately 10 years.

The investment securities shown below currently have fair values less
than amortized cost and therefore contain unrealized losses. The Company has evaluated these securities and has determined that the decline in value is not related to any company or industry specific event. At June 30, 2006, there were
approximately 32 out of 35 investment securities with unrealized losses. The Company anticipates full recovery of amortized costs with respect to these securities at maturity or sooner in the event of a more favorable market interest rate
environment. The lengths of time the individual securities have been in continuous unrealized loss position, aggregated by investment by category at June 30, 2006 are as follows:



|                           |                     |                  |                       |  |                  |                     |   |                       |   |            |                     |   |                       |   |  |   |            |  |   |          |  
|-------------------------- | ------------------- | ---------------- | --------------------- |  | ---------------- | ------------------- | - | --------------------- | - | ---------- | ------------------- | - | --------------------- | - |  | - | ---------- |  | - | -------- | -
|Description                |                     | Loss < 12 months |                       |  | Loss > 12 months |                     |   | Total                 |  
|                           | EstimatedFair Value |                  | Grossunrealizedlosses |  |                  | EstimatedFair Value |   | Grossunrealizedlosses |   |            | EstimatedFair Value |   | Grossunrealizedlosses |  
|Municipal Obligations      |                     | $                | 3,062,316             |  | $                | (49,535             | ) |                       | $ | 14,853,099 |                     | $ | (214,919              | ) |  | $ | 17,915,415 |  | $ | (264,454 | )
|U.S. Corporate Obligations |                     |                  |                      |  |                  |                    |   |                       |   | 2,913,680  |                     |   | (214,052              | ) |  |   | 2,913,680  |  |   | (214,052 | )
|                           |                     |                  |                       |  |                  |                     |   |                       |   |            |                     |   |                       |   |  |   |            |  |   |          |  
|Total Investments          |                     | $                | 3,062,316             |  | $                | (49,535             | ) |                       | $ | 17,766,779 |                     | $ | (428,971              | ) |  | $ | 20,829,095 |  | $ | (478,506 | )
|                           |                     |                  |                       |  |                  |                     |   |                       |   |            |                     |   |                       |   |  |   |            |  |   |          |  

Comprehensive IncomeThe Company accounts for comprehensive income under the
provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS 130). Accordingly, accumulated other comprehensive (loss) income is shown in the consolidated statements of stockholders equity at June 30, 2006, 2005 and 2004,
and is comprised of net unrealized gains and losses on the Companys available-for-sale securities, foreign currency translation adjustments and interest rate swap. The tax effect for fiscal 2006, 2005, and 2004 of other comprehensive income
was $60,376, $76,038 and $147,428, respectively.

Inventory - Inventory is stated at the lower of cost (determined by the average cost
method, which approximates first-in, first-out) or market. Inventory primarily includes the cost of material utilized in the processing of the Companys products and is as follows:



|                                     |  |          |           |   |      |   |           |  
|------------------------------------ |  | -------- | --------- | - | ---- | - | --------- | -
|                                     |  | June 30, |          
|                                     |  | 2006     |           |   | 2005 |  
|Raw materials                        |  | $        | 5,825,062 |   |      | $ | 4,216,895 |  
|Work in process                      |  |          | 880,975   |   |      |   | 776,166   |  
|Finished goods                       |  |          | 932,597   |   |      |   | 749,638   |  
|                                     |  |          |           |   |      |   |           |  
|Gross inventory                      |  |          | 7,638,634 |   |      |   | 5,742,699 |  
|Provision for inventory obsolescence |  |          | (440,766  | ) |      |   | (84,908   | )
|                                     |  |          |           |   |      |   |           |  
|Inventory                            |  | $        | 7,197,868 |   |      | $ | 5,657,791 |  
|                                     |  |          |           |   |      |   |           |  



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Adjustments to inventory are made at the individual part level for estimated excess, obsolescence or impaired balances,
to reflect inventory at the lower of cost or market. Factors influencing these adjustments include: changes in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical
deterioration and quality concerns. Revisions to these adjustments would be required if any of these factors differ from the Companys estimates.

Property, Plant and Equipment - Property, plant and equipment consists primarily of building, land, machinery and equipment and construction in progress and is recorded at cost. Maintenance and repairs are expensed as
incurred. Building, machinery, furniture and equipment are depreciated using the straight-line method over its useful life ranging from two to thirty years.

Construction of New Facility

The Companys new facility is located approximately two miles from the previous leased facilities
in Exton, Pennsylvania. The new building site consolidates all U.S. operations, research and development, and administrative areas into a 202,500 square foot facility and thus provides for our future growth and continued expansion. The construction
plan had three phases. Phase one consisted of land, a building shell of 162,000 square feet and a fit out of 105,000 square feet for the manufacturing and quality assurance operations. This phase was completed in December 2005 at an approximate cost
of $27.3 million. The remaining building shell (phases two and three) is now complete and consists of 40,000 square feet and additional fit out of approximately 70,000 square feet. The additional cost of phases two and three was approximately $22
million in the aggregate, including the purchase of additional land required to complete the expansion. In January 2006, we purchased this additional parcel of land at the existing site for $1.3 million. The total cost of the project will be
approximately $49 million.

Associated with managements April 30, 2005 finalization of the plan for transition of its operations to the new
facility, we have recorded acceleration of depreciation charges related to the assets to be abandoned at the time of transition. The total net book value of assets to be abandoned was $4.9 million at April 30, 2005, of which an acceleration of
depreciation charge of $813,000 was recorded in the quarter ended June 30, 2005. Total facility transition costs during fiscal 2006 were $4.7 million; $4.2 million of accelerated depreciation and $543,000 of moving costs.

Goodwill Goodwill represents the excess of cost over the fair value of the identifiable net assets of THM Biomedical, Inc. (THM), a company acquired
in September 2000 and IntraLuminal Therapeutics, Inc. (ILT), a business acquired in May 2006 (see Note 3). Effective July 1, 2001, the Company adopted SFAS No. 141, Business Combinations(SFAS 141) and SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a
business combination. Under SFAS 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are subject to annual impairment tests. Intangible assets with definite useful lives will continue to be amortized over
their respective useful lives. Adoption of SFAS 142 did not result in the reclassification of any intangible assets, changes in the amortization periods for those intangible assets with definite lives or in the impairment of any intangible assets.

Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If the undiscounted expected future cash flows to be generated by the related asset are less than the carrying value of the asset, the Company measures the amount of the impairment by comparing the
carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company borrows.

Accounts Receivable Allowance The Company had trade receivable allowances of $8,804 and $8,697 at June 30, 2006 and 2005, respectively. The Company established trade receivable allowances of
$59,580 and $122,357 and wrote off amounts totaling $59,473 and $59,799 in the years ended June 30, 2006 and 2005, respectively. In addition, for the year ended June 30, 2005, the Company reduced the accounts receivable allowance
established during the year by $67,451 which had primarily been established for a customer that we



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were under negotiations with for a disputed payment. A portion of the customers outstanding balance was paid and the remaining portion written off and
the specific allowance for the recovered portion was no longer needed. These amounts are included in selling, general and administrative expense for the years ended June 30, 2006 and 2005.

Patents and Other Intangible Assets  The costs of internally developed patents are expensed when incurred due to the long development cycle for
patents and the Companys inability to measure the recoverability of these costs when incurred. The entire cost of acquired patents and other intangible assets is being amortized over the remaining period of economic benefit, ranging from 3 to
15 years at June 30, 2006 (See Note 6 and 21). The gross carrying amount of such patents and other intangible assets at June 30, 2006 was $8,491,366 with accumulated amortization of $3,241,987. Amortization expense on these patents and
other intangible assets was $811,204 for the fiscal year ended June 30, 2006, $745,040 for the fiscal year ended June 30, 2005 and $263,026 for the fiscal years ended June 30, 2004. Amortization expense on the Companys acquired
patents and other intangible assets is estimated at $985,664 for the fiscal year ended June 30, 2007, $980,204 for the fiscal year ended June 30, 2008, $978,399 for the fiscal year ended June 30, 2009, $481,345 for the fiscal year
ended June 30, 2010 and $437,486 for the fiscal year ending June 30, 2011.

Revenue Recognition

Sales Revenue

The Company recognizes revenue under the provisions of
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104), which superseded SAB No. 101, Revenue Recognition in Financial Statements(SAB 101). .Accordingly, sales revenue is
recognized when the related product is shipped. All products are shipped freight-on-board shipping point. Advance payments received for products or services are recorded as deferred revenue and are recognized when the product is shipped or services
are performed. The Company reduces sales revenue for estimated customer returns and other allowances, including discounts. The Company manufactures medical products specifically to customer specifications for the majority of its customers, which are
subject to return only for failure to meet customer specifications. The Company had sales returns allowances and discounts of $9,195, $146,237 and $135,305 for the years ended June 30, 2006, 2005 and 2004, respectively.

Research and Development Revenue

Revenue under research and
development contracts is recognized as the related expenses are incurred. All revenues recorded on this line item are derived from government programs under which the U.S. government funds the research of high risk, enabling technologies. The
program reflected in the statement of operations for fiscal 2004 and 2005 is an award for the research of a synthetic vascular graft, which concluded in September 2004. Also included in the fiscal 2004 statements of operations is an award for the
research of breast cancer drug delivery technology, which concluded in October 2003.

Royalty Income

The Company recognizes substantially all of its royalty revenue at the end of each month, in accordance with its agreements with St. Jude Medical, Inc. (St. Jude Medical)
and Orthovita, Inc. (Orthovita), when the Company is advised by the respective party of the net total end-user product sales dollars for the month. Royalty payments from both parties are generally received within 45 days of the end of each calendar
quarter.

The Company receives a 6% royalty on every Angio-Seal unit sold by St. Jude Medical under the license agreement. As of June 30, 2006 approximately 7.6 million
Angio-Seal units had been sold.

The Company receives a royalty on all co-developed Vitoss Foam product sales by Orthovita. The royalty is pursuant to an
agreement entered into between the Company and Orthovita in March 2003. The first royalty was earned in February 2004 when the first co-developed product was commercially launched by Orthovita. In addition, in a separate transaction, the Company
acquired proprietary rights of a third party to the Vitoss technology. This acquisition entitled the Company to certain rights, including the economic rights, of the third party. These economic rights included a royalty on all products containing
the VITOSS technology.

Research and Development Research and development costs are charged to
expense as incurred.



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Income Taxes -The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes,(SFAS 109) (see Note 9).

Earnings Per Share - Earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share(SFAS 128), which requires the Company to report both basic and diluted earnings per share (EPS). Basic and diluted EPS are computed using the weighted average number of shares of common stock outstanding,
with common equivalent shares from options and nonvested stock awards included in the diluted computation when their effect is dilutive (see Note 17). Options and nonvested stock awards to purchase shares of our Common Stock which were outstanding
for the years ended June 30, 2006, 2005 and 2004, but were not included in the computation of diluted EPS because the exercise prices of the options exceeded the average market price and would have been antidilutive are shown in the table
below:



|                   |  |          |               |      |   |               |  |   |              
|------------------ |  | -------- | ------------- | ---- | - | ------------- |  | - | -------------
|                   |  | June 30,
|                   |  | 2006     |               | 2005 |   | 2004         
|Number of Options  |  |          | 663,434       |      |   | 236,833       |  |   | 3,135        
|                   |  |          |               |      |   |               |  |   |              
|Option Price Range |  | $        | 22.90 -$34.36 |      | $ | 29.19 -$34.36 |  | $ | 25.55 -$34.36
|                   |  |          |               |      |   |               |  |   |              

Stock-Based Compensation Stock-based compensation costs prior to July 1, 2005 were
accounted for by the Company under SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), which permitted (i) recognition of the fair value of stock-based awards as an expense, or (ii) continued application of the
intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). The Company previously accounted for its stock-based employee and director compensation plans under the recognition
and measurement principles of APB 25. Under this intrinsic value method, compensation cost represented the excess, if any, of the quoted market price of the Companys Common Stock at the grant date over the amount the grantee must pay for the
stock.

The Companys policy has been to grant employee stock options with an exercise price equal to the fair market value of the Companys
Common Stock at the date of grant, therefore recording no compensation expense under APB 25. Prior to the adoption of SFAS No. 123(R) Share-Based Payment (FAS 123(R)), the Company had expensed all share-based payments to non-employee
outside consultants, as defined under SFAS 123, based upon the fair market value of such grants and all nonvested shares granted using the intrinsic value method under APB 25.

On December 16, 2004, the Financial Accounting Standards Board (FASB) finalized SFAS 123(R), which amends SFAS 123 and supersedes APB 25 and requires that the cost of share-based payment transactions (including
those with employees and non-employee directors) be recognized in the financial statements. SFAS 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an Employee Stock Ownership Plan (ESOP)) or by incurring liabilities (1) in amounts based (even in part) on the price of the entitys shares or other equity instruments, or
(2) that require (or may require) settlement by the issuance of an entitys shares or other equity instruments. This statement was effective as of the first annual reporting period beginning after June 15, 2005, or the Companys
fiscal quarter ended September 30, 2005.

Effective July 1, 2005, the Company adopted the provisions of SFAS 123(R) using the modified
prospective approach and now accounts for share-based compensation applying the fair value method for expensing stock options and nonvested stock awards (referred to in previous SEC filings as restricted stock awards or restricted shares, see
below). Accordingly, the adoption of SFAS 123(R)s fair value method resulted in compensation costs for the Companys two equity compensation plans. The compensation cost that was charged against income as a result of adoption of SFAS
123(R) for those plans was $2,358,848 for the year ended June 30, 2006. The total income tax benefit recognized in the statement of income for share-based compensation costs was $802,008 for the year ended June 30, 2006.



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Stock Options

Stock options granted to employee and non-employee members of the Board of Directors are recorded as compensation expense using the fair value method under SFAS 123(R). Fair value is calculated under the Black-Scholes
option-pricing model. See Note 15 for additional information.

Nonvested Stock Awards

All nonvested shares granted to executive officers, management and non-employee members of the Board of Directors are recorded as compensation expense
using the fair value method under SFAS 123(R). Fair value is based upon the closing price of the Companys Common Stock on the date of grant. See Note 16 for nonvested stock awards granted to the non-employee members of the Board of Directors,
executive officers and certain other management of the Company.

Nonvested shares granted to executive officers, management and non-employee
members of the Board of Directors usually are referred to as restricted shares, but SFAS 123(R) reserves that term for fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of
time.

Non-Employee Stock Options

Options granted to non-employee outside consultants, as defined under SFAS 123 (R), are recorded as compensation expense using the fair value method under SFAS 123(R). Fair value is calculated under the Black-Scholes
option-pricing model. See Note 10 for a discussion of options granted to non-employee outside consultants in July 2003 and October 2002.

In
March 2005, the U.S. Securities and Exchange Commission (SEC) issued SAB No. 107 (SAB 107),Share-Based Payment, which expressed views of the SEC staff regarding the application of Statement 123(R). In April 2005, the SEC
issued release No. 33-8568,Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement 123(R). Among other things, SAB 107 and release No. 33-8568 provided interpretive guidance related to the
interaction between Statement 123(R) and certain SEC rules and regulations, provided the SEC staffs views regarding the valuation of share-based payment arrangements for public companies and changed the required adoption date of the standard
to periods beginning after June 15, 2005, or the Companys fiscal quarter ended September 30, 2005.

Prior to the adoption of SFAS 123(R),
had compensation costs for the Companys equity compensation plans been determined based on the fair market value of the stock options and the nonvested stock, consistent with the provisions of SFAS 123 as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation(SFAS 148), the Companys net income and earnings per share for the
years ended June 30, 2005 and 2004 would have been reduced to the pro forma amounts below:



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|                                    |  |          |            |   |      |   |            |  
|----------------------------------- |  | -------- | ---------- | - | ---- | - | ---------- | -
|                                    |  | June 30, |           
|                                    |  | 2005     |            |   | 2004 |  
|Net income, as reported             |  | $        | 12,931,371 |   |      | $ | 12,950,783 |  
|Add back fair market value expense: |  |          |            |   |      |   |            |  
|Non-employee option grants (1)      |  |          | 57,755     |   |      |   | 53,327     |  
|Add back intrinsic value expense:   |  |          |            |   |      |   |            |  
|Nonvested stock grants (2)          |  |          | 546,555    |   |      |   | 21,948     |  
|Deduct fair market value expense:   |  |          |            |   |      |   |            |  
|Non-employee option grants (1)      |  |          | (57,755    | ) |      |   | (53,327    | )
|Nonvested stock grants (3)          |  |          | (546,555   | ) |      |   | (21,948    | )
|Employee stock options (3)          |  |          | (6,177,568 | ) |      |   | (1,377,437 | )
|                                    |  |          |            |   |      |   |            |  
|Pro forma net income                |  | $        | 6,753,803  |   |      | $ | 11,573,346 |  
|                                    |  |          |            |   |      |   |            |  
|Earnings per share:                 |  |          |            |   |      |   |            |  
|Basic - as reported                 |  | $        | 1.13       |   |      | $ | 1.14       |  
|                                    |  |          |            |   |      |   |            |  
|Basic - pro forma                   |  | $        | 0.59       |   |      | $ | 1.01       |  
|                                    |  |          |            |   |      |   |            |  
|Diluted - as reported               |  | $        | 1.06       |   |      | $ | 1.06       |  
|                                    |  |          |            |   |      |   |            |  
|Diluted - pro forma                 |  | $        | 0.55       |   |      | $ | 0.94       |  
|                                    |  |          |            |   |      |   |            |  

---

|(1) | Amounts represent compensation expense determined under the fair market value method included in reported net income, net of related tax effect.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts represent compensation expense determined under the intrinsic value method included in reported net income, net of related tax effects.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amounts represent compensation expense if it had been determined under the fair market value based method for all awards, net of related tax effects.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Accelerated Vesting of Stock Options-On April 27, 2005, the Companys Board of Directors approved the acceleration of vesting of certain
unvested and out-of-the-money stock options with exercise prices equal to or greater than $27.35 per share (the share price on the date of acceleration) that were previously awarded to the Companys employees, including its
executive officers and other management, under its equity compensation plans. The acceleration of vesting was effective for these stock options outstanding as of May 4, 2005. Options to purchase 547,815 shares of Common Stock (of which options
to purchase 431,000 shares were held by executive officers and other management) or 47% of the shares underlying the Companys outstanding unvested options were subject to the acceleration. We anticipate that the stock option acceleration will
not have an immediate dilutive effect on our earnings per share as the majority of the employee group has a historical expected option term of approximately 6 years. Compensation expense that would have been recorded over a weighted average period
of 2.12 years after the adoption of SFAS 123(R) absent the accelerated vesting, was approximately $5.2 million, or $3.7 million net of related tax effects, of which $4.2 million, or $3.0 million net of related tax effects, was related to stock
options held by executive officers and directors. The purpose of the acceleration was to enable the Company to decrease future recognized compensation expense associated with options upon adoption of SFAS 123(R).

Derivative Instruments and Hedging Activities The Company recognizes all derivatives as either assets or liabilities in the balance sheet, depending
on the Companys rights or obligations under the applicable derivative contract, and measures those instruments at fair value. The change in a derivatives fair value is recorded each period in current earnings or accumulated other
comprehensive income (OCI), depending on if the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction.

Cash Flow Hedge

On May 25, 2006, the Company entered into a $35 million aggregate ten-year fixed interest rate swap
agreement (the swap), with Citibank, N.A., to manage the market risk from changes in interest rates under a secured commercial mortgage (see Note 7). Because this transaction involves the hedging of forecasted interest rate payments, the derivative
instrument is classified as a cash flow hedge in



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accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, No. 138 and
No. 149 and is recorded in the Consolidated Balance Sheet at fair value.

The Companys objective and strategy for undertaking the
swap was to hedge its exposure to variability in cash flows and interest expense associated with the future interest rate payments under the secured commercial mortgage and to reduce the Companys interest rate risk in the event of an
unfavorable interest rate environment.

The effective portion of the interest rate swap gains or losses, due to changes in fair value, are
recorded as a component of OCI and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The Company utilizes the Hypothetical Derivative Method in determining hedge effectiveness
each period. Transactions that would cause ineffectiveness and result in the Company reclassifying the ineffective portion into current earnings would include the prepayment of the Secured Commercial Mortgage and/or the Companys election of
the Prime interest rate option on any draw under the Companys secured commercial mortgage (see Note 7). Interest expense under the swap is recorded in earnings at the fixed rate set forth in the swap.

For the fiscal year ended June 30, 2006, no amount was recognized in current earnings due to ineffectiveness or amounts excluded from the assessment
of hedge effectiveness. The amount reported as an unrealized loss on interest rate swap in the accumulated OCI account within stockholders equity represents the net unrealized loss on the swap, which has been designated as a cash flow hedge.
The Company does not anticipate any material unrealized losses to be recognized within the subsequent 12 months as the anticipated transactions occur.

The Company did not have any derivative instruments during the fiscal years ended June 30, 2005 or 2004.

New
Accounting Pronouncements  In November 2004, the FASB issued SFAS No. 151, Inventory Costs(SFAS 151). SFAS 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) under the guidance in ARB No. 43 (ARB 43), which previously required such items that were so abnormal; to be treated as current period charges. SFAS 151 requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, or the Companys fiscal year ended June 30, 2006. The Companys adoption of SFAS 151 did not have a material
impact on the Companys financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets(SFAS 153), an amendment to Opinion No. 29, Accounting for Nonmonetary Transactions(Opinion No. 29). SFAS 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
asset exchanges occurring in periods beginning after June 15, 2005, or the Companys fiscal quarter ended September 30, 2005. The Companys adoption of SFAS 153 did not have a material impact on the Companys financial
position or results of operations.

In December 2004, the FASB issued two FASB staff positions (FSP): FSP 109-1, Application of FASB Statement
No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S.-Based Manufacturers by the American Jobs Creation Act of 2004 (FSP 109-1); and FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act



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of 2004(FSP 109-2). FSP 109-1 clarifies that the tax deduction for domestic manufacturers under the American Jobs Creation Act of 2004 (the Act)
should be accounted for as a special deduction in accordance with FASB Statement No. 109,Accounting for Income Taxes. FSP 109-2 provides enterprises more time (beyond the financial-reporting period during which the Act took effect) to
evaluate the Acts impact on an enterprises plan for reinvestment or repatriation of certain foreign earnings for purposes of applying SFAS 109. FSP 109-1 and 109-2 were effective upon issuance in December 2004. The Companys
adoptions of FSP 109-1 and 109-2 did not have a material impact on the Companys financial position or results of operations.

In March 2005, the FASB
issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of
settlement are conditional upon a future event that may or may not be within control of the entity. FIN 47 was effective no later than the end of the first fiscal year ending after December 15, 2005, or the Companys fiscal year ending
June 30, 2006. Retrospective application for interim financial information was permitted but not required. The Companys adoption of FIN 47 did not have a material impact on the Companys financial position or results of operations.

In May 2005, the FASB issued FASB Statement No. 154,Accounting Changes and Error Corrections(SFAS 154). SFAS 154 supersedes APB Opinion
No. 20,Accounting Changes, and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Generally, the provisions of SFAS 154 are similar to the provisions of both Opinion 20 and Statement 3.
However, SFAS 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle. Recognition of the cumulative effect of a voluntary change in accounting principle in net earnings in the
period of change would only be permitted if retrospective application to prior periods financial statements is impracticable. Statement 154 is effective as of the beginning of the Companys 2007 fiscal year. We are currently evaluating
the impact, if any, that SFAS 154 will have on our financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition
in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the Companys 2007 fiscal year. We are currently evaluating the impact, if
any, that FIN 48 will have on our financial statements.

2. STRATEGIC ALLIANCE AGREEMENTS

St. Jude Medical, Inc.

The Company has a strategic alliance
with St. Jude Medical, Inc. (St. Jude Medical) which incorporates United States and foreign license agreements (together, the License Agreements), a Collagen Supply Agreement and an Angio-Seal Vascular Closure Device Component Supply Contract (see
below).

The License Agreements  Under the License Agreements, St. Jude Medical has exclusive rights to manufacture and market all
current and future sizes of the Angio-Seal worldwide. Also under the License Agreements, the Company receives royalty payments based upon a percentage of the revenues generated from the sale of the Angio-Seal.

The Collagen Supply Agreement -Pursuant to an agreement with St. Jude Medical, the Company manufactures the collagen plug component of the Angio-Seal. The
original agreement was a three-year agreement that was scheduled to expire on November 30, 2005 which contained a minimum purchase requirement from St. Jude Medical, with pricing that fluctuated based on product size and cumulative quantities
sold.

The Angio-Seal Vascular Closure Device Component Supply Contract - On June 15, 2005, the Company executed a new Angio-Seal
Vascular Closure Device component supply contract (the Contract) with its licensee, St. Jude Medical, Inc. The contract, which was effective June 30, 2005 and will expire in December



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2010, provides for the Company to exclusively supply 100% of St. Jude Medicals requirements for the collagen component of all current and future
versions of the Angio-Seal device, as well as 30% of St. Jude Medicals bioresorbable polymer anchor requirements over the term of the agreement. Although St. Jude Medical has historically purchased 100% of their collagen requirements from the
Company, their contractual obligation was only 50% of such requirements. In addition, the two companies had only an informal verbal agreement under which the Company provided St. Jude Medical with approximately 20% of their annual anchor component
requirements. This new contract adds 100% collagen component exclusivity, the formal and increased commitment for the supply of the anchor component at 30% of the total annual requirements, and provides for a five and a half year term compared to
the existing contract three-year term.

In addition to future revenue derived from the component sales, the Company received a $1 million origination fee
upon signing in consideration of the companys required investment, including development efforts, to provide the collagen components specified in the contract. Under the agreement, the Company will commercialize new proprietary collagen
technologies through incorporation into the Angio-Seal Device. The contract also provides St. Jude Medical with access to the Companys new closed herd collagen sources.

Orthovita

In March 2003, the Company entered into a development, manufacturing and supply agreement with
Orthovita under which the Company develops and commercializes products based on Orthovitas proprietary VITOSS bone graft substitute material in combination with the Companys proprietary biomaterials (the Orthovita Agreement). Under the
Orthovita Agreement, products are co-developed, Kensey Nash manufactures the products and Orthovita markets and sells the products worldwide. Also under the Orthovita Agreement, Kensey Nash receives a royalty payment based upon Orthovitas
total end-user sales of co-developed products.

In July 2004, the Company acquired the intellectual property rights of a third party, an inventor of the
VITOSS technology (the Inventor), for $2.6 million under an assignment agreement with the Inventor (the Assignment Agreement). Under the Assignment Agreement, the Company receives all intellectual property rights of the Inventor that had not
previously been assigned to Orthovita. Also under the Assignment Agreement, the Company will receive a royalty from Orthovita on the sale of all Orthovita products containing the VITOSS technology, up to a total royalty to be received of $4,035,782.

3. GOODWILL

The Company accounts for goodwill under
the provisions of SFAS 142. Under SFAS 142, goodwill is no longer amortized but is subject to annual impairment tests. The Company has established its annual impairment testing date to be June 30thof each fiscal year.

The Company completed its initial required
goodwill impairment test under SFAS 142 in the first quarter of fiscal 2002. The net carrying amount of goodwill increased by $6.3 million for the year ended June 30, 2006 from June 30, 2005 related to the acquisition of ILT (See Note 21).
The most recent tests in fiscal 2006, 2005 and 2004 indicated that goodwill was not impaired.



|                            |  |          |          
|--------------------------- |  | -------- | ---------
|                            |  | Goodwill
|Balance as of June 30, 2005 |  | $        | 3,284,303
|IntraLuminal Acquisition    |  |          | 6,342,897
|                            |  |          |          
|Balance as of June 30, 2006 |  | $        | 9,627,200
|                            |  |          |          

4. ACCRUED EXPENSES

As of June 30, 2006 and June 30, 2005, accrued expenses consisted of the following:



|                                         |  |              |           |              |   |          
|---------------------------------------- |  | ------------ | --------- | ------------ | - | ---------
|                                         |  | June 30,2006 |           | June 30,2005
|Accrued payroll and related compensation |  | $            | 888,730   |              | $ | 1,364,278
|Accrued new facility costs               |  |              | 1,176,602 |              |   | 3,371,665
|Other                                    |  |              | 888,747   |              |   | 722,775  
|                                         |  |              |           |              |   |          
|Total                                    |  | $            | 2,954,079 |              | $ | 5,458,718
|                                         |  |              |           |              |   |          



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5. LEASES

At June 30, 2006, future minimum annual rental commitments under non-cancelable lease obligations were as follows:



|                             |  |                  |       
|---------------------------- |  | ---------------- | ------
|                             |  | Operating Leases
|Year Ending June 30:         |  |                  |       
|2007                         |  | $                | 15,639
|                             |  |                  |       
|Total minimum lease payments |  | $                | 15,639
|                             |  |                  |       

Rent expense for operating leases consists of rent for the Companys facilities in Exton, Pennsylvania and
Eschborn, Germany. Rent expense for the fiscal years ended June 30, 2006, 2005, and 2004 was approximately $765,000, $986,000, and $811,000, respectively.

6. PATENT AND PROPRIETARY RIGHTS AGREEMENTS

The Patent Acquisition Agreement

In November 1997, the Company entered into an agreement (the Patent Acquisition Agreement) to acquire a portfolio of puncture closure patents and patent applications as
well as the rights of the seller under a pre-existing licensing agreement. In addition, in September 2000 in conjunction with the acquisition of THM, the Company acquired a separate portfolio of patents related to its biomaterials business.

The costs of the Patent Acquisition Agreement and patents acquired as part of the THM acquisition are being amortized over the remaining periods of
economic benefit, ranging from 3 to 10 years at June 30, 2006. The gross carrying amount of such patents at June 30, 2006 was $4,096,366 with accumulated amortization of $2,211,795. Amortization expense on these patents was $263,026 for
the year ended June 30, 2006 and was included within research and development expense. Amortization expense on the Companys acquired patents is estimated at $263,026 for each of the years ending June 30, 2007, 2008, 2009, $262,500
for the fiscal year ending June 30, 2010 and $261,973 for the fiscal year ending June 30, 2011.

The Assignment Agreement

In August 2004, the Company acquired the intellectual property rights of a third party, an inventor of the VITOSS technology (the Inventor), for
$2,600,000 under an assignment agreement with the Inventor (the Assignment Agreement). Under the Assignment Agreement, the Company receives all intellectual property rights of the Inventor that had not previously been assigned to Orthovita. Also
under the Assignment Agreement, the Company receives a royalty from Orthovita on the sale of all Orthovita products containing the VITOSS technology, up to a total royalty to be received of $4,035,782. As of June 30, 2006, the Company
recognized royalty income of $1,075,046 under the Assignment Agreement and $2,960,736 was yet to be received. The entire cost of these proprietary rights is being amortized over the 60-month period the Company anticipates receiving the economic
benefit in relation to the proprietary rights. Amortization expense on these proprietary rights was $520,000 for the year ended June 30, 2006 and was included within selling, general and administrative expense. Amortization expense on these
proprietary rights is estimated at $520,000 for each of the fiscal years ending June 30, 2007 through fiscal 2009 and $43,334 for the year ending June 30, 2010.

The Technology Purchase Agreement

In March 2005, the Company entered into an agreement to acquire patents and
other proprietary rights from a pair of inventors (the Technology Purchase Agreement). The intellectual property and processing information



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acquired under the Technology Purchase Agreement is complimentary to and broadens the Companys existing biomaterials intellectual property and
materials processing knowledge platform. Under the Technology Purchase Agreement, the Company paid $250,000 for the patents upon execution of the agreement and is obligated to pay certain milestone payments and royalties upon achievement of certain
product development and commercial launch goals for products that incorporate the acquired patent technology. The Company anticipates that the patents and other proprietary rights acquired will enhance its existing biomaterials platform and have
alternative future uses to expand such platform. The initial $250,000 purchase price of the patents will be amortized over the remaining period of economic benefit of such patents, currently estimated at approximately 14 years at June 30, 2006.
The gross carrying amount of the acquired technology at June 30, 2006 was $250,000. Amortization expense on the acquired technology was $16,043 for the fiscal year ending June 30, 2006 and included within research and development expense.
Amortization expense on the acquired technology is currently estimated at $16,043 for each of the fiscal years ending June 30, 2007, 2008, 2009, 2010 and 2011.

7. DEBT

Acquisition ObligationOn September 1, 2000, in conjunction with the
acquisition of THM Biomedical, the Company incurred a note payable in the amount of $4.5 million (the Acquisition Obligation). The Acquisition Obligation was due in equal quarterly installments of $281,250 beginning on December 31, 2000 and
ending on September 30, 2004. Accordingly, the present value of the cash payments (discounted based upon the Companys then available borrowing rate of 7.5%) of $3,833,970 was recorded as a liability on the Companys consolidated
financial statements. During the quarter ended March 31, 2003, the Company repaid certain debt holders, thereby reducing the Companys remaining quarterly installments to $223,256 through September 30, 2004. As of September 30,
2004, the Company had repaid the entire Acquisition Obligation.

Secured Commercial Mortgage - On May 25, 2006, Kensey Nash Corporation
(the Company) entered into an agreement for a Secured Commercial Mortgage (the Mortgage) with Citibank, F.S.B. (the Bank). The Mortgage provides the Company with the ability to take aggregate advances of up to $35
million through November 25, 2007 (the Draw Period) and is secured by the Companys facility located at 735 Pennsylvania Drive, Exton, Pennsylvania 19341.

Advances under this Mortgage shall bear interest computed daily on the outstanding principal balance at the time of advance until paid in full. At the time of advance, the Company will elect one of the two following
interest rate options: (1) LIBO Rate Option - a fluctuating interest rate equal to the one month LIBO Rate, reset monthly, plus eighty-two basis points (the Loan Credit Spread); or (2) Prime Rate Option - a fluctuating interest rate per
annum equal to the prime rate. As of June 30, 2006, the Company had taken an $8 million advance under the Mortgage.

The Company has entered into a
$35 million aggregate ten-year fixed interest rate swap agreement (See Note 1), with Citibank, N.A., to hedge its interest rate risk under the Mortgage. The swap agreement bears interest at a fixed rate of 5.62%, exclusive of the Loan Credit Spread.
As of June 30, 2006 the notional amount of $8.0 million advanced under the Mortgage matched the interest rate swap. Including the Loan Credit Spread, the Companys maximum interest rate exposure for the ten-year term of the swap is 6.44%
(5.62% fixed interest rate plus .82% Loan Credit Spread). Under the swap, interest is paid on the current outstanding principal balance.

Under the
Mortgage, commencing on June 25, 2006, the Company is required to pay interest only on the outstanding principal amount of this Mortgage during the Draw Period. After the Draw Period, and beginning December 25, 2007, the Company shall pay
principal and interest based on a twenty-five year straight-line amortization schedule.

The Mortgage contains various conditions to borrowing, and
affirmative, restrictive and financial maintenance covenants. Certain of the more significant covenants require: the Company to maintain a Minimum Fixed Charge Coverage Ratio of EBITDA (as defined in the Mortgage) to debt service equal to or greater
than 1.50 to- 1.0; and maintain an interest rate hedge of at least fifty percent of the outstanding principal balance of the Mortgage through an interest rate protection product reasonably acceptable to the Bank.



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The Mortgage also contains various events of default, the occurrence of which could result in a termination by the Bank
and the acceleration of all the Companys obligations under the Mortgage. These events of default include, without limitation: (i) payment defaults, (ii) breaches of covenants under the Mortgage (certain of which breaches do not have
any grace period), (iii) bankruptcy events, (iv) cross-defaults and (v) transfer of mortgaged premises. As of June 30, 2006, the Company was in compliance with affirmative, restrictive and financial maintenance covenants.

8. RETIREMENT PLAN

The Company has a 401(k) Salary
Reduction Plan and Trust (the 401(k) Plan) in which all employees that are at least 21 years of age are eligible to participate. Contributions to the 401(k) Plan are made by employees through an employee salary reduction election. Effective
October 1, 1999, the Company implemented a 25% discretionary matching contribution, on up to 6% of an employees total compensation, for all employee contributions. Effective July 1, 2004, the Company revised its discretionary
matching contribution to 50%, on up to 6% of an employees total compensation, for all employee contributions. Employer contributions to the 401(k) plan for 2006, 2005, and 2004 were $418,943, $348,538, and $143,694, respectively.

9. INCOME TAXES

The Company accounts for income taxes under SFAS
No. 109, which generally provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Companys assets and liabilities and expected benefits of
utilizing net operating loss (NOL) carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled are reflected in the financial statements in
the period of enactment.

The Company recorded tax credits of $528,017, $493,536 and $984,817 for the fiscal years ended June 30, 2006, 2005 and 2004,
respectively. During the fourth quarter of fiscal 2003, the Company performed a retrospective research and development tax credit study for fiscal years 1993 through 2003. This study resulted in a retrospective tax credit of $2.2 million of which
the majority was recorded in the fourth quarter of fiscal 2003 and the remainder was recorded in subsequent years. The Company continues to record research and development tax credits as a component of its current tax provision related to its
ongoing performance of qualified research and development.

Earnings before income taxes earned within or outside the
United States are shown below:



|                               |  |          |           |      |   |            |  |   |           
|------------------------------ |  | -------- | --------- | ---- | - | ---------- |  | - | ----------
|                               |  | June 30,
|                               |  | 2006     |           | 2005 |   | 2004      
|United States                  |  | $        | 4,551,916 |      | $ | 18,086,184 |  | $ | 18,091,648
|Foreign                        |  |          | 4,218     |      |   | 4,673      |  |   | 3,258     
|                               |  |          |           |      |   |            |  |   |           
|Net income before income taxes |  | $        | 4,556,134 |      | $ | 18,090,857 |  | $ | 18,094,906
|                               |  |          |           |      |   |            |  |   |           



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The Provision for income taxes is composed of the following:



|                          |  |          |           |   |      |   |           |  |   |          
|------------------------- |  | -------- | --------- | - | ---- | - | --------- |  | - | ---------
|                          |  | June 30,
|                          |  | 2006     |           |   | 2005 |   | 2004     
|Taxes on U.S. earnings    |  |          |           |   |      |   |           |  |   |          
|Federal                   |  |          |           |   |      |   |           |  |   |          
|Current                   |  | $        | 1,409,277 |   |      | $ | 3,316,836 |  | $ | 4,196,745
|Deferred                  |  |          | (572,254  | ) |      |   | 1,841,061 |  |   | 651,595  
|State                     |  |          |           |   |      |   |           |  |   |          
|Current                   |  |          |          |   |      |   |          |  |   | 294,675  
|                          |  |          |          
|Taxes on foreign earnings |  |          |           |   |      |   |           |  |   |          
|Deferred                  |  |          | 1,434     |   |      |   | 1,589     |  |   | 1,108    
|                          |  |          |           |   |      |   |           |  |   |          
|Total income tax expense  |  | $        | 838,457   |   |      | $ | 5,159,486 |  | $ | 5,144,123
|                          |  |          |           |   |      |   |           |  |   |          

The differences between the Companys income tax expense (benefit) and the income tax expense (benefit)
computed using the U.S. federal income tax rate were as follows:



|                                                   |  |          |           |   |      |   |            |      |  |   |            |  
|-------------------------------------------------- |  | -------- | --------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                   |  | June 30, |          
|                                                   |  | 2006     |           |   | 2005 |   |            | 2004 | 
|Net income before income taxes                     |  | $        | 4,556,134 |   |      | $ | 18,090,857 |      |  | $ | 18,094,906 |  
|                                                   |  |          |           |   |      |   |            |      |  |   |            |  
|Tax provision at U.S. statutory rate               |  |          | 1,549,086 |   |      |   | 6,150,891  |      |  |   | 6,152,268  |  
|State income tax provision, net of federal benefit |  |          |          |   |      |   |           |      |  |   | 212,137    |  
|Reconciliation to actual tax rate:                 |  |          |           |   |      |   |            |      |  |   |            |  
|Non-deductible meals and entertainment             |  |          | 36,910    |   |      |   | 20,668     |      |  |   | 16,874     |  
|Research and development credits                   |  |          | (528,017  | ) |      |   | (493,536   | )    |  |   | (984,817   | )
|Domestic production deduction                      |  |          | (10,142   | ) |      |   |           |      |  |   |           |  
|Non-taxable municipal bond interest income         |  |          | (233,178  | ) |      |   | (432,418   | )    |  |   | (254,986   | )
|Other                                              |  |          | 23,798    |   |      |   | (86,119    | )    |  |   | 2,647      |  
|                                                   |  |          |           |   |      |   |            |      |  |   |            |  
|Income tax expense                                 |  | $        | 838,457   |   |      | $ | 5,159,486  |      |  | $ | 5,144,123  |  
|                                                   |  |          |           |   |      |   |            |      |  |   |            |  
|Current income tax expense                         |  | $        | 1,409,277 |   |      | $ | 3,316,836  |      |  | $ | 4,491,420  |  
|                                                   |  |          |           |   |      |   |            |      |  |   |            |  
|Deferred income tax (benefit) expense              |  | $        | (570,820  | ) |      | $ | 1,842,650  |      |  | $ | 652,703    |  
|                                                   |  |          |           |   |      |   |            |      |  |   |            |  



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Significant components of the Companys deferred tax assets and liabilities are as
follows:



|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|----------------------------------------------- |  | -------- | --------- | - | ---------- | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                |  | June 30, |          
|                                                |  | 2006     |           |   | 2005       |  
|Deferred Tax Asset:                             |  | Current  |           |   | Noncurrent |   |            | Current |  |   | Noncurrent |  
|Accrued vacation                                |  | $        | 131,584   |   |            | $ |           |         |  | $ | 129,640    |   |  | $ |           |  
|Accrued bonus                                   |  |          | 4,760     |   |            |   |           |         |  |   |           |   |  |   |           |  
|Basis difference - patents & proprietary rights |  |          |          |   |            |   | 205,546    |         |  |   |           |   |  |   | 94,399     |  
|Inventory                                       |  |          | 402,124   |   |            |   |           |         |  |   | 218,236    |   |  |   |           |  
|Goodwill - THM Acquisition                      |  |          |          |   |            |   | 1,152,169  |         |  |   |           |   |  |   | 1,413,340  |  
|Stock Options                                   |  |          | 319,898   |   |            |   |            |         |  |   |            |   |  |   |            |  
|Nonvested Stock Awards                          |  |          | 395,999   |   |            |   |           |         |  |   | 136,038    |   |  |   |           |  
|Opportunity Grant Income                        |  |          |          |   |            |   | 124,054    |         |  |   |           |   |  |   | 151,622    |  
|Other                                           |  |          | 174,614   |   |            |   |           |         |  |   | 125,872    |   |  |   |           |  
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|                                                |  |          | 1,428,979 |   |            |   | 1,481,769  |         |  |   | 609,786    |   |  |   | 1,659,361  |  
|Research and development credits                |  |          | 384,042   |   |            |   |           |         |  |   | 40,608     |   |  |   |           |  
|AMT Tax Credit                                  |  |          |          |   |            |   | 277,700    |         |  |   |           |   |  |   | 277,700    |  
|NOL carryforwards                               |  |          | 106,138   |   |            |   | 2,637,360  |         |  |   | 107,573    |   |  |   | 1,318,000  |  
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|                                                |  |          | 1,919,159 |   |            |   | 4,396,829  |         |  |   | 757,967    |   |  |   | 3,255,061  |  
|Less valuation allowance                        |  |          |          |   |            |   | (2,637,360 | )       |  |   |           |   |  |   | (1,318,000 | )
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|Deferred tax asset                              |  |          | 1,919,159 |   |            |   | 1,759,469  |         |  |   | 757,967    |   |  |   | 1,937,061  |  
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|Deferred Tax Liability:                         |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|Basis difference - fixed assets                 |  |          |          |   |            |   | (2,282,956 | )       |  |   |           |   |  |   | (1,899,714 | )
|Prepaid insurance                               |  |          | (69,646   | ) |            |   |           |         |  |   | (101,920   | ) |  |   |           |  
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|Deferred tax liability                          |  |          | (69,646   | ) |            |   | (2,282,956 | )       |  |   | (101,920   | ) |  |   | (1,899,714 | )
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  
|Net Deferred Tax Asset (Liability)              |  | $        | 1,849,513 |   |            | $ | (523,487   | )       |  | $ | 656,047    |   |  | $ | 37,347     |  
|                                                |  |          |           |   |            |   |            |         |  |   |            |   |  |   |            |  

A portion of the Companys deferred tax asset is offset by a valuation allowance relating to state NOL
carryforwards due to restrictions imposed and uncertainty surrounding its use. The valuation allowance reduces deferred tax assets to an amount that represents managements best estimate of the amount of such deferred tax assets that more than
likely will be realized. At June 30, 2006, the Company had NOL carryforwards for state tax purposes totaling $40.0 million, which will expire through 2027. In addition, the Company has a foreign net operating loss of $312,171 at June 30,
2006, which will not expire.

10. CONSULTING CONTRACTS

In October 2002, the Company granted options to purchase 50,000 shares of common stock to a physician pursuant to a five-year consulting agreement related to the development of a carotid artery application for the TriActiv System.

In July 2003, the Company granted options to purchase 1,500 shares of common stock to a physician pursuant to a two-year consulting agreement related to
the development of orthopaedic applications for the Companys porous and non-porous tissue fixation and regeneration devices and drug delivery devices.

The Company calculated the fair value of these non-employee options in accordance with SFAS No.123, as $375,550 and $11,378 for the October 2002 and July 2003 grants, respectively, using the Black-Scholes option-pricing model. These amounts
were recorded as prepaid consulting expense and increases to additional paid in capital in the quarters ended December 31, 2002 and September 30, 2003, respectively. The prepaid expense is being amortized to research and development
expense over the terms of the agreements. Accordingly, $75,110 was recorded as a component of research and development expense for the period ended June 30, 2006 and $80,799 for the period ended June 30, 2005.

11. STOCK REPURCHASE PROGRAM

On October 23, 2003, we announced
that our board of directors had approved a program to repurchase up to 400,000 of its issued and outstanding shares of Common Stock over six months from the date of the board



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approval. In the second quarter of fiscal year 2004, the Company repurchased and retired 140,500 shares of common stock under the program at a cost of
approximately $3.0 million at an average market price of $21.34 per share. We financed the repurchases using our available cash.

On August 17, 2004,
we announced that our board of directors had reinstated a program to repurchase issued and outstanding shares of the Companys Common Stock over six months from the date of the board reinstatement. The reinstated plan called for the repurchase
of up to 259,500 shares, the balance under the original plan approved in October 2003. For the year ended June 30, 2005, we repurchased and retired 199,867 shares of common stock under the reinstated program at a cost of approximately $5.1
million, or an average market price of $25.68 per share. This program expired in February 2005.

On March 16, 2005, we announced a new program under
which an additional 400,000 issued and outstanding shares of our Common Stock were approved for repurchase by the Board of Directors. As of June 30, 2005, we had repurchased and retired 103,133 shares of Common Stock under this new program at a
cost of approximately $2.7 million, or an average market price of $26.58 per share, using available cash. At June 30, 2005, there were 296,867 shares remaining for repurchase under this program. This plan was scheduled to expire on
September 30, 2005, but it has been extended indefinitely until terminated by our Board of Directors. During the quarter ended December 31, 2005, we repurchased and retired 20,000 shares of Common Stock at a cost of $441,000, or an average
market price of $22.05 per share, using available cash. At June 30, 2006, there were 276,867 shares remaining for repurchase under this program.

12. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, investments and accounts receivable. The Company places its cash, cash equivalents and investments with high quality financial institutions and has established guidelines relative to diversification
and maturities to maintain safety and high liquidity. No single component of the Companys investment portfolio represented more than 11% or 15% of the total investments at June 30, 2006 and June 30, 2005, respectively. With respect
to trade and royalty receivables, such receivables are primarily with St. Jude Medical (40% and 86%, and 32% and 89% of trade and royalty receivables, respectively, at June 30, 2006 and 2005) (see Note 2). The trade receivables from two other
customers, Arthrex and Orthovita, were approximately 30% and 13%, respectively, of trade receivables at June 30, 2006. If any of these customers receivable balances should be deemed uncollectible, it would have a material adverse effect
on the Companys results of operations and financial condition. The Company performs ongoing credit evaluations on all of its customers financial conditions, but does not require collateral to support customer receivables.

13. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS

The Company has
entered into employment agreements with certain of its officers, which provided for aggregate annual base salaries of $737,600 through June 30, 2007.

14. PREFERRED STOCK

The Company has an authorized class of undesignated Preferred Stock consisting of 100,000 shares with a $.001 par
value. The Board of Directors may authorize the issuance of Preferred Stock, which ranks senior to the common stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors is
authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of Preferred Stock are outstanding. The Board of Directors, without stockholder approval, can issue Preferred
Stock with voting and conversion rights, which could adversely affect the voting power of the holders of Common Stock. At June 30, 2006 and 2005, no shares of Preferred Stock were outstanding. The Company has no present intention to issue
shares of Preferred Stock.

15. STOCK OPTION PLANS

The
Company has an Employee Incentive Compensation Plan (the Employee Plan), a flexible plan that provides the Compensation Committee of the Board of Directors (the Committee) with broad discretion to



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award eligible participants with stock-based and performance-related incentives as the Committee deems appropriate. The persons eligible to participate in
the Employee Plan are officers, non-employee directors and employees of the Company who, in the opinion of the Committee, contribute to the growth and success of the Company.

The Committee oversees the Employee Plan and may grant nonqualified stock options, incentive stock options, nonvested stock (see Note 16) or a combination thereof to the participants. As of June 30, 2006, awards
under the Employee Plan consisted of stock options and nonvested stock. As of June 30, 2006, the total number of shares authorized for issuance under the Employee Plan was 4,050,000, of which options to purchase a total of 2,146,107 shares of
the Companys Common Stock at a weighted average exercise price of $17.78 were outstanding, 143,822 nonvested stock awards were outstanding, options to purchase a total of 1,706,030 shares of the Companys Common Stock had previously been
exercised/issued, and 54,041 shares remained available for new awards under the Employee Plan. Options granted provide for the purchase of Common Stock at prices determined by the Compensation Committee, but in no event less than the closing price
of the stock on the date of grant. The Company also has a Non-employee Directors Stock Option Plan (the Directors Plan). The Directors Plan grants nonqualified stock options for the purchase of Common Stock to directors who are not
employees. As of June 30, 2006 a total of 410,000 shares were authorized for issuance under the Directors Plan of which options to purchase a total of 337,000 shares of the Companys Common Stock at a weighted average exercise price
of $20.07 were outstanding, and options to purchase a total of 73,000 shares of the Companys Common Stock had previously been exercised under the Directors Plan. As a result, zero shares remained available for new awards under the
Directors Plan. Awards previously granted under the Board of Directors plan are now granted under the Employee Plan.

Each non-employee director
receives an initial grant of options to purchase 5,000 shares of Common Stock upon their appointment to the Board of Directors, exercisable at the fair market value of such shares on the date of grant. In consideration of their service on the Board
of Directors, on the date of each annual meeting of the stockholders of the Company, each non-employee director who is elected, re-elected, or continues to serve as a director because his term has not expired, receives an option to purchase 7,500
shares of Common Stock, exercisable at the fair market value of such shares on the date of grant. In addition, each non-employee director who serves on a committee, as of the date of the annual meeting, receives an additional option to purchase
1,500 shares of Common Stock, exercisable at the fair market value of such shares on the date of grant. Each committee member is only entitled to a single such option to purchase 1,500 shares even if he serves on multiple committees. The Chairman of
the Board receives one-and-one-half times the standard non-employee director awards for continuation of service (options to purchase 11,250 shares of Common Stock); he does not receive any additional shares for serving on committees. In addition,
additional grants of options may be made, from time to time, as determined by the Compensation Committee.

Under both plans, options are exercisable over a
maximum term of ten years from the date of grant and vest over periods of zero to three years from the grant date.



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A summary of the stock option (see Note 16 below for nonvested stock activity) activity under both plans for the fiscal
years ended June 30, 2006, 2005 and 2004, is as follows:



|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|----------------------------------------------------------------------------- |  | ------------- | --------- | --------------- | -------------------------- | ----- | ------ | - | ------- | -------------------------- |  | -----
|                                                                              |  | Employee Plan |           | Directors Plan
|                                                                              |  | Shares        |           |                 | Weighted AvgExercise Price |       | Shares |   |         | Weighted AvgExercise Price
|Balance at June 30, 2003                                                      |  |               | 2,077,325 |                 |                            | 12.31 |        |   | 265,000 |                            |  | 15.54
|Granted                                                                       |  |               | 282,000   |                 |                            | 30.09 |        |   | 54,000  |                            |  | 21.93
|Cancelled                                                                     |  |               | (6,522    | )               |                            | 16.19 |        |   |        |                            |  |     
|Exercised                                                                     |  |               | (260,331  | )               |                            | 11.87 |        |   | (25,000 | )                          |  | 11.83
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Balance at June 30, 2004                                                      |  |               | 2,092,472 |                 |                            | 14.91 |        |   | 294,000 |                            |  | 17.03
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Granted                                                                       |  |               | 305,500   |                 |                            | 22.88 |        |   | 54,000  |                            |  | 32.00
|Cancelled                                                                     |  |               | (12,947   | )               |                            | 24.03 |        |   |        |                            |  |     
|Exercised                                                                     |  |               | (189,067  | )               |                            | 12.86 |        |   | (7,000  | )                          |  | 12.00
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Balance at June 30, 2005                                                      |  |               | 2,195,958 |                 |                            | 16.85 |        |   | 341,000 |                            |  | 19.50
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Granted                                                                       |  |               | 163,750   |                 |                            | 28.09 |        |   | 19,500  |                            |  | 23.45
|Cancelled                                                                     |  |               | (25,916   | )               |                            | 26.98 |        |   |        |                            |  |     
|Exercised                                                                     |  |               | (187,685  | )               |                            | 14.64 |        |   | (23,500 | )                          |  | 14.58
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Balance at June 30, 2006                                                      |  |               | 2,146,107 |                 |                            | 17.78 |        |   | 337,000 |                            |  | 20.07
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Exercisable portion                                                           |  |               | 1,967,010 |                 |                            | 16.89 |        |   | 299,500 |                            |  | 19.74
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Available for future grant                                                    |  |               | 54,041    |                 |                            |       |        |   |        |                            |  |      
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|Weighted-average fair value of options granted during the year ended June 30, |  |               |           |                 |                            |       |        |   |         |                            |  |      
|2004                                                                          |  | $             | 14.15     |                 |                            |       |        | $ | 9.80    |                            |  |      
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|2005                                                                          |  | $             | 11.38     |                 |                            |       |        | $ | 13.13   |                            |  |      
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      
|2006                                                                          |  | $             | 11.87     |                 |                            |       |        | $ | 9.71    |                            |  |      
|                                                                              |  |               |           |                 |                            |       |        |   |         |                            |  |      

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
that uses the weighted average assumptions noted in the following table. Expected volatilities are based on historical volatility of the Companys Common Stock, and other factors. The Company uses historical data to estimate option exercise and
employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options is derived from historical exercise behavior
and represents the period of time that options granted are expected to be outstanding; the terms given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the
option is based on U.S. treasuries with constant maturities in effect at the time of grant.



|                        |  |                     |   |  |      |   |  |      |  
|----------------------- |  | ------------------- | - |  | ---- | - |  | ---- | -
|                        |  | Year Ended June 30, |  
|                        |  | 2006                |   |  | 2005 |   |  | 2004 |  
|Dividend yield          |  | 0                   | % |  | 0    | % |  | 0    | %
|Expected volatility     |  |                     |   |  |      |   |  |      |  
|Employee Plan           |  | 35                  | % |  | 35   | % |  | 40   | %
|Directors Plan         |  | 35                  | % |  | 35   | % |  | 40   | %
|Risk-free interest rate |  |                     |   |  |      |   |  |      |  
|Employee Plan           |  | 4.20                | % |  | 3.71 | % |  | 3.85 | %
|Directors Plan         |  | 4.40                | % |  | 3.78 | % |  | 3.57 | %
|Expected lives:         |  |                     |   |  |      |   |  |      |  
|Employee Plan           |  | 6.16                |   |  | 6.02 |   |  | 6.08 |  
|Directors Plan         |  | 5.83                |   |  | 6.07 |   |  | 6.13 |  



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The following table summarizes significant option groups outstanding at June 30, 2006 and related weighted average
exercise price and remaining contractual life information as follows:



|                         |  |                        |  |                          |  |                        |       |                        |           |                        |   |      
|------------------------ |  | ---------------------- |  | ------------------------ |  | ---------------------- | ----- | ---------------------- | --------- | ---------------------- | - | -----
|                         |  | Options Outstanding    |  | Options Exercisable     
|Range of Exercise Prices |  | Number atJune 30, 2006 |  | RemainingContractualLife |  | Wghtd AvgExercisePrice |       | Number atJune 30, 2006 |           | Wghtd AvgExercisePrice
|$7.625 - $14.120         |  | 867,851                |  | 3.25                     |  | $                      | 10.35 |                        | 867,851   |                        | $ | 10.35
|$14.510 - $21.930        |  | 854,013                |  | 5.52                     |  |                        | 15.79 |                        | 836,013   |                        |   | 15.66
|$22.900 - $34.360        |  | 761,243                |  | 8.37                     |  |                        | 29.49 |                        | 562,646   |                        |   | 30.34
|                         |  |                        |  |                          |  |                        |       |                        |           |                        |   |      
|                         |  | 2,483,107              |  |                          |  |                        |       |                        | 2,266,510 |                        |   |      
|                         |  |                        |  |                          |  |                        |       |                        |           |                        |   |      

Compensation expense related to stock options is recorded as a component of either cost of goods sold, selling,
general and administrative expense or research and development expense, dependent on the employee receiving the stock options. For the year ended June 30, 2006, the Company recognized expense of $960,387 related to stock options. As of
June 30, 2006, there was $1,751,894 of unrecognized compensation costs related to unvested stock options granted under the two equity compensation plans. That cost is expected to be recognized over a weighted-average period of 2.00 years.

16. NONVESTED STOCK

The Company may provide nonvested
stock grants under its stockholder approved Employee Incentive Compensation Plan. During fiscal years 2004 and 2005, the Company granted shares of nonvested Common Stock to the non-employee members of the Board of Directors and to executive
officers. In addition, as part of a shift in focus of the Companys equity compensation program from stock options to nonvested stock, the Company granted shares of nonvested Common Stock to other management of the Company during the year ended
June 30, 2006.

Shares granted to non-employee members of the Board of Directors prior to December of 2005 vested in three equal annual installments
contingent upon the Companys achievement of certain earnings-per-share targets, Company Common Stock price targets and continued service of the board member on each anniversary of the date of grant. Beginning with the December 2005 nonvested
stock grants, all grants awarded to non-employee members of the Board of Directors were no longer subject to the achievement of certain earnings per share targets and Company Common Stock price targets; all other attributes of the grants will remain
the same as described above. Previously awarded nonvested stock grants will remain subject to the original provisions that were in effect at the time of grant.

The shares granted to executive officers and other management vest in three equal annual installments based solely on continued employment with the Company. Unvested shares are forfeited upon termination of service on the Board of Directors
or employment, as applicable. The Company made the following grants to non-employee, directors, executive officers and other management during the fiscal years ended June 30, 2006, 2005 and 2004:



|                                |  |                            |           |      |   |           |  |   |        
|------------------------------- |  | -------------------------- | --------- | ---- | - | --------- |  | - | -------
|                                |  | Fiscal Year Ended June 30,
|                                |  | 2006                       |           | 2005 |   | 2004     
|Shares granted:                 |  |                            |           |      |   |           |  |   |        
|Non-employee Directors          |  |                            | 13,000    |      |   | 12,000    |  |   | 11,580 
|Executive officers              |  |                            | 67,547    |      |   | 55,500    |  |   |       
|Other Management                |  |                            | 26,000    |      |   |          |  |   |       
|                                |  |                            |           |      |   |           |  |   |        
|Total shares granted            |  |                            | 106,547   |      |   | 67,500    |  |   | 11,580 
|                                |  |                            |           |      |   |           |  |   |        
|Fair value on the date of grant |  | $                          | 3,131,792 |      | $ | 1,915,060 |  | $ | 253,950
|                                |  |                            |           |      |   |           |  |   |        



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The fair value disclosed above is based upon the closing price of the Companys common stock on the date of grant.

Compensation expense related to all nonvested stock grants is being recorded over the three-year vesting period of these grants. Compensation expense
related to the shares issued to the members of the Board of Directors is recorded as a component of selling, general and administrative expense. Compensation expense related to executive officer and other management shares is recorded as a component
of either cost of goods sold, selling, general and administrative expense or research and development expense, dependent on which executive officer or other management team member received the shares. For the fiscal years ended June 30, 2006,
2005 and 2004 the Company recognized expense of $1,398,461, 764,627 and $33,255, respectively, related to nonvested stock awards.

As of June 30,
2006, there was an estimated $3,098,586 of unrecognized compensation costs related to nonvested stock awards granted under the Companys two equity compensation plans. That cost is expected to be recognized over a weighted average period of
1.93 years.

Following is a summary of nonvested stock transactions for the fiscal years ended June 30, 2006, 2005
and 2004.



|                                |  |               |   |  |                               
|------------------------------- |  | ------------- | - |  | ------------------------------
|                                |  | Employee Plan
|                                |  | Shares        |   |  | WeightedAverage Price PerShare
|Balance June 30, 2003           |  |              |   |  |                              
|Granted:                        |  |               |   |  |                               
|Non-employee Directors          |  | 11,580        |   |  | 21.93                         
|Executive officers              |  |              |   |  |                              
|Issued:                         |  |               |   |  |                               
|Non-employee Directors          |  |              |   |  |                              
|Executive officers              |  |              |   |  |                              
|Cancelled:                      |  |               |   |  |                               
|Non-employee Directors          |  |              |   |  |                              
|Executive officers              |  |              |   |  |                              
|                                |  |               |   |  |                               
|Balance June 30, 2004           |  | 11,580        |   |  | 21.93                         
|Granted:                        |  |               |   |  |                               
|Non-employee Directors          |  | 12,000        |   |  | 32.00                         
|Executive officers              |  | 55,500        |   |  | 27.59                         
|Issued:                         |  |               |   |  |                               
|Non-employee Directors          |  | (3,864        | ) |  | 21.93                         
|Executive officers              |  | (10,667       | ) |  | 27.43                         
|Cancelled:                      |  |               |   |  |                               
|Non-employee Directors          |  |              |   |  |                              
|Executive officers              |  |              |   |  |                              
|                                |  |               |   |  |                               
|Balance June 30, 2005           |  | 64,549        |   |  | 27.76                         
|Granted:                        |  |               |   |  |                               
|Non-employee Directors          |  | 13,000        |   |  | 23.45                         
|Executive officers & management |  | 93,547        |   |  | 30.22                         
|Issued:                         |  |               |   |  |                               
|Non-employee Directors          |  | (1,932        | ) |  | 23.97                         
|Executive officers & management |  | (18,502       | ) |  | 26.13                         
|Cancelled:                      |  |               |   |  |                               
|Non-employee Directors          |  | (5,940        | ) |  | 28.72                         
|Executive officers & management |  | (900          | ) |  | 30.40                         
|                                |  |               |   |  |                               
|Balance June 30, 2006           |  | 143,822       |   |  | 29.17                         
|                                |  |               |   |  |                               



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17. EARNINGS PER SHARE

The following table shows the reconciliation between the numerators and denominators for the basic and diluted EPS calculations, where income is the numerator and the weighted average number of shares is the denominator.



|                                                                      |  |                          |           |        |            |                  |   |     
|--------------------------------------------------------------------- |  | ------------------------ | --------- | ------ | ---------- | ---------------- | - | ----
|                                                                      |  | Year Ended June 30, 2006
|                                                                      |  | Income                   |           | Shares |            | Per Share Amount
|Basic EPS                                                             |  |                          |           |        |            |                  |   |     
|Income available to common shareholders                               |  | $                        | 3,717,677 |        | 11,493,558 |                  | $ | 0.32
|                                                                      |  |                          |           |        |            |                  |   |     
|Effect of Dilutive Securities                                         |  |                          |           |        |            |                  |   |     
|Options & nonvested stock                                             |  |                          |          |        | 825,783    |                  |   |     
|                                                                      |  |                          |           |        |            |                  |   |     
|Diluted EPS                                                           |  |                          |           |        |            |                  |   |     
|Income available to common shareholders including assumed conversions |  | $                        | 3,717,677 |        | 12,319,341 |                  | $ | 0.30
|                                                                      |  |                          |           |        |            |                  |   |     



|                                                                      |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|--------------------------------------------------------------------- |  | ------------------------ | ---------- | ------------------------ | ---------- | --------------- | - | ------ |  | ------ | ---------- | --------------- | ---------- |  | - | ----
|                                                                      |  | Year Ended June 30, 2005 |            | Year Ended June 30, 2004
|                                                                      |  | Income                   |            | Shares                   |            | Per ShareAmount |   | Income |  | Shares |            | Per ShareAmount
|Basic EPS                                                             |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|Income available to common shareholders                               |  | $                        | 12,931,371 |                          | 11,412,025 |                 | $ | 1.13   |  | $      | 12,950,783 |                 | 11,403,129 |  | $ | 1.14
|                                                                      |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|Effect of Dilutive Securities                                         |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|Options & nonvested stock                                             |  |                          |           |                          | 772,924    |                 |   |        |  |        |           |                 | 765,193    |  |   |     
|                                                                      |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|Diluted EPS                                                           |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     
|Income available to common shareholders including assumed conversions |  | $                        | 12,931,371 |                          | 12,184,949 |                 | $ | 1.06   |  | $      | 12,950,783 |                 | 12,168,322 |  | $ | 1.06
|                                                                      |  |                          |            |                          |            |                 |   |        |  |        |            |                 |            |  |   |     

18. SEGMENT REPORTING

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-making group in making decisions regarding how to allocate
resources and assess performance. Based on the criteria established by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131), the Companys operations and products have been aggregated into a
single reportable segment since they have similar economic characteristics, production processes, types of customers and distribution methods.

The
Companys primary products are all medical devices and include Biomaterials and Endovascular devices. With respect to biomaterials products, the Company designs and/or manufactures and markets various absorbable polymer and collagen products
for use in numerous applications including orthopaedic, cardiology, drug/biologics delivery, periodontal, general surgery and wound care. The Company also receives royalty revenue from the sale of Angio-Seal units by St. Jude Medical and from the
sales of Vitoss Foam product by Orthovita. In prior years, the company has received research and development revenue under certain research and development contracts or grants. With respect to endovascular products, the company designs and
manufactures embolic protection and thrombectomy devices. The commercially launched its first endovascular device in Europe in the fourth quarter of fiscal 2002 and commercially launched its first endovascular device in the United States in the
fourth quarter of fiscal 2005. Net sales by product line and a reconciliation to total revenue is as follows:



|                         |  |                   |            |      |   |            |  |   |           
|------------------------ |  | ----------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                         |  | Fiscal Year Ended
|                         |  | 2006              |            | 2005 |   | 2004      
|Biomaterials             |  | $                 | 36,698,841 |      | $ | 39,852,946 |  | $ | 36,142,160
|Endovascular             |  |                   | 1,179,213  |      |   | 516,507    |  |   | 218,375   
|                         |  |                   |            |      |   |            |  |   |           
|Net Sales                |  |                   | 37,878,054 |      |   | 40,369,453 |  |   | 36,360,535
|Research and development |  |                   |           |      |   | 253,292    |  |   | 688,353   
|Royalty income           |  |                   | 22,518,697 |      |   | 20,753,169 |  |   | 21,165,911
|                         |  |                   |            |      |   |            |  |   |           
|Total Revenue            |  | $                 | 60,396,751 |      | $ | 61,375,914 |  | $ | 58,214,799
|                         |  |                   |            |      |   |            |  |   |           



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For the years ended June 30, 2006, 2005 and 2004, revenues from St. Jude Medical represented the following
percentages of total revenues to the Company:



|                            |  |                                                         |   |  |      |   |  |      |  
|--------------------------- |  | ------------------------------------------------------- | - |  | ---- | - |  | ---- | -
|                            |  | Percentage of Total Revenue for the Year Ended June 30, |  
|                            |  | 2006                                                    |   |  | 2005 |   |  | 2004 |  
|Net sales                   |  | 25                                                      | % |  | 27   | % |  | 22   | %
|Royalty Income (see Note 2) |  | 32                                                      | % |  | 30   | % |  | 36   | %

For the years ended June 30, 2006, 2005 and 2004, revenues from Arthrex represented the following percentages
of total revenues to the Company:



|          |  |                                                         |   |  |      |   |  |      |  
|--------- |  | ------------------------------------------------------- | - |  | ---- | - |  | ---- | -
|          |  | Percentage of Total Revenue for the Year Ended June 30, |  
|          |  | 2006                                                    |   |  | 2005 |   |  | 2004 |  
|Net sales |  | 22                                                      | % |  | 21   | % |  | 30   | %

For the years ended June 30, 2006, 2005 and 2004, revenues from Orthovita represented the following
percentages of total revenues to the Company:



|                            |  |                                                         |   |  |      |   |  |      |  
|--------------------------- |  | ------------------------------------------------------- | - |  | ---- | - |  | ---- | -
|                            |  | Percentage of Total Revenue for the Year Ended June 30, |  
|                            |  | 2006                                                    |   |  | 2005 |   |  | 2004 |  
|Net sales                   |  | 5                                                       | % |  | 12   | % |  | 5    | %
|Royalty Income (see Note 2) |  | 5                                                       | % |  | 4    | % |  | 0.5  | %

The Companys revenues from external customers are summarized below. Revenues are attributed to a country
based on the location of the customer. The companys business is not dependent on foreign operations. No one country other than the U.S. represented more than 10% of the Companys revenues. In addition, all of the Companys long-lived
assets are located in the U.S.:



|                        |  |                                      |            |      |   |            |  |   |           
|----------------------- |  | ------------------------------------ | ---------- | ---- | - | ---------- |  | - | ----------
|                        |  | Revenues for the Year Ended June 30,
|                        |  | 2006                                 |            | 2005 |   | 2004      
|United States           |  | $                                    | 59,844,909 |      | $ | 60,182,383 |  | $ | 57,627,227
|Other foreign countries |  |                                      | 551,842    |      |   | 1,193,531  |  |   | 587,572   
|                        |  |                                      |            |      |   |            |  |   |           
|Total                   |  | $                                    | 60,396,751 |      | $ | 61,375,914 |  | $ | 58,214,799
|                        |  |                                      |            |      |   |            |  |   |           



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19. QUARTERLY FINANCIAL DATA (UNAUDITED)

The summarized quarterly results of operations of the Company for the years ended June 30, 2006 and June 30, 2005 are presented below:



|                             |  |                          |            |   |             |   |            |             |  |             |            |  |   |           
|---------------------------- |  | ------------------------ | ---------- | - | ----------- | - | ---------- | ----------- |  | ----------- | ---------- |  | - | ----------
|                             |  | Year Ended June 30, 2006
|                             |  | 1st Quarter              |            |   | 2nd Quarter |   |            | 3rd Quarter |  | 4th Quarter
|Operating revenues           |  | $                        | 12,726,172 |   |             | $ | 13,626,965 |             |  | $           | 15,675,525 |  | $ | 18,368,090
|Operating costs and expenses |  | $                        | 13,556,070 |   |             | $ | 14,492,880 |             |  | $           | 13,482,126 |  | $ | 15,363,475
|Net income                   |  | $                        | (182,752   | ) |             | $ | (555,860   | )           |  | $           | 1,787,634  |  | $ | 2,668,656 
|Basic earnings per share     |  | $                        | (0.02      | ) |             | $ | (0.05      | )           |  | $           | 0.16       |  | $ | 0.23      
|Diluted earnings per share   |  | $                        | (0.02      | ) |             | $ | (0.05      | )           |  | $           | 0.15       |  | $ | 0.21      
|                             | 
|                             |  | Year Ended June 30, 2005
|                             |  | 1st Quarter              |            |   | 2nd Quarter |   |            | 3rd Quarter |  | 4th Quarter
|Operating revenues           |  | $                        | 15,077,394 |   |             | $ | 15,220,717 |             |  | $           | 14,790,818 |  | $ | 16,286,985
|Operating costs and expenses |  | $                        | 10,904,217 |   |             | $ | 10,828,048 |             |  | $           | 10,595,268 |  | $ | 12,252,024
|Net income                   |  | $                        | 3,155,687  |   |             | $ | 3,289,637  |             |  | $           | 3,184,036  |  | $ | 3,302,011 
|Basic earnings per share     |  | $                        | 0.27       |   |             | $ | 0.29       |             |  | $           | 0.28       |  | $ | 0.29      
|Diluted earnings per share   |  | $                        | 0.26       |   |             | $ | 0.27       |             |  | $           | 0.26       |  | $ | 0.27      

Quarterly and total year earnings per share are calculated independently based on the weighted average number of
shares outstanding during each period.

20. OPPORTUNITY GRANT

In November 2004, the Company was awarded a $500,000 grant under the Opportunity Grant Program of the Department of Community and Economic Development of the Commonwealth of Pennsylvania. This grant was awarded to the Company for the
potential job-creating economic development opportunities created by the Companys construction of its new facility within the state of Pennsylvania. The grant is conditioned upon meeting the following: (1) the Company will create 238
full-time jobs within 5 years, beginning April 1, 2003, the date of the Companys request for the grant, (2) the Company will invest at least $54,250,000 in total project costs, including, but not limited to, personnel, land and
building construction within three years, beginning July 19, 2004, the date of the Companys facility groundbreaking and (3) the Company will operate at its new facility for a minimum of 5 years. The Company received the cash payment
of $500,000 in its third fiscal quarter 2005. Revenue will be recognized as earned over the longest period contained within the grant commitment term (five years from the date of occupancy of the Companys new facility). This date of
satisfaction of the last grant commitment is expected to be in December 2010, assuming the original expectation for a transition to the new facility in January 2006. During the fiscal year ended June 30, 2006, approximately $81,081 of revenue
was recognized related to this grant as a component of Other Income. Revenue from this opportunity grant is estimated at $81,081 for each of the years ending June 30, 2007 through 2010 and $40,543 for the fiscal year ended June 30, 2011.

21. ACQUISITION OF INTRALUMINAL THERAPEUTICS, INC.

In
May 2006, the Company acquired the assets of IntraLuminal Therapeutics, Inc. (ILT), a company focused on the emerging market opportunity of chronic total occlusion (CTO) (a complete vessel blockage common in both coronary and
peripheral vessels), for cash of $8 million plus acquisition costs of $148,000. The Company, as part of the asset purchase agreement, has escrowed $1 million of the $8 million purchase price for the purposes of securing ILTs post-closing
obligations. After covering any post-closing obligations, the remaining cash and interest earned will be disbursed within twelve months from the date of acquisition. The assets acquired included inventory, fixed assets, and certain intangible assets
to broaden the Companys existing endovascular intellectual property and knowledge platform. The Company also anticipates that the assets acquired will add to the companys future plans in the Chronic Total Occlusion market.

The valuation of the purchase price allocation was performed in an independent appraisal using proven valuation procedures and techniques and represents the estimated
fair market value based on risk-adjusted cash flows related to the identifiable assets with the excess of the cost over net assets acquired allocated to goodwill.



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The following is a summary of the allocation (in thousands):



|                                                     |  |   |          
|---------------------------------------------------- |  | - | ---------
|Inventory                                            |  | $ | 188,013  
|Machinery, furniture and equipment                   |  |   | 147,420  
|Intangible assets (patents, customer list and brand) |  |   | 1,470,000
|Excess of cost over net assets acquired (goodwill)   |  |   | 6,342,897
|                                                     |  |   |          
|                                                     |  | $ | 8,148,330
|                                                     |  |   |          

The components of acquired intangible assets listed in the above table as of the acquisition date utilized an
independent third party valuation and are as follows:



|              |  |        |           |      |        
|------------- |  | ------ | --------- | ---- | -------
|              |  | Amount |           | Life
|Customer List |  | $      | 760,000   |      | 8 years
|Patents       |  |        | 645,000   |      | 11years
|Brand         |  |        | 65,000    |      | 3 years
|              |  |        |           |      |        
|              |  | $      | 1,470,000 |      |        
|              |  |        |           |      |        

The gross carrying amount of the acquired intangible assets at June 30, 2006 was $1,470,000. Amortization
expense on the acquired intangible assets was $9,149 for the fiscal year ending June 30, 2006 and included within research and development expense. Amortization expense on the acquired intangible assets is currently estimated at $180,762 for
the fiscal year ending June 30, 2007, $175,303 for the fiscal year ending June 30, 2008, $173,497 for the fiscal year ending June 30, 2009, and $153,636 for each of the fiscal years ending June 30, 2010 and 2011.

The total amount of goodwill totaled $6.3 million and that amount is expected to be fully deductible for tax purposes.

The acquisition has been accounted for under the purchase method of accounting and ILTs results of operations are included in those of the Company since the date
of acquisition.

The following unaudited pro-forma financial information assumes that the acquisition had occurred as of the beginning of the earliest
period presented:



|                                  |  |                            |            |   |      |   |           
|--------------------------------- |  | -------------------------- | ---------- | - | ---- | - | ----------
|                                  |  | Fiscal Year Ended June 30,
|                                  |  | 2006                       |            |   | 2005
|Total revenue                     |  | $                          | 61,828,114 |   |      | $ | 65,706,750
|                                  |  |                            |            |   |      |   |           
|Net (loss) income                 |  | $                          | (3,438,811 | ) |      | $ | 1,362,242 
|                                  |  |                            |            |   |      |   |           
|Basic (loss) earnings per share   |  | $                          | (0.30      | ) |      | $ | 0.12      
|                                  |  |                            |            |   |      |   |           
|Diluted (loss) earnings per share |  | $                          | (0.30      | ) |      | $ | 0.11      
|                                  |  |                            |            |   |      |   |           

These pro forma results are based on certain assumptions and estimates. The pro forma results do not necessarily
represent results that would have occurred if the acquisition had taken place at the beginning of the specified periods, nor are they indicative of the results of future combined operations.

* * * * *



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15 (a) 2. FINANCIAL STATEMENT SCHEDULES

All other schedules are omitted because they are not required, are not applicable or the information is scheduled in our financial statements or notes
thereto.

15 (a) 3. EXHIBITS



|          |  |                                                                                                                                                                                    
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit # |  | Description                                                                                                                                                                        
|          | 
|2.1       |  | Asset Purchase Agreement dated September 1, 2000 by and among Kensey Nash Corporation, THM Acquisition Sub, Inc., THM Biomedical, Inc. and the stockholders of THM Biomedical, Inc.
|          | 
|3.1       |  | Amended and Restated Certificate of Incorporation of Kensey Nash Corporation (1)                                                                                                   
|          | 
|3.2       |  | Second Amended and Restated Bylaws of Kensey Nash Corporation (2)                                                                                                                  
|          | 
|4.1       |  | Specimen stock certificate representing Kensey Nash Corporation common stock (1)                                                                                                   
|          | 
|10.1      |  | Kensey Nash Corporation Fourth Amended and Restated Employee Incentive Compensation Plan and form of Stock Option Agreement (5)                                                   
|          | 
|10.2      |  | Kensey Nash Corporation Fourth Amended and Restated Nonemployee Directors Stock Option Plan and form of Stock Option Agreement (3)                                               
|          | 
|10.3      |  | Form of Directors Indemnification Agreement (1)                                                                                                                                   
|          | 
|10.4      |  | Employment Agreement dated June 1, 2004, by and between Kensey Nash Corporation and Joseph W. Kaufmann  (8)                                                                       
|          | 
|10.5      |  | Employment Agreement dated May 11, 2006, by and between Kensey Nash Corporation and Wendy F. DiCicco, CPA                                                                         
|          | 
|10.7      |  | Employment Agreement dated June 1, 2004, by and between Kensey Nash Corporation and Douglas G. Evans, P.E.  (8)                                                                   
|          | 
|10.8      |  | Termination and Change in Control Agreement dated June 1, 2004, by and between Kensey Nash Corporation and Joseph W. Kaufmann  (8)                                                
|          | 
|10.10     |  | License Agreement (United States) dated September 4, 1991, by and between Kensey Nash Corporation and American Home Products Corporation (assumed by St. Jude Medical)
(1)         
|          | 
|10.11     |  | License Agreement (Foreign) dated September 4, 1991, by and between Kensey Nash Corporation and American Home Products Corporation (assumed by St. Jude Medical) (1)               
|          | 
|10.12     |  | Tenant Lease dated November 19, 1996, by and between Kensey Nash Corporation and Marsh Creek Associates One and Lease Amendment dated January 3, 2000 (4)                          
|          | 
|10.13     |  | Termination and Change in Control Agreement dated June 1, 2004, by and between Kensey Nash Corporation and Douglas G. Evans, P.E.  (8)                                            
|          | 
|10.14     |  | Amendment to the Development and Distribution Agreement dated February 28, 2005 between Kensey Nash Corporation and Orthovita, Inc. (6)                                            
|          | 
|10.15     |  | Supply Agreement, dated June 15, 2005, by and between Kensey Nash Corporation and St. Jude Medical, Daig Division, Inc. (7)                                                        
|          | 
|10.16     |  | Secured Commercial Mortgage, dated May 25, 2006, between Kensey Nash Corporation and Citibank, F.S.B. (9)                                                                          
|          | 
|10.17     |  | Swap Agreement, dated May 24, 2006, between Kensey Nash Corporation and Citibank, N.A. (9)                                                                                         
|          | 
|21.1      |  | Subsidiaries of Kensey Nash Corporation                                                                                                                                            
|          | 
|23.1      |  | Consent of Independent Registered Public Accounting Firm                                                                                                                           
|          | 
|31.1      |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).                                                                                                  
|          | 
|31.2      |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).                                                                                                  
|          | 
|32.1      |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                                                            
|          | 
|32.2      |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                                                            



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|    |  |                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Registration Statement on Form S-1, Registration No. 33-98722.                  
|    | 
|(2) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.
|    | 
|(3) |  | This exhibit is incorporated by reference to Exhibit 4.5 in our Registration Statement on Form S-8, Registration No. 333-71050.                                              
|    | 
|(4) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Registration Statement on Form S-3, Registration No. 333-35494.                 
|    | 
|(5) |  | This exhibit is incorporated by reference to Exhibit 4.2 in our Registration Statement on Form S-8, Registration No. 333-117354.                                             
|    | 
|(6) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005.    
|    | 
|(7) |  | This exhibit is incorporated by reference to Exhibit Number 10 in our Current Report on Form 8-K filed with the SEC on June 21, 2005.                                        
|    | 
|(8) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Annual Report on Form 10-K for the annual period ended June 30, 2004.           
|    | 
|(9) |  | This exhibit is incorporated by reference to the exhibit with the same Exhibit Number in our Current Report on Form 8-K filed with the SEC on June 1, 2006.                  
|    | 
|   |  | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.                                               



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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, on the 13th day of
September 2006.



KENSEY NASH CORPORATIONBy:

/s/ WENDY F. DICICCO, CPAWendy F. DiCicco, CPAChief Financial Officer


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 indicated on the 13th day of September 2006.



|                                          |  |  |  |                                                                                         
|----------------------------------------- |  |  |  | ----------------------------------------------------------------------------------------
|Signature                                 |  |  |  | Titles                                                                                  
|                                          |  | 
|/s/ JOSEPH W. KAUFMANN Joseph W.
Kaufmann |  |  |  | Chief Executive Officer (principal executive officer), President, Secretary and Director
|                                          |  | 
|/s/ JOHN E. NASH, P.E.                    |  |  |  | Vice President of New Technologies and Director                                         
|John E. Nash, P.E.                        |  |  |  |                                                                                         
|                                          |  | 
|/s/ DOUGLAS G. EVANS, P.E.                |  |  |  | Chief Operating Officer, Assistant Secretary and Director                               
|Douglas G. Evans, P.E.                    |  |  |  |                                                                                         
|                                          |  | 
|/s/ WENDY F. DICICCO, CPA                 |  |  |  | Chief Financial Officer (principal financial and accounting officer)                    
|Wendy F. DiCicco, CPA                     |  |  |  |                                                                                         
|                                          |  | 
|/s/ ROBERT J. BOBB                        |  |  |  | Director                                                                                
|Robert J. Bobb                            |  |  |  |                                                                                         
|                                          |  | 
|/s/ HAROLD N. CHEFITZ                     |  |  |  | Director                                                                                
|Harold N. Chefitz                         |  |  |  |                                                                                         
|                                          |  | 
|/s/ WALTER R. MAUPAY, JR.                 |  |  |  | Director                                                                                
|Walter R. Maupay, Jr.                     |  |  |  |                                                                                         
|                                          |  | 
|/s/ C. MCCOLLISTER EVARTS, M.D.           |  |  |  | Director                                                                                
|C. McCollister Evarts, M.D.               |  |  |  |                                                                                         
|                                          |  | 
|/s/ STEVEN J. LEE                         |  |  |  | Director                                                                                
|Steven J. Lee                             |  |  |  |                                                                                         
|                                          |  | 
|/s/ KIM D. ROSENBERG                      |  |  |  | Director                                                                                
|Kim D. Rosenberg                          |  |  |  |                                                                                         



84