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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended: JUNE 30, 1999

                                       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

                             KENSEY NASH CORPORATION
             (Exact name of registrant as specified in its charter)

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

          MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON,
                               PENNSYLVANIA 19341
              (Address of principal executive offices and zip code)

       Registrant's telephone number, including area code: (610) 524-0188
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (TITLE OF CLASS)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___

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

         The aggregate market value of the registrant's voting stock (based upon
the per share closing price of $12.00 on September 17, 1999 and, in making such
calculation, registrant is not making a determination of the affiliate or
non-affiliate status of any holders of shares of Common Stock) was approximately
$89,661,120.

         The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of September 17, 1999 was 7,471,760.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the following document are incorporated by reference
                               into this report:
          Definitive Proxy Statement in connection with the 1999 Annual
                             Meeting of Stockholders

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


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                                     PART I

ITEM 1.  BUSINESS

COMPANY OVERVIEW

Kensey Nash Corporation (the "Company") designs, develops, manufactures and
markets, both individually and in conjunction with third parties, medical
devices for use primarily in the cardiovascular and orthopedic markets. The
Company was founded in Delaware in 1984 by Dr. Kenneth Kensey and Mr. John Nash.

The Company is a leader in the cardiac catheterization puncture closure market
(the "Puncture Closure Market") with its Angio-Seal device (the "Angio-Seal").
The Angio-Seal is an absorbable medical device for the sealing of arterial
punctures created during cardiovascular procedures such as angiography,
angioplasty, atherectomy and the placement of stents. The Company's 8 French
("F") Angio-Seal, a leader in the worldwide Puncture Closure Market, has been on
the European and US markets since 1995 and 1996, respectively. The Company
believes this is due to the ease-of-use (quickest deployment time in the market)
as well as the clinical efficacy (time-to-hemostasis, time-to-ambulation and low
complication rates) which has been demonstrated in both clinical trials and
daily use. In February 1999, the Company announced European Community ("CE")
Mark approval had been granted for the new 6F Angio-Seal puncture closure
device. This smaller version of the Company's 8F Angio-Seal is designed to seal
arterial punctures 6F and smaller and addresses the largest segment of the
Puncture Closure Market. The Company has submitted to the US Food and Drug
Administration ("FDA") for US approval. The Company filed its first patent
related to the Angio-Seal in 1987 and entered into a long-term strategic
relationship granting manufacturing, marketing and distribution rights to a
strategic alliance partner (originally American Home Products ("AHP" or
"Strategic Alliance Partner") in 1991. The Company participates in the Puncture
Closure Market primarily through this relationship (see "Relationship with
Strategic Alliance Partner" section below).

The Company's next product in the cardiovascular market is a revascularization
device, the Aegis Vortex System ("AVS"). The AVS is a device designed to open
occluded saphenous vein bypass grafts ("SVGs") while minimizing the risk of
embolization, a common problem with current treatment alternatives. The AVS
combines an atherectomy feature, a distal embolization protection balloon and an
extraction system. The Company is developing the AVS utilizing its intellectual
property and in-house expertise and will continue to expand possible
applications of the AVS to include the treatment of in-stent restenosis, carotid
artery occlusions and native coronaries. The initiation of clinical trials for
the AVS was announced in July 1999.

The Company also has leading technology in the area of absorbable biomaterials
and continues to expand its capabilities. The Company is currently manufacturing
absorbable collagen and polymer products for third parties for use in
orthopedic, cardiovascular, tissue regeneration, bone growth factors and drug
delivery applications, among others, for products in various stages of clinical
trials and commercial availability. The Company has a contract with its
Strategic Alliance Partner to supply a minimum of 50% of the Angio-Seal collagen
plug requirements until May 2000. To date, the Company has been the exclusive
manufacturer of the collagen plug for the Angio-Seal. The Company has also been
the exclusive manufacturer of the absorbable polymer anchor component of the
Angio-Seal. The Company expects its Strategic Alliance Partner to take over
manfacturing of the anchor during fiscal 2000.

The Company wholly owns its Kensey Nash Holding Corporation subsidiary, formed
in 1992 to hold title to certain Company patents, which has no operations.

PUNCTURE SEALING MARKET OVERVIEW

Coronary artery disease, which affects millions of people each year, is caused
when organic material, known as plaque, develops on the inside walls of the
arteries that lead to the heart. The plaque build up can cause blood flow
restrictions, limiting oxygen to the heart, or complete obstructions, both of
which can cause severe chest pain and, ultimately, a heart attack. One of the
most common ways a physician will diagnose and treat



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coronary artery disease is by performing a cardiovascular catheterization
procedure. The physician gains access to the heart by inserting a catheter into
the femoral artery, located in the groin area. Cardiovascular catheterization
allows a physician to more precisely assess the damage caused by the plaque to
the artery and, consequently, the heart. Peripheral vascular disease is assessed
and treated through similar catheterization procedures.

The cardiovascular catheterization market consists of diagnostic (angiography)
and therapeutic (angioplasty, atherectomy, stent placement) procedures.
Currently, over 5.2 million diagnostic cardiac catheterization procedures,
angiographies, are performed worldwide each year. During an angiography
procedure, a dye is injected into the coronary arteries and viewed on an x-ray
imaging system to determine the extent and location of arterial blockages. Once
the physician determines the extent of the blockages, any number of therapeutic
procedures may be performed, sometimes through the same access puncture.

Currently, there are an estimated 1.7 million total therapeutic procedures
performed worldwide each year, including angioplasties, atherectomies, and the
placement of stents. An angioplasty is a procedure in which a balloon is
inserted into the artery and inflated to compress the blockage against the
arterial wall, enlarging the artery and increasing blood flow. An atherectomy
uses a miniature cutting system or a high speed rotating burr to debulk the
artery plaque. The placement of stents, used in conjunction with these
procedures, is extremely popular and it is one of the fastest growing segments
of this cardiovascular market. A stent is a metal device, resembling a small
coil, that is permanently implanted in an artery to support the arterial wall
and increase blood flow, therefore, reducing and delaying the risk of the artery
closing again (restenosis). In many of the therapeutic procedures, such as
atherectomies and the placement of stents, physicians use high levels of
anticoagulants (blood thinning therapies) and larger arterial punctures, which
often lead to increased bleeding and related puncture site complications. These
procedures, due to their potential puncture site complications, have created an
increased awareness of the need for arterial puncture closure devices.

Together, there are currently over 7.0 million diagnostic and therapeutic
cardiac catheterizations performed each year. Depending on the procedure, and
the size of the catheter necessary to perform the procedure, a cardiac
catheterization creates a puncture in the artery that typically ranges in size
from a 5F to a 10F. The Company believes the Angio-Seal addresses the needs of
both the diagnostic and therapeutic cardiac catheterization markets.

REVASCULARIZATION MARKET OVERVIEW
Revascularization is the treatment of occluded coronary arteries, both native
and grafts. When a native coronary artery is totally occluded a coronary artery
bypass graft procedure ("CABG") is performed to circumvent the native artery and
restore blood flow to the heart via the graft. The bypass graft is typically
harvested from the patient's leg (the saphenous vein) and the graft is referred
to as an SVG. There are approximately 600,000 worldwide coronary artery bypass
surgeries performed annually, the majority of these surgeries involve three or
more bypassed vessels. The SVGs occlude over time and an estimated 50%
are occluded after ten years. The Company believes the total market for occluded
SVGs to be approximately 250,000 annual procedures with a potential market size
of $500 million.

The current treatment options include pharmaceutical management, repeat bypass
surgery, percutaneous intervention and heart transplant. The Company believes it
has a unique device, the Aegis Vortex System, a percutaneous interventional
treatment, which combines an atherectomy feature, a distal protection balloon
and an extraction system to target the occluded SVGs.

Future applications of the device may include the treatment of in-stent
restenosis (the occlusion of a stent which has been placed in either a native
artery or an SVG), carotid arteries and native coronary arteries.




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BIOMATERIALS MARKET OVERVIEW
Biomaterials are substances of synthetic or natural origin which can treat,
augment or replace tissue, organs or functions of the body. There are currently
over 40 million medical treatments each year involving some form of implantable
biomaterial. Segments of the biomaterials market include wound management,
orthopedic implants and reconstructive surgery, drug delivery systems,
cardiovascular, dental, and blood transfusions. The Company's biomaterials
currently address several of these market segments, the largest of which are
orthopedics and wound management.

Orthopedics. Biomaterials can be used to repair or regenerate most
musculoskeletal tissues, including bone, cartilage, ligaments, meniscus, spinal
discs and tendons. The worldwide biomaterials orthopedic device market is
estimated to be a multi-billion dollar market. Collagen and polymers are among
the biomaterials currently used for musculoskeletal repair in the form of
bioresorbable fixation devices, bone replacement materials and bone growth
factors. Most of the top competitors in the orthopedics industry have ventured
into this new technology. These companies either have their own manufacturing
capabilities or look to third party manufacturers to bring their designs to the
market. The Company offers state-of the-art production capabilities and over a
decade of experience in developing and manufacturing medical products made from
absorbable biomaterials. These capabilities and the Company's experience have
enabled the Company to develop relationships with several of the top competitors
in the orthopedics market on the design, development and/or manufacture of
orthopedic applications.

Wound Management. The US wound care market is a multi-billion dollar industry
currently dominated by conventional bandages and dressings and surgical staples
or sutures. There is a new generation of products which has been triggered by
recent developments in biomaterials, tissue engineering and biotechnology. New
products include genetically engineered topical drugs, bioengineered artificial
skin, wound healing devices and biosynthetic dressings. Again, collagen and
polymers are among the biomaterials being integrated into the wound care market.
The Company's products have been used as an integral part of wound care products
as diverse as hemostatic sponges, topical wound dressings, bioengineered skin
and drug delivery matrices.

BUSINESS STRATEGY
The Company's primary goals include: the establishment of the Angio-Seal product
line as the standard of care for closing arterial puncture sites associated with
cardiovascular catheterizations; the completion of the clinical trial phase of
the AVS and establishment of the device as a commercially available alternative
for the treatment of SVG disease; and the continued expansion of its customer
base and proprietary technologies in its biomaterials business segment. The
Company continues to expand and research other technologies. The Company's goals
are and will continue to be pursued through the following strategy:

         -     Expand Angio-Seal Product Technology. The Company's 8F and 6F
               Angio-Seal devices seal arterial punctures 8F and 6F and smaller,
               respectively, and address the vast diagnostic and therapeutic
               markets, including balloon angioplasty and stenting. The Company
               received CE Mark approval for its 6F Angio-Seal in February of
               1999 and has submitted a PMA supplement to the FDA for US
               approval. Approval is anticipated in the third quarter of fiscal
               year 2000.

         -     Continued Development of Revascularization Technology. The
               Company will continue to develop the AVS, its device designed to
               address diseased SVGs. The Company believes it has a unique
               device for treating this currently unaddressed problem as the AVS
               combines the three features of atherectomy, distal protection and
               extraction. Clinical trials of the AVS commenced in July 1999.
               Additional development will include working toward additional
               applications for the device, including in-stent restenosis and
               carotid and native coronary arteries.

         -     Expand Biomaterials Business. While the Company's original
               purpose in manufacturing collagen and absorbable polymer
               components was to supply its Strategic Alliance Partner
               with such components for the Angio-Seal product line, the
               Company has developed significant expertise in the processing,
               handling and manufacturing of bioabsorbable materials. The
               Company


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         -     manufactures several standard collagen products and can customize
               materials to meet specific customer specifications. The Company's
               collagen has been used as an integral part of products as diverse
               as hemostatic sponges, topical wound dressings, bioengineered
               skin, bone regeneration and drug delivery matrices. In addition,
               recent advances in biotechnology, biomaterials and tissue
               engineering have made absorbable polymers one of the fastest
               growing segments within the medical field, particularly in
               orthopedics. The Company provides a full array of mold design,
               injection-molding and compression molding services for absorbable
               polymers, tailored to meet the unique requirements of medical
               product manufacturers. The Company intends to continue to utilize
               its expertise to expand its position in the market as a supplier
               of absorbable polymer products and is already working with
               several companies that are leaders in the orthopedic market.

         -     Develop Opportunities in Other Technology. The Company will
               continue to focus its research and development capabilities on
               developing new products that relate to its three technology
               platforms: puncture closure, revascularization and biomaterials.

RELATIONSHIP WITH STRATEGIC ALLIANCE PARTNER
The Company has a strategic alliance with St. Jude Medical, Inc. ("St.Jude")
which incorporates United States and foreign license agreements, a research and
development agreement and a collagen supply agreement (collectively, the
"Strategic Alliance Agreements"). The Strategic Alliance Agreements were
formerly with Tyco International Ltd. ("Tyco"). In November 1998, Tyco announced
the sale of the License Agreements to St. Jude. The sale was finalized in March
1999. Under the terms of the sale, the Company's Strategic Alliance Agreements
with Tyco were transferred to St. Jude. Prior to Tyco, the Strategic Alliance
Agreements had been with AHP.

The Company's relationship with its Strategic Alliance Partner has enabled the
Company to obtain critical funding to research and develop the Angio-Seal,
complete clinical trials and gain regulatory approval in the US and Europe. This
relationship provides access for the Angio-Seal product line to the major
worldwide markets.

The License Agreements. Under the License Agreements, entered into in September
1991, the Company's Strategic Alliance Partner has exclusive rights to
manufacture, market and distribute all current and future sizes of the
Angio-Seal worldwide. The term "Angio-Seal" is a trademark of the Strategic
Alliance Partner. The Company retains the rights of use for the puncture closure
technology for other applications. Through fiscal 1997, the Company had earned
$13.5 million in licensing and milestone fees as well as received a $3 million
royalty advance from its Strategic Alliance Partner pursuant to the terms of the
License Agreements. There are no further milestones or one-time payments under
the License Agreements.

Under the License Agreements, the Company earns a royalty on each Angio-Seal
sold worldwide, by its Strategic Alliance Partner. The royalty rates are based
on volume of Angio-Seals sold and are equivalent in both License Agreements. In
fiscal 1998, the Company acquired a patent portfolio as well as the rights of
the seller under a pre-existing licensing agreement with AHP. As a result of
this acquisition the Company now receives royalties under its existing Licensing
Agreements as well as the royalties formerly paid to the seller under a separate
licensing agreement (combined, the "Royalty Agreements"). The Royalty Agreements
provide for minimum royalty payments for five years following FDA approval,
which range from $450,000 in the first year to $4.1 million in the fifth year.
If the Strategic Alliance Partner fails to pay the minimum, the Company is
entitled to convert all of the Strategic Alliance Partner's rights under the
License Agreements from exclusive to non-exclusive. Such right of conversion is
the Company's sole remedy for the Strategic Alliance Partner's failure to make
any minimum royalty payment, and if it is exercised, the Strategic Alliance
Partner has no further obligation to make any minimum royalty payments to the
Company.



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The term of the License Agreements extends to the expiration date of the most
recently issued licensed patent, including all continuations or supplements.
Currently, the most recent patent for the Angio-Seal technology was issued in
1998, although the Company has applied for, and expects to have issued,
additional patents in the future. The Strategic Alliance Partner may terminate
the License Agreements any time after the fifth royalty year for any reason upon
12-months notice.

If a license under any third-party patent is necessary to make, use or sell the
Angio-Seal product line, any payments and royalties for such third-party
license, and any related attorney's fees, will be deducted from payments due to
the Company, on a territory-by-territory basis, in an amount in any one year not
to exceed one-half of any royalties in any such territory for such year.

The Research and Development Agreement. The Company and its Strategic Alliance
Partner had an agreement whereby such partner funded certain ongoing Angio-Seal
research and development costs incurred by the Company. The Company contributed
one-third of such research and development costs while the Strategic Alliance
Partner contributed the remaining two-thirds. This agreement has expired and the
Company's Strategic Alliance Partner is planning to perform any remaining
development work on the Angio-Seal product line. As of June 30, 1999, the
Company had earned $14.2 million in research and development revenue from its
Strategic Alliance Partner over the life of the agreement.

The Collagen Supply Agreement. Pursuant to an agreement with the Strategic
Alliance Partner, the Company manufactures collagen to be used in the
Angio-Seal. The agreement contains a minimum purchase requirement from the
Company for five years beginning May 31, 1995.

PRODUCT OVERVIEW
The Company's existing and proposed products, their potential markets and
regulatory status are summarized as follows. See the text below for additional
details.


<TABLE>
<CAPTION>
                                                                   UNITED STATES                INTERNATIONAL
                                         PROPOSED                REGULATORY STATUS         REGULATORY STATUS(1)
                      PRODUCT            APPLICATIONS                STATUS (1)
             ----------------------------------------------------------------------------------------------------------
<S>                                      <C>                     <C>                      <C>
             ANGIO-SEAL PRODUCT LINE

             8F Angio-Seal               Angiography,              FDA approval            CE Mark approval received
               Sealing 8F or smaller     angioplasty,              received September      September 1995.
               punctures.                placement of stents       1996.
                                         and peripheral
                                         radiology.

             6F Angio-Seal(2)            Angiography and           PMA supplement          CE Mark approval received
               Sealing 6F or smaller     certain therapeutic       submitted to the FDA    February 1999.
               punctures.                procedures.               June 1999.


             Collagen Plug for           Angio-Seal component.     See above.(3)           See above.(3)
             Angio-Seal

             Anchor Component for        Angio-Seal component.
             Angio-Seal                                            See above.(3)           See above.(3)
</TABLE>


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<TABLE>
<CAPTION>
             ---------------------------------------------------------------------------------------------------------
<S>                                      <C>                     <C>                      <C>
             BIOMATERIALS PRODUCTS
             Medical grade collagen      Topical wound            Customers required to    Customers required to gain
                                         dressing; cultured       gain regulatory          regulatory approval for
                                         skin product for         approval for the end     the end use of their
                                         burn treatment;          use of their product.    product.
                                         surgical wound
                                         repair; drug
                                         delivery systems.

             Injection molded            Repair of soft           Customers required to    Customers required to gain
             absorbable polymer          tissue and bone          gain regulatory          regulatory approval for
             devices                     injury or defects.       approval for the end     the end use of their
                                                                  use of their product.    product.
             ----------------------------------------------------------------------------------------------------------
             REVASCULARIZATION TECHNOLOGY

             Aegis Vortex System         Opening diseased         Clinical trial phase.    Clinical trial phase.
                                         saphenous vein
                                         coronary bypass
                                         grafts.
             ----------------------------------------------------------------------------------------------------------
</TABLE>


 (1) See "Government Regulation".
 (2) The 6F size of the device was not included in the PMA for the 8F
     Angio-Seal. A PMA supplement containing data from the clinical trials was
     filed with the FDA and the Company is awaiting approval before it can be
     commercially marketed in the United States.
 (3) The collagen plug and anchor are components for the different sizes of the
     Angio-Seal. Because the FDA and foreign regulatory bodies generally approve
     devices as complete systems, the regulatory status for each component for a
     specific size device is equivalent to that of the specific size Angio-Seal.

ANGIO-SEAL

The Angio-Seal Technology. The Angio-Seal acts to close and seal femoral artery
punctures made during diagnostic and therapeutic cardiovascular
catheterizations. The device consists of four components: an absorbable anchor
that is seated securely against the inside surface of a patient's artery at the
point of puncture, an absorbable collagen plug that is applied adjacent to the
outside of the artery wall, an absorbable suture and a delivery system. The
delivery system consists of an insertion sheath, puncture locator, guidewire,
tamper tube and spring. 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 the puncture. The collagen induces the blood-clotting process at the
puncture site and the anchor is designed to encapsulate into the artery wall.
Based on the characteristics of the materials used, the anchor, collagen and
suture are all absorbed into the patient's body within 60 to 90 days after the
procedure. The Company believes that this mechanical (via the anchor) and
biochemical (via the collagen) seal offers physicians a method for closing
punctures with significant advantages over traditional manual or mechanical
compression methods as well as other competitive products.

How the Angio-Seal Is Used. The Angio-Seal is designed and clinically proven to
take a trained healthcare professional less than two minutes to place. After a
cardiovascular catheterization is completed and the introducer for the procedure
is ready to be removed, the insertion sheath and puncture locator supplied with
the Angio-Seal are inserted into the artery over the guide wire, using standard
introducer exchange techniques. The guide wire is then removed and the anchor is
inserted into the artery through the delivery system. The delivery system is
pulled back until the anchor is secured onto the inside surface of the artery
wall at the puncture site. As the delivery system is withdrawn from the tissue
surrounding the artery, the collagen plug is deployed from the delivery system
into the puncture tract adjacent to the outside of the artery wall. When the
delivery system is removed from the tissue surrounding the artery, the
Angio-Seal's anchor and suture act as a pulley to compress the collagen within
the puncture tract adjacent to the outside of the artery wall. The exposed
tamper tube is used to compress the collagen further. A spring is then attached
to the suture to maintain light pressure on the tamper tube. After 20 to 30
minutes, the spring and the tamper tube are removed and the suture is cut below
the skin.



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Advantages of the Angio-Seal over Manual and Mechanical Compression. Until
recently, closing arterial punctures resulting from cardiovascular
catheterizations was generally limited to manual or mechanical compression of
the puncture site following the procedure. The Company believes, based on
results of clinical trials and published reports, that the Angio-Seal has the
following advantages over manual or mechanical compression:

         -    Reduced Time to Ambulation. Clinical studies have shown reductions
              in the amount of time required for the removal of the introducer
              sheath used during the procedure and reduced times to hemostasis.
              A premarket approval application ("PMA") supplement was approved
              in September 1997 allowing the Company to expand the labeling of
              the Angio-Seal to include time-to-ambulation data (mean time to
              ambulation for Angio-Seal of 1.4 hours verses 6.6 hours for manual
              compression).

         -    Reduced Staffing and Hospital Time. The reduction or elimination
              of post-procedure manual compression, as well as reduced needs for
              post-procedure examinations, may decrease the staff time
              associated with the procedure and follow-up care and lead to more
              efficient use of hospital personnel and space.

         -    Possible Reduction in Procedure Cost. The faster treatment time
              and reduced staffing requirements should reduce the costs of the
              typical cardiovascular catheterization. In addition, hospitals
              should enjoy greater efficiency in catheterization lab scheduling,
              greater flexibility in the use of physical space reserved for
              catheterization patients and have the possibility for greater
              catheterization lab throughput.

         -    Increased Patient Comfort. Patients generally regard the manual
              compression following cardiovascular catheterization as the most
              painful aspect of the procedure. The Angio-Seal device requires
              little or no manual pressure, reducing the pain and discomfort
              associated with current methods of puncture site hemostasis. In
              addition, it eliminates the need for pressure dressings leading to
              less restriction and discomfort for the patient.

         -    Greater Flexibility in Post Procedure Anticoagulation Therapy. In
              highly anticoagulated patients, physicians typically discontinue
              blood thinning therapy in order to effectively stop the bleeding
              at the arterial puncture, despite the importance of the therapy in
              minimizing the formation of blood clots. Based upon published
              results, the Angio-Seal device provides fast, reliable hemostasis,
              independent of heparin levels (a common anticoagulant therapy).

         -    Increased Blood Flow to the Leg. The Angio-Seal allows for greater
              blood flow to the patient's leg during a cardiovascular
              catheterization procedure than does manual compression, thereby
              reducing the possibility of vessel blockages in the leg.

The Angio-Seal is currently a leader in the Puncture Closure Market with over
575,000 devices sold to-date. The Company believed that the Angio-Seal offers
advantages over the competing methodologies (see "Competition") in its ability
to provide quickly and easily both a mechanical and biochemical seal of arterial
punctures.


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AEGIS VORTEX SYSTEM
System Technology. The Aegis Vortex System is an interventional device designed
to open blocked saphenous vein coronary bypass grafts, while minimizing the risk
of embolization, a common problem with current treatment alternatives. The
system incorporates a guidewire with an occlusion balloon inflated distal to the
blockage, which is designed to prevent particles from going downstream during
the procedure. The system then uses a high speed rotating tip with a vortex
action designed to impact the blockages, including blood clots and more fibrous
material commonly found in vein grafts.
The debris is then removed through an extraction system.

The current available treatment options include pharmaceutical management,
repeat bypass surgery, percutaneous intervention and heart transplant. The AVS,
a percutaneous interventional treatment, is designed to improve clinical
outcomes while reducing patient trauma and reducing cost. The Company initiated
clinical trials of the AVS in July 1999.

CLINICAL TRIALS AND REGULATORY STATUS
Angio-Seal. The Company obtained CE Mark approval from the EEC in September 1995
and FDA approval in the United States in September 1996 for its 8F Angio-Seal
device. In September 1997, the Company received a PMA supplement approval
allowing the Company to make additional labeling claims regarding early
ambulation in diagnostic angiography patients.

The 6F Angio-Seal received CE Mark approval in February 1999 and in June 1999 a
PMA supplement was submitted to the FDA for approval. The Company expects FDA
approval for the 6F Angio-Seal to occur in the third quarter of fiscal year
2000.

Aegis Vortex System. The Company received Investigational Device Exemption
("IDE") approval from the FDA to commence clinical trials for its
revascularization product, the AVS, in June 1999 and initiated the pilot
clinical trials in July 1999. There are seven U.S. sites approved under the IDE.

SALES AND MARKETING
Angio-Seal. The Strategic Alliance Partner (St. Jude), is responsible for the
worldwide sales of the Angio-Seal. The Angio-Seal has been on the European
market since 1995 and in the US market since 1996. The Angio-Seal is currently
being sold in the US, Canada, Latin America, the UK, Germany, Italy, France,
Switzerland, Australia, Saudi Arabia, Israel, Austria, Spain, Malta and the
Netherlands. To date, there have been over 575,000 devices sold to end users.

St. Jude is selling the Angio-Seal through dedicated sales forces in the US and
Europe. Both the Company and St. Jude believe that dedicated sales forces are
appropriate to cover the concentrated market of cardiovascular catheterization
facilities that perform the majority of these procedures. The Strategic Alliance
Partner has the sole right to determine the worldwide marketing and pricing
strategy for the Angio-Seal product line.

Other products. As the Company develops new products, such as the AVS, it will
continue to explore a variety of means to market and sell such products if and
when they receive appropriate regulatory approvals. Such means include, but are
not limited to, contracting with distributors, developing its own sales force
and licensing products to third parties.

CUSTOMERS
Sales to the Company's Strategic Alliance Partner comprised 66%, 86% and 91% in
the years ended June 30, 1999, 1998 and 1997, respectively, of total sales for
the Company. The loss of the Strategic Alliance Partner as a customer would have
a material adverse impact on the Company.



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THIRD-PARTY REIMBURSEMENT
The Company believes that continued sales growth of the Angio-Seal may depend
not only on its clinical efficacy and cost effectiveness, but also, in part, on
the availability of third-party reimbursement. Separate reimbursement for the
Angio-Seal is not expected to be available in the United States and there can be
no assurance that reimbursement for the Angio-Seal will be available in
international markets under either governmental or private reimbursement
systems. In the United States, healthcare providers, such as hospitals and
physicians, that purchase medical devices such as the Angio-Seal, generally rely
on third-party payers, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic cardiovascular catheterization procedures. Reimbursement for
cardiovascular catheterization procedures performed using devices that have
received FDA approval has generally been available in the United States. The
Company anticipates that in prospective payment systems, and in many managed
care systems used by private healthcare payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate additional reimbursement for the Company's products.
The Company anticipates the hospital administrators and physicians will justify
the additional cost of an arterial access site closure device by the attendant
cost savings and clinical benefits derived from the use of the Angio-Seal.

The main types of reimbursement systems in international markets are government
sponsored healthcare and private insurance. Countries with government sponsored
healthcare, such as the United Kingdom, Italy and the Netherlands, have a
centralized, nationalized healthcare system. In most foreign countries, there
are also private insurance systems that may offer payments for alternative
therapies. Although not as prevalent as in the United States, health maintenance
organizations are beginning to appear in Europe, particularly in Spain.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Angio-Seal will be the key to obtaining third-party
reimbursement. The Company could be materially adversely affected by changes in
reimbursement policies of governmental or private health care payers.

MANUFACTURING, RAW MATERIALS AND SUPPLIES

The Company has developed manufacturing expertise in the assembly and testing of
technologically advanced medical products. The Company's Angio-Seal
manufacturing activities to date have consisted primarily of producing
Angio-Seal clinical devices, for use in worldwide clinical trials and
sub-assemblies and commercial devices, both 8F and 6F, for sale to customers in
Europe.

The Company also has a significant presence in the manufacture of absorbable
biomaterials. The Company has historically manufactured 100% of the
bioabsorbable components of the Angio-Seal, the collagen plug and absorbable
polymer anchor, to fulfill the Strategic Alliance Partner's requirements for the
Angio-Seal. The Company is the only approved supplier of collagen approved for
use in the Angio-Seal in the EEC and it has a contract with its Strategic
Alliance Partner to supply a minimum of 50% of the collagen needs for the
Angio-Seal on a country-by-country basis through May 2000. In the US, the
current Angio-Seal PMA includes the Company's absorbable anchor and collagen
plug. The Strategic Alliance Partner has the rights to the manufacture of the
polymer anchor and intends to manufacture that component in the future. The
Company anticipates it will continue to be an additional source of Angio-Seal
anchor requirements through some portion of fiscal year 2000.

In addition to the Angio-Seal components, the Company manufactures numerous
absorbable collagen and polymer products for third parties for use in
applications including orthopedic, cardiovascular, tissue regeneration, bone
growth protein and drug delivery, among others.

The Company is currently manfacturing all of the requirements for the AVS
program and will continue to do so through at least the completion of the
clinical trials.

The Company purchases most raw materials, parts and peripheral components used
in its products. Although many of these supplies are off-the-shelf items readily
available from several supply sources, others are custom-made for the Company to
meet its specifications. The Company believes that, in most of these cases,


                                       9
<PAGE>   11

alternative sources of supply for custom-made materials are available or could
be developed within a reasonable period of time. The Company has generally been
able to obtain adequate supplies of all materials, parts and components in a
timely manner from existing sources. When this has not proven feasible, the
Company has brought the production of those critical parts under its own
manufacturing control. However, the inability to develop alternative suppliers
for present and future needs, if required, or a reduction or interruption in
supply or a significant increase in the price of materials, parts or components
could adversely impact the Company's operations. Several of the Company's raw
materials are derived from natural sources and carry the inherent risk of
disease or contamination of source material. In those areas in which natural raw
material sourcing has presented the potential for contamination, the Company has
taken steps which it believes will assure itself and its customers of the purity
of these products. The validation of the purity of these raw materials and/or
the ability of the Company processes to inactivate potential contaminants has
been undertaken at significant expense by the Company to preclude withdrawal or
restriction of these products by regulatory agencies in any country. The Company
will, as a practice, continue to take these steps in any area in which
biological or other contaminants may compromise a raw material supply.

The Company's manufacturing facilities in Exton, Pennsylvania, contain separate
areas for Angio-Seal assembly, collagen manufacturing and polymer manufacturing.
In addition, the Company has its own capabilities in tool and die making,
injection molding, model making and laser welding, which allows it to engineer
and reengineer its products in development on site. The Company's FDA-registered
facility is equipped with multiple class 100,000 clean room facilities and is
certified to the two international quality standards, ISO 9001 and EN 46001.
Certification is based on adherence to established standards of quality
assurance and manufacturing process control. For this reason, the Company's
manufacturing facilities are subject to regulatory requirements and periodic
inspection by regulatory authorities. The Company has a separate in-house
quality control department that sets standards, monitors production, writes and
reviews operating procedures and protocols and performs final testing of samples
of devices and products manufactured by or for the Company. See "Government
Regulation."

RESEARCH AND DEVELOPMENT
The Company's research and development and regulatory staff consisted of 36
individuals as of September 17, 1999. Since signing the License Agreements in
September 1991, the Company's research and development effort had focused on
designing the Angio-Seal, supporting clinical trials, seeking regulatory
approval in the United States and Europe and establishing a technology base in
puncture closure devices. Currently, the Company is concentrating on the
development of its revascularization technology, the AVS, for opening diseased
SVGs, the further development of its biomaterials capabilities as well as
various other projects in the early stages of development. The Company incurred
total research and development expenses of $5.7, $5.5 and $4.7 million in the
fiscal years ended June 30, 1999, 1998 and 1997, respectively.

In addition to the resources dedicated to the product development process, the
Company has an internal regulatory affairs and clinical monitoring staff, which
has had responsibility for establishing, monitoring, collecting and analyzing
data relating to clinical trials for the Angio-Seal product line. The staff
worked closely with the Company's Strategic Alliance Partner on gaining
regulatory approvals for additions to the Angio-Seal product line in the United
States and, in some instances, abroad. Currently, the regulatory and clinical
staff is conducting, and has the sole responsibility for, the AVS's pilot
clinical trials as well as all future clinical trials.

COMPETITION
The primary competition for the Angio-Seal is the current standard of care,
manual pressure. Manual pressure is an inherently cumbersome procedure which is
costly, complicated and associated with high levels of patient discomfort.
Although the Company believes that the Angio-Seal competes favorably with the
application of manual and/or mechanical compression as a standard of care, the
acceptance of new methodologies and technologies is inherently uncertain. In
addition, the Company is aware of competitors trying to develop noninvasive
and/or pharmaceutical products which could render the Angio-Seal product line
technology obsolete. Many of these organizations, and certain other medical
device companies that may enter the markets



                                       10
<PAGE>   12

in which the Company does or will compete, are larger and have more extensive
financial, technical, managerial, research and development and marketing
resources than the Company or its Strategic Alliance Partner. The Company is
aware of competitors who have developed and commercialized devices to seal
arterial punctures, including Datascope, Perclose and Vascular Solutions. The
Company is also aware of other companies who are developing proposed products
which may compete with the Angio-Seal product line.

Datascope's VasoSeal vascular hemostasis device, currently marketed in the U.S.
and internationally, works by delivering a collagen plug into the
tissue tract outside of the artery. Once positioned in the tissue tract, the
biochemical interaction between collagen and blood platelets acts to create a
hemostatic seal at the puncture site. In August 1998 Datascope announced it had
received CE Mark approval for a second generation device, VasoSeal ES.

Perclose's Prostar and Techstar systems consist of catheter-based instruments
designed to mechanically suture arterial access sites below the skin following
cardiovascular catheterization procedures. The 9-11F Prostar was approved by the
FDA in April 1997 and PMA supplements for Perclose's second generation devices,
the Techstar (6-8F) and the Prostar Plus (8-10F) were approved in November 1997
and January 1998, respectively. Perclose submitted a PMA supplement application
to the FDA for its new version, The Closer 6F, in May 1999. In July 1999,
Perclose announced they had agreed to be acquired by Abbott Laboratories.

A new entrant to the puncture closure market is Vascular Solutions, who has
developed a sealing device catheter, the Duett. The device employs a balloon
inserted over the guidewire into the femoral artery to temporarily close the
entry channel. A mixture of collagen and thrombin is then injected into the
puncture site to close the wound after a period of compression. The Duett
received CE Mark approval in July 1998 and the company commenced clinical
studies in the US in August 1998.

The Angio-Seal is a puncture closure device market leader with over 575,000
devices sold to-date and the Company believes that its continued competitive
success will depend upon several factors. These factors include its ability to
create and maintain technologically advanced proprietary medical products, to
obtain patents or other protection for these technologies and to apply these
technologies across several different product opportunities and markets, to
attract and retain high quality engineering and scientific personnel, to obtain
timely regulatory approvals when possible, and to manufacture and market its
products in a cost-effective manner whether through internal means or through
outside parties. See "Angio-Seal."

The Company is also aware of several cardiology companies competing in the SVG
market. The Company believes, however, that the AVS is a unique device which
combines an atherectomy feature, a distal embolization protection balloon and an
extraction system. The Company is not aware of any other device currently on the
market or in clinical trials which combines all three of these features.

GOVERNMENT REGULATION

The medical devices marketed and manufactured by the Company and its Strategic
Alliance Partner are subject to extensive regulation by the FDA, and, in some
instances, by foreign governments. Pursuant to the Federal Food, Drug, and
Cosmetic Act of 1976, as amended, and the regulations promulgated thereunder
(the "Act"), the FDA regulates the clinical testing, manufacture, labeling,
distribution, and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government 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 request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
Noncompliance with applicable requirements on the part of the Company's
Strategic Alliance Partner with respect to the Angio-Seal, or by the Company,
could have a material adverse impact on the Company.



                                       11
<PAGE>   13

The Company obtained PMA approval on the Angio-Seal 8F device in September 1996,
the ownership of which was subsequently transferred to its Strategic Alliance
Partner. The Strategic Alliance Partner will be responsible for all future
amendments and PMA supplements for the Angio-Seal device, including the PMA
supplement necessary to market the 6F size Angio-Seal device in the United
States. However, there can be no assurance that the Strategic Alliance Partner
will be able to obtain necessary regulatory approvals or clearances on the
Angio-Seal product line on a timely basis or at all, and delays in receipt of or
failure to receive such approvals, the loss of previously received approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse impact on the Company's business, financial condition and
results of operation.

The Angio-Seal received CE Mark approval from the EEC in September 1995, which
permits marketing of the Angio-Seal in EEC member countries and it is also
available for sale in several other countries. The 6F Angio-Seal received CE
Mark approval in February 1999. International sales of medical devices are
subject to the regulatory agency product registration requirements of each
country. The regulatory review process varies from country to country. Many
countries also impose product standards, packaging requirements, labeling
requirements 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 the
Company's business, financial condition and results of operations.

It will be the Company's responsibility to obtain CE Mark approval, from the
EEC, and PMA approval, from the FDA, as well as all future PMA supplements and
amendments for the AVS.

Any products manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA including record keeping requirements and reporting of adverse experiences
with the use of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA and are subject to periodic
inspections by the FDA and certain state agencies. The Act requires devices to
be manufactured in accordance with Good Manufacturing Practices ("GMP")
regulations which impose certain procedural and documentation requirements upon
the Company and its Strategic Alliance Partner with respect to 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. Changes in existing requirements or adoption of new
requirements or policies could adversely affect the ability of the Company to
comply with regulatory requirements. Failure to comply with regulatory
requirements could have a material adverse impact on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws or regulations will not have a
material adverse impact upon the Company's business, financial condition or
results of operations.

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. There can be no assurance that the Company or
its Strategic Alliance Partner will not be required to incur significant costs
to comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the Company's or its
Strategic Alliance Partner's ability to do business.

PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other things, filing
patent applications for the patentable technologies that it considers material
to the development of its business. The Company first filed for patent
protection for the concept of sealing arterial punctures in the United States in
1987 and was first issued a United States patent in 1988. As of August 31, 1999,
the Company held 61 United States patents and 66 foreign national patents and
has pending several United States patents and foreign national patent
applications that cover various aspects of its technology. The Company also has
a number of files of potential patent application material at its patent
counsel's office. In addition, the Company holds the exclusive or joint



                                       12
<PAGE>   14

rights to inventions that result from a number of agreements among the Company,
leading medical institutions and their principal investigators. There can be no
assurance that patent applications filed by the Company will result in the
issuance of patents or that any patents or licenses now or hereafter held by the
Company will provide competitive advantages for the Company or its licensees, or
that these patents or licenses will not be challenged or circumvented by
competitors.

The Company also relies heavily on trade secrets and unpatented proprietary
know-how which the Company seeks to protect, in part through non-disclosure
agreements with all corporations, institutions, and individuals that are exposed
to the Company's proprietary information. It is the Company's policy to require,
as a condition of employment, that all full-time and part-time employees enter
into an assignment and non-disclosure agreement with the Company. There can be
no assurance that these and other agreements specifically constructed to protect
the Company will not be breached or that others will not independently develop
the same or similar technology.

There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which would result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets, know-how, or
other proprietary rights owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. Adverse determinations in
litigation could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties and could
prevent the Company and/or its licensees from manufacturing, selling or using
its products, any of which could have a material adverse impact on the Company's
business, financial condition and result of operations. It is possible that the
Company, in the course of new product development and introduction, may need to
acquire licenses to, or contest the validity of, issued or pending patents of
third parties relating to the Company's technology or to products presently
under license or under development by the Company. There can be no assurance
that any license required under any such patent would be made available to the
Company on acceptable terms, if at all, or that the Company would prevail in
such a patent dispute.

In March 1998, the Company, together with its Strategic Alliance Partner, filed
a patent infringement suit against Perclose, Inc. For more information on this
suit, see "Legal Proceedings".

The Company has licensed its United States and foreign patents for the
Angio-Seal to its Strategic Alliance Partner, and is obliged to license all
improvements for the same product to its Strategic Alliance Partner in the
future at no additional charge. The License Agreements are exclusive, worldwide,
with rights to make, have made, use, sell, and have sold the Angio-Seal, but are
limited to the cardiovascular field of use only, leaving all other fields of use
in the Company's possession. The licenses include rights to use related trade
secrets and know-how.

PRODUCT LIABILITY

The clinical testing, marketing and sale of human healthcare products entails an
inherent risk of product liability claims. There can be no assurance that
product liability claims will not be asserted against the Company or its
licensees. Although the Company maintains product and clinical trials liability
insurance in the aggregate amount of $12 million, there can be no assurance that
product liability claims will not exceed such insurance coverage limits, that
claims for coverage would not be denied or that such insurance will be available
in the future on commercially reasonable terms, if at all. The Company believes
that its Strategic Alliance Partner has adequate insurance coverage for product
liability claims. There can be no assurance that liability claims made against
its Strategic Alliance Partner or other potential licensees will not result in
any claims against the Company

EMPLOYEES AND CONSULTANTS
As of September 17, 1999, the Company had 102 employees, including 52 in
operations, 31 in research and development, 13 in finance and administration,
five in clinical and regulatory affairs and one in sales and



                                       13
<PAGE>   15

marketing. All of the Company's employees are located at the Company's facility
in Pennsylvania. The Company believes that its success is dependent in a large
part on its ability to attract and retain employees in all areas of its
business.

The Company maintains continuing relationships with a number of independent
consultants that have contributed to the development of the Company's products
and work on specific development projects. These relationships are integral to
the continued success of the Company and the generation of new products from the
research and development departments.

The Company is dependent upon a number of key management and technical
employees. The loss of services of one or more key employees could have a
material adverse impact on the Company. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes its
relationship with its employees is good.

ITEM 2.  PROPERTIES
The Company leases approximately 44,000 square feet of executive offices,
manufacturing and research and development facilities in Exton, Pennsylvania, a
suburb of Philadelphia. The lease expires in 2002, subject to renewal options.
The Company believes that the complex in which the current facilities are
located offers the necessary space for required expansion over the foreseeable
future.

ITEM 3.  LEGAL PROCEEDINGS In March 1998, the Company, together with its
Strategic Alliance Partner, filed a patent infringement claim against Perclose,
Inc. ("Perclose") of Menlo Park, California, a competitor in the puncture
closure market. In 1999, the Company amended the claim to add a second patent to
the infrigement suit. The original and amended suits, filed in the Eastern
District of Pennsylvania, claim that Perclose infringes the Company's U.S.
Patent Nos. 5,676,689 and 5,861,004 (together, the "Patents"). The Patents cover
a system and method for sealing a puncture in a blood vessel (e.g. the femoral
artery). The Company seeks damages and an order to permanently enjoin Perclose
from making, using or selling product that infringes the Patents.

Perclose filed four counterclaims in answer to the complaint. The first
counterclaim seeks to declare the Patent invalid and not infringed; the second
and third counterclaims maintain that the Company committed antitrust
violations; and the fourth counterclaim asserts that the Company committed
unfair competition. Management is unable to predict the final outcome of the
suit or whether the resolution of the matter could materially affect the
Company's results of operations, cash flows, or financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
fiscal 1999.


                                       14
<PAGE>   16


PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

The Company's Common Stock is traded on the Nasdaq National Market
(Nasdaq symbol: KNSY). The approximate number of record holders and beneficial
shareholders of the Company's Common Stock at September 17, 1999 was 83 and
2,802, respectively. The Company has not paid any dividends since its inception
and does not intend to pay any dividends in the foreseeable future.

The range of high and low closing sale prices for the Common Stock is as
follows:

QUARTER ENDED                                       HIGH              LOW
-------------                                       ----              ---
December 31, 1995 (from December 13, 1995)          $13.50           $12.00
March 31, 1996                                      $16.75            $9.75
June 30, 1996                                       $17.25           $12.00
September 30, 1996                                  $15.75           $10.75
December 31, 1996                                   $18.25           $14.25
March 31, 1997                                      $15.55           $11.50
June 30, 1997                                       $13.75            $9.88
September 30, 1997                                  $16.00           $10.38
December 31, 1997                                   $17.00           $13.00
March 31, 1998                                      $24.25           $14.00
June 30, 1998                                       $23.63            $9.25
September 30, 1998                                   $9.88            $7.13
December 31, 1998                                   $11.00            $5.75
March 31, 1999                                      $11.75            $7.88
June 30, 1999                                       $10.25            $7.25

On September 17, 1999, the last reported sale price for the Common Stock was
$12.00.



                                       15
<PAGE>   17



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, 1999, 1998,
1997, 1996, and 1995. The selected financial data for each such fiscal year
listed below has been derived from the consolidated financial statements of the
Company for those years, which have been audited by Deloitte & Touche, LLP,
independent certified public accountants, whose report for fiscal years 1999,
1998, and 1997 is included elsewhere herein. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements and
related Notes and other financial information included herein.



<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED JUNE 30,
                                               ----------------------------------------------------------
                                                 1999       1998        1997        1996           1995
                                               --------   --------    --------    --------       --------
                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>        <C>         <C>         <C>            <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
         Net sales                             $  7,168   $  4,669    $  3,661    $  1,315       $  1,358
         Research and development                 1,894      3,642       2,843       1,576            468
         Licensing and milestone fees                                    1,050        --            2,700
         Royalty income and other                 7,183      3,008         353          76             41
                                               --------   --------    --------    --------       --------
  Total revenues                                 16,245     11,319       7,907       2,967          4,567
                                               --------   --------    --------    --------       --------
  Operating costs and expenses:
         Cost of products sold                    5,135      4,084       3,063       1,637          1,468
         Research and development                 5,668      5,524       4,695       3,581          3,034
         Selling, general and administrative      2,585      1,762       1,823       2,132          1,850
         Deferred compensation                     --         --          --         1,493          1,182
         Product return                            --         --          --           574           --
                                               --------   --------    --------    --------       --------
  Total operating costs and expenses             13,388     11,370       9,581       9,417          7,534
                                               --------   --------    --------    --------       --------
  Income (loss) from operations                   2,858        (51)     (1,674)     (6,450)        (2,967)
                                               --------   --------    --------    --------       --------
  Other income (expense):
         Net interest income (expense)              317        390         435        (473)        (1,081)
         Other                                        4          4           8          62           (164)
         Insurance settlement                                              969         946           --
                                               --------   --------    --------    --------       --------
         Total other income (expense) - net         321        394       1,412         535         (1,245)
                                               --------   --------    --------    --------       --------
  Income (loss) before income taxes               3,179        343        (262)     (5,915)        (4,212)
  Income taxes                                     --         --          --          --             --
                                               --------   --------    --------    --------       --------
  Net income (loss)                            $  3,179   $    343    $   (262)   $ (5,915)      $ (4,212)
                                               ========   ========    ========    ========       ========
  Basic earnings (loss) per common share (1)   $   0.43   $   0.05    $  (0.04)   $  (1.00)      $  (0.92)
                                               ========   ========    ========    ========       ========


Weighted average common shares outstanding        7,477      7,552       7,182       5,927(2)       4,599(2)
                                               ========   ========    ========    ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                 JUNE 30,
                                            -----------------------------------------------------
                                              1999       1998       1997       1996       1995
                                            --------   --------   --------   --------   ---------
                                                          (IN THOUSANDS)
BALANCE SHEET DATA:
<S>                                         <C>        <C>        <C>        <C>        <C>
  Cash and short-term investments           $  9,669   $  7,777   $  7,351   $ 11,734   $      8
  Inventory                                      749      1,027        736        413        436
  Working capital equity (deficiency)         10,860      9,423      9,172      6,678    (14,044)
  Total assets                                28,215     22,039     16,593     19,743      1,931
  Long-term obligations                        6,013      2,374        574         81        108
    Total stockholders' equity (deficiency)   18,901     15,863     12,127     12,001    (16,095)
</TABLE>



--------
(1)  Diluted earnings per share is not presented as common share equivalents are
     antidilutive

(2)  Includes 446,437 Common Stock equivalents issued within one year of the
     public offering with exercise prices below the public offering price. See
     Note 1 of Notes to the Consolidated Financial Statements.






                                       16
<PAGE>   18

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

OVERVIEW

 Kensey Nash Corporation (the "Company") designs, develops
and manufactures, both individually and in conjunction with third parties,
medical devices for use primarily in the cardiovascular and orthopedic markets.

The Company is a leader in the cardiac catheterization puncture closure market
with its Angio-Seal device. The Angio-Seal is an absorbable medical device for
the sealing of arterial punctures created during cardiovascular procedures such
as angiography, angioplasty, atherectomy and the placement of stents. The
Company participates in the puncture closure market primarily through its
relationship with its Strategic Alliance Partner, from which it generates
royalty income, research and development funding and sales revenue through the
manufacture of Angio-Seal devices and components for the Angio-Seal.

In February the Company announced European Community ("CE") Mark Approval had
been granted for the new 6F Angio-Seal puncture closure device. CE Mark approval
allows the sale of the device throughout the European Union. This smaller
version of the Company's 8F Angio-Seal, currently marketed in both the US and
Europe, is designed to seal arterial punctures 6F and smaller and addresses the
largest segment of the puncture closure market.

On March 16, 1999, St. Jude Medical, Inc. ("St. Jude") announced the completion
of its acquisition of the marketing and manufacturing rights of the Angio-Seal
product line from Tyco International Ltd. ("TYCO"), the Company's previous
Strategic Alliance Partner. Under the purchase agreement, all of the Company's
agreements with Tyco were transferred to St. Jude. Accordingly, St. Jude
replaced Tyco as the Company's Strategic Alliance Partner upon finalization of
the acquisition.

The Company's next product in the cardiovascular market is a revascularization
device, the Aegis Vortex System ("AVS"). The AVS is a device designed to open
occluded saphenous vein bypass grafts ("SVG") while minimizing the risk of
embolization, a common problem with current treatment alternatives. The Company
is developing the AVS utilizing its strong intellectual property and in-house
expertise. The Company announced the initiation of clinical trials for the AVS
in July 1999.

The Company also has leading technology in the area of absorbable biomaterials
and continues to expand its capabilities. The Company is currently manufacturing
absorbable collagen and polymer products for third parties for use in
orthopedic, cardiovascular, tissue regeneration, bone growth protein and drug
delivery applications, among others.

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the notes thereto contained elsewhere in
this report.

RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998

Revenues for these periods consisted of net sales, research and development
revenue and royalty income. Revenues increased 44% to $16.2 million in the year
ended June 30, 1999 ("fiscal 1999") from $11.3 million in the year ended June
30, 1998 ("fiscal 1998"). Net sales of products increased 54% while research and
development revenue decreased 48% from the prior year. Royalty income increased
139% from the prior year. The increase in net sales was primarily attributable
to the sale of complete 6F Angio-Seal commercial devices as well as increased
sales of commercial bioabsorbable polymer and collagen products to third
parties, including the sale of components for the 8F Angio-Seal device to the
Strategic Alliance Partner. The sale of the 6F Angio-Seal devices was related to
the product launch in Europe in April of 1999 while increases in sales of
Angio-Seal components came as a result of increased demand for the 8F product in
the US and European markets. The decrease in research and development revenues
was due to a reduction in Angio-Seal research and development activity as the 6F
Angio-Seal transitioned from the development phase to a



                                       17
<PAGE>   19

commercial product. Going forward, the Company expects research and development
revenue to be nominal as its new Strategic Alliance Partner, St. Jude, plans to
perform the majority of the ongoing Angio-Seal research and development
in-house.

Royalty income increased 139% to $7.2 million from $3.0 million in fiscal 1999
and fiscal 1998, respectively. Approximately 310,000 Angio-Seal units were sold
to end-users in fiscal 1999 compared to 178,000 units sold in fiscal 1998. The
increase in royalty income reflected the launch of the 6F Angio-Seal in Europe
in fiscal 1999 as well as increased demand for the 8F Angio-Seal in both the US
and European markets in fiscal 1999 versus fiscal 1998. In addition, the Company
received a $1.5 million supplemental royalty payment in fiscal 1999 from TYCO,
the previous owner of the Angio-Seal Licensing Agreements. As the Company's
Strategic Alliance Partner continues to increase production and enhance
marketing efforts for the Angio-Seal product line in the United States and in
Europe, the Company expects royalty income to continue as a significant source
of revenue. Royalty rates are based on volume of units sold (rates decline as
certain cumulative unit sales levels are reached) and are equivalent in both the
domestic and foreign licensing agreements.

Cost of products sold increased 26% to $5.1 million in fiscal 1999 from $4.1
million in fiscal 1998. This increase reflects greater net sales of products,
which created a more favorable product mix resulting in a favorable gross margin
trend.

Research and development expense, including regulatory and clinical expenses,
increased 3% to $5.7 million in fiscal 1999 from $5.5 million in fiscal 1998.
This increase is mainly attributable to increased development efforts in
revascularization technology as the Company applied for and received its
Investigational Device Exemption ("IDE") from the FDA for the AVS and prepared
for the initiation of clinical trials of the device. The Company is also
expanding its development efforts in the area of absorbable biomaterials as it
continues to work with new customers as well as on proprietary products in the
polymer and collagen markets. These increases in expense were offset by the
ongoing shift of development of the Angio-Seal to the Company's Strategic
Alliance Partner in tandem with the commercialization of the 6F product. The
Company expects research and development expense to continue to increase as it
investigates and develops new products, conducts clinical trials and seeks
regulatory approval for its proprietary products.

Selling, general and administrative expense increased 47% to $2.6 million in
fiscal 1999 from $1.8 million in fiscal 1998. This increase was primarily a
result of legal expenses incurred related to the Company's ongoing patent
infringement suit.

Interest expense increased 121% to $332,000 in fiscal 1999 from $150,000 in
fiscal 1998. This increase was due to an increase in the Company's outstanding
debt from $2.0 million at June 30, 1998 to $6.1 million at June 30, 1999.
Interest income increased 20% to $649,000 in fiscal 1999 from $540,000 in fiscal
1998 as a result of an increase in average total cash and investment balances.

Other non-operating income remained constant at $4,000 for fiscal 1999 and
fiscal 1998. Fiscal 1999 other non-operating income represented primarily a net
gain on the sale of fixed assets while fiscal 1998 represented miscellaneous
nonrecurring items.

FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

Revenues for these periods consisted of net sales, research and development
revenue, milestone fees and royalty income. Revenues increased 43% to $11.3
million in the year ended June 30, 1998 ("fiscal 1998") from $7.9 million in the
year ended June 30, 1997 ("fiscal 1997"). Net sales of products and research and
development revenue both increased 28% from the prior year while royalty income
increased 752%. The increase in net sales was mainly attributable to an increase
in Angio-Seal components sold to the Company's Strategic Alliance Partner, as a
result of increased demand in the US and European markets, as well as the
expansion of the Company's third-party business with other collagen and polymer
customers. Approximately 178,000 Angio-Seal units were sold to end-users in
fiscal year 1998 compared to 26,000 in fiscal 1997. The


                                       18
<PAGE>   20

increase in royalty income represented a full year of Angio-Seal US sales
royalties compared to nine months of US sales royalties in fiscal 1997, a
significant increase in demand in the US and European markets and an increase in
total royalty per unit resulting from the Patent Acquisition Agreement (see Note
5 of the Financial Statements). The increase in research and development revenue
related to contract research and development, including clinical trials, from
the Strategic Alliance Partner for additional sizes of and product enhancements
to the Angio-Seal product line. The $1.1 million milestone fee represented the
final milestone under the License Agreement and was earned by the Company upon
receipt of FDA approval in the first quarter of fiscal 1997.

Cost of products sold increased 33% to $4.1 million in fiscal 1998 from $3.1
million in fiscal 1997. This increase reflected greater net sales of products
offset by manufacturing inefficiencies realized in the start-up phase of
production for the new sizes of the Angio-Seal, the 6F and 10F, and new
biomaterials products during the fiscal year.

Research and development expense, including regulatory and clinical expenses,
increased 18% to $5.5 million in fiscal 1998 from $4.7 million in fiscal 1997.
The Company expanded the development of additional Angio-Seal sizes and
biomaterials products, including resorbable polymers and collagen, and increased
clinical trial activity. In addition, the Company significantly expanded its
development in revascularization technology as it targeted commencement of
clinical trials on the AVS in fiscal year 1999.

Selling, general and administrative expense decreased 3%, or $61,000, in fiscal
1998 from fiscal 1997. This decrease was primarily due to a reduction in certain
outside professional fees.

Interest income decreased 14% to $540,000 in fiscal 1998 from $627,000 in fiscal
1997. The decrease was primarily attributable to cash equivalent and investment
balances in the first quarter of fiscal 1997, which included funds used in the
repayment of the Credit Agreement. Total cash and investment balances have
remained relatively constant since that time. Interest expense decreased 22% to
$150,000 for fiscal 1998 from $193,000 for fiscal 1997. This decrease is also a
result of the repayment of a credit agreement with the Company's Strategic
Alliance Partner in October 1996 offset by amounts drawn under the Company's
line of credit during the current fiscal year and interest charges recorded in
relation to the obligation under the Company's Patent Acquisition Agreement.

During fiscal 1997, the Company received $1.3 million in final settlement for
the business interruption portion of their insurance claim related to the roof
collapse. Of this amount, $969,000 was recorded as other income.

Other non-operating income decreased 47% from $8,000 in fiscal 1997 to $4,000 in
fiscal 1998. Fiscal 1998 represented miscellaneous nonrecurring items while
fiscal 1997 represented primarily a net gain on the sale of fixed assets.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by the Company's operating activities during fiscal 1999 was
$2.9 million, and net cash provided by the Company's operating activities during
fiscal 1998 was $6,000. In fiscal 1999, changes in asset and liability balances
resulted in a $1.5 million use of cash, which was offset by a net income of $3.2
million and non-cash depreciation and amortization of $1.3 million. In fiscal
1998, changes in asset and liability balances resulted in a $1.4 million use of
cash offset by net income of $343,000 and depreciation of $1 million.

Capital expenditures were $1.7 million for fiscal 1999, primarily representing
machinery and equipment and leasehold improvements related to the continued
expansion of the Company's manufacturing capabilities, principally its collagen
and polymer product lines.

The Company's cash, cash equivalents and short-term investments were $9.7
million at June 30, 1999. In addition, the Company had $4.7 million in
restricted investment accounts (not included in the $9.7 million).



                                       19
<PAGE>   21
The Company has pledged $1.9 million in investments as collateral to secure
bank loans made to employees for the payment of taxes incurred by such employees
as a result of their receipt of Common Stock at the time of the IPO. In exchange
for the Company's pledging this collateral, the employees have pledged their
Common Stock as collateral to the Company. The Company also had $2.8 million in
investments restricted for capital spending through June 30, 2000 under the
terms of a financing arrangement described below. The Company has a $2.8 million
captital spending plan for fiscal year 2000 for the continued expansion and
improvement of its Exton manufacturing facility.

In January 1999, the Company entered into a $5 million financing agreement with
a bank (the "Financing Agreement"). Under the terms of the Financing Agreement,
the bank purchased the Company's $5 million tax-exempt bond issue (the "Bond
Issue"), which was issued through the local development authority. The Company
used $925,000 of the proceeds of the Bond Issue to pay down the balance under
its existing $2 million Term Loan. The remaining proceeds of the Bond Issue were
placed into a certificate of deposit (the "CD") from which withdrawals are
restricted for capital expenditure purposes only.

The Company received a $3.0 million royalty advance under the License Agreement
upon receipt of FDA approval of the Angio-Seal in fiscal year 1997. This royalty
advance continues to be reduced as the Company exceeded minimum royalty
stipulations under the Licensing Agreement.

In November 1997, the Company acquired patents under a Patent Acquisition
Agreement in exchange for 200,000 shares of common stock and a series of eight
quarterly cash payments, which began on March 31, 1998, totaling $1.2 million.
The patents were recorded on the balance sheet at the value of the shares on the
date of the agreement plus the present value of the $1.2 million cash and any
legal and other related costs incurred to acquire such patents. The present
value of the cash payments ($1.1 million) was recorded on the balance sheet with
a remaining balance at June 30, 1999 of $503,000.

The Company plans to continue to expend substantial resources to fund clinical
trials to gain regulatory approvals and to continue to expand research and
development activities particularly for its revascularization technology and
biomaterials products.

The Company believes cash generated from operations as well as funds available
under financing arrangements with its bank will be sufficient to meet the
Company's operating and capital requirements for the next twelve months.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's interest income and expense are most sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates
affect the interest earned on the Company's cash, cash equivalents and
investments as well as interest paid on its debt.

The Company's investment portfolio consists primarily of high quality US
government securities and certificates of deposit with an average maturity of
one year or less. The Company mitigates default risk by investing in what it
believes are the safest and highest credit quality securities and by monitoring
the credit rating of investment issuers. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and there are limitations regarding duration of investments. These
available-for-sale securities are subject to interest rate risk and decrease in
market value if interest rates increase. At June 30, 1999, the Company's total
portfolio consisted of approximately $13.2 million of investments, all of which
had maturities within one year. Additionally, the Company generally holds
securities until maturity. Therefore, the Company does not expect its results of
operations or cash flows to be materially impacted due to a sudden change in
interest rates.

The Company has $1,075,000 in fixed rate debt, for which the risk would be an
inability to refinance if rates decreased. The remaining $5 million of the
Company's debt fluctuates with the US treasury rate and is therefore subject to
increases in US interest rates. The estimated potential reduction in earnings
from a one-point increase in the Five Year US treasury rate for the year ended
June 30, 1999 would have been approximately $22,000.



                                       20
<PAGE>   22

YEAR 2000 COMPLIANCE

The Company is aware of computer program issues associated with existing
computer systems as the year 2000 approaches. The year 2000 problem is pervasive
and complex, as virtually every computer operation will be affected in some way
by the rollover of the two-digit year value from 99 to 00. The issue is whether
computer systems and embedded controls will properly recognize date sensitive
information when the year changes to 2000 ("Year 2000 Compliance Issue").
Systems that do not properly recognize such information could result in system
failures or miscalculations causing disruptions to operations and normal
business activities.


The Company has completed its assessment of potential year 2000 issues and the
associated potential risks. The Company has assessed the impact of the year 2000
issues and believes that its business products and services will not be
significantly impacted. The Company has identified all financial, informational
and operational systems and found that all critical processes incorporating
these systems are 2000 compliant. The Company is verifying the readiness of its
significant customers and suppliers, including its Strategic Alliance Partner,
through the distribution of a questionnaire. This process was substantially
completed as of June 30, 1999. The Company does not warrant, however, that these
companies' year 2000 compliance activities will be completely successful. The
Company continues to monitor the situation and refine its contingency plans as
appropriate.


The Company began work on the computer Year 2000 Compliance Issue in fiscal year
1998. Software applications, hardware and related information and
non-information technologies have been upgraded or replaced to ensure that all
systems are Year 2000 compliant. Replacing hardware or software in this fashion
is considered a normal cost of doing business and is being expensed or
capitalized as appropriate. Management does not anticipate that the costs of
year 2000 compliance will have a material effect on the Company's results of
operations, cash flows or financial position. The Company does not presently
expect that its operations will be materially affected by problems with its
computer systems or those of third parties with whom it deals.

Statements contained in this Form 10-K that are not historical facts are
forward-looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
fiscal year 2000 and beyond to differ materially from those in any
forward-looking statements made by, or on behalf of, the Company. These
important factors include, without limitation, the time, effort and priority
level that the Company's Strategic Alliance Partner attaches to the Angio-Seal
and the Strategic Alliance Partner's ability to successfully manufacture, market
and distribute the Angio-Seal, the Company's ability to manufacture Angio-Seal
components, the results of ongoing clinical trials for the AVS and other
products and timing of additional regulatory approvals in the United States and
in countries outside of Europe including Japan, announcements of technological
innovations or the introduction of new products by the Company, its customers or
its competitors, competition of puncture closure and occluded SVG devices in
general, general business conditions in the healthcare industry and general
economic conditions. 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 the common stock.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements, with the report of the independent auditors,
listed in Item 14, are included in this Annual Report on Form 10-K.

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

         None.



                                       21
<PAGE>   23


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information in response to this item is incorporated by reference from
the "Election of Directors", "Executive Officers", and "Compliance with Section
16(a) of the Exchange Act" sections of the Company's definitive Proxy Statement
in connection with its 1999 Annual Meeting of Stockholders scheduled to be held
on December 1, 1999 (the "1999 Proxy Statement"), which will be filed with the
Securities and Exchange Commission on or before November 4, 1999.

ITEM 11. EXECUTIVE COMPENSATION

         Information in response to this item is incorporated by reference to
the 1999 Proxy Statement captioned "Executive Compensation and Certain
Transactions".


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated by reference to
the information under the captions "Security Ownership of Certain Shareholders"
and "Security Ownership of Management" in the 1999 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated by reference to
the information under the caption "Certain Transactions" in the 1999 Proxy
Statement.


                                      *****





                                       22
<PAGE>   24



                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

14(A) 1. FINANCIAL STATEMENTS

The following financial statements of the Company and Report of Deloitte &
Touche LLP, Independent Auditors are included in this report:

         Independent Auditors' Report

         Consolidated Balance Sheets as of June 30, 1999 and 1998

         Consolidated Statements of Operations for the Years Ended June 30,
         1999, 1998 and 1997

         Consolidated Statements of Stockholders' Equity for the Years Ended
         June 30, 1999, 1998 and 1997

         Consolidated Statements of Cash Flows for the Years Ended June 30,
         1999, 1998 and 1997

         Notes to Consolidated Financial Statements

INDEPENDENT AUDITORS' REPORT

         To the Board of Directors and Shareholders of
                  Kensey Nash Corporation:

         We have audited the accompanying consolidated balance sheets of Kensey
         Nash Corporation (the "Company") as of June 30, 1999 and 1998, and the
         related consolidated statements of operations, stockholders' equity and
         cash flows for each of the three years in the period ended June 30,
         1999. These financial statements are the responsibility of the
         Company's management. Our responsibility is to express an opinion on
         these financial statements based on our audits.

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

         In our opinion, such consolidated financial statements present fairly,
         in all material respects, the financial position of Kensey Nash
         Corporation as of June 30, 1999 and 1998, and the results of its
         operations and its cash flows for each of the three years in the period
         ended June 30, 1999 in conformity with generally accepted accounting
         principles.



         DELOITTE & TOUCHE LLP
         Philadelphia, Pennsylvania

         August 11, 1999



                                       23
<PAGE>   25
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                               June 30,         June 30,
ASSETS                                                                           1999            1998
<S>                                                                          <C>             <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                  $  1,189,083    $  1,407,684
  Short-term investments                                                        8,479,617       6,368,866
  Trade receivables, net of allowance for doubtful accounts of $19,000
     and $0 at June 30, 1999 and 1998, respectively (Note 11)                   2,247,050       1,369,960
  Royalties receivable (Note 2 and 11)                                            742,143         645,784
  Officer loans (Note 4)                                                          264,535          55,361
  Other receivables (including approximately $62,000 and $59,000 at
       June 30, 1999 and 1998, respectively, due from employees)                  170,181         170,063
  Inventory (Note 1)                                                              748,698       1,027,326
  Prepaid expenses and other                                                      320,106         200,169
                                                                             ------------    ------------

         Total current assets                                                  14,161,413      11,245,213
                                                                             ------------    ------------

PROPERTY, PLANT AND EQUIPMENT, AT COST (Note 1):
  Leasehold improvements                                                        4,023,373       4,006,066
  Machinery, furniture and equipment                                            4,840,529       3,599,827
  Construction in progress                                                        676,836         191,154
                                                                             ------------    ------------

         Total property, plant and equipment                                    9,540,738       7,797,047
  Accumulated depreciation                                                     (3,801,514)     (2,843,785)
                                                                             ------------    ------------

         Net property, plant and equipment                                      5,739,224       4,953,262
                                                                             ------------    ------------

OTHER ASSETS:
  Restricted investments (Notes 6 and 9)                                        4,675,725       1,914,418
  Property under capital leases, net (Note 3)                                      28,368          61,181
  Acquired patents, net of accumulated amortization of $381,873 and
       $127,291 at June 30, 1999 and 1998, respectively (Note 5)                3,610,536       3,865,118
                                                                             ------------    ------------

      Total other assets                                                        8,314,629       5,840,717
                                                                             ------------    ------------

TOTAL                                                                        $ 28,215,266    $ 22,039,192
                                                                             ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                           $  1,446,800    $    639,605
  Accrued expenses                                                                863,458         551,573
  Current portion of debt, obligation under patent acquisition agreement
        and capital lease obligations (Notes 3, 5 and 6)                          600,398         577,891
  Deferred revenue - royalties and other (Note 2)                                 390,846          53,120
                                                                             ------------    ------------

         Total current liabilities                                              3,301,502       1,822,189
                                                                             ------------    ------------

DEFERRED REVENUE - ROYALTIES (Note 2)                                                           1,979,580

DEBT and OBLIGATION UNDER CAPITAL
    LEASES, long-term portion (Notes 3 and 6)                                   6,012,863       2,373,960
                                                                             ------------    ------------

         Total liabilities                                                      9,314,365       6,175,729
                                                                             ------------    ------------

COMMITMENTS AND CONTINGENCIES (Notes  2, 3, 9, 12, 14 and 18)

STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value, 100,000 shares authorized,
       no shares issued or outstanding at June 30, 1999 and 1998 (Note 13)
  Common stock, $.001 par value, 25,000,000 shares authorized,
       7,470,710 and 7,459,272 shares issued and outstanding at
       June 30, 1999 and 1998,  respectively (Notes 1 and 14)                       7,470           7,459
  Capital in excess of par value (Note 1)                                      37,697,452      37,597,381
  Accumulated deficit                                                         (18,562,619)    (21,741,377)
  Accumulated other comprehensive income                                         (241,402)
                                                                             ------------    ------------

      Total stockholders' equity                                               18,900,901      15,863,463
                                                                             ------------    ------------

TOTAL                                                                        $ 28,215,266    $ 22,039,192
                                                                             ============    ============
</TABLE>


See notes to consolidated financial statements.



                                       24
<PAGE>   26
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                             Year Ended June 30,
                                                ---------------------------------------------
                                                    1999            1998            1997
<S>                                             <C>             <C>             <C>
REVENUES (Notes 1, 2 and 11):
  Net sales                                     $  7,168,103    $  4,668,913    $  3,661,323
  Research and development                         1,894,350       3,641,492       2,842,433
  Milestone fees                                                                   1,050,000
  Royalty income                                   7,182,969       3,008,327         353,239
                                                ------------    ------------    ------------

           Total revenues                         16,245,422      11,318,732       7,906,995
                                                ------------    ------------    ------------

OPERATING COSTS AND EXPENSES:
  Cost of products sold                            5,135,311       4,083,543       3,062,670
  Research and development                         5,667,668       5,524,501       4,695,323
  Selling, general and administrative              2,584,766       1,762,011       1,822,986
                                                ------------    ------------    ------------

           Total operating costs and expenses     13,387,745      11,370,055       9,580,979
                                                ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS                      2,857,677         (51,323)     (1,673,984)
                                                ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest income                                    649,435         539,577         627,184
  Interest expense                                  (331,969)       (149,977)       (192,812)
  Insurance settlement (Note 10)                                                     968,761
  Other                                                3,615           4,405           8,375
                                                ------------    ------------    ------------

           Total other income - net                  321,081         394,005       1,411,508
                                                ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                  3,178,758         342,682        (262,476)
PROVISION FOR INCOME TAXES (Note 8)
                                                ------------    ------------    ------------

NET INCOME (LOSS)                               $  3,178,758    $    342,682    $   (262,476)
                                                ============    ============    ============


BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
  (Notes 1 and 15)                              $       0.43    $       0.05    $      (0.04)
                                                ============    ============    ============


WEIGHTED AVERAGE COMMON
  SHARES OUTSTANDING (Note 1)                      7,476,939       7,551,596       7,181,959
                                                ============    ============    ============
</TABLE>


See notes to consolidated financial statements.



                                       25
<PAGE>   27
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                               CAPITAL
                                                                        COMMON STOCK          IN EXCESS
                                                                 --------------------------    OF PAR       ACCUMULATED
                                                                     SHARES       AMOUNT        VALUE          DEFICIT

<S>                                                               <C>         <C>            <C>            <C>
BALANCE, JUNE 30, 1996                                            7,156,493   $      7,156   $ 33,815,216   $(21,821,583)

   Exercise of stock options (Note 14)                               41,758             42        388,591

   Net Loss                                                                                                     (262,476)
                                                                  ---------   ------------   ------------   ------------
BALANCE, JUNE 30, 1997                                            7,198,251          7,198     34,203,807    (22,084,059)

   Exercise of stock options (Note 14)                               61,021             61        556,174

   Shares issued under Patent Acquisition Agreement (Note 5)        200,000            200      2,837,400

   Net income                                                                                                    342,682
                                                                  ---------   ------------   ------------   ------------

BALANCE, JUNE 30, 1998                                            7,459,272          7,459     37,597,381    (21,741,377)
                                                                  ---------   ------------   ------------   ------------

   Exercise of stock options (Note 14)                               11,438             11        100,071

   Net income                                                                                                  3,178,758

   Comprehensive loss  (Note 1)

   Comprehensive income

                                                                  ---------   ------------   ------------   ------------
BALANCE, JUNE 30, 1999                                            7,470,710   $      7,470   $ 37,697,452   $(18,562,619)
                                                                  =========   ============   ============   ============


<CAPTION>


                                                                ACCUMULATED
                                                                   OTHER        COMPREHENSIVE
                                                                COMPREHENSIVE      INCOME/
                                                                   (LOSS)          (LOSS)           TOTAL
<S>                                                            <C>             <C>             <C>
BALANCE, JUNE 30, 1996                                                                         $ 12,000,789

   Exercise of stock options (Note 14)                                                              388,633

   Net loss                                                                    $   (262,476)       (262,476)
                                                               ------------    ------------    ------------
BALANCE, JUNE 30, 1997                                                                           12,126,946

   Exercise of stock options (Note 14)                                                              556,235

   Shares issued under Patent Acquisition Agreement (Note 5)                                      2,837,600

   Net income                                                                       342,682         342,682
                                                               ------------    ------------    ------------

BALANCE, JUNE 30, 1998                                                                           15,863,463
                                                               ------------    ------------    ------------

   Exercise of stock options (Note 14)                                                              100,082

   Net income                                                                     3,178,758       3,178,758

   Comprehensive loss  (Note 1)                                    (241,402)       (241,402)       (241,402)
                                                                               ------------

   Comprehensive income                                                        $  2,937,356
                                                                               ============

                                                               ------------                    ------------
BALANCE, JUNE 30, 1999                                         $   (241,402)                   $ 18,900,901
                                                               ============                    ============

</TABLE>

See notes to consolidated financial statements.



                                       26
<PAGE>   28
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                 YEAR ENDED JUNE 30,
                                                                  -----------------------------------------------
                                                                      1999            1998             1997
<S>                                                                <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net income (loss)                                                $  3,178,758    $    342,682    $   (262,476)
  Adjustments to reconcile net income (loss) to net cash
       provided by operating activities:
       Depreciation and amortization                                  1,253,844       1,043,890         725,944
       Gain on sale of property, plant and equipment                                                     (7,036)
  Changes in assets and liabilities which (used) provided cash:
       Accounts receivable                                           (1,182,741)       (557,390)        248,535
       Prepaid expenses and other current assets                       (119,937)         95,063         (35,326)
       Inventory                                                        278,628        (291,404)       (323,079)
       Accounts payable and accrued expenses                          1,119,080         345,017        (394,089)
       Deferred revenue                                              (1,641,854)       (972,300)      2,985,000
                                                                   ------------    ------------    ------------

        Net cash provided by operating activities                     2,885,778           5,558       2,937,473
                                                                   ------------    ------------    ------------

INVESTING ACTIVITIES:
  Additions to property, plant and equipment                         (1,743,691)     (1,823,311)     (2,320,877)
  Proceeds from sale of property, plant and equipment                                                    20,057
  Patent acquisition costs capitalized                                                  (69,539)
  Sale of investments                                                 4,491,096      10,709,918      11,476,618
  Purchase of investments                                            (6,886,937)    (10,090,613)    (10,277,424)
                                                                   ------------    ------------    ------------

        Net cash used in investing activities                        (4,139,532)     (1,273,545)     (1,101,626)
                                                                   ------------    ------------    ------------

FINANCING ACTIVITIES:
  Principal payments under capital leases                               (37,814)        (42,702)        (49,183)
  Proceeds from Term Loan and Financing Agreement                     5,000,000       1,500,000         500,000
  Repayments of long-term debt and Patent Acquisition Obligation     (1,300,776)       (206,042)     (6,356,824)
  Purchase of restricted investments                                 (4,075,000)
  Sale of restricted investments                                      1,348,661
  Proceeds from exercise of stock options                               100,082         556,235         388,633
                                                                   ------------    ------------    ------------

        Net cash provided by (used in) financing activities           1,035,153       1,807,491      (5,517,374)
                                                                   ------------    ------------    ------------

 (DECREASE) INCREASE IN CASH                                           (218,601)        539,504      (3,681,527)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          1,407,684         868,180       4,549,707
                                                                   ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                             $  1,189,083    $  1,407,684    $    868,180
                                                                   ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                           $    310,762    $    139,411    $  1,549,635
                                                                   ============    ============    ============
  Cash paid for income taxes                                       $               $               $
                                                                   ============    ============    ============
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:

Capital lease obligations of $39,353 were incurred during the year ended June
30, 1997 when the Company entered into new equipment leases (see Note 3).

During the year ended June 30, 1998, the Company issued 200,000 shares of common
stock in conjunction with the Patent Acquisition Agreement and incurred a
related obligation in the amount of $1,085,270 (see Note 5).

See notes to consolidated financial statements.


                                       27
<PAGE>   29
KENSEY NASH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
--------------------------------------------------------------------------------


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BUSINESS - Kensey Nash Corporation (the "Company") designs, develops and
      manufactures, both individually and in conjunction with third parties,
      medical devices for use primarily in the cardiovascular and orthopedic
      markets. The Company is a leader in the cardiac catheterization puncture
      closure market with its Angio-Seal device. The Angio-Seal is an absorbable
      medical device for the sealing of arterial punctures created during
      cardiovascular procedures such as angiography, angioplasty, atherectomy
      and the placement of stents. The Company's next product in the
      cardiovascular market is a revascularization device, the Aegis Vortex
      System ("AVS"), which is currently in clinical trials. The AVS is a device
      designed to open blocked saphenous vein grafts while minimizing the risk
      of embolization, a common problem with current treatment alternatives. The
      Company also has leading technology in the area of absorbable
      biomaterials, including applications in orthopedics, cardiovascular,
      tissue regeneration, drug delivery and many others. The Company was
      incorporated in Delaware on August 6, 1984.

      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The consolidated
      financial statements include the accounts of Kensey Nash Corporation and
      Kensey Nash Holding Company. All intercompany transactions and balances
      have been eliminated. Kensey Nash Holding Company, incorporated in
      Delaware on January 8, 1992, was formed to hold title to certain Company
      patents and has no operations.

      The preparation of the consolidated financial statements in conformity
      with generally accepted accounting principles 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 date of the financial statements, as well as
      the reported amounts of revenue and expense during the period.

      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, 1999 and 1998. The fair value of short-term investments is
      based on quoted market prices.

      INVESTMENTS - Investments at June 30, 1999 consist of short-term
      Certificates of Deposit and Government Bonds. In accordance with Statement
      of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
      Investments in Debt and Equity Securities, the Company has classified its
      entire investment portfolio as available-for-sale securities, except for
      those pledged as collateral or restricted as to use which are included as
      restricted investments (see Note 9). Available-for-sale securities are
      reported at fair value with unrealized gains and losses included in
      stockholders' equity (see "Comprehensive Income"). Realized gains and
      losses are included in interest income.

      COMPREHENSIVE INCOME - Effective July 1, 1998 the Company adopted SFAS No.
      130, Reporting Comprehensive Income ("SFAS 130"), which establishes new
      rules for the reporting and display of comprehensive income and its
      components. Accumulated other comprehensive loss, shown in the
      consolidated statements of shareholders' equity at June 30, 1999, 1998 and
      1997, is solely comprised of unrealized losses on the Company's
      available-for-sale securities. There were no unrealized gains or losses in
      the years ended June 30, 1998 and 1997. The tax effect for 1999 other
      comprehensive income was not significant.


                                       28
<PAGE>   30

      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:


<TABLE>
<CAPTION>
                                            JUNE 30,
                                 --------------------------
                                     1999        1998

<S>                              <C>          <C>
               Raw Materials     $  666,271   $  971,357
               Work in process       82,427       55,969
                                 ----------   ----------

               Total             $  748,698   $1,027,326
                                 ==========   ==========
</TABLE>


      PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment consists
      primarily of machinery and equipment and leasehold improvements and is
      recorded at cost. Maintenance and repairs are expensed as incurred.
      Machinery, furniture and equipment is depreciated using the straight-line
      method over its useful life ranging from five to seven years. Leasehold
      improvements are amortized using the straight-line method over the lesser
      of the term of the lease or useful life of the asset.

      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 has a trade receivable
      allowance of $19,000 at June 30, 1999. During the year, the Company
      established trade receivable allowances of $59,376 and wrote off amounts
      totaling $40,376. This amount is included in selling, general and
      administrative expense for the year ended June 30, 1999.

      PATENTS - 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
      cost of acquired patents is being amortized over the remaining period of
      economic benefit, ranging from 14 to 15 years at June 30, 1999.

      REVENUE RECOGNITION - Revenue under research and development contracts is
      recognized as the related costs are incurred; licensing fees and milestone
      payments under the Strategic Alliance Agreements (see Note 2) are
      recognized when the earnings process is complete; and sales revenue is
      recognized when the related product is shipped.

      INCOME TAXES - The Company accounts for income taxes under the provisions
      of SFAS No. 109, Accounting for Income Taxes (see Note 8).

      EARNINGS PER SHARE - Earnings per share are calculated in accordance with
      SFAS No. 128, Earnings per Share 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 included in the
      diluted computation when their effect is dilutive (see Note 15).

      STOCK-BASED COMPENSATION - Stock-based compensation cost is accounted for
      under SFAS No. 123, Accounting for Stock-Based Compensation, which permits
      continued application of the intrinsic value method of Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
      Under the intrinsic value method, compensation cost represents 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 is to grant stock options at the fair market value at the
      date of grant (see Note 14).





                                       29
<PAGE>   31

      NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
      Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities. This statement establishes accounting
      and reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts, (collectively referred
      to as derivatives) and for hedging activities. It requires that an entity
      recognize all derivatives as either assets or liabilities in the statement
      of financial position and measure those instruments at fair value. The
      Company is not required to adopt this standard until fiscal 2001 (as
      deferred by SFAS No. 137, Accounting for Derivative Instruments and
      Hedging Activities - Deferral of the Effective Date of FASB Statement No.
      133). At this time, the Company has not determined the impact this
      standard will have on the Company's financial statements.

      PRESENTATION - Certain items in the 1998 and 1997 consolidated financial
      statements have been reclassified to conform with the presentation in the
      1999 consolidated financial statements.

2.    STRATEGIC ALLIANCE AGREEMENTS

      The Company has a strategic alliance with St. Jude Medical, Inc. ("St.
      Jude") which incorporates United States and foreign license agreements
      (together, the "License Agreements"), a research and development agreement
      and a collagen supply agreement (collectively, the "Strategic Alliance
      Agreements"). The Strategic Alliance Agreements were formerly with The
      Kendall Company ("Kendall"), a subsidiary of Tyco International, Ltd.
      ("Tyco"). In November 1998, Kendall announced the sale of the Angio-Seal
      License Agreements to St. Jude. Under the terms of the sale, the Company's
      Strategic Alliance Agreements with Kendall were transferred to St. Jude.
      Prior to Kendall, the Strategic Alliance Agreements had been with American
      Home Products. The Company's current or previous alliance partners will be
      referred to as the Strategic Alliance Partner throughout.

      THE LICENSE AGREEMENTS - Under the License Agreements, St. Jude 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 License Agreements also
      provide for certain minimum royalty payments ("Minimum Royalty") during
      the first five years after receiving US Food and Drug Administration
      ("FDA") approval.

      The Company has received "licensing and milestone fees," totaling $11.0
      million, as set forth in the License Agreements. The final milestone
      payment of $1.05 million was received upon receipt of pre-market approval
      by the FDA to produce and market the Angio-Seal in the United States on
      September 30, 1996. In addition, a $3.0 million advance was received on
      future royalties, which, as stipulated in the License Agreements, will be
      reduced in each royalty year (the period beginning on October 1st and
      ending on September 30th) by 50% of royalties earned in excess of the
      Minimum Royalty in that year. The remainder of royalties earned will be
      received as cash proceeds by the Company. At June 30, 1999, the Company
      had exceeded the first, second and third royalty year (periods ended
      September 30, 1997, 1998 and 1999) Minimum Royalties by $352,310,
      $3,058,970 and $1,812,529, respectively. The deferred revenue balance has
      been reduced by 50% of such total excess, to $388,096. The Company
      anticipates the remainder of the deferred royalty balance will be repaid
      during the fiscal year ended June 30, 2000. As such, the entire balance
      has been classified as short-term at June 30, 1999.

      During 1999, the Company received additional royalty payments (the
      "Supplemental Royalty") from the previous owner of the Angio-Seal License
      Agreements, TYCO, in the amount of $1.5 million. The Supplemental Royalty
      was to compensate the Company for lost Angio-Seal sales and expenses
      incurred during the ongoing transition of corporate ownership of the
      Angio-Seal License Agreements to St. Jude. The payments were made in two
      equal installments on March 29, 1999 and April 5, 1999. As such, the
      Company has recorded the $1.5 million as royalty income for the year
      ending June 30, 1999.

      THE RESEARCH AND DEVELOPMENT AGREEMENT - The Company and its Strategic
      Alliance Partner had an agreement whereby such partner funded certain
      ongoing research and development costs incurred by the



                                       30
<PAGE>   32

      Company. The Company contributed one-third of such research and
      development costs while the Strategic Alliance Partner contributed the
      remaining two-thirds. This agreement has expired and the Company's
      Strategic Alliance Partner will be performing any remaining development
      work on the Angio-Seal product line.

      THE COLLAGEN SUPPLY AGREEMENT - Pursuant to an agreement with the
      Strategic Alliance Partner, the Company manufactures collagen to be used
      in the Angio-Seal. The agreement contains a minimum purchase requirement
      from the Company, the price of which fluctuates based on size and
      cumulative quantities sold, for five years beginning May 31, 1995.

3.    LEASES

      At June 30, 1999, future minimum annual rental commitments under
      non-cancelable lease obligations are as follows:


<TABLE>
<CAPTION>
                                                                 CAPITAL LEASES        OPERATING LEASES
                                                                 --------------        ----------------
   YEAR ENDING JUNE 30:
<S>                                                              <C>
   2000                                                          $  25,078             $   382,530
   2001                                                             11,055                 387,446
   2002                                                              1,947                 394,328
   2003                                                                                    166,352
                                                                 ---------             -----------
   Total minimum lease payments                                     38,080             $ 1,330,656
                                                                                       ===========
   Amount representing interest (at rates ranging
     from 7.25% to 10.25%)                                          (3,272)
                                                                 ---------
   Present value of net minimum lease payments                      34,808
   Current portion                                                 (22,498)
                                                                 ---------
   Long-term portion                                             $  12,310
                                                                 =========

</TABLE>


      Rent expense for operating leases consists solely of rent for the
      Company's facility in Exton, Pennsylvania. Rent expense for the fiscal
      years ended June 30, 1999, 1998 and 1997 was approximately $360,341,
      $326,000 and $275,000, respectively.

      Capital leases are for various types of equipment, as follows:


<TABLE>
<CAPTION>
                                            JUNE 30,
                                    -----------------------
CLASSES OF PROPERTY                    1999          1998

<S>                                 <C>          <C>
Office equipment                    $  17,420    $  38,280
Computer equipment                      9,600        9,600
Manufacturing and other equipment     105,230      118,980
Accumulated amortization             (103,882)    (105,679)
                                    ---------    ---------
Total                               $  28,368    $  61,181
                                    =========    =========
</TABLE>


      Such assets are amortized over periods ranging from three to five years,
      which represent the lesser of the term of the lease or useful life of the
      asset.

4.    OFFICER LOANS

      The Company has loans to a current officer of the Company totaling
      $250,000 which are collateralized by the officer's stock. Interest on
      the loans ranges from 7% to 8.75% and was based on the prime rate of
      interest at the time the advances were made. Total interest income earned
      by the Company on these loans was $9,174, $4,750 and $611 for the years
      ended June 30, 1999, 1998 and 1997, respectively.Interest and principal
      on the loans are due at the sooner of the sale of a portion of the
      officers' common stock or June 22, 2000.

5.    PATENT ACQUISITION AGREEMENT

      On November 10, 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



                                       31
<PAGE>   33

      under a pre-existing licensing agreement. As a result of the Patent
      Acquisition Agreement, beginning January 1, 1998, the Company earns
      royalty fees, formerly paid to the sellers, for each Angio-Seal device
      sold. These royalties are in addition to the royalties already earned by
      the Company under its own License Agreement with its Strategic Alliance
      Partner.

      Under the terms of the Patent Acquisition Agreement, the Company issued
      200,000 shares of common stock and will make cash payments totaling $1.2
      million for the transfer of ownership of the patents. The cash portion is
      payable in eight quarterly installments (four $125,000 payments followed
      by four $175,000 payments), beginning on March 31, 1998. Accordingly, them
      present value of the cash payments (discounted based upon the Company's
      available borrowing rate at the time of the transaction of 8.5%) was
      recorded as a liability on the Company's financial statements, with a
      remaining balance of $503,453 at June 30, 1999 (see Note 6). The
      remaining unamortized discount under the agreement based on imputed
      interest was $21,547 and $70,771 at June 30, 1999 and 1998, respectively.
      The remaining quarterly payments are due by December 31, 1999 and, as
      such, have been classified as short term at June 30, 1999. The acquired
      patents are valued at the share price on the date of the Patent
      Acquisition Agreement plus the present value of the cash payments and the
      legal and related costs incurred to acquire the patents.

6.    DEBT

      TERM LOAN - The Company had a $2 million revolving credit and term loan
      agreement (the "Term Loan"). The Term Loan bore interest at the prime rate
      (8.5% at June 30, 1998) and called for interest only payments until August
      1, 1998 (the "Term Date") at which time it converted to a term loan due in
      60 monthly installments of principal and interest. At June 30, 1998, the
      Company had borrowed $2.0 million under the Term Loan. In January 1999,
      the Company refinanced $925,000 of the outstanding balance under the Term
      Loan with a $5.0 million financing agreement with a bank (the "Financing
      Agreement"). The interest rate on the remaining $1,075,000 under the Term
      Loan was modified to a fixed 8.0% and the Term Date was extended to
      February 1, 2000. Accordingly, $74,447 has been classified as short term
      at June 30, 1999.

      FINANCING AGREEMENT - In January 1999, the Company entered into a $5
      million financing agreement with a bank (the "Financing Agreement"). Under
      the terms of the Financing Agreement, the bank purchased the Company's $5
      million tax-exempt bond issue (the "Bond Issue"), which was provided
      through the local development authority. The Financing Agreement bears
      interest at the five year Treasury rate plus 1%, adjusted quarterly (6.25%
      at June 30, 1999) and calls for twenty-four interest only payments
      followed by sixty monthly installments of principal and interest. The
      Financing Agreement is collaterilized by the assets of the Company.

      The Company used $925,000 of the proceeds of the Bond Issue to pay down
      the balance under its existing Term Loan. The remaining proceeds of the
      Bond Issue were placed into a certificate of deposit (the "CD") from which
      withdrawals are restricted for capital expenditure purposes only. The
      balance of the CD at June 30, 1999 is $2,726,339 and is included in
      restricted investments due to the capital expenditure restriction placed
      on its use.

      Amounts outstanding under the Company's Term Loan, Financing Agreement and
      Patent Acquisition Agreement (see Note 5) are shown in the following
      table.


<TABLE>
<CAPTION>
                                          JUNE 30,
                               ---------------------------
                                   1999           1998

<S>                            <C>            <C>
Term Loan                      $ 1,075,000    $ 2,000,000
Financing Agreement              5,000,000
Patent Acquisition Agreement       503,453        879,228
                               -----------    -----------
Total                            6,578,453      2,879,228
Current portion                   (577,900)      (540,077)
                               -----------    -----------
Long-term                      $ 6,000,553    $ 2,339,151
                               ===========    ===========
</TABLE>


      The annual debt maturities are approximately $577,900, $548,848,
      $1,107,293, $1,182,342 and $1,262,534 for the years 2000 through 2004,
      respectively.



                                       32
<PAGE>   34

7.    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. Company
      contributions are discretionary. The Company has not made any
      contributions to the 401(k) Plan to date.

8.    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.

      For 1999 the Company has not provided for current income taxes due to the
      utilization of NOLs for tax purposes. The differences between the
      Company's income tax expense (benefit) and the income tax expense
      (benefit) computed using the US federal income tax rate were as follows:


<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                       ------------------------------------------
                                                           1999           1998           1997
<S>                                                    <C>            <C>            <C>
Net income (loss) before income taxes                  $ 3,178,758    $   342,682    $  (262,476)
                                                       ===========    ===========    ===========
Tax provision at U.S. statutory rate                     1,080,729        123,121        (94,491)
State income tax provision, net of federal benefit                         17,066        (13,098)
Reconciliation to actual tax rate:
     Non-deductible meals and entertainment                 13,062         13,328          9,158
     Timing differences                                                   (80,880)         2,696
     Utilization of net operating loss carryforwards    (1,093,791)       (72,635)
     Creation of net operating loss carryforwards                                         95,735
                                                       -----------    -----------    -----------
                                                       $              $              $
                                                       ===========    ===========    ===========
</TABLE>


      Significant components of the Company's deferred taxes are as follows:


<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                     ---------------------------
                                                         1999            1998
<S>                                                  <C>            <C>
Accrual for:
  Vacation                                           $    92,536    $   102,958
  Bonuses
Basis difference-patents                                 316,965        381,627
Basis difference-fixed assets                            167,730        (50,520)
Prepaid insurance                                        (76,345)       (46,884)
Inventory                                                193,145        170,870
Other                                                     22,486          7,491
                                                     -----------    -----------
                                                         716,517        565,542
Effective tax rate                                         40.59%         40.59%
                                                     -----------    -----------
Deferred tax asset                                       290,834        229,553
NOL carryforwards (expiring between 2000 and 2012)     5,417,799      6,322,911
                                                     -----------    -----------
                                                       5,708,633      6,552,464
Less valuation allowance                              (5,708,633)    (6,552,464)
                                                     -----------    -----------
                                                     $         0    $         0
                                                     ===========    ===========
</TABLE>


      The Company's entire deferred tax asset is offset by a valuation allowance
      due to the uncertainty surrounding future earnings. At June 30, 1999, the
      Company had NOL carryforwards for federal and state tax purposes totaling
      $14.8 and $3 million, respectively. A portion of the NOL may be subject to
      various statutory limitations as to its usage.



                                       33
<PAGE>   35

9.    COMMITMENTS AND CONTINGENCIES

      The Company has pledged $1,949,386 in investments as collateral to secure
      certain bank loans to employees which were used by such employees for the
      payment of taxes incurred as the result of the receipt of Common Stock at
      the Company's Initial Public Offering in December 1995. In exchange for
      the Company pledging collateral for such loans, each affected employee has
      pledged their Common Stock as collateral to the Company. The balance
      outstanding on such employee loans was $1,879,286 at June 30, 1999.

10.   INSURANCE SETTLEMENT

      On January 8, 1996, the Company's facility sustained significant damage
      from a roof collapse resulting from a major snowstorm. The production of
      the Company's products was halted until the destroyed facilities could be
      reconstructed. Construction was completed in late March 1996 and
      production resumed at such time. The Company maintains both property
      damage and business interruption insurance.

      The Company recovered $1,309,882 as final settlement for business
      interruption as a result of this event in December 1996. Of this amount
      $968,761 (net of adjuster fees) was recorded as a component of other
      income for the year ended June 30, 1997.

11.   CONCENTRATION OF CREDIT RISK

      Financial instruments that potentially subject the Company to significant
      concentrations of credit risk consist primarily of cash and cash
      equivalents, short-term investments and accounts receivable. The Company
      places its cash, cash equivalents and short-term investments with high
      quality financial institutions and has established guidelines relative to
      diversification and maturities that maintain safety and high liquidity.
      With respect to trade and royalty receivables, such receivables are
      primarily with the Company's Strategic Alliance Partner (67% and 100% of
      trade and royalty receivables, respectively, at June 30, 1999) (see Note
      2). The Company performs ongoing credit evaluations on the remainder of
      its customers' financial conditions but does not require collateral to
      support customer receivables.

12.   CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS

      The Company has entered into employment agreements with certain of its
      officers which provide for aggregate annual base salaries of $748,662
      through June 2000.

13.   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, 1999 and 1998 no shares of Preferred Stock were
      outstanding. The Company has no present intention to issue shares of
      Preferred Stock.

14.   STOCK OPTION PLANS

      During 1995, the Company adopted the Employee Incentive Compensation Plan
      (the "Employee Plan"), a flexible plan that provides the Employee Plan
      Committee (the "Committee") broad discretion to 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, employees and



                                       34
<PAGE>   36

      consultants of the Company who, in the opinion of the Committee,
      contribute to the growth and success of the Company.

      The Compensation Committee of the Board of Directors oversees the
      Committee and may grant nonqualified stock options, incentive stock
      options or a combination thereof to the participants. The Employee Plan
      provides for a total of 2.2 million shares available for option grants.
      Options granted will provide for the purchase of Common Stock at prices
      determined by the Compensation Committee, but in no event less than fair
      market value on the date of grant. As of June 30, 1999, awards consist
      solely of stock options as summarized in the table below.

      During 1995, the Company adopted the 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. The Directors' Plan provides for a total number of 60,000
      shares available for option grants.

      Each non-employee director was granted an option to purchase 5,000 shares
      of Common Stock on the Directors' Plan's effective date. In addition, the
      Director's plan provides for the grant of an option to purchase 5,000
      shares of Common Stock on the date of each regular annual stockholder
      meeting after the effective date to each participant upon such date. The
      participant must either be continuing as a non-employee director
      subsequent to the meeting or have been elected at such meeting to serve as
      a non-employee director. Options granted under the Directors' Plan must
      provide for the purchase of Common Stock at fair market value on the date
      of grant.

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

      A summary of the stock option activity under both plans for the years
      ended June 30, 1999, 1998 and 1997, is as follows:


<TABLE>
<CAPTION>
                                                   EMPLOYEE PLAN                DIRECTORS' PLAN
                                            ---------------------------      ------------------------
                                                             WEIGHTED                      WEIGHTED
                                                             AVERAGE                       AVERAGE
                                                             EXERCISE                      EXERCISE
                                              SHARES          PRICE           SHARES        PRICE
                                            ---------------------------      ------------------------
<S>                                         <C>              <C>             <C>          <C>
Balance at June 30, 1996                         803,600      $9.66              15,000    $12.00

Granted                                            2,000      14.88               7,500     14.88
Cancelled                                        (11,349)     12.53
Exercised                                        (41,758)      9.31                  -
                                              ----------                        -------
Balance at June 30, 1997                         752,493       9.64              22,500     12.96

Granted                                          201,100      11.69              15,000     16.25
Cancelled                                        (13,030)     11.84
Exercised                                        (61,021)      9.12                 -
                                              ----------                        -------

Balance at June 30, 1998                         879,542      10.12              37,500     14.28

Granted                                          816,650       8.56              15,000      8.88
Cancelled                                        (40,924)     10.47
Exercised                                        (11,438)      9.59                  -
                                              ----------                        -------
Balance at June 30, 1999                       1,643,830       9.34              52,500     12.73
                                              ==========                        =======

Exercisable portion                              724,802       9.79              25,002     13.43
                                              ==========                        =======

Available for future grant                       441,953                          7,500
                                              ==========                        =======
Weighted-average fair value of options
   granted during the year ended June 30,
                  1997                        $     9.80                        $ 11.08
                                              ==========                        =======
                  1998                        $     8.24                        $ 11.53
                                              ==========                        =======
                  1999                        $     5.78                         $ 6.00
                                              ==========                        =======
</TABLE>

                                       35
<PAGE>   37



      The fair value of each option grant is estimated on the date of grant
      using the Black-Scholes option-pricing model with the following weighted
      average assumptions used for grants:



<TABLE>
<CAPTION>
                                           YEAR ENDED JUNE 30,
                                       -----------------------------------------
                                             1999          1998      1997
<S>                                    <C>               <C>          <C>
     Dividend yield                           0%            0%         0%
     Expected volatility                   50%-81%        65%-70%    68%-75%
     Risk-free interest rate                5.77%          5.7%       6.4%
     Expected lives:
          Employee Plan                      7.61          7.75        5
          Directors Plan                     7.61          7.75        7
</TABLE>


      The following table summarizes significant option groups outstanding at
      June 30, 1999 and related weighted average exercise price and remaining
      contractual life information as follows:


<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                      ------------------------------------------------ -----------------------------------
      RANGE OF                             REMAINING      WGHTD AVG                          WGHTD AVG
      EXERCISE            NUMBER AT       CONTRACTUAL     EXERCISE         NUMBER AT          EXERCISE
       PRICES           JUNE 30, 1999        LIFE           PRICE        JUNE 30, 1999         PRICE
------------------    ------------------ --------------   ---------      -------------     ---------------
<S>                   <C>                <C>                <C>           <C>              <C>
  $7.625 - $9.375             1,342,036      8.15          $ 8.57         526,736            $  8.58
  $11.75 - $13.375              318,294      7.56           12.42         201,441              12.80
  $14.875 - $16.25               36,000      7.57           15.77          21,627              15.66
                              ---------                                   -------
                              1,696,330                                   749,804
                              =========                                   =======
</TABLE>


      The Company has adopted the disclosure only provisions of SFAS No. 123,
      Accounting for Stock Based Compensation. Accordingly, no compensation cost
      has been recognized for the Company's two stock option plans. Had
      compensation cost for the plans been determined based on the fair market
      value at the grant date for awards, consistent with the provisions of SFAS
      No. 123, the Company's net loss and earnings per share would have been
      reduced to the proforma amounts below:


<TABLE>
<CAPTION>
                                    JUNE 30, 1999                   JUNE 30, 1998                   JUNE 30, 1997
                            ------------------------------- ------------------------------- -----------------------------
                              AS REPORTED      PRO FORMA      AS REPORTED      PRO FORMA     AS REPORTED      PRO FORMA
                            ---------------- -------------- ---------------- -------------- --------------- -------------
<S>                           <C>             <C>              <C>            <C>             <C>             <C>
   Net income (loss)          $3,178,758      $1,698,182       $342,682       ($664,398)      ($262,476)      ($818,363)
   Income (loss) per share       $0.43           $0.23           $0.05          ($0.09)        ($0.04)         ($0.11)
</TABLE>


15.   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. The reconciliation is not shown for the year ended June 30,
      1997, as any common share equivalents are antidilutive.


<TABLE>
<CAPTION>
                                                  YEAR ENDED JUNE 30, 1999              YEAR ENDED JUNE 30, 1998
                                          --------------------------------------  ---------------------------------------
                                                                    PER SHARE                                 PER SHARE
                                            INCOME       SHARES        AMOUNT        INCOME       SHARES       AMOUNT
                                          --------------------------------------  ---------------------------------------
<S>                                       <C>           <C>         <C>           <C>           <C>         <C>
BASIC EPS
Income available to common shareholders   $3,178,758    7,462,723   $      0.43   $  342,682    7,342,683   $      0.05
                                                                    ===========                             ===========

EFFECT OF DILUTIVE SECURITIES
Options                                         --         14,216                      --         208,913
                                          ----------   ----------                 ----------   ----------
DILUTED EPS
Income available to common shareholders
  including assumed conversions           $3,178,758    7,476,939   $      0.43   $  342,682    7,551,596   $      0.05
                                          ==========   ==========   ===========   ==========   ==========   ===========
</TABLE>




                                       36
<PAGE>   38

16.   SEGMENT REPORTING

Effective July 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires the
Company to use the "management approach" for identifying operating segments and
establishes annual and interim reporting standards for these operating segments.
The statement also establishes standards for related disclosures about products
and services and geographic areas. The Company's operations and products have
been aggregated into a single reportable segment, as permitted under SFAS No.
131, since they have similar economic characteristics, production processes,
types of customers and distribution methods.

The Company's primary products include Puncture Closure (the Angio-Seal) and
Biomaterials. Puncture Closure products primarily represents Angio-Seal device
sales to the Company's Strategic Alliance Partner. Under Biomaterials products,
the Company designs and/or manufactures and markets various absorbable polymer
and collagen products for use in numerous applications including orthopedics,
cardiovascular, tissue regeneration, drug delivery and many others. The Company
also receives royalty revenue from the sale of Angio-Seal units by its Strategic
Alliance Partner and research and development revenue reimbursed for certain
research and development expenses. Revenue by product line is as follows:



<TABLE>
<CAPTION>
                             REVENUE FOR THE YEAR ENDED JUNE 30,
                           ---------------------------------------
                               1999          1998          1997
<S>                        <C>           <C>           <C>
Puncture Closure           $ 1,127,641   $ 1,248,293   $ 2,544,062
Biomaterials                 6,040,462     3,420,620     1,117,261
                           -----------   -----------   -----------
Net sales                    7,168,103     4,668,913     3,661,323
Research and development     1,894,350     3,641,492     2,842,433
Royalty income               7,182,969     3,008,327       353,239
Milestone fees                                           1,050,000
                           -----------   -----------   -----------
   Total Revenue           $16,245,422   $11,318,732   $ 7,906,995
                           ===========   ===========   ===========
</TABLE>



For the years ended June 30, 1999, 1998 and 1997, revenues from the Strategic
Alliance Partner represented the following percentages of total revenues of the
Company:


<TABLE>
<CAPTION>
                                                        PERCENTAGE OF TOTAL REVENUE
                                                        FOR THE YEAR ENDED JUNE 30,
                                                ---------------------------------------------
                                                    1999             1998           1997
<S>                                                  <C>             <C>             <C>
           Net Sales                                  66%            86%             91%
           Research and development (see Note 2)     100%            96%             98%
           Milestone Fees (see Note 2)                                              100%
           Royalty Income (see Note 2)              100%             100%           100%
</TABLE>



      The Company's sales to external customers are summarized below. Net sales
      are attributed to a country based on the location of the customer. No one
      country other than the US represented more than 10% of the Company's
      revenues. In addition, all of the Company's long-lived assets are located
      in the US.
                                            REVENUE FOR THE YEAR ENDED JUNE 30,
                                          -------------------------------------
                                              1999         1998         1997


           United States                  $ 15,911,292  $11,246,697  $ 6,269,412
           Other foreign countries             334,130       72,035    1,637,583
                                          ------------  -----------  -----------
             Total                        $ 16,245,422  $11,318,732  $ 7,906,995
                                          ============  ===========  ===========

17.   QUARTERLY FINANCIAL DATA (UNAUDITED)

      The summarized quarterly results of operations of the Company for the
      years ended June 30, 1999 and June 30, 1998 are presented below:


                                       37
<PAGE>   39



<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30, 1999
                                                   -------------------------------------------------
                                                      1ST          2ND           3RD         4TH
                                                    QUARTER      QUARTER       QUARTER     QUARTER
                                                   ----------   ----------   ----------  -----------
<S>                                                <C>          <C>          <C>          <C>
Operating revenues                                 $3,551,497   $3,714,312   $4,368,369   $4,611,244
Operating costs and expenses                       $3,249,673   $3,131,134   $3,494,695   $3,512,243
Net income                                         $  370,579   $  654,128   $  958,931   $1,195,120
Basic and diluted earnings per share               $     0.05   $     0.09   $     0.13   $     0.16

</TABLE>


<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30, 1999
                                                   ------------------------------------------------------
                                                       1ST           2ND            3RD          4TH
                                                     QUARTER       QUARTER        QUARTER      QUARTER
                                                   -----------    -----------   -----------  ------------
<S>                                                <C>            <C>           <C>          <C>
Operating revenues                                 $ 1,565,290    $ 2,762,081   $ 3,606,955   $ 3,384,406
Operating costs and expenses                       $ 2,365,692    $ 2,878,737   $ 2,902,788   $ 3,222,838
Net (loss) income                                  $  (679,680)   $       492   $   809,722   $   212,148
Basic and diluted (loss) earnings per share        $     (0.09)   $      --     $      0.11   $      0.03
</TABLE>



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

18.   LITIGATION

      In March 1998, the Company, together with its Strategic Alliance Partner,
      filed a patent infringement claim against Perclose, Inc. of Menlo Park,
      California ("Perclose"), a competitor in the puncture closure market. In
      1999, the Company amended the claim to add a second patent to the
      infringement suit. The original and amended suits, filed in the Eastern
      District of Pennsylvania, claim that Perclose infringes the Company's US
      Patent Nos. 5,676,689 and 5,861,004 (together, the "Patents"). The Patents
      cover a system and method for sealing a puncture in a blood vessel (e.g.
      the femoral artery). The Company seeks damages and an order to permanently
      enjoin Perclose from making, using or selling product that infringes the
      Patents.

      Perclose filed four counterclaims in answer to the complaint. The first
      counterclaim seeks to declare the Patent invalid and not infringed; the
      second and third counterclaims maintain that the Company committed
      antitrust violations; and the fourth counterclaim asserts that the Company
      committed unfair competition. Management is unable to predict the final
      outcome of the suit or whether the resolution of the matter could
      materially affect the Company's results of operations, cash flows, or
      financial position. The Company has expensed legal costs, as a component
      of selling, general and administrative expenses, as services have been
      incurred.

                                      * * * * *




                                       38
<PAGE>   40


14(A) 2. FINANCIAL STATEMENT SCHEDULES
         All schedules have been omitted because they are not applicable or not
required.

14(A) 3. EXHIBITS
         Exhibit #                          Description
         ---------                          -----------

         3.1*              Form of Amended and Restated Certificate of
                           Incorporation of the Company.

         3.2*              Form of Amended and Restated Bylaws of the Company.

         4.1*              Specimen stock certificate representing Common Stock.

         10.1*             Kensey Nash Corporation Employee Stock Incentive Plan
                           and form of Stock Option Agreement.

         10.2*             Kensey Nash Corporation Nonemployee Directors' Stock
                           Option Plan and form of Stock Option Agreement.

         10.3*             Form of Directors' Indemnification Agreement.

         10.4*             Employment Agreement dated March 24, 1995, by and
                           between the Company and Joseph W. Kaufmann.

         10.5*             Employment Agreement dated July 1, 1993, by and
                           between the Company and Kenneth R. Kensey, M.D.

         10.6*             Employment Agreement dated July 1, 1993, by and
                           between the Company and John E. Nash, P.E.

         10.7*             Employment Agreement dated March 24, 1995, by and
                           between the Company and Douglas G. Evans, P.E. and
                           First Amendment to Employment Agreement dated October
                           1, 1995.

         10.8*             Collagen Component Supply Agreement dated May 31,
                           1995, by and between the Company and Quinton
                           Instrument Company.

         10.9*             Credit Agreement dated as of May 3, 1993, by and
                           between the Company and American Home Products
                           Corporation, as amended.

         10.10*            License Agreement (United States) dated September 4,
                           1991, by and between the Company and American Home
                           Products Corporation.

         10.11*            License Agreement (Foreign) dated September 4, 1991,
                           by and between the Company and American Home Products
                           Corporation.

         10.12*            Research and Development Agreement dated November 19,
                           1995, by and between the Company and American Home
                           Products Corporation.

         10.13*            Amendment No. 1 to Credit Agreement dated November
                           30, 1993, by and between the Company and American
                           Home Products Corporation.

         10.14*            Amendment No. 2 to Credit Agreement dated as of
                           August 1, 1995, by and between the Company and
                           American Home Products Corporation.

         27.1              Financial Data Schedule

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

*         This exhibit is incorporated by reference to the exhibit with the same
     Exhibit Number in the Company's Registration Statement on Form S-1,
     Registration Statement No. 33-98722.



                                       39
<PAGE>   41


14(B).   REPORTS ON FORM 8-K

         None.

                                   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 28th day of
September, 1999.

                                          KENSEY NASH CORPORATION


                                          By: /s/ WENDY F. DICICCO
                                             -------------------------------
                                             Wendy F. DiCicco
                                             Chief 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 28th day of September, 1999.


<TABLE>
<CAPTION>
              SIGNATURE                                             TITLES
              ---------                                             ------
<S>                                          <C>
/s/ JOSEPH W. KAUFMANN                       Chief Executive Officer (Principal Executive Officer),
---------------------------------------      President,  Secretary and Director
Joseph W. Kaufmann

/s/ JOHN E. NASH, P.E.                       Vice President of New Technologies and Director
---------------------------------------
John E. Nash, P.E.

/s/ KENNETH R. KENSEY, M.D.                  Director
---------------------------------------
Kenneth R. Kensey, M.D.

/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 Accounting and Financial 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.
</TABLE>



                                       40