<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   -----------

                                    FORM 10-K

(MARK ONE)
            [ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934.

                    FOR THE FISCAL YEAR ENDED MARCH 26, 1999

                                       or

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

                         COMMISSION FILE NUMBER: 0-26890

                                   -----------

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

                 DELAWARE                               94-3154669
      (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

    400 SAGINAW DRIVE, REDWOOD CITY, CA                   94063
 (Address of principal executive offices)               (Zip code)

       Registrant's telephone number, including area code: (650) 473-3100

                                   -----------

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

                         Common Stock, $0.001 par value
                                (Title of class)

                         Preferred Share Purchase Rights
                                (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. Yes [ X ] No [ ]

         The aggregate value of voting stock held by non-affiliates of the
registrant was approximately $293,296.00 as of April 30, 1999, based upon the
closing price of the Registrant's Common Stock reported for such date on the
Nasdaq Stock Market. Shares of Common Stock held by each executive officer
and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of April 30, 1999, the
registrant had outstanding 11,074,101 shares of Common Stock.

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                                                       TABLE OF CONTENTS

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<CAPTION>

                                                                                                                   PAGE
                                                                                                                  NUMBER
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<S>                                                                                                                 <C>
PART I.........................................................................................................          3
  Item 1.       BUSINESS.......................................................................................          3
                Company Overview...............................................................................          3
                Industry Overview..............................................................................          4
                Arterial Access Site Management................................................................          5
                Perclose Solution..............................................................................          6
                Minimally Invasive CABG Surgery Products.......................................................          6
                Business Strategy..............................................................................          7
                Products and Technology........................................................................          8
                Clinical and Regulatory Status.................................................................          9
                Marketing and Distribution.....................................................................          9
                Research and Development.......................................................................         10
                Manufacturing..................................................................................         10
                Competition....................................................................................         11
                Patents and Proprietary Rights.................................................................         12
                Government Regulation..........................................................................         13
                Third-Party Reimbursement......................................................................         16
                Product Liability and Insurance................................................................         17
                Employees......................................................................................         17
  Item 2.       PROPERTIES.....................................................................................         17
  Item 3.       LEGAL PROCEEDINGS..............................................................................         17
  Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................         18
PART II........................................................................................................         18
  Item 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................         18
  Item 6.       SELECTED FINANCIAL DATA........................................................................         19
  Item 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........         19
  Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................         29
  Item 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........         29
PART III.......................................................................................................         29
  Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................         29
  Item 11.      EXECUTIVE COMPENSATION.........................................................................         32
  Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................         38
  Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................         40
PART IV........................................................................................................         41
  Item 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................         41
                SIGNATURES.....................................................................................         43
</TABLE>



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                                     PART 1

ITEM 1. BUSINESS


COMPANY OVERVIEW

         Perclose, Inc. ("Perclose" or the "Company") designs, manufactures
and markets less invasive medical devices that automate the surgical closure
or connection of blood vessels. The Company's first product family, the
Prostar-Registered Trademark- and Techstar-Registered Trademark- products,
which are marketed worldwide, surgically close the arterial access site in
the femoral artery after catheterization procedures such as angioplasty,
stenting, atherectomy and diagnostic angiography. A second group of products,
The Heartflo-TM- System, is under development and is designed to automate the
surgical connection of blood vessels in conventional and minimally invasive
coronary artery bypass surgery.

         The Prostar and Techstar percutaneous vascular surgery ("PVS")
products are designed to provide routine, definitive closure that replicates
results previously obtainable only through open surgery, without the
associated risks and costs. Randomized clinical trials of the Prostar and
Techstar products have demonstrated significant clinical and economic
advantages over conventional compression methods of arterial access site
closure. These advantages include achieving rapid hemostasis (the cessation
of bleeding), reducing nursing time required to monitor patients, allowing
earlier patient ambulation, enabling more efficient use of the
catheterization laboratory, reducing overall treatment costs and improving
patient comfort. In addition, for certain high risk patients, such as those
who have experienced a heart attack, the Company's products allow
continuation of aggressive anticoagulation, thrombolytic or anti-restenosis
drug therapy without an increased risk of bleeding complications at the
arterial access site.

         The Company commenced international shipments of its Prostar and
Techstar products in 1994 and 1995, respectively. During fiscal 1998, the
Company received a FDA premarket approval ("PMA") and several PMA supplement
approvals for commercial sale in the United States of versions of its Prostar
and Techstar PVS products. The Company is developing a new generation of PVS
product trademarked as the Closer-TM-. The Company has recently completed a
200 patient, randomized multi-center clinical trial for this product and has
submitted a PMA supplement application to the FDA for the purpose of
obtaining approval to market this product in the United States.

         The Company is developing the Heartflo Anastomosis System to allow
cardiac surgeons to automate the rapid placement of sutures in blood vessels
during coronary artery bypass graft ("CABG") surgery. The success of a
coronary artery bypass surgery procedure is largely determined by the quality
of the anastomosis (attachment), which dictates the long-term patency, or
blood flow, through the vein graft to the coronary arteries. While cardiac
surgeons have developed effective surgical techniques to perform hand-sewn
anastomoses of coronary blood vessels in conventional CABG surgeries, the
recent emergence of minimally invasive CABG procedures introduces additional
challenges for performing hand-sewn anastomoses during such procedures. Since
the opening to the chest cavity created by ports or mini-thoracotomies used
in minimally invasive CABG procedures is small, accessing and suturing the
bypass graft to the coronary artery is more difficult, may take longer to
perform and may not achieve the same therapeutic results as in conventional
open chest CABG surgery. The Heartflo Anastomosis System is being designed to
deploy an ideal suture pattern in a rapid, consistent and automated fashion
while still allowing the surgeon ultimate control over the tensioning and
tying of the sutures to complete attachment of the bypass graft. The Heartflo
Anastomosis System is being designed for use with conventional, open chest
CABG procedures and the newer, minimally invasive, beating heart and stopped
heart procedures. The Heartflo system is currently undergoing human clinical
testing.

         This Report on Form 10-K contains certain forward-looking statements
regarding future events with respect to the Company. Actual events and/or
future results of operations may differ materially as a result of


                                      3
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the factors described herein and in the documents incorporated herein by
reference, including, in particular those factors described under
"Business--Manufacturing", "--Competition," "--Patents and Proprietary
Rights", "--Government Regulations", "--Third Party Reimbursement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Factors Affecting Future Operating Results."

INDUSTRY OVERVIEW

         THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET

         CORONARY ARTERY DISEASE. More than 6 million people in the United
States have been diagnosed with coronary artery disease, which is a formation
of atherosclerotic plaque that causes blood flow restrictions, or blockages,
within the coronary arteries. These blockages can occur anywhere within the
complex network of arteries that provide blood to the heart muscle. If left
untreated, coronary artery disease can cause severe chest pain and lead to
heart attacks. The principal means of treating coronary artery disease when
diet, exercise or drug therapy fail to achieve therapeutic results include
CABG, a highly invasive open surgical procedure, and percutaneous
transluminal coronary angioplasty ("balloon angioplasty") as well as other
percutaneous catheter-based procedures including stenting and atherectomy.
Prior to the late 1970's, CABG was the only alternative for treating coronary
artery disease that did not respond to non-invasive therapy. Since its
clinical introduction in 1978, balloon angioplasty, either alone or in
conjunction with stents, has emerged as the principal less invasive
alternative to CABG. Industry estimates in 1997 indicate that there are
approximately 540,000 CABG procedures performed annually worldwide, with
approximately 320,000 of those occurring in the United States. Industry
sources estimate that there are approximately 675,000 balloon angioplasty,
stenting and atherectomy procedures performed annually worldwide, including
approximately 425,000 such procedures in the United States. In addition,
minimally invasive forms of CABG have been recently introduced and continue
to be developed. These procedures attempt to reduce the invasiveness of CABG
by minimizing the size of the incisions required.

         BALLOON ANGIOPLASTY AND STENTING PROCEDURES. At the beginning of a
balloon angioplasty procedure, the physician initiates anticoagulation drug
therapy to prevent formation of blood clots, which can cause arterial
blockages. Anticoagulation therapy is typically continued throughout the
procedure. A local anesthetic is administered and a small incision is made in
the groin area to gain access to the femoral artery, which is punctured to
create an access site for catheterization devices. The cardiologist inserts
an introducer sheath into the femoral artery and places a guiding catheter
through the introducer sheath to create a path from outside the patient to
the arteries of the heart. The cardiologist advances a small guidewire
through the inside of the guiding catheter, into the coronary artery and
across the site of the blockage. A balloon catheter is delivered over the
guidewire through the inside of the guiding catheter into the artery and
across the site of the blockage. The balloon is inflated to compress the
blockage against the walls of the artery, thereby enlarging the diameter of
the arterial lumen and increasing blood flow to the heart muscle. During this
procedure, anticoagulation drug therapy is ordinarily used to prevent clot
formation in the coronary arteries. At the conclusion of the procedure, the
cardiologist decides if the benefits of continued anticoagulation therapy
outweigh the increased risk of bleeding at the femoral artery access site.
This decision influences the level of post-procedure nursing observation and
the length of the hospital stay, which is typically one to three days.

         Other catheter-based therapeutic coronary procedures include
stenting and atherectomy. Stents are implantable, metal, tube shaped devices
delivered on a balloon catheter and permanently deployed at a blockage site
to maintain increased lumen diameter by mechanically supporting the artery.
Stenting procedures have been reported to reduce the risk of abrupt coronary
artery closure, thereby creating the possibility for outpatient stenting due
to a reduced need to keep patients under post-procedure nursing observation.
The current potential for outpatient stenting is, however, limited by the
inability to achieve predictable, sustained hemostasis of the arterial access
site. Atherectomy encompasses several types of devices that are designed to
remove atherosclerotic plaque that blocks blood flow in the arteries.


                                      4
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         DIAGNOSTIC ANGIOGRAPHY AND OTHER PERCUTANEOUS VASCULAR PROCEDURES

         Patients believed to have coronary artery disease typically undergo
diagnostic angiography to determine the extent and location of their arterial
blockages. Angiography is a procedure in which radiopaque dye visible under
x-ray is delivered through a catheter directly into the coronary arteries,
allowing real-time visualization with an x-ray imaging system. Like
therapeutic angioplasty, angiography is also performed using a catheter
placed into the vascular system through a puncture in the femoral artery.
Industry estimates in 1997 indicated that angiography is performed annually
on approximately 2.9 million patients worldwide including approximately 1.7
million patients in the United States. Angiography procedures represent a
significant market opportunity for arterial closure devices because under
conventional treatment protocols many of these patients are kept under
nursing observation for several hours following the procedure primarily to
confirm achievement of hemostasis.

         Many other catheterization procedures rely on percutaneous access to
the vascular system through a puncture in the femoral artery. These
procedures include peripheral vascular therapeutic and diagnostic procedures,
of which approximately 1.0 million and 1.3 million, respectively, are
performed annually worldwide. These procedures may represent a significant
market opportunity for arterial closure devices because under conventional
treatment protocols, many of these patients are kept under nursing
observation following the procedure primarily to confirm achievement of
hemostasis. Therefore, the availability of reliable arterial access site
closure devices could facilitate early discharge of these patients.
Percutaneous vascular surgery devices could also be used to close femoral
artery access sites in interventional neuroradiology catheterization
procedures, electrophysiology procedures to map and ablate cardiac
arrhythmias and intra-aortic balloon pump procedures. In addition, emerging
percutaneous catheterization procedures and other new interventional
procedures, including catheter-based vascular grafts, cardiopulmonary support
procedures and percutaneous treatment of abdominal aortic aneurysms may also
represent new market opportunities for larger versions of the Company's PVS
products.

ARTERIAL ACCESS SITE MANAGEMENT

         Following catheter-based coronary procedures such as balloon
angioplasty, stenting, atherectomy or angiography, the physician or nursing
staff must close the arterial access site. With procedures relying on
conventional compression closure techniques, anticoagulation therapy (which
is used in all interventional cases) is discontinued for up to four hours
prior to closure of the access site to allow the patient's clotting function
to normalize. During this period, the introducer sheath is left in place and
the patient must remain immobile in bed to prevent bleeding at the access
site. Once the introducer sheath is removed, intense direct pressure is
applied to the puncture site for a period of time ranging from 15 minutes to
over one hour to facilitate formation of a blood clot in order to seal the
arterial access site. This pressure is applied either manually or with a
large C-clamp or other pressure device placed around the patient's leg. A
dislodged clot can result in internal or external bleeding, which may
necessitate transfusions or result in other vascular complications if not
immediately controlled. Because any movement may dislodge the clot, the
patient is required to remain immobile under close nursing observation in a
coronary care unit for an additional four to 24 hours after the procedure,
depending on the amount of anticoagulation drug therapy used and the type of
procedure performed. Conventional closure methods may result in substantial
costs, limit operating efficiencies and constrain the scheduling and usage of
the catheterization laboratory by the number of beds and nursing staff in the
coronary care unit.

         The arterial access site can be affected by other complications
associated with conventional compression methods, including a hematoma in
which a coagulated blood mass forms at the access site, a pseudoaneurysm in
which blood continues to flow from the artery into the coagulated blood mass
at the access site, femoral nerve damage from extended compression and a
vagal response characterized by a sharp drop in blood pressure. Patients
often experience significant pain and discomfort during compression of the
artery and in the period in which they are required to be immobile, and may
require pain medication. Many patients report that the pain associated with
compression of the artery and immobilization is the most uncomfortable and
difficult aspect of the catheterization procedure.


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         In addition to the anticoagulation therapy administered during
routine coronary catheterization procedures, post-procedure anticoagulation
or antiplatelet therapy is necessary in certain patients who are at an
elevated risk of formation of a life-threatening blood clot in the coronary
arteries. The Company believes that this group may represent up to 30% of
therapeutic coronary catheterization patients and includes patients who have
experienced a heart attack or undergone complicated balloon angioplasty
characterized by dissection of the arterial wall during expansion of the
balloon. For these patients, optimal treatment usually requires continued
anticoagulation therapy to keep blood clots from forming, new drugs to reduce
the risk of restenosis or thrombolytic drugs to dissolve existing clots. With
conventional arterial access site closure therapies, the interventional
cardiologist is faced with the choice of discontinuing anticoagulation
therapy and closing the arterial access site using compression or continuing
drug therapy and leaving the sheath in place overnight, which requires the
patient to remain immobile and extends the hospital stay. The cardiologist
must therefore manage the difficult balance of preventing clot formation in
the coronary arteries while encouraging a clot formation to close the
arterial access site. In high clinical need patients, conventional arterial
access site management options may lead to a greater risk of heart attack,
higher vascular complication rates, significant patient discomfort during
clamping and immobilization, intensive nursing monitoring, extended
hospitalization and increased costs of care.

PERCLOSE SOLUTION

         The Company believes that its PVS products, which achieve rapid
closure of arterial access sites following percutaneous catheterization
procedures, overcome the clinical disadvantages of conventional closure
methods and enable catheterization laboratories to achieve increased
operating efficiencies and cost savings. The Company's PVS products enable
the physician to suture arterial access sites percutaneously, providing a
means of closure that has previously been possible only through open vascular
surgery. Since the introduction of catheterization procedures, vascular
surgery has been the definitive method used to close arterial access sites
that do not respond to conventional compression therapy. Open surgery
requires a long incision in the patient's groin area, involves a significant
recovery period and increases overall treatment costs. While surgeons can
close the arterial access site with one or two sutures, the invasive nature
of open surgery makes it unsuitable for routine use in catheterization
patients. Perclose PVS products are designed to provide routine, definitive
closure that replicates, through a minimally invasive procedure, the results
previously obtainable only through open surgery without the associated risks
and costs. The products are designed to be easy to use, relying on standard
techniques that are familiar to physicians performing these procedures.

         Perclose PVS products are used in the catheterization laboratory to
close the arterial access site as the final step in the catheterization
procedure. By achieving rapid hemostasis, PVS products reduce the need for
the patient to remain immobile under close observation in the coronary care
unit. This minimizes the patient's pain and discomfort and allows the patient
to ambulate shortly after the catheterization procedure. Early ambulation of
patients can also improve utilization of hospital resources. For example, in
conventional practice, angiography is usually performed in the morning to
permit same-day discharge following observation and confirmation of
hemostasis. Earlier ambulation and discharge of these patients may contribute
to more efficient usage of the of catheterization laboratory by allowing
scheduling of diagnostic procedures throughout the day.

MINIMALLY INVASIVE CABG SURGERY PRODUCTS

         The Company's first application of its core technology and technical
competency outside of the PVS area is the Heartflo Anastomosis System for use
in conventional, open chest CABG procedures and the newer minimally invasive
beating heart and stopped heart procedures. The success of a CABG procedure
is largely determined by the quality of the anastomosis (attachment), which
dictates the long-term patency, or blood flow, through the vein graft to the
coronary arteries. While effective surgical techniques which enable cardiac
surgeons to perform hand-sewn anastomoses of coronary blood vessels in
conventional CABG surgeries exist, the recent emergence of minimally invasive
CABG procedures introduces additional


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challenges for hand-sewn anastomoses during such procedures. Since the
opening to the chest cavity created by ports or mini-thoracotomies used in
minimally invasive CABG procedures is small, accessing and suturing the
bypass graft to the coronary artery is more difficult, may take longer to
perform and may not achieve the same therapeutic results as in conventional
open chest CABG surgery.

         The Heartflo system is being designed to consistently replicate the
ideal, hand-sewn pattern used by cardiac surgeons during a CABG procedure by
automatically deploying needles and sutures in a precise pattern in both the
bypass vein graft and the coronary artery while still allowing the cardiac
surgeon to maintain control over the joining of the bypass grafts to the
coronary artery. When using the Heartflo system, the surgeon would first
deploy needles and sutures through the bypass graft vessel and then through
the coronary artery. Once the sutures have been deployed by the system, the
cardiac surgeon would then tie the two vessels together using standard
surgical knots.

         The Company believes that by automating the placement of the
sutures, the pattern and positioning of the sutures will be more precise,
consistent and reliable, leading to more clinically efficacious attachments
of vein grafts to coronary arteries (i.e. higher patency rates). In addition,
the Company believes that by automating the suture placement process, the
Heartflo system may reduce the time needed to perform an anastomosis,
especially in minimally invasive CABG procedures. Finally, this procedure
also allows the cardiac surgeon to maintain control of the final suture
tensioning and tying which enables the surgeon to make clinical decisions
based upon the anatomy, thickness and calcification of the vessels to be
joined.

         Most of the recent product development announcements and
introductions for minimally invasive CABG procedures have focused on
improving access to the chest cavity by reducing the need to perform a medial
sternotomy during the CABG procedure. One of the limitations of minimally
invasive CABG is the inability to bypass all blockages of the arteries of the
heart. During these procedures, the surgeon has a difficult time rotating the
heart to access to all coronary vessels and is often unable to reach the
aorta in order to attach the proximal end of the graft. The Heartflo system
is being designed to facilitate the attachment of bypass grafts for these
more difficult attachments in the smaller working spaces used in minimally
invasive CABG procedures. The Company believes that the Heartflo system will
enable surgeons using the newer minimally invasive CABG procedures to obtain
a quality of anastomosis similar to that obtained in conventional CABG
procedures, whether surgeons perform these newer procedures through ports or
mini-thoracotomies and whether on still or beating hearts. The Company
believes that the availability of tools for improving the quality of the
anastomosis for minimally invasive CABG procedures could encourage the
adoption and enhance the long-term effectiveness of these procedures.

         The Company plans to develop three types of anastomosis devices: a
proximal device which would attach one end of the graft to the aorta, a
distal end-to-side device which would attach the distal end of the graft to
the coronary artery and a distal side-to-side device that would attach the
middle of the graft to a coronary artery.

BUSINESS STRATEGY

         The Company's objective is to be a leader in the development,
manufacture and marketing of minimally invasive medical devices that automate
the delivery of needles and sutures in cardiovascular surgical procedures.
Key elements of the Company's strategy include:

         EMPHASIZE CLINICAL UTILITY AND COST-EFFECTIVENESS. In six randomized
trials with over 2,200 patients enrolled, the Company has established that
percutaneous vascular surgical repair of the arterial access site decreases
time to hemostasis and time to ambulation and improves patient comfort. The
Company uses data collected from clinical trials to demonstrate the clinical
and cost advantages of its products to physicians, administrators and health
care payors.

         APPLY FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's
approved products are currently marketed to interventional cardiologists,
radiologists and catheterization laboratory administrators.


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These products are currently marketed in the United States through a direct
sales organization and internationally through distributors in Germany,
France, Japan and other major countries, under regulatory approvals where
required. The Company believes that the majority of interventional
catheterization procedures in the United States are performed in high volume
catheterization laboratories that can be served effectively by a relatively
small, focused sales force. Perclose develops and maintains close working
relationships with its customers to address their needs for products and
services and to receive input regarding the Company's product development
plans. The Company builds these relationships through focused physician
training, which the Company believes will also be an important factor in
encouraging cardiologists to use the Company's products. Perclose provides a
standardized, in-the-field training course in the markets it enters.

         EXTEND THE TECHNOLOGY PLATFORM. The Company applies its core
technology to other high value cardiovascular surgical areas in which remote
and precise delivery of needles and sutures would improve clinical outcomes
and reduce health care costs. Anastomosis of coronary blood vessels during
CABG procedures represents the first application of the Company's core
technology beyond arterial access site closure. The Company intends to
develop new applications for its technology in other minimally invasive
surgical procedures.

         EXPAND MARKETS FOR EXISTING PRODUCTS. The Company believes that
several other minimally invasive catheterization procedures, both currently
used and under development, will be candidates for application of its
existing PVS products. The Company intends to expand its product marketing
efforts into these new clinical applications, including electrophysiology,
interventional neuroradiology and intra-aortic balloon pump procedures, where
percutaneous surgical closure of arterial access sites can meet significant
clinical needs and achieve cost reductions.

         MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company continually evaluates
new developments in percutaneous catheterization procedures and will seek to
expand its product development efforts to address access site closure
following these new procedures, including catheter-based vascular grafts,
treatment of abdominal aortic aneurysms and cardiac pulmonary support
procedures. Because the large diameter catheter devices required for these
procedures make closure of the arterial access site difficult using
conventional compression methods, open surgical procedures are ordinarily
used to close the access sites. The Company believes that larger diameter
versions of its current PVS products could be used to close the arterial
access sites in these procedures, making it feasible to perform such
procedures in a less invasive manner. The Company also focuses on improving
the performance and ease of use and reducing the manufacturing costs of its
PVS products.

PRODUCTS AND TECHNOLOGY

         The Company has introduced two PVS product families, the Prostar and
Techstar. Prostar products provide two sutures for closing arterial access
sites ranging in diameter from 7 French ("F") to 11F. Techstar products are
single-suture devices for suturing 6F and 7F arterial access sites.

         PROSTAR PRODUCTS. The Prostar products are single-use, hand-held
medical devices which consist of a four-needle, two-suture Prostar PVS device
and a Perclose Knot Pusher. Prostar products are currently marketed worldwide
in the 8F and 10F sizes and used to close arterial access sites following
balloon angioplasty, stenting and atherectomy procedures.

         At the end of the catheterization procedure, the introducer sheath
used in the procedure is removed utilizing a standard over-the-wire exchange
technique. Next, the flexible sheath of the PVS device is inserted in the
artery over a guidewire. The unique design of the device allows the physician
to maintain hemostasis throughout the procedure. Properly positioned, the
pull handle is drawn away from the patient, deploying the needles and
sutures. As the needles advance toward the artery wall, they are guided by a
ramp that precisely positions the needles around the arterial access site.
The needles are captured in the barrel of the device which also positions the
needles for removal. Two needles, each attached to the end of a single
suture, will


                                      8
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create one surgical stitch. The needles are removed from the device and
detached from the sutures, which are then tied in a standard surgical square
knot. The device is removed and the knots are advanced to the arterial access
site with the Perclose Knot Pusher. The knots can be further secured with
additional throws, which are also advanced with the Knot Pusher.

         TECHSTAR PRODUCTS. Techstar products consist of a two-needle,
single-suture Techstar PVS device and a Perclose Knot Pusher. Techstar
products are currently marketed worldwide in 6F, 7F and 6FS (short) sizes.
The Techstar 6F product is suitable for closure of arterial access sites in
therapeutic and diagnostic procedures having puncture sites dilated by 6F or
smaller introducer sheaths while the 7F diameter product is suitable for
closure of puncture sites dilated by 7F interventional and diagnostic
introducer sheaths. The Techstar 6FS is shorter in length than the Techstar
6F and is suitable for use after peripheral diagnostic and interventional
procedures for vascular disease of the lower legs.

CLINICAL AND REGULATORY STATUS

         In April 1997, the Company received PMA approval for commercial sale
in the United States of its Prostar 9F and 11F products. In November 1997,
the Company received PMA supplement approval for commercial sale in the
United States of its Techstar 6F and Techstar XL 6F products. In January 1998
the Company received PMA supplement approval for the Prostar Plus 8F and 10F
and Prostar XL 8F products for commercial sale in the United States. In
September 1998, the Company received PMA supplement approval for commercial
sale in the United States of its Prostar XL 10F product. In May 1999, the
Company filed a PMA supplement application for the Closer 6F for use after
diagnostic angiograms to the FDA for commercial sale in the United States.

         Perclose PVS products are currently marketed internationally in
Germany, France, Japan and other major countries under regulatory approvals
where required. The Company obtained CE mark certification in 1996, allowing
it to market its products in all member countries of the European Union and
to ship its products to European Union countries directly from its United
States manufacturing facility.

         The Company has received regulatory approval to market the Prostar
and Techstar products in Japan and has completed a clinical trial in Japan
that will form the basis for an application for reimbursement approvals in
the Japanese health care system. There can be no assurance that such
reimbursement approvals will be obtained in a timely manner or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Government
Regulation."

MARKETING AND DISTRIBUTION

         The Company markets its PVS products in the United States through a
direct sales organization. The Company believes that the majority of
interventional catheterization procedures in the United States are performed
in high volume catheterization laboratories, and that these institutions can
be effectively served by a relatively small, focused sales force. The Company
develops and maintains close working relationships with its customers to
address their needs for products and services and to receive input regarding
the Company's product development plans. The Company builds these
relationships through focused physician training, which the Company believes
will also be a key factor in encouraging physicians to use the Company's
products. The Company provides a standardized, in-the-field training course
in the markets it enters.

         The Company's international sales and marketing strategy for PVS
products focuses on interventional cardiologists and radiologists through
established distributors in major international markets, subject to required
regulatory approvals. The Company generally operates under written
distribution agreements with its distributors, although the Company does not
have written agreements with certain distributors, typically those in smaller
markets. Distributors with which the Company has distribution agreements
generally have the exclusive right to sell the Company's products within a
defined territory.


                                      9
<PAGE>

These distributors also typically market other medical products, although the
Company generally seeks to obtain covenants from its distributors prohibiting
them from marketing medical devices that compete directly with the Company's
products. The Company's distributors typically purchase the Company's
products at a discount from the end user list price and resell the products
to hospitals and clinics. Sales to international distributors are denominated
in U.S. dollars, except to the Company's German and French distributors. The
distributor and end-user price varies from country to country. Because
international sales comprise only a relatively small percentage of the
Company's net revenues, foreign currency exchange risks are not material to
the Company's business.

         For fiscal years 1999 and 1998, no single customer contributed 10%
or more of the Company's net revenues.

RESEARCH AND DEVELOPMENT

         The Company's research and development activities are performed by
an internal research and development staff. The Company has a three-part
strategy in research and development. First, the Company continues to enhance
its existing PVS products to maintain its technological leadership in
percutaneous vascular surgery. Second, the Company plans to apply its core
technology to the closure of other arterial access sites including those for
vascular grafts, treatment of abdominal aortic aneurysms and cardiac
pulmonary support procedures. Third, the Company is applying its core
technology to other high value surgical areas such as coronary anastomosis
with its Heartflo system. Research and development expenses for fiscal 1997,
1998 and 1999 were $4.7 million, $5.4 million and $8.0 million, respectively.

The Company is developing a new generation of PVS product trademarked as the
Closer-TM-. The Company has recently completed a 200 patient, randomized
multi-center clinical trial for this product and has submitted a PMA
supplement application to the FDA for the purpose of obtaining approval to
market this product in the United States.

MANUFACTURING

         The Company currently manufactures its PVS products in a Class
10,000 clean room facility in Redwood City, California. The Company purchases
components from various suppliers and relies on single sources for several
parts. To date, the Company has not experienced any significant adverse
affects resulting from shortages of components. Delays associated with any
future part shortages, particularly as the Company scales up its
manufacturing activities in support of commercial sales in the United States
and for international distributor orders, would have a material adverse
effect on the Company's business, financial condition and results of
operations. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and lack of qualified
personnel. Difficulties encountered by the Company in manufacturing scale-up
could have a material adverse effect on its business, financial condition and
results of operations. The Company has only recently begun manufacturing its
products in large-scale commercial quantities.

         The Company is also required to register as a medical device
manufacturer with the FDA and to list its products with the FDA. As such, the
Company is subject to inspections by the FDA for compliance with the FDA's
good manufacturing practices ("GMP") and other applicable regulations. In
addition, in connection with international sales, the Company is required to
comply with GMP requirements and ISO 9001 standards. These standards require
that the Company maintain processes and documentation in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Failure to either attain or maintain compliance with the applicable
regulatory requirements or standards of various regulatory agencies would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Manufacturing Experience and Scale-Up Risk."


                                      10
<PAGE>

         In November 1997, Perclose undertook a voluntary manufacturer's
recall of specific lots of Techstar XL 6F PVS products. The Company traced
the problem resulting in the recall to a defective mold. The problem was not
attributable to a design defect. The Company is not aware any adverse patient
consequences resulting from these product performance issues. The recall and
replacement had only an immaterial effect on its results of operations during
the third and fourth quarters of fiscal 1998. However, there can be no
assurance that future product problems necessitating recalls will not arise
in the future, and any such future recall could have a material adverse
effect on the Company's business, financial condition and results of
operations.

COMPETITION

         Competition in the emerging market for arterial access site closure
devices is intense and is expected to continue to increase. The Company
believes its principal competition will come from conventional manual
compression devices, mechanical compression devices and collagen plug closure
devices. Conventional compression products are marketed by several companies
that supply C-clamp closure devices. C.R. Bard markets the Femostop
compression arch, a cuff that imposes pressure on the access site. Several
new collagen-based closure devices have been developed in response to the
need for improved methods of arterial access site closure following
catheterization procedures. These collagen plug devices are delivered through
a sheath and placed at the site of the femoral artery puncture. These
collagen plugs rely on the body's clotting function, which is enhanced by the
presence of collagen, and may still require external pressure to achieve
closure of the arterial access site. In contrast, the Company's percutaneous
vascular surgery products provide a mechanical suture closure which aids in
the natural healing process and, like open surgical repair, do not rely on
the body's clotting function. Datascope and Kensey Nash Corporation have
received PMA approval from the FDA for products that use collagen plugs to
achieve hemostasis. A subsidiary of St. Jude Medical, Inc. has exclusive
worldwide distribution rights to the Kensey Nash device. Several other
companies are reported to be developing or have tried to develop arterial
closure devices, some of which have an established presence in the field of
interventional cardiology, including Boston Scientific Corporation, C.R.
Bard, United States Surgical Corporation and Guidant Corporation. In
addition, several companies are developing fibrin sealants for use as
arterial access site closure devices. The Company believes that the primary
competitive factors in the market for arterial closure devices are clinical
need, complication rates, efficacy, time to patient ambulation and discharge,
ease of use and price. In addition, the length of time required for products
to be developed and to receive regulatory and, in some cases, reimbursement
approvals are important competitive factors.

         Competition in the market for conventional and emerging minimally
invasive CABG surgical devices is also intense and is expected to increase.
In September 1997 United States Surgical Corporation received FDA approval to
market an anastomosis device. The Company believes that other companies,
including major cardiovascular device companies focused on both the
conventional and minimally invasive CABG markets, are currently attempting to
develop anastomosis devices.

         Many of the Company's competitors have substantially greater name
recognition and financial resources than the Company and also have greater
resources and expertise in the areas of research and development,
manufacturing, marketing and regulatory affairs. There can be no assurance
that the Company's competitors will not succeed in developing and marketing
technologies and products that are more effective than those developed and
marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there is no assurance that
the Company will be able to compete effectively against such competitors in
terms of manufacturing, marketing and sales. Also, there can be no assurance
that the Company's products will be able to demonstrate clinical efficacy or
cost effectiveness advantages over competing products, or that clinical
trials will demonstrate such advantages.

         In addition, the medical device market is generally characterized by
rapid and significant technological change and frequent emergence of new
technologies, products and procedures. There can be no assurance that any
such new technologies, products or procedures will not reduce the number of
coronary


                                      11
<PAGE>

catheterization or CABG procedures performed. The Company's success will also
depend in part on its ability to respond quickly to medical and technological
changes through the development and introduction of new products. Product
development involves a high degree of risk and there can be no assurance that
the Company's new product development efforts will result in any commercially
successful products. The Company believes it competes favorably with respect
to these factors, although there is no assurance that it will be able to
continue to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Operating
Results--Competition and Risk of Technological Obsolescence."

PATENTS AND PROPRIETARY RIGHTS

         Perclose's policy is to protect its proprietary position by, among
other methods, filing United States and foreign patent applications to
protect technology, inventions and improvements that are important to its
business. The Company has nine issued United States patents covering certain
aspects of the percutaneous suturing technology used in the Company's PVS
products and has exclusive licenses under four additional issued patents
relating to a different method of percutaneous suturing. The Company has nine
United States patent applications pending in the areas of device design,
percutaneous suturing for vascular puncture sites and accessory devices. The
Company has also licensed, on a nonexclusive basis, certain coating
technology used in its products. Under the license, the Company is obligated
to pay royalties on sales of products using this coating technology. The
Company has filed two United States patent applications covering its
anastomosis products and intends to file additional patents in the future.
The Company has also filed several international patent applications
corresponding to certain of its United States patent applications.

         The patent positions of medical device companies, including those of
the Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied
or significantly reduced before or after the patent is issued. Consequently,
there can be no assurance that any patent applications will result in the
issuance of patents, or that the Company's issued or any future patents will
provide significant protection or commercial advantage or will not be
circumvented by others. Since patent applications are secret until patents
are issued in the United States or corresponding applications are published
in international countries, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make the inventions
covered by each of its pending patent applications or that it was the first
to file patent applications for such inventions. There can be no assurance
that patents held by or licensed to the Company or any patents that may be
issued as a result of the Company's pending or future patent applications
will be of commercial benefit, afford the Company adequate protection from
competing products or technologies or will not be challenged by competitors
or others or declared invalid. Also, there can be no assurance that the
Company will have the financial resources to defend its patents from
infringement or claims of invalidity.

         In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company countersued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
that these counterdefendants have engaged in antitrust and unfair competition
violations.

         In March 1999, Tyco sold the marketing rights to the competitive
product to St. Jude Medical, Inc. The case is presently set for trial in
September 1999. The Company believes that the case is without merit and
intends to defend itself and its intellectual property rights vigorously.
Based on currently available information, the Company believes that the
resolution of this matter will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
However, there can be no assurance that this matter will not be determined
adversely to the Company and any adverse determination could have such a
material adverse effect on the Company's business, financial condition

                                      12
<PAGE>

and results of operations. For information regarding this lawsuit, see "Legal
Proceedings."

         In the event a third party has filed a patent application relating
to an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding declared by the USPTO
to determine priority of invention, which could result in substantial
uncertainties and costs to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that any patents issued
to the Company would be held valid by a court of competent jurisdiction.

         The Company relies upon trade secret protection for certain
unpatented aspects of other proprietary technology. There is no assurance
that others will not independently develop or otherwise acquire substantially
equivalent proprietary information or techniques, others will not otherwise
gain access to the Company's proprietary technology or disclose such
technology, or the Company can meaningfully protect its trade secrets.

         The Company typically requires its employees and consultants to
execute appropriate confidentiality and proprietary information agreements
upon the commencement of an employment or a consulting relationship with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual by the Company during the course of
the individual's relationship with the Company is to be kept confidential and
not disclosed to third parties, except in specific circumstances. The
agreements generally provide that all inventions conceived by the individual
in the course of rendering services to the Company shall be the exclusive
property of the Company; however, certain of the Company's agreements with
consultants, who typically are employed on a full-time basis by academic
institutions or hospitals, do not contain assignment of invention provisions.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company in the event of
unauthorized use, transfer or disclosure of such information or inventions.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Operating Results--Reliance on
Patents and Protection of Proprietary Technology."

GOVERNMENT REGULATION

         UNITED STATES REGULATION

         The Company's products are regulated in the United States as
"medical devices" by the FDA under the Federal Food, Drug, and Cosmetic Act
("FDC Act") and require premarket clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to FDA review and clearance or approval.
Pursuant to the FDC Act, the FDA regulates the research, testing,
manufacture, safety, labeling, storage, record keeping, advertising,
distribution and production of medical devices in the United States.
Noncompliance with applicable requirements can result in warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, and criminal
prosecution. Medical devices are classified into one of three classes, Class
I, II or III, on the basis of the controls deemed by the FDA to be necessary
to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification and
adherence to GMPs). Class II devices are subject to general controls and to
special controls (e.g., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and Class II
devices. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
preamendment Class III device (i.e. one that has been in commercial
distribution since before May 28, 1976) for which the FDA has called for such
applications.

         If human clinical trials of a device are required and if the device
presents a "significant risk," the


                                      13
<PAGE>

manufacturer or the distributor of the device is required to file an
investigational device exemption ("IDE") application prior to commencing
human clinical trials. The IDE application must be supported by data,
typically including the results of animal and, possibly, mechanical testing.
If the IDE application is approved by the FDA, human clinical trials may
begin at a specific number of investigational sites with a maximum number of
patients, as approved by the agency. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study
provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be conducted
under the auspices of an independent institutional review board ("IRB")
established pursuant to FDA regulations.

         Generally, before a new device can be introduced into the market in
the United States, the manufacturer or distributor must obtain FDA clearance
of a 510(k) notification or approval of a PMA application. If a medical
device manufacturer or distributor can establish that a device is
"substantially equivalent" to a "predicate device" which is a legally
marketed Class I or Class II device or to a preamendment Class III device for
which the FDA has not called for PMAs, the manufacturer or distributor may
seek clearance from the FDA to market the device by submitting a 510(k)
notification. The 510(k) notification may need to be supported by appropriate
data, including clinical data, establishing the claim of substantial
equivalence to the satisfaction of the FDA. The FDA recently has been
requiring a more rigorous demonstration of substantial equivalence.

         Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order is issued by the FDA. No law or regulation specifies the time limit by
which the FDA must respond to a 510(k) notification. At this time, the
Company believes that the FDA typically responds to the submission of a
510(k) notification within 90 to 120 days, although it can take longer. An
FDA order may declare that the device is substantially equivalent to another
legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is
not substantially equivalent or require further information, including
clinical data, to make a determination regarding substantial equivalence.
Such determination or request for additional information could delay market
introduction of the products that are the subject of the 510(k) notification.

         If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to a predicate device, the
manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including preclinical and clinical trial data,
as well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that
the application is sufficiently complete to permit a substantive review, the
FDA will "file" the application. Under the FDC Act, the FDA has 180 days to
review a PMA application, although the review of such an application more
often occurs over a protracted time period, and generally takes more than one
year or more from the date of filing to complete.

         The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought
have never been approved for marketing. The review time is often
significantly extended by the FDA, which may require more information or
clarification of information already provided in the submission. During the
review period, an advisory committee likely will be convened to review and
evaluate the application and provide recommendations to the FDA as to whether
the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's GMP requirements
prior to approval of an application. If granted, the approval of the PMA
application may include significant limitations on the indicated uses for
which a product may be marketed.

         In April 1997, the Company received PMA approval for commercial sale
in the United States of its Prostar 9F and 11F products. In November 1997,
the Company received PMA supplement approval for commercial sale in the
United States of its Techstar 6F and Techstar XL 6F products. In January 1998
the Company received PMA supplement approval for the Prostar Plus 8F and 10F
and Prostar XL 8F products


                                      14
<PAGE>

for commercial sale in the United States. There can be no assurance that the
Company will be able to obtain further PMA application or PMA supplement
approvals to market its products, or any other products, on a timely basis,
if at all, and delays in receipt or failure to receive such approvals, the
loss of previously received approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.

         The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the CDHS, and to list
its products with the FDA. The Company has been inspected by both the FDA,
the CDHS and international regulatory authorities for compliance with the
FDA's QS Reg. and other applicable regulations that require the Company to
manufacture its products according to elaborate testing, control activities
documentation and other quality assurance procedures. Further, the Company is
required to comply with various FDA requirements for design, safety,
advertising and labeling. In March 1999, the Company moved to a new
manufacturing and headquarters facility in Redwood City, California and has
received all federal, state and international certifications and
authorizations to manufacture products from this facility.

         The Company is required to provide information to the FDA on death
or serious injuries alleged to have been associated with the use of its
medical devices, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur. In
addition, the FDA prohibits an approved device from being marketed for
unapproved applications. If the FDA believes that a company is not in
compliance with the law, it can institute proceedings to detain or seize
products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the company, its officers and its employees.
Failure to comply with the regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         The advertising of most FDA-regulated products is subject to both
FDA and Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities. Regulations regarding the manufacture and sale of the
Company's products are subject change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition
or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Government Regulation."

         INTERNATIONAL REGULATION

         International sales of the Company's products are subject to the
regulatory agency product registration requirements of each country. The
regulatory review process varies from country to country. The Company's
distributors have obtained regulatory approval in several international
markets. At this time, Prostar and Techstar products are being marketed in
Germany, France, Japan and other major countries under regulatory approvals
where required.

         Commercial sales of medical devices, including the Company's PVS
products, in member countries of the European Union require the manufacturer
to obtain the right to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable
European medical device directives. In July 1996, the Company received CE
mark certification for its Techstar and Prostar PVS products. In connection
with CE mark certification, the Company received ISO 9001 qualification of
its manufacturing and quality assurance processes. Certification under the
ISO 9000 series of standards is one of the CE mark certification requirements.


                                      15
<PAGE>

         The Company, through its Japanese distributor, has received
regulatory approval for commercial sale of its products in Japan and has
completed clinical trials in Japan that will form the basis of an application
for reimbursement approvals in the Japanese health care system. There can be
no assurance such approvals will be obtained in a timely manner or at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Operating Results--Government
Regulation."

THIRD-PARTY REIMBURSEMENT

         In the United States, health care providers, such as hospitals and
physicians that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of therapeutic and diagnostic catheterization procedures. Reimbursement
for catheterization procedures performed using devices that have received FDA
approval has generally been available in the United States. The Company
anticipates that in a prospective payment system, such as the DRG system
utilized by Medicare, and in many managed care systems used by private health
care payors, 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 that
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 Company's products.

         Separate reimbursement for the Company's products is not expected to
be available in the United States and there can be no assurance that
reimbursement for the Company's products will be available in international
markets under either governmental or private reimbursement systems.
Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for
therapeutic or diagnostic catheterization procedures in which the Company's
products are used. Failure by physicians, hospitals and other users of the
Company's products to obtain sufficient reimbursement from health care payors
for procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement
for such procedures could have a material adverse effect on the Company's
business, financial condition and results of operations.

         In international markets, market acceptance of the Company's
products may be dependent in part upon the availability of reimbursement
within prevailing health care payment systems. However, in general, hospitals
using the Company's products do not receive specific, cost-based, direct
reimbursement for the use of Perclose PVS products. Reimbursement and health
care payment systems in international markets vary significantly by country.
The main types of health care payment systems in international markets are
government sponsored health care and private insurance. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. In Japan, the Company has completed a
clinical study to support governmental reimbursement approvals. The
application for reimbursement has been submitted to the Japanese government,
however, the Company may not receive reimbursement approvals in Japan in a
timely manner, or at all. The Company may seek additional international
reimbursement approvals, although there can be no assurance that any such
approvals will be obtained in a timely manner, or at all, and failure to
receive additional international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Uncertainty of Third
Party Reimbursement."


                                      16
<PAGE>

PRODUCT LIABILITY AND INSURANCE

         The Company's business involves the risk of product liability
claims. Although the Company maintains product liability insurance, there can
be no assurance that product liability claims will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company,
or that such insurance will be available on commercially reasonable terms or
at all.

EMPLOYEES

         As of March 26, 1999, the Company had 274 full-time employees.
Approximately 30 persons were engaged in research and development activities,
120 persons were engaged in manufacturing and manufacturing engineering, 28
persons were engaged in quality assurance and regulatory affairs, 76 persons
were engaged in sales and marketing and 20 persons were engaged in general
and administrative functions. No employees are covered by collective
bargaining agreements, and the Company believes it maintains good relations
with its employees. The Company is dependent upon a number of key management
and technical personnel, and the loss of services of one or more key
employees could have a material adverse effect on the Company.

ITEM 2. PROPERTIES

         The Company leases an approximately 80,000 square foot, two-building
facility in Redwood City, California. This facility includes an
environmentally controlled, Class 10,000 clean room for device assembly
together with warehouse, laboratory and office space. The lease will expire
in 2008. Additionally, several leases for approximately 31,000 square feet of
space are in effect through September 1999 relating to the Company's prior
facilities in Menlo Park, California.

ITEM 3. LEGAL PROCEEDINGS

         In March 1998, the Company received a patent infringement complaint
stating that it is being sued by Kensey Nash Corporation of Exton,
Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood
Medical Company was Kensey Nash's marketing partner for its Angioseal product
at the time the suit was filed and is a subsidiary of Tyco International,
Ltd. The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. The Company has responded to the patent infringement complaint filed
by Kensey Nash Corporation and Sherwood Medical Company.

         In its response in May 1998, to the complaint, Perclose denies that
its Prostar and Techstar devices infringe the Kensey Nash patent. In
addition, Perclose seeks a declaration from the Court that Perclose does not
infringe the Kensey Nash patent, and that the patent is both invalid and
unenforceable. At the same time, the Company countersued Kensey Nash
Corporation, Sherwood Medical Company and Tyco claiming the patent on which
Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not
infringed and also claiming conterdefendants have engaged in antitrust and
unfair competition violations. In March 1999, Tyco sold the marketing rights
to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case is
presently set for trial in September 1999. Management believes the patent
infringement complaint is without merit and intends to defend itself and its
intellectual property rights vigorously.

         Based on currently available information, the Company believes that
the resolution of this matter will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
However, there can be no assurance that this matter will not be determined
adversely to the Company and any adverse determination could have such a
material adverse effect on the Company's business, financial condition and
results of operations. See --"Factors Affecting Future Operations
Results--Reliance on Patents and Protection of Proprietory Technology."


                                      17
<PAGE>

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.

                                    PART II

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

         The Company's Common Stock is traded on the Nasdaq Stock Market
under the symbol PERC. The number of record holders of the Company's Common
Stock at May 24, 1999 was approximately 198. The approximate number of
beneficial owners at May 24, 1999 was 4,062. The Company has not paid any
dividends since its inception and does not intend to pay any dividends in the
foreseeable future. The following table sets forth, for each quarterly period
indicated, the high and low sales price for the Common Stock as reported by
the Nasdaq Stock Market.

<TABLE>
<CAPTION>

                                                       HIGH          LOW
                                                       ----          ---
<S>                                              <C>            <C>
FISCAL YEAR ENDED MARCH 1997
Quarter Ended June 1996........................... $    24 3/4    $ 20 1/2
Quarter Ended September 1996......................      23 1/4      13
Quarter Ended December 1996.......................      24 1/4      16
Quarter Ended March 1997..........................      27 1/2      19

FISCAL YEAR ENDED MARCH 1998
Quarter Ended June 1997...........................      27 1/4      20
Quarter Ended September 1997......................      27 3/8      21
Quarter Ended December 1997.......................      27 1/2      18
Quarter Ended March 1998..........................      32 3/8      17 3/4

FISCAL YEAR ENDED MARCH 1999
Quarter Ended June 1998...........................      31 15/16    22 21/32
Quarter Ended September 1998......................      30 1/4       9 3/8
Quarter Ended December 1998.......................      38 1/16     13 3/8
Quarter Ended March 1999..........................      50          31 3/8
</TABLE>



                                      18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA


                                 PERCLOSE, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                        YEARS ENDED MARCH 31,
                                                                        ---------------------
                                                         1995        1996        1997       1998        1999
                                                         ----        ----        ----       ----        ----
<S>                                                  <C>          <C>        <C>        <C>          <C>
   STATEMENTS OF OPERATIONS DATA:
     Net revenues................................     $    178     $ 2,457    $  4,456   $ 10,631     $43,340
     Gross profit (loss).........................       (1,971)     (2,315)       (247)     2,848      29,361
     Income (loss) from operations...............       (7,192)     (8,860)    (11,293)   (15,131)      4,251
     Net income (loss)...........................     $ (6,993)    $(8,084)   $ (9,658)  $(13,796)    $ 5,544

     Basic earnings (loss) per common share......     $(5.13) (1)  $ (1.76)   $  (1.02)  $  (1.38)    $  0.51
     Diluted earnings (loss) per common share....     $(5.13) (1)  $ (1.76)   $  (1.02)  $  (1.38)    $  0.47
     Shares used in computing basic earnings
       (loss) per share..........................        1,362       4,584       9,471      9,967      10,829
     Shares used in computing diluted
       earnings (loss) per share.................        1,362       4,584       9,471      9,967      11,725

<CAPTION>
                                                                           MARCH 31,
                                                                           ---------
                                                       1995        1996       1997        1998        1999
                                                       ----        ----       ----        ----        ----
<S>                                                   <C>        <C>         <C>         <C>        <C>
BALANCE SHEET DATA:
     Cash, cash equivalents and short-term
       investments...............................     $8,127     $37,857     $27,672     $31,581    $30,197
     Total assets................................     10,949      40,916      32,514      40,451     49,590
     Current liabilities.........................      1,315       1,905       2,903       3,509      4,675
     Long-term obligations.......................        593         511         228          --         --
     Total stockholders' equity..................     $9,041     $38,500     $29,383     $36,942    $44,915
</TABLE>

 (1)     Pro forma net loss per share for 1995 was $(1.56) computed assuming the
         conversion of preferred stock outstanding.


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

OVERVIEW

         Perclose, Inc. (the "Company") designs, manufactures and markets
less invasive medical devices that automate the surgical closure or
connection of blood vessels. The Company's first product family, the Prostar
and Techstar products, which are marketed worldwide, surgically close the
arterial access site in the femoral artery after catheterization procedures
such as angioplasty, stenting, atherectomy and diagnostic angiography. A
second group of products, The Heartflo System, is under development and is
designed to automate the surgical connection of blood vessels in conventional
and minimally invasive coronary artery bypass surgery.

         The Company commenced international shipments of its first Prostar
and Techstar Percutaneous Vascular Surgery ("PVS") products in December 1994
and July 1995, respectively. During fiscal year


                                      19
<PAGE>

1998, the Company received several FDA pre-market approvals ("PMA") and PMA
supplement approvals for commercial sale in the United States of various
versions of its Prostar and Techstar products.

         The Company's fiscal year ends on the last Friday in March. The
Company's fiscal quarters end on the Friday closest to the end of each
calendar quarter. Fiscal years 1999, 1998 and 1997 ended on March 26, 1999,
March 27, 1998 and March 28, 1997, respectively.

         This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the preceding material as well as in the material
set forth under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". We use words such as believes, intends, expects,
anticipates, plans and similar expressions to identify forward-looking
statements. You should not place undo reliance on these forward-looking
statements. Our actual results can differ materially from those anticipated
in the forward-looking statements for many reasons including the risks
described under the "Factors Affecting Operating Results" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

RESULTS OF OPERATIONS

FISCAL YEARS 1999 AND 1998

         REVENUES. Net revenues for fiscal year 1999 increased 308% to $43.3
million from $10.6 million for fiscal year 1998. The increase in revenues was
primarily due to significant increased penetration of the domestic market
following receipt of FDA pre-market approval of the Company's Prostar and
Techstar families of products during fiscal 1998. Introductions of new
generations of these products also contributed to the sales increase. New
account growth was the primary factor, however, higher sales volume among
previously established domestic accounts also played an important role.
Domestic revenues for fiscal year 1999 increased 331% to $38.9 million from
$9.0 million for fiscal year 1998. Domestic sales as a percentage of total
net revenue for fiscal year 1999 increased to 90% from 85% for fiscal year
1998. International sales as a percentage of total net revenue for fiscal
year 1999 decreased to 10% from 15% for fiscal year 1998. Prices remained
relatively stable throughout the year in both international and domestic
markets. Combined shipments of Prostar and Techstar units increased to
approximately 190,000 units for fiscal year 1999 from 54,000 units for fiscal
year 1998. Sales of Prostar and Techstar products accounted for 33% and 67%,
respectively, of net revenues for fiscal year 1999; and 46% and 54%,
respectively, of net revenues for fiscal year 1998.

         GROSS PROFIT. Cost of goods sold for fiscal year 1999 increased 80%
to $14.0 million from $7.8 million for fiscal year 1998. Gross profit as a
percentage of net revenue for fiscal year 1999 increased to 68% from 27% for
fiscal year 1998. The increase was primarily the result of a decrease in the
unit cost of product shipped from approximately $144 per unit in fiscal year
1998 to approximately $72 per unit in fiscal year 1999. Fiscal year 1998 was
a transitional year for the Company as new products were transferred from
research and development to manufacturing. Cost of goods included material,
labor and overhead costs to set up new production lines and train
manufacturing employees. During fiscal year 1999, the manufacturing process
experienced less transition in its production activity and had higher volumes
to absorb manufacturing overhead. The volume of units produced increased to
206,000 for fiscal year 1999 from 76,000 in fiscal year 1998, an increase of
171%. These increased volumes, together with improvements in manufacturing
process efficiencies, were responsible for the reduction in per unit costs.

         RESEARCH AND DEVELOPMENT. Research and development expenses
increased 46% to $8.0 million for fiscal year 1999 from $5.4 million for
fiscal year 1998. The increase in research and development costs was
attributable to a 57% increase in headcount resulting in higher payroll
expense. In addition, materials and services associated with prototype builds
increased significantly due to an accelerated development schedule for the
Company's next generation of PVS product, known as the Closer. The


                                      20
<PAGE>

Company recently completed a clinical trial for this product and has
submitted a PMA supplement application to the FDA to obtain approval to
market this product for certain indications in the United States. FDA
approval of a PMA supplement will be required for U.S. commercial sales of
this product.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 37% to $17.2 million for fiscal year 1999
from $12.5 million for fiscal year 1998. The increase was primarily due to
the expansion of the Company's domestic sales force which resulted in both
higher payroll-related costs as well as increased travel-related expenses and
increased spending on promotional support and training materials to assist
the sales force in acquiring and training new accounts. Total selling,
general and administrative expenses are expected to increase significantly
during fiscal 2000 as a result of further increases in field training
personnel and from anticipated increases in legal costs associated with the
Company's defense of a patent infringement suit.

         INTEREST INCOME AND EXPENSE. Interest income increased 13% to $1.7
million for fiscal year 1999 from $1.5 million for fiscal year 1998. The
increase was attributable to a higher average balance of cash and short-term
investments in fiscal year 1999 as compared to the prior year. Interest
expense decreased 91% to $17,000 for fiscal year 1999 from $186,000 for
fiscal year 1998. The decrease was primarily attributable to the expiration
of most of the Company's equipment leases during fiscal year 1999.

FISCAL YEARS 1998 AND 1997

         REVENUES. Net revenues for fiscal year 1998 increased 139% to $10.6
million from $4.5 million in fiscal year 1997. Domestic sales comprised 85%
of net revenue for fiscal year 1998. There were no domestic sales in fiscal
year 1997. International sales for fiscal year 1998 decreased 64% from fiscal
year ended 1997 primarily as a result of an increased emphasis by the Company
on the commercial launch of the Company's PVS products in the United States.
This involved a diversion of several international sales employees to the
United States sales efforts, a reorganization and termination of sales
personnel in Europe and changes in international sales management. The above
factors resulted in lower sales volume in Europe.

         COST OF GOODS SOLD. Cost of goods sold for fiscal year 1998
increased 65% to $7.8 million for fiscal year 1998 from $4.7 million for
fiscal year 1997. Gross profit increased to $2.8 million for fiscal year 1998
from a negative gross profit of $200,000 for fiscal year 1997. Gross profit
increased to 27% of net revenues for fiscal year 1998 from a negative gross
profit for fiscal year 1997. The increase in gross profit resulted primarily
from higher average selling prices from direct sales to U.S. customers in
fiscal year 1998. All sales in fiscal year 1997 were to international
distributors at lower prices than direct customer prices in the U.S. In
addition, the increase in sales and production volumes contributed to
reductions in fixed overhead cost per unit and enabled the Company to achieve
improvements in manufacturing efficiency.

         RESEARCH AND DEVELOPMENT. Research and development expenses
increased 15% to $5.4 million for fiscal year 1998 from $4.7 million for
fiscal year 1997. The increase in research and development costs resulted
primarily from a higher allocation of expenses related to engineers shared by
the manufacturing and research departments. This increase was partially
offset by a decrease in clinical trial expense, which was $1.3 million for
fiscal year 1997 and $64,000 for fiscal year 1998.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 99% to $12.5 million for fiscal year 1998
from $6.3 million for fiscal year 1997. The increase was primarily due to the
hiring of a sales force in the United States just prior to the start of
fiscal year 1998.

         INTEREST INCOME AND EXPENSE. Interest income decreased 16% to $1.5
million for fiscal year 1998 from $1.7 million for fiscal year 1997 primarily
due to the lower average cash and short-term investments balances in fiscal
year 1998. The proceeds of the Company's common stock offering, which closed
in November 1997, provided the Company with a higher level of interest income
for the remaining


                                      21

<PAGE>

four months of fiscal year 1998. Interest expense increased 56% to $186,000
for fiscal year 1998 from $118,000 for fiscal year 1997 primarily as the
result of higher interest payments on equipment leases during fiscal 1998.

INCOME TAXES

         The income tax provision for fiscal year 1999 of $292,000 is
attributable to current income taxes and consists principally of state and
federal minimum taxes. No income tax provision was recorded for fiscal years
1998 and 1997 as the Company did not have taxable income. No income tax
benefit has been recorded for the net operating losses or other deferred tax
assets in fiscal years 1999, 1998 and 1997.

         As of fiscal year end 1999, the Company had net operating loss
carryforwards for federal and state tax purposes of approximately $31.0
million and $7.0 million, respectively, which will expire from 1999 through
2012 if not utilized. At March 31, 1999, the Company also had research and
development tax credit carryforwards of approximately $400,000 and $350,000,
respectively, for federal and state tax purposes expiring from 2007 through
2014 if not utilized. As of fiscal year end 1999 the future use of the net
operating loss and tax credit carryforwards are not subject to material
limitations resulting from the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions.

         The following table sets forth unaudited selected consolidated
quarterly statement of operations data. The financial statements from which
these data have been derived were prepared on substantially the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, that are considered necessary for a fair
presentation of the Company's results of operations for each quarter. The
quarterly statement of operations data include the same adjustments that are
reflected in the financial statements included in this Report on Form 10-K.
Results of operations for any quarter are not necessarily indicative of the
results of operations to be expected in any future period.

                                 PERCLOSE, INC.
           UNAUDITED SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>

                                                  QUARTERS ENDED:                                       QUARTERS ENDED:
                                     --------------------------------------------------  -----------------------------------------
                                         JUN. 30,    SEP. 30,   DEC. 31,     MAR. 31,    JUN. 30,   SEP. 30,  DEC. 31,  MAR. 31,
                                          1998         1998       1998         1999        1998      1998      1998       1999
                                          ----         ----       ----         ----        ----      ----      ----       ----
                                           (In thousands, except per share data)              (As a percentage of net revenues)
<S>                                   <C>         <C>         <C>          <C>          <C>        <C>       <C>         <C>
STATEMENTS OF OPERATIONS DATA:
 Net revenues ......................... $  8,364     $  9,123    $ 11,564     $ 14,289     100%       100%     100%       100%
 Gross profit .........................    5,174        5,853       8,230       10,104      62%        64%      71%        71%

 Research and development .............    1,629        1,883       2,125        2,320      19%        21%      18%        16%
 Selling, general and administrative ..    3,633        3,629       4,684        5,207      43%        40%      41%        36%

 Income (loss) from operations ........      (88)         341       1,421        2,577      (1)%        4%      12%        18%

 Net income ........................... $    283     $    755    $  1,691     $  2,815       3%         8%      15%        20%


Basic earnings per common share ....... $   0.03     $    0.07   $     0.16   $   0.26
Diluted earnings per common
   share .............................. $   0.02     $    0.07   $     0.14   $   0.23
Shares used in computing basic
   earnings per share .................   10,752       10,817      10,810       10,938
Shares used in computing diluted
   earnings per share .................   11,425       11,271      11,761       12,221
</TABLE>




                                      22
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company's net cash provided by operating activities was $3.8
million for fiscal year 1999 compared to net cash used in operating
activities of $15.0 million and $8.5 million for fiscal years 1998 and 1997,
respectively. The Company became profitable during fiscal year 1999 which
resulted in net income of $5.5 million compared to losses during fiscal years
1998 and 1997 of $13.8 million and $9.7 million, respectively. This current
year profitability was the primary factor resulting in the generation of cash
provided by operating activities for fiscal year 1999.

         The Company's net cash used by investing activities was $11.6
million in fiscal year 1999 compared to net cash provided by investing
activities of $5.3 million and $1.9 million in fiscal years 1998 and 1997,
respectively. In fiscal year 1999, net purchases of short-term investments
were $4.5 million compared to net proceeds from short-term investments of
$6.7 million in fiscal year 1998 and $3.1 million in fiscal year 1997. In
fiscal 1999, the Company generated cash from its operating activities and
therefore was able to reinvest the cash from maturing securities. Additions
to property, plant and equipment totaled $4.6 million for fiscal year 1999 of
which $2.4 million related to building improvements for the Company's new
facility. The balance of the cash spent on capital equipment was used
primarily to purchase machinery required to support the increased
manufacturing and prototyping volume of the Company. Capital equipment
purchases were $1.7 million and $1.3 million for fiscal years 1998 and 1997,
respectively.

         Other assets increased by $2.4 million for fiscal year 1999
primarily as a result of a $518,000 security deposit and a $1.0 million
certificate of deposit for the establishment of a $1.0 million letter of
credit made in connection with the Company's new facility lease which was
entered into in June 1998. The new lease has a ten year term. The letter of
credit designates the landlord as beneficiary and provides that the landlord
may draw down the letter of credit in the amount equal to any default under
the lease. The letter of credit will be required for a minimum of eighteen
months; upon the Company's achievement of certain financial criteria, the
letter of credit and related certificate of deposit will be released. The
facility lease agreement also requires the security deposit of $518,000 to be
held by the lessor for the term of the lease. In March 1999, the Company
subleased to a third party approximately 13,000 square feet of space in its
new facility. The term of the lease is for one year and includes a renewal
option.

         Net cash provided by financing activities was $1.9 million in fiscal
year 1999 compared to $20.3 million in fiscal year 1998 and net cash used of
$538,000 in fiscal year 1997. During fiscal year 1999, proceeds of $2.7
million resulting from the issuance of common stock were partially offset by
the Company's stock repurchase of 56,800 shares of its common stock at a cost
of $857,000. Net cash generated by financing activities during fiscal year
1998 was primarily attributable to net proceeds of $19.4 million from a
common stock offering and $1.5 million from other issuances of common stock.
The Company's principal source of liquidity as of fiscal year ended March
1999 consisted of cash, cash equivalents and short-term investments of $30.2
million. The Company believes that its cash resources at fiscal year ended
March 1999 in addition to the cash the Company expects to generate from
operations, should be sufficient to meet the Company's capital needs for the
foreseeable future.

YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN

         The Company is aware of software compatibility 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 will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.


                                      23
<PAGE>

         The Company recognizes the importance of the Year 2000 issue and has
assigned a project leader to supervise an assessment of the Company's Year
2000 readiness. The scope of the Year 2000 readiness effort includes computer
software and hardware, electronic data interchange, manufacturing and lab
equipment, facilities systems and utilities, as well as supplier readiness.
The Company has reviewed the Year 2000 issue as it may affect the Company's
business activities. The Company has purchased its internal manufacturing and
financial information systems, and installs on an ongoing basis all updates
and patches as they are released by the suppliers to make certain that the
Company's systems and software are up-to-date and Year 2000 compliant
according to supplier representations. The Company has received Year 2000
compliance certifications from all software vendors from whom the Company has
purchased software. The Company is in the process of replacing most of its
hardware, specifically system servers and desktop work stations. The new
equipment will facilitate Year 2000 readiness, however, the equipment is
being acquired for the purpose of replacing older computers. These
expenditures would have been required even if the Year 2000 issue were not a
concern. All hardware and software are currently being internally tested by
the Company's internal computer staff. Final testing is expected to be
completed by July 1999. The Company is relying on the certification of its
suppliers and internal confirmatory testing to ensure Year 2000 compliance
relating to computer hardware and software.

         The product which the Company manufactures is a mechanical device
which does not contain software components. Therefore date sensitivity is not
an issue. The Company believes that it has no material exposure to
contingencies directly related to the Year 2000 issue for the products it has
sold or will sell in the future. As of fiscal year ended March 1999, the
Company had not incurred any expenses outside of ordinary operating expenses
in connection with its Year 2000 assessment and compliance plan.

         The majority of the Company's production and manufacturing equipment
is non-date dependent table top equipment. The manufacturing equipment that
has date dependent functions have been certified by their vendors as Year
2000 compliant.

         The Company recently leased an office and manufacturing headquarters
facility and has installed new building systems throughout the facility. All
such building systems were Year 2000 compliant as certified by the
manufacturer prior to installation.

         In addition to internal Year 2000 software and equipment assessment
and remediation activities, the Company has contacted its critical suppliers
in order to assess their compliance. As of fiscal year ended March 1999 all
but one of these suppliers contacted have responded. All responses indicate
that the supplier is aware of the Year 2000 issue and intends to be
compliant. With regard to the one supplier who has not yet responded, if
there is any question as to a supplier's ability to provide product after
December 31, 1999, then a joint effort will be made between quality assurance
and the materials group to assist that supplier in achieving compliance or
qualify another supplier. There can be no absolute assurances that there will
not be a material adverse effect on the Company if third parties do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems. Any Year 2000 compliance problem of either the
Company, its suppliers, or customers could materially adversely affect the
Company's business, results of operations, cash flows, financial condition
and prospects. However, based on currently available information, the Company
does not believe that the Year 2000 matters discussed above related to
internal systems or products sold to customers will have a material adverse
impact on the Company's business, financial condition or results of
operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         The Company is exposed to financial market risks, including changes
in interest rates and foreign currency fluctuations.

         INTEREST RATE RISK. The Company's cash equivalents and short-term
investments are subject to market risk, primarily interest-rate and credit
risk. The Company's investments are managed by outside professional managers
within investment guidelines set by the Company. Such guidelines include
security


                                      24
<PAGE>

type, credit quality and maturity and are intended to limit market risk by
restricting the Company's investments to high quality debt instruments with
relatively short-term maturities. Based upon the weighted average duration of
the Company's investments at fiscal year end 1999, a 1% (100 basis points)
increase in short-term interest rates would result in a decrease in market
value of the Company's investments totaling approximately $180,000. However,
because the Company's debt securities are carried as available for sale, no
gains or losses are recognized by the Company due to changes in interest
rates unless such securities are sold prior to maturity. The Company
generally holds securities until maturity and carries the securities at
amortized cost, which approximates fair market value.

         FOREIGN CURRENCY RISK. International revenues from the Company's
foreign distributors comprised 10% of total revenues for the fiscal year
1999. With the exception of the German and French distributors, sales are
denominated in U.S. dollars. Combined French and German sales for fiscal year
1999 comprised 7% of the Company's net revenue. The Company experienced an
immaterial amount of transaction gains and losses through fiscal year 1999.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of its German subsidiary are translated into U.S. dollars
in consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability.
The net effect of foreign exchange rate fluctuations on the Company during
fiscal year 1999 was not material.

FACTORS AFFECTING FUTURE OPERATING RESULTS

         This report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's future results of operations
could vary significantly as a result of the factors described in this section.

DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar
products for percutaneous closure of arterial access sites following
catheterization procedures are currently the Company's only marketed
products. There can be no assurance as to when or whether the Company will
receive FDA clearance or approval for sale of other PVS products or any other
products in the United States. There can be no assurance that the Company's
development efforts will be successful or that any further PVS products or
any other product developed by the Company will be safe or effective, capable
of being manufactured in commercial quantities at acceptable costs, approved
by appropriate regulatory and reimbursement authorities or successfully
marketed.

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar products
represent a new method of closing arterial access sites and there can be no
assurance that these products will gain any significant degree of sustained
market acceptance among physicians, patients and health care payors.
Physicians will not use the Prostar and Techstar products unless they
determine, based on clinical data and other factors, that these products are
an attractive alternative to other means of closing arterial access sites and
that the clinical benefits to the patient and cost savings achieved through
use of these products outweigh the cost of the products. Such determinations
will depend, in part, on the ability of the Company's products to reduce the
time to ambulation and the length of hospital stays associated with coronary
catheterization procedures. Failure of the Company's products to achieve
significant market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.

UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The markets in which the
Company participates are characterized by rapid innovation and development
and introduction of new products. Accordingly, the Company must innovate and
develop new products to maintain and enhance its market position. The Company
is currently developing the Heartflo System, which is designed to enable
cardiac surgeons to automate the rapid placement of sutures in blood vessels
during coronary artery bypass graft surgery. This product is currently under
development and has not yet entered human clinical trials. The Company is
also developing a new generation PVS product, known as the Closer. The
Company has recently completed a clinical trial for this product and has
submitted a PMA supplement application to the FDA for


                                      25
<PAGE>

the purpose of obtaining approval to market this product in the United
States. The product development process is time-consuming and costly, and
there can be no assurance that product development will be successfully
completed, that necessary regulatory clearances or approvals will be granted
by the FDA on a timely basis, or at all, or that the potential products will
achieve market acceptance. Failure by the Company to develop, obtain
necessary regulatory clearances or approvals for, or successfully market
potential new products could have a material adverse effect on the Company's
business, financial condition and results of operations.

HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a
limited history of profitability. The Company experienced significant
operating losses through fiscal year 1998 and has an accumulated deficit of
approximately $36.2 million as of fiscal year end 1999. Although the Company
recorded net income for each of the four quarters in fiscal year 1999, there
can be no assurance that the Company will be able to increase its level of
profitability or to sustain profitability. Failure to increase or sustain the
level of profitability could have a material adverse effect on the Company's
future operating results.

FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results
of operations will fluctuate significantly from quarter to quarter and will
depend upon numerous factors, including the extent to which the Company's
products gain market acceptance, introduction of alternative means for
arterial access site closure and competitive developments, actions relating
to regulatory and reimbursement matters, and progress and results of clinical
trials. Due to the elective nature of many coronary catheterization
procedures, patients may defer such procedures during the summer vacation
season. As a result, the Company may experience seasonal fluctuations in its
results of operations, particularly in the second fiscal quarter. Results of
operations will also be affected by the timing of orders received from
distributors and the extent to which the Company is able to expand its
manufacturing capabilities. In addition, depending upon the timing of new
product introductions, warranty claims and product returns, the Company may
need to make allowances for product obsolescence, excess inventory, warranty
claims and product returns. While the Company is currently and will likely
continue to make such allowances, there can be no assurance that such
allowances will be adequate to cover all costs associated with such items.

GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of
the Company's products and the certification of its manufacturing facility
are subject to extensive regulation by numerous governmental authorities in
the United States, principally the FDA, and corresponding foreign regulatory
agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other
federal and state statutes and regulations govern or influence the testing,
manufacture, manufacturing process, labeling, advertising, distribution and
promotion of drugs and devices. Noncompliance with applicable requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal to authorize the
marketing of new products or to allow the Company to enter into government
supply contracts, and criminal prosecution. The Company's Prostar and
Techstar PVS products are regulated as Class III medical devices and its
manufacturing facility is subject to FDA regulations.

         Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
The Company has obtained the certifications necessary to enable the CE mark
to be affixed to the Company's Prostar and Techstar products for commercial
sales in member countries of the European Union. The Company has not obtained
all other such international certifications and there can be no assurance it
will be able to do so in a timely manner. The Company has received regulatory
approval to market the Prostar and Techstar products in Japan. The Company,
through its Japanese distributor has completed a clinical trial in Japan that
will form the basis of an application for reimbursement approvals in the
Japanese health care system. There can be no assurance Japanese reimbursement
approvals will be obtained in a timely manner or at all.


                                      26
<PAGE>

COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the
emerging market for arterial access site closure devices is intense and is
expected to increase. Most of the Company's competitors have significantly
greater name recognition, experience, financial, technical, research,
marketing, sales, distribution and other resources than the Company. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products that are technologically
superior, more effective or commercially attractive than any that are being
developed by the Company, or that such competitors will not succeed in
obtaining regulatory approval, introducing or commercializing any such
products prior to the Company. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the medical device market is generally characterized
by rapid and significant technological change and frequent emergence of new
technologies, products and procedures. Accordingly, the Company's success
will also depend in part on its ability to respond quickly to medical and
technological changes.

MANUFACTURING AND SCALE-UP RISK. The Company currently manufactures the
Prostar and Techstar products for domestic and international commercial
sales. There can be no assurance that future manufacturing difficulties,
which could have a material adverse effect on the Company's business,
financial condition and results of operations, will not occur.

         In November 1997, Perclose voluntarily recalled specific lots of
Techstar XL 6 french ("F") PVS products. The Company traced the problem
resulting in the recall to a defective mold. The problem was not attributable
to a design defect. The Company is not aware of any adverse patient
consequences resulting from these product performance issues. The recall and
replacement had only an immaterial effect on its results of operations during
the third and fourth quarters of fiscal year 1998. However, there can be no
assurance that future product problems necessitating recalls will not arise
in the future, and any such future recall could have a material adverse
effect on the Company's business, financial condition and results of
operations.

DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its
products from various suppliers and relies on single sources for several
components. For certain of these components, there are relatively few
alternative sources of supply. Establishing additional or replacement
suppliers for any of the components used in the Company's products, if
required, may not be accomplished quickly and could involve significant
additional costs. Any supply interruption from vendors or failure of the
Company to obtain alternative vendors, if required, for any of the components
used to manufacture the Company's products would limit the Company's ability
to manufacture its products and could therefore have a material adverse
effect on the Company's business, financial condition and results of
operations.

RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop
and maintain proprietary aspects of its technology. There can be no assurance
that the Company's issued patents, any patents that may be issued as a result
of the Company's U.S. or international patent applications, or the patent
under which the Company has license rights, will offer any degree of
protection. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not
be challenged, invalidated or circumvented in the future. In addition, there
can be no assurance that competitors, many of which have substantial
resources and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use or sell its products either
in the United States or in international markets.

         In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company counter-sued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
counter-defendants


                                      27
<PAGE>

have engaged in antitrust and unfair competition violations. In March 1999,
Tyco sold the marketing rights to the competitive product to St. Jude
Medical, Inc. The case is presently set for trial in September 1999. The
Company believes that the case is without merit and intends to defend itself
and its intellectual property rights vigorously.

         The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Any
litigation or interference proceedings, including the proceeding currently
pending against the Company, will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in the current pending
litigation or interference proceedings to which the Company may become a
party could subject the Company to significant liabilities to third parties
or require the Company to seek licenses from third parties. Although patent
and intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms if at all. Adverse
determinations in a judicial or administrative proceeding, including the
currently pending proceedings, or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling its products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care
providers, such as hospitals and physicians that purchase the Company's
products, generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to reimburse all or part
of the cost of therapeutic and diagnostic catheterization procedures.
Reimbursement for catheterization procedures performed using devices that
have received FDA approval has generally been available in the United States.
The Company anticipates that in a prospective payment system, such as the
diagnostic related group ("DRG") system utilized by Medicare, and in many
managed care systems used by private health care payors, 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. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third-party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.

         In international markets, market acceptance of the Company's
products may be dependent in part upon the availability of reimbursement
within prevailing health care payment systems. Failure of the Company to
receive international reimbursement approvals could have an adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.

PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The
manufacture and sale of medical products entail significant risk of product
liability claims or product recalls. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require
increased product liability coverage as its products are further
commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its
insurance coverage, or a recall of the Company's products, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE. The stock market from time to time
experiences significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock. In addition, the market price of the Company's common stock is likely
to be highly volatile. Factors such as


                                      28
<PAGE>

fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
FDA and international regulatory actions, actions with respect to
reimbursement matters, developments with respect to patents or proprietary
rights and related litigation to which the Company is or may become a party,
public concern as to the safety of products developed by the Company or
others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding
the Company, other medical device companies or the medical device industry
generally and general market conditions may have a significant effect on the
market price of the common stock.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Report of Independent Auditors and the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of Perclose,
Inc. that are filed as part of this Report are listed under Item 14,
"Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and are
set forth on pages F-1 through F-19 of this Annual Report on Form 10-K.

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

         Not Applicable

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information with respect to
the directors and executive officers of the Company:

<TABLE>
<CAPTION>

NAME                               AGE                   PRINCIPAL OCCUPATION                     DIRECTOR
----                               ---                   --------------------                      SINCE
                                                                                                   -----
<S>                               <C>   <C>                                                       <C>

John B. Simpson, Ph.D., M.D.        55  Chairman, Perclose, Inc.                                    1992
                                        Professor, Stanford University
Henry A. Plain, Jr...............   41  President and Chief Executive Officer, Perclose, Inc.       1993
Coy F. Blevins...................   51  Vice President of U.S. Sales                                 --
Randolph E. Campbell.............   42  Vice President of Operations                                 --
Kenneth E. Ludlum................   46  Vice President of Finance and Administration                 --
                                        Chief Financial Officer
John G. McCutcheon...............   38  Vice President of Marketing and International Sales          --
Ronald W. Songer.................   42  Vice President of Product Development                        --
Vaughn D. Bryson.................   61  President, Life Science Advisors, LLC                       1995
Michael L. Eagle.................   52  Vice President, Manufacturing,                              1996
                                        Eli Lilly and Company
Serge Lashutka...................   52  Manager of Organizational Development, Unocal               1996
                                        Corporation
James W. Vetter, M.D.............   42  Staff Cardiologist, Sequoia Hospital Associate              1992
                                        Professor, Stanford University
Mark A. Wan......................   34  General Partner, Three Arch Partners                        1992
</TABLE>

         DR. SIMPSON co-founded Perclose in March 1992 and has served as
Chairman of the Board since the Company's inception. Dr. Simpson is a
professor of clinical medicine at Stanford University. He has served as a
Staff Cardiologist at Sequoia Hospital in Redwood City, California since
1981. Dr. Simpson founded Advanced Cardiovascular Systems, Inc. ("ACS") in
1978 and Devices for Vascular Intervention, Inc. ("DVI") in 1984, each of
which are currently divisions of Guidant Corporation.


                                      29
<PAGE>

Dr. Simpson is a director of several privately held companies. Dr. Simpson
holds a B.S. in Agriculture for Ohio State University, a Ph.D. in Biomedical
Sciences from the University of Texas at Houston and an M.D. from Duke
University.

         MR. PLAIN joined Perclose in February 1993 as President and Chief
Executive Officer and a member of the Company's board of directors. Prior to
joining Perclose, Mr. Plain was with Eli Lilly and Company ("Lilly") for
twelve years where he held various management positions in Lilly's
pharmaceutical and medical device units in a variety of functional areas
including marketing, sales, finance, human resources, manufacturing and
international operations. Mr. Plain is a director of several private
companies.

         MR. BLEVINS joined Perclose as Director of U.S. Sales in January
1994 and was promoted to Vice President, U.S. Sales in July 1996. From 1990
through 1993, Mr. Blevins was a Regional Sales Manager with DVI. Prior to
1990, Mr. Blevins held various sales and sales management positions at Baxter
Healthcare, Inc. Mr. Blevins holds a B.S. in Accounting from Baylor
University.

         MR. CAMPBELL joined Perclose in January 1994 as Vice President of
Operations. From 1986 until joining the Company, Mr. Campbell held various
management positions at DVI, serving most recently as Director of
Manufacturing Engineering from 1992 to 1994 and previously as Director of
Product Development from 1990 to 1992. Mr. Campbell holds a B.S. in Chemical
Engineering from the University of California at Berkeley.

         MR. LUDLUM joined Perclose as Vice President of Finance and
Administration and Chief Financial Officer in May 1996. From 1995 until
joining Perclose, Mr. Ludlum was an independent business and financial
consultant to health care and high growth companies. From 1993 to 1995, Mr.
Ludlum was Vice President, Finance & Administration and Chief Financial
Officer of RiboGene, Inc., a private biopharmaceutical company. From 1985 to
1991, Mr. Ludlum held various positions with Montgomery Securities in the
health care finance group, most recently as Partner. Mr. Ludlum holds a B.S.
in business from Lehigh University and an M.B.A. from Columbia Business
School.

         MR. MCCUTCHEON joined Perclose in January 1994 as Director of
Marketing. In July 1996, Mr. McCutcheon was promoted to Vice President,
Marketing and in July 1997 was promoted to Vice President of Marketing and
International Sales. From 1992 until joining the Company, Mr. McCutcheon was
a Marketing Manager at DVI. From 1985 to 1992, Mr. McCutcheon held positions
in sales and marketing with the Bentley Laboratories Division of Baxter
Healthcare Corporation. Mr. McCutcheon holds a B.A. in Economics and in
Psychology and an M.B.A., both from the University of California, Los Angeles.

         MR. SONGER joined Perclose in April 1993 as Vice President of
Research and Development. From 1990 until joining Perclose, Mr. Songer was
Director of Catheter Systems Research and Development for the Spectranetics
Corporation, a manufacturer of laser atherectomy systems. Prior to joining
Spectranetics, Mr. Songer was Manager of Research and Development for the
movable wire systems unit of ACS. Mr. Songer holds a B.S. in Nuclear
Engineering from the University of California at Santa Barbara and an M.S. in
Mechanical Engineering from the University of California at Berkeley.

         MR. BRYSON has served as a Director of Perclose since January 1995.
Mr. Bryson is currently President of Life Science Advisors, LLC. Mr. Bryson
was a thirty-two year employee of Lilly and served as President and Chief
Executive Officer of Lilly from 1991 to 1993. He was Executive Vice President
from 1986 until 1991. He served as a member of Lilly's Board of Directors
from 1984 until his retirement in 1993. Mr. Bryson was Vice Chairman of
Vector Securities International from April 1994 to December 1996. Mr. Bryson
is also a Director of Ariad Pharmaceuticals, Chiron Corporation, Fusion
Medical Technologies and Quintiles Transnational Corporation. Mr. Bryson
received a B.S. degree in Pharmacy from the University of North Carolina and
completed the Sloan Program at Stanford University Graduate School of
Business.


                                      30
<PAGE>

         MR. EAGLE has served as a Director of Perclose since September 1996.
He has held various management positions in Lilly's pharmaceutical and
medical device units since 1983, and currently serves as Vice President,
Manufacturing. From June 1993 until January 1994, he served as Vice President
of Pharmaceutical Manufacturing for Lilly, and from January 1991 until June
1993, he served as Vice President of the vascular intervention component of
the Medical Devices and Diagnostics Division of Lilly. From 1988 to 1991, Mr.
Eagle was President and Chief Executive Officer of IVAC Corporation, a Lilly
subsidiary. From 1983 to 1988, he held various positions with ACS, a former
Lilly subsidiary, serving most recently as Senior Vice President of
Manufacturing from 1985 to 1988. Mr. Eagle is also a Director of Cardiac
Pathways, Inc. Mr. Eagle holds a B.S. in Mechanical Engineering from
Kettering University and an M.S. in Industrial Administration from Purdue
University.

         MR. LASHUTKA has served as a Director of Perclose since September
1996. He is currently a Manager of Organizational Development of Unocal
Corporation, a major oil, gas and chemical company. From 1993 to 1996, Mr.
Lashutka was Director, Organization Development and Senior Consultant of
Pacific Health Systems, Inc., a managed health care organization. From 1979
to 1993, he to was Manager of the Organization Effectiveness Department at
the Kaiser Permanente Medical Care Program, a major managed health care
organization operating in California. Mr. Lashutka holds a B.A. from Ohio
State University, an M.A. in Psychology from the United States International
University and an M.B.A. from the University of California at Berkeley.

         DR. VETTER is a co-founder of the Company and has served as a
director of the Company and as a consultant and medical advisor to the
Company since its inception. Since 1989, Dr. Vetter has served as a
Physician-Partner at Cardiovascular Medicine and Coronary Interventions, Inc.
and as a Staff Cardiologist at Sequoia Hospital in Redwood City, California.
Dr Vetter is an associate professor of clinical medicine at Stanford
University.

         MR. WAN has served as a Director of Perclose since September 1992.
He has been a General Partner of Three Arch Partners, a venture capital firm
specializing in health care investments since October 1993. From 1987 to
1993, Mr. Wan held various positions at Brentwood Associates, a venture
capital firm, most recently as a General Partner. Mr. Wan has been involved
in the formation of several privately held venture capital-backed health care
companies and serves as a director of several privately held companies. Mr.
Wan holds a B.S. in Electrical Engineering, and a B.A. in Economics from Yale
University and an M.B.A. from Stanford University.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's executive officers and directors
and persons who own more than ten percent of a registered class of the
Company's equity securities to file an initial report of ownership on Form 3
and changes in ownership on Form 4 or Form 5 with the Securities and Exchange
Commission (the "SEC") and the National Associates of Securities Dealers,
Inc. Executive officers, directors and greater than ten percent stockholders
are also required by SEC rules to furnish the Company with copies of all
Section 16(a) forms they file.

         Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons, the Company
believes that with respect to fiscal year 1999, all filing requirements
applicable to its officers, directors and ten percent stockholders were
complied with except that the Company failed to file on behalf of Mark A.
Wan, a timely Form 4 with respect to one disposition transaction.


                                      31
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION TABLES

         SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer and the four
other most highly compensated executive officers of the Company for services
rendered during each of the fiscal years 1997, 1998 and 1999:

                                     SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                  LONG TERM
                                                                                 COMPENSATION
                                                                                 ------------
                                                                                  SECURITIES
                                                                                  UNDERLYING
                                          FISCAL      ANNUAL COMPENSATION          OPTIONS           ALL OTHER
      NAME AND PRINCIPAL POSITION          YEAR     SALARY ($)      BONUS        (# OF SHARES      COMPENSATION
      ---------------------------          ----     ----------      -----        ------------      ------------
<S>                                     <C>      <C>          <C>                 <C>           <C>
Henry A. Plain, Jr.....................    1999    $ 282,596   $       --            101,000       $      659 (1)
  President and Chief                      1998      243,846        21,000           62 ,000              733 (1)
  Executive Officer                        1997      215,000        19,250             9,000              770 (1)

Coy F. Blevins.........................    1999      169,558   $       --             55,891            6,950 (2)
  Vice President of Sales                  1998      140,640        20,000            21,000           20,671 (3)
                                           1997      107,246        11,000            24,500           51,412 (4)
Kenneth E. Ludlum......................    1999      176,615   $       --            120,500              659 (1)
  Vice President of Finance and            1998      158,404        12,000            36,000              759 (1)
  Administration,                          1997      127,154        11,000            84,500            1,260 (1)
  Chief Financial Officer
John G. McCutcheon.....................    1999      169,558   $       --             73,500              650 (1)
  Vice President of                        1998      146,521        20,000            31,000              733 (1)
  International Sales and Marketing        1997      113,090        11,000            34,500              736 (1)

Ronald W. Songer.......................    1999      158,500   $       --             60,500              650 (1)
  Vice President of                        1998      142,616        12,000            21,000              692 (1)
  Product Development                      1997      125,577        11,000            24,500              770 (1)
------------------------
</TABLE>

(1)  Consists of life insurance premiums paid by the Company.
(2)  Consists of automobile allowance totaling $6,300 and life insurance
     premiums totaling $650, all paid by the Company.
(3)  Consists of commissions totaling $15,092, automobile allowance totaling
     $4,846, and life insurance premiums totaling $733, all paid by the Company.
(4)  Consists of commissions totaling $43,600, automobile allowance totaling
     $6,300 and life insurance premiums totaling $1,512, all paid by the
     Company.



                                      32
<PAGE>

         OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to each grant of stock options made during the fiscal
year ended March 26, 1999 to each executive officer named in the Summary
Compensation Table above. All of the option grants set forth below were made in
connection with the Company's September 1998 stock option repricing whereby the
original options were canceled and replaced by the grant of new options.

                                         OPTION GRANTS IN FISCAL 1999

<TABLE>
<CAPTION>

                                                     % OF TOTAL
                                     NUMBER           OPTIONS                                POTENTIAL REALIZABLE
                                 OF SECURITIES       GRANTED TO  EXERCISE                      VALUE AT ASSUMED
                                   UNDERLYING        EMPLOYEES    OR BASE                     PRICE APPRECIATION
                                    OPTIONS          IN FISCAL   PRICE (1)   EXPIRATION      FOR OPTION TERM (2)
NAME                            GRANTED (1)(3)          YEAR      ($/SH)        DATE          5% ($)       10% ($)
----                            --------------          ----      ------        ----          ------       -------
<S>                                   <C>          <C>          <C>        <C>             <C>           <C>
Henry A. Plain, Jr.............          2,625         0.2         11.50     02/18/07         15,359        37,230
                                         3,881         0.2         11.50     07/15/07         24,044        58,944
                                         6,119         0.4         11.50     07/15/07         37,910        92,935
                                         6,375         0.4         11.50     02/18/07         37,301        90,416
                                        11,530         0.7         11.50     01/31/06         57,478       135,346
                                         3,890         0.2         11.50     01/21/08         25,871        64,362
                                        46,110         2.8         11.50     01/21/08        306,658       762,907
                                        18,470         1.1         11.50     01/31/06         92,075       216,812
                                           709         0.0         11.50     05/05/07          4,274        10,421
                                         1,291         0.1         11.50     05/05/07          7,782        18,975

Coy F. Blevins.................            105         0.0         11.50     05/05/07            633         1,543
                                        15,378         1.0         11.50     01/21/08        102,273       254,435
                                         2,515         0.2         11.50     02/18/07         14,715        35,670
                                         7,109         0.4         11.50     07/22/06         38,165        91,039
                                         4,622         0.3         11.50     01/21/08         30,739        76,473
                                         7,500         0.5         11.50     01/31/06         37,388        88,039
                                         1,751         0.1         11.50     02/18/07         10,245        24,834
                                         2,749         0.2         11.50     02/18/07         16,085        38,989
                                         2,891         0.2         11.50     07/22/06         15,520        37,022
                                         7,485         0.5         11.50     02/18/07         43,795       106,159
                                           895         0.0         11.50     05/05/07          5,395        13,154
                                         2,500         0.2         11.50     09/14/08         18,081        45,820
                                           391         0.0         11.50     09/14/08          2,828         7,166

Kenneth E. Ludlum..............         14,797         0.9         11.50     01/21/08         98,409       244,822
                                        18,388         1.1         11.50     05/08/06         95,623       226,811
                                        61,612         3.8         11.50     05/08/06        320,399       759,967
                                           188         0.0         11.50     02/18/07          1,100         2,666
                                         1,000         0.1         11.50     05/05/07          6,028        14,698
                                        15,000         0.9         11.50     05/05/07         90,424       220,465
                                         5,203         0.3         11.50     01/21/08         34,603        86,086
                                         4,312         0.3         11.50     02/18/07         25,230        61,157
</TABLE>



                                      33
<PAGE>

                      OPTION GRANTS IN FISCAL 1999-CONTINUED

<TABLE>
<CAPTION>

                                                     % OF TOTAL
                                     NUMBER           OPTIONS                                POTENTIAL REALIZABLE
                                 OF SECURITIES       GRANTED TO  EXERCISE                      VALUE AT ASSUMED
                                   UNDERLYING        EMPLOYEES    OR BASE                     PRICE APPRECIATION
                                    OPTIONS          IN FISCAL   PRICE (1)   EXPIRATION      FOR OPTION TERM (2)
NAME                            GRANTED (1)(3)          YEAR      ($/SH)        DATE          5% ($)       10% ($)
----                            --------------          ----      ------        ----          ------       -------
<S>                                    <C>           <C>         <C>       <C>                 <C>        <C>
John G. McCutcheon ............           15,818        1.0        11.50      02/18/07            92,552     224,345
                                           4,182        0.3        11.50      02/18/07            24,469      59,313
                                           7,300        0.4        11.50      01/31/06            36,391      85,692
                                           2,084        0.1        11.50      10/06/07            13,323      32,870
                                           7,916        0.5        11.50      10/06/07            50,606     124,856
                                             895        0.0        11.50      05/05/07             5,395      13,154
                                           6,410        0.4        11.50      07/22/06            34,412      82,087
                                             105        0.0        11.50      05/05/07               633       1,543
                                           3,022        0.2        11.50      02/18/07            17,682      42,861
                                           3,590        0.2        11.50      07/22/06            19,273      45,974
                                             200        0.0        11.50      01/31/06               997       2,348
                                           1,699        0.1        11.50      01/21/08            11,299      28,111
                                          18,301        1.1        11.50      01/21/08           121,712     302,797
                                           1,478        0.1        11.50      02/18/07             8,648      20,962
                                             500        0.0        16.94      09/22/08             5,326      13,497

Ronald W. Songer...............           16,219        1.0        11.50      02/18/07            94,899     230,032
                                          15,852        1.0        11.50      01/21/08           105,425     262,277
                                           4,148        0.3        11.50      01/21/08            27,587      68,630
                                             893        0.0        11.50      05/05/07             5,383      13,125
                                          11,972        0.7        11.50      01/31/06            59,682     140,534
                                           3,028        0.2        11.50      01/31/06            15,095      35,544
                                           3,781        0.2        11.50      02/18/07            22,123      53,626
                                           2,145        0.1        11.50      02/18/07            12,551      30,422
                                             107        0.0        11.50      05/05/07               645       1,573
                                           2,355        0.1        11.50      02/18/07            13,779      33,401
</TABLE>

(1)  The exercise price and tax withholding obligations related to exercise may
     in some cases be paid by delivery of other shares or by offset of the
     shares subject to the options.
(2)  The dollar amounts under these columns are the result of calculations at
     the 5% and 10% rates set by the SEC and therefore are not intended to
     forecast possible future appreciation, if any, of the Company's stock
     price. The Company did not use an alternative formula for a grant date
     valuation, as the Company does not believe that any formula will determine
     with reasonable accuracy a present value based on future unknown or
     volatile factors.
(3)  Options generally become exercisable as to 25% of the option shares on the
     first anniversary of the vesting commencement date and thereafter ratably
     on a monthly basis, with full vesting occurring on the fourth anniversary
     of the vesting commencement date.


                                      34
<PAGE>

         AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
VALUES. The following table sets forth, for each of the executive officers
named in the Summary Compensation Table above, information with respect to
each exercise of stock options during the fiscal year ended March 26, 1999
and the value of unexercised options at March 26, 1999:

          AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND YEAR-END VALUES

<TABLE>
<CAPTION>

                                                                                        VALUE OF UNEXERCISED
                                                           NUMBER OF SECURITIES             IN-THE-MONEY
                           SHARES                         UNDERLYING UNEXERCISED          OPTIONS AT FISCAL
                        ACQUIRED ON         VALUE       OPTIONS AT FISCAL YEAR END          YEAR-END (2)
                          EXERCISE       REALIZED (1)    EXERCISABLE/UNEXERCISABLE    EXERCISABLE/UNEXERCISABLE
                       ---------------   -------------  ----------------------------  --------------------------
                            (#)              ($)                    (#)                          ($)
<S>                          <C>            <C>            <C>                       <C>
Henry A. Plain, Jr....             --              --         45,393 / 55,607           1,344,768 / 1,647,357
Coy F. Blevins........         21,700         312,578         26,124 / 27,676             810,471 / 819,902
Kenneth E. Ludlum.....             --              --         71,341 / 49,159           2,113,477 / 1,456,335
John G. McCutcheon ...          6,000         227,104         35,702 / 39,298           1,065,922 / 1,161,484
Ronald W. Songer                   --              --         29,203 / 31,297             865,139 / 927,174
</TABLE>

(1)  Based on the last reported sale price of the Company's Common Stock on the
     date of exercise.
(2)  Based on a fair market value of $41.125, which was the last reported sale
     price of the Company's Stock on March 26, 1999.

         REPRICING OF STOCK OPTIONS. In September 1998, the Company offered
employees, including executive officers, the option to exchange stock options
to purchase 1,342,168 shares of common stock with exercise prices ranging
from $13.75 to $30.25 per share and an aggregate exercise price of $28.6
million, for new options to purchase 1,342,168 shares with an exercise price
of $11.50 per share and an aggregate exercise price of $15.4 million. All of
the repriced options have vesting provisions consistent with the terms of the
original option grant. In exchange for the offer to reprice stock options,
employees and executive officers agreed to a moratorium on exercising
repriced options until March 16, 1999.

         The following table sets forth, for the period commencing November
7, 1995 (the date of the Company's initial public offering) and ending March
26, 1999, certain information concerning the re-pricing of options held by
the named executive officers and any person who was an executive officer of
the Company at the time of such repricing:


                                      35
<PAGE>

                                OPTION REPRICINGS

<TABLE>
<CAPTION>

                                                                                                        LENGTH OF
                                                NUMBER OF                            EXERCISE           ORIGINAL
                                               SECURITIES       MARKET PRICE         PRICE AT          OPTION TERM
                                               UNDERLYING       OF STOCK AT          TIME OF          REMAINING AT
                                                 OPTIONS          TIME OF          REPRICING OR          DATE OF
                                DATE OF         REPRICED         REPRICING          AMENDMENT           REPRICING OR
           NAME                REPRICING           (#)              ($)                ($)              AMENDMENT
  ------------------------    ------------    --------------    -------------     ---------------    ----------------
 <S>                         <C>             <C>                 <C>                <C>            <C>
  Henry A. Plain, Jr.....       9/11/98        11,530              11.50              23.50          139 days
                                9/11/98        18,470              11.50              23.50          139 days
                                9/11/98         2,625              11.50              22.75          8 yrs. 157 days
                                9/11/98         6,375              11.50              22.75          8 yrs. 157 days
                                9/11/98           709              11.50              20.25          8 yrs. 233 days
                                9/11/98         1,291              11.50              20.25          8 yrs. 233 days
                                9/11/98         3,881              11.50              24.63          8 yrs. 304 days
                                9/11/98         6,119              11.50              24.63          8 yrs. 304 days
                                9/11/98         3,890              11.50              19.75          9 yrs. 129 days
                                9/11/98        46,110              11.50              19.75          9 yrs. 129 days

  Coy F. Blevins.........       9/11/98         7,500              11.50              23.50          7 yrs. 139 days
                                9/11/98         7,109              11.50              15.75          7 yrs. 311 days
                                9/11/98         2,891              11.50              15.75          7 yrs. 311 days
                                9/11/98         2,749              11.50              22.75          8 yrs. 157 days
                                9/11/98         1,751              11.50              22.75          8 yrs. 157 days
                                9/11/98         2,515              11.50              22.75          8 yrs. 157 days
                                9/11/98         7,785              11.50              22.75          8 yrs. 157 days
                                9/11/98           105              11.50              20.25          8 yrs. 233 days
                                9/11/98           895              11.50              20.25          8 yrs. 233 days
                                9/11/98         4,622              11.50              19.75          9 yrs. 129 days
                                9/11/98        15,378              11.50              19.75          9 yrs. 129 days

  Randolph E. Campbell...       9/11/98        11,842              11.50              23.50          7 yrs. 139 days
                                9/11/98         3,158              11.50              23.50          7 yrs. 139 days
                                9/11/98         2,336              11.50              22.75          8 yrs. 157 days
                                9/11/98         2,164              11.50              22.75          8 yrs. 157 days
                                9/11/98           356              11.50              20.25          8 yrs. 233 days
                                9/11/98           644              11.50              20.25          8 yrs. 233 days
                                9/11/98         8,195              11.50              19.75          9 yrs. 129 days
                                9/11/98        11,805              11.50              19.75          9 yrs. 129 days

  Kenneth E. Ludlum......       9/11/98        18,388              11.50              21.75          7 yrs. 236 days
                                9/11/98        61,612              11.50              21.75          7 yrs. 236 days
                                9/11/98           188              11.50              22.75          8 yrs. 157 days
                                9/11/98         4,312              11.50              22.75          8 yrs. 157 days
                                9/11/98         1,000              11.50              20.25          8 yrs. 233 days
</TABLE>




                                      36
<PAGE>

                            OPTION REPRICINGS-CONTINUED

<TABLE>
<CAPTION>

                                                                                                        LENGTH OF
                                               NUMBER OF                             EXERCISE           ORIGINAL
                                               SECURITIES       MARKET PRICE         PRICE AT          OPTION TERM
                                               UNDERLYING       OF STOCK AT          TIME OF          REMAINING AT
                                                OPTIONS           TIME OF          REPRICING OR          DATE OF
                                DATE OF         REPRICED         REPRICING          AMENDMENT        REPRICING OR
           NAME                REPRICING          (#)               ($)                ($)              AMENDMENT
  ------------------------    ------------    --------------    ------------     ---------------    ----------------
 <S>                         <C>             <C>                 <C>                <C>            <C>
  Kenneth E. Ludlum
     continued..............    9/11/98        15,000              11.50              20.25          8 yrs. 233 days
                                9/11/98         5,203              11.50              19.75          9 yrs. 129 days
                                9/11/98        14,797              11.50              19.75          9 yrs. 129 days

  John G. McCutcheon ...........9/11/98         7,300              11.50              23.50          7 yrs. 139 days
                                9/11/98           200              11.50              23.50          7 yrs. 139 days
                                9/11/98         6,410              11.50              15.75          7 yrs. 311 days
                                9/11/98         3,590              11.50              15.75          7 yrs. 311 days
                                9/11/98         1,478              11.50              22.75          8 yrs. 157 days
                                9/11/98         3,022              11.50              22.75          8 yrs. 157 days
                                9/11/98         4,182              11.50              22.75          8 yrs. 157 days
                                9/11/98        15,818              11.50              22.75          8 yrs. 157 days
                                9/11/98           105              11.50              20.25          8 yrs. 233 days
                                9/11/98           895              11.50              20.25          8 yrs. 233 days
                                9/11/98         2,084              11.50              22.63          9 yrs.  22 days
                                9/11/98         7,916              11.50              22.63          9 yrs.  22 days
                                9/11/98         1,699              11.50              19.75          9 yrs. 129 days
                                9/11/98        18,301              11.50              19.75          9 yrs. 129 days

  Ronald W. Songer .............9/11/98        11,972              11.50              23.50          7 yrs. 139 days
                                9/11/98         3,028              11.50              23.50          7 yrs. 139 days
                                9/11/98         2,355              11.50              22.75          8 yrs. 157 days
                                9/11/98         2,145              11.50              22.75          8 yrs. 157 days
                                9/11/98         3,781              11.50              22.75          8 yrs. 157 days
                                9/11/98        16,219              11.50              22.75          8 yrs. 157 days
                                9/11/98           107              11.50              20.25          8 yrs. 233 days
                                9/11/98           893              11.50              20.25          8 yrs. 233 days
                                9/11/98         4,148              11.50              19.75          9 yrs. 129 days
                                9/11/98        15,852              11.50              19.75          9 yrs. 129 days
</TABLE>



                                      37
<PAGE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         The Company has an employment agreement with Kenneth E. Ludlum, its
Vice President, Finance and Administration and Chief Financial Officer. The
agreement provides that in the event of a change in control of the Company,
all of Mr. Ludlum's then unvested stock options will become fully vested and
that, if Mr. Ludlum's employment were terminated voluntarily or involuntarily
within twelve months following such change in control, he will be entitled to
receive six months severance pay in the event of voluntary termination and
twelve months severance pay in the event of involuntary termination. The
agreement does not provide for any specified term of employment. No payments
have been made to Mr. Ludlum under such agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

         During the year ended March 26, 1999, Messrs. Simpson, Bryson and
Wan served as the Compensation Committee of the Company's board of directors.
Dr. Simpson holds options to purchase up to 60,000 shares of Common Stock of
the Company. Mr. Bryson holds options to purchase up to 63,155 shares of
Common Stock of the Company. Mr. Wan holds options to purchase up to 21,875
shares of Common Stock of the Company. During fiscal year 1999, the Company
entered into a consulting agreement with Life Science Advisors, LLC ("LSA").
Mr. Bryson also serves as the President of LSA. During fiscal year 1999, a
total of 8,155 stock options were granted to Mr. Bryson in connection with
the consulting agreement. For the fiscal year ended March 31, 1999, the
Company has made no payments to either LSA or the Director in connection with
the consulting agreement. No member of the Compensation Committee has a
relationship that would constitute an interlocking relationship with
executive officers or directors of another entity.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information known to the
Company with respect to the beneficial ownership of the Common Stock of the
Company as of April 30, 1999, by (i) each person who is known to the Company
to beneficially own more than five percent of the outstanding shares of its
Common Stock, (ii) each director of the Company, (iii) each officer named in
the Summary Compensation Table and (iv) all directors and executive officers
as a group. Unless otherwise indicated, the address of each executive officer
and director is the address of the Company's principal executive offices. A
total of 11,074,101 shares of the Company's Common Stock were issued and
outstanding as of April 30, 1999.


                                      38
<PAGE>

<TABLE>
<CAPTION>

                                                                                   SHARES        APPROXIMATE
                                                                                BENEFICIALLY       PERCENT
NAME AND ADDRESS                                                                 OWNED (1)        OWNED (2)
----------------                                                                 ---------        ---------
<S>                                                                            <C>                   <C>
John B. Simpson, Ph.D., M.D. (3)...........................................      1,648,884             14.8%

Putnam Investment Management, Inc. ........................................      1,197,697             10.8%
   One Post Office Square
   Boston, MA  02109

TCW Asset Management.......................................................        759,993              6.9%
   One Post Office Square
   865 South Figueroa Street
   Suite 1800
   Los Angeles, CA  90017

Deerfield Management ......................................................        600,000              5.4%
   One Post Office Square
   450 Lexington Avenue
   Suite 1450
   New York, NY  10017

Henry A. Plain, Jr. (4)....................................................        241,072              2.2%

James W. Vetter (5)........................................................        225,302              2.0%

Vaughn D. Bryson (6).......................................................         75,965               *
  800 Pembroke Court
  Vero Beach, FL  32963

Serge Lashutka (7) ........................................................         19,395               *
  Unocal Corporation
  2141 Rosecrans Avenue, Suite 4000
  El  Segundo, CA  90245

Michael L. Eagle (8).......................................................         17,395               *
  Eli Lilly and Company
  Lilly Corporate Center
  Indianapolis, IN  46285

Mark A. Wan (9)............................................................          5,318               *
  Three Arch Partners
  2800 Sand Hill Road, Suite 270
  Menlo Park, CA  94025

Ronald W. Songer (10)......................................................         97,901               *

Coy F. Blevins (11)........................................................         56,912               *

John G. McCutcheon (12)....................................................         45,093               *

Kenneth E. Ludlum (13).....................................................         77,621               *

All directors and executive officers as a group (Includes 12 persons) (14)       2,560,865             23.1%
--------------------------
</TABLE>

 * Less than 1%.
(1)  Except as indicated in the footnotes to this table, the persons or entities
     named in the table have sole voting and investment power with respect to
     all shares of Common Stock shown as beneficially owned by them, subject to
     community property laws where applicable.

(2)  Percent of the outstanding shares of Common Stock, treating as outstanding
     all shares issuable on exercise of options held by the particular
     beneficial owner that are included in the first column.


                                      39
<PAGE>

(3)  Includes (i) 1,202,143 shares held by the Simpson Family Trust over which
     Dr. Simpson and his wife hold voting and dispositive control, (ii) 49,200
     shares held by the John David Simpson Trust over which Dr. Simpson and his
     wife hold voting and dispositive control and (iii) 356,294 shares held by
     Fox Hollow, Ltd. Also includes 41,247 shares issuable upon exercise of
     stock options exercisable within 60 days after April 30, 1999.

(4)  Includes (i) 95,349 shares held by the Plain Family Trust over which Mr.
     Plain and his wife hold voting and dispositive control, (ii) 20,000 shares
     held by the Alexandra Marie Plain Trust, (iii) 20,000 shares held by the
     Henry Albert Plain III Trust. Also includes 48,580 shares issuable upon
     exercise of stock options exercisable within 60 days after April 30, 1999.

(5)  Includes 30,310 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(6)  Includes 30,000 shares held by the Vaughn D. Bryson Irrevocable Trust. Also
     includes of 45,965 shares issuable upon exercise of stock options
     exercisable within 60 days after April 30, 1999.

(7)  Includes 17,395 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(8)  Consists of 17,395 shares issuable upon exercise of stock options
     exercisable within 60 days after April 30, 1999.

(9)  Includes 4,685 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(10) Includes 31,716 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(11) Includes 28,212 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(12) Includes 39,015 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

(13) Consists of 77,621 shares issuable upon exercise of stock options
     exercisable within 60 days after April 30, 1999.

(14) Includes 402,783 shares issuable upon exercise of stock options exercisable
     within 60 days after April 30, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the fiscal year ended March 26, 1999, the Company made
payments to the following members of its Board of Directors pursuant to
consulting arrangements between the Company and such directors: John B.
Simpson, Ph.D., M.D., $43,333.33 and James W. Vetter, M.D., $65,000.00.

         On August 31, 1998, the Company loaned to Ronald W. Songer, the Vice
President of Product Development, the principal amount of $200,000, with
interest to accrue at a rate of 5.57% per annum. The loan was subsequently
paid in full in February 1999.

         In December 1998, the Company entered into a consulting agreement
with Life Science Advisors, LLC ("LSA"). Vaughn D. Bryson, a member of the
Company's Board of Directors, serves as President of LSA. A total of 8,155
stock options have been granted to Mr. Bryson in connection with the
consulting agreement. During the fiscal year 1999, the Company made no
payments to either LSA or Mr. Bryson in connection with the consulting
agreement.


                                      40
<PAGE>

                                    PART IV

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

<TABLE>
<CAPTION>

(a)  1.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                        PAGE
                                                                           ----
      <S>                                                               <C>
         Report of Ernst & Young LLP, Independent
         Auditors.......................................................   F-1
         Consolidated Balance Sheets, March 31, 1999 and 1998...........   F-2
         Consolidated Statements of Operations, Years Ended March 31,
         1999, 1998 and 1997............................................   F-3
         Consolidated Statements of Cash Flows, Years Ended
         March 31, 1999, 1998 and 1997..................................   F-4
         Consolidated Statements of Stockholders' Equity, Years Ended
         March 31, 1999, 1998 and 1997..................................   F-5
         Notes to Consolidated Financial Statements.....................   F-6
</TABLE>

     2.  FINANCIAL STATEMENT SCHEDULES
         Schedule II--Valuation and Qualifying Accounts is listed on page F-19
         of this Annual Report on Form 10-K.
         All other schedules are omitted because they are not applicable or
         the required information is shown in the Financial Statements or
         the notes thereto.

     3.  INDEX TO EXHIBITS
         See Index to Exhibits on page 42.

(b)   REPORTS ON FORM 8-K
      The Company did not file any reports on Form 8-K during the fourth
      quarter of the fiscal year ended March 1999.


                                      41
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                                          INCORPORATING
EXHIBIT                                                                                                     REFERENCE
  NO.                  DESCRIPTION                                                                        IF APPLICABLE
-------                -----------                                                                        -------------
<S>       <C>                                                                                                 <C>
    3.1   Restated Certificate of Incorporation.                                                              [A]
    3.2   Bylaws of the Registrant, as amended.
    3.3   Certificate of Designations of Rights, Preferences and Privileges of Series A Participating         [B]
           Preferred Stock.
    3.4   Preferred Shares Rights Agreement, dated as of January 27, 1997.                                    [B]
    4.1   Specimen Common Stock Certificate.                                                                  [A]
   10.1   Form of Indemnification Agreement between the Company and each of its directors and officers.       [A]
   10.2   1992 Stock Plan and form of Stock Option Agreement thereunder.                                      [A]
   10.3   1995 Director Option Plan.                                                                          [A]
   10.4   1995 Employee Stock Purchase Plan and forms of agreements thereunder.                               [A]
   10.9   Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders       [A]
           of the Registrant's securities.
  10.10   Employment Agreement dated May 8, 1996 between the Registrant and Kenneth E. Ludlum.                [C]
  10.11   Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc.                            [A]
  10.12   Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997.               [C]
  10.13   Promissory Note between the Registrant and Kenneth E. Ludlum and Judy M. Wong dated June 26, 1997.  [D]
  10.14   1997 Stock plan and Form of Stock Option Agreement.                                                 [E]
  10.15   1995 Director Option Plan, as amended to date.                                                      [I]
  10.17   Lease Agreement dated June 24, 1998 between Registrant and Seaport Centre Associates, LLC for       [G]
          facility located at 300 & 400 Saginaw Drive, Redwood City, California.
  10.18   Promissory Note between the Registrant and Ronald W. Songer dated August 31, 1998                   [H]
  10.19   Standby Letter of Credit dated July 14, 1998.                                                       [H]
  10.20   Sublease Agreement dated March 18, 1999 between Registrant and Ventis, Inc.
   23.1   Consent of Ernst & Young LLP, Independent Auditors.
   24.1   Power of Attorney-(see page 44).
   27.1   Financial Data Schedule (Edgar version only).
-------------
</TABLE>

[A]   Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
      (File No. 33-97128) and incorporated herein by reference.
[B]   Filed as an Exhibit to the Registrant's Registration Statement of Form 8-A
      filed with the Securities and Exchange Commission on January 28, 1997, and
      incorporated herein by reference.
[C]   Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
      fiscal year ended March 28, 1997 and incorporated herein by reference.
[D]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
      the quarter ended June 27, 1997 and incorporated herein by reference.
[E]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
      the quarter ended December 19, 1997 and incorporated herein by reference.
[F]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-K for
      the fiscal year ended March 27, 1998 and incorporated herein by reference.
[G]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
      the quarter ended June 26, 1998 and incorporated herein by reference.
[H]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
      the quarter ended September 25, 1998 and incorporated herein by reference.
[I]   Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
      the quarter ended December 25, 1998 and incorporated herein by reference.


                                      42

<PAGE>

                                   SIGNATURES

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

                                 PERCLOSE, INC.
                                 By:
                                        ----------------------------------------
                                               Henry A. Plain, Jr.
                                          PRESIDENT AND CHIEF EXECUTIVE OFFICER

           KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
    signature appears below constitutes and appoints Henry A. Plain, Jr. and
    Kenneth E. Ludlum, jointly and severally, his or her attorneys-in-fact,
    and each with the power of substitution, for him or her in any and all
    capacities, to sign any amendments to this Report on Form 10-K, and to
    file the same, with exhibits thereto and other documents in connection
    therewith, with the Securities and Exchange Commission, hereby ratifying
    and confirming all that each of said attorneys-in-fact, or his or her
    substitute or substitutes, may do or cause to be done by virtue thereof.

           Pursuant to the requirements of the Securities Exchange Act of
    1934, this report has been signed below by the following persons on
    behalf of the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

               SIGNATURE                                                 TITLE                                  DATE
               ---------                                                 -----                                  ----
<S>                         <C>                                                                        <C>
Henry A. Plain, Jr.            President, Chief Executive Officer and Director                             June 24, 1999
                               (Principal Executive Officer)

Kenneth E. Ludlum              Vice President, Finance and Administration and Chief Financial Officer      June 24, 1999
                               (Principal Financial and Accounting Officer)

Michael L. Eagle               Director                                                                    June 24, 1999

Vaughn D. Bryson               Director                                                                    June 24, 1999

Serge Lashutka                 Director                                                                    June 24, 1999

John B. Simpson, Ph.D., M.D.   Director                                                                    June 24, 1999

James W. Vetter, M.D.          Director                                                                    June 24, 1999

Mark A. Wan                    Director                                                                    June 24, 1999
</TABLE>


                                      43

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Perclose, Inc.

         We have audited the accompanying consolidated balance sheets of
Perclose, Inc. as of March 31, 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 March 31, 1999. Our audits also included
financial statements schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Perclose, Inc. at March 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

San Jose, California
April 28, 1999


                                      F-1
<PAGE>

                                                  PERCLOSE, INC.

                                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands, except share and par value data)

<TABLE>
<CAPTION>

                                                                                          MARCH 31,
                                                                                  --------------------------
                                                                                     1999          1998
                                                                                  ------------  ------------
                                                   ASSETS
<S>                                                                               <C>           <C>
Current assets:
   Cash and cash equivalents....................................................    $  7,333      $ 13,232
   Short-term investments.......................................................      22,864        18,349
   Accounts receivable, net of allowance for returns and doubtful
    accounts of $301 in 1999 and 1998 ..........................................       7,762         3,455
   Inventories..................................................................       2,549         1,619
   Prepaid expenses.............................................................         689           628
                                                                                  ------------  ------------
      Total current assets......................................................      41,197        37,283

Equipment and leasehold improvements, net.......................................       5,767         2,277
Officer notes receivable........................................................         200           600
Other assets....................................................................       2,426           291
                                                                                  ------------  ------------
Total assets....................................................................    $ 49,590      $ 40,451
                                                                                  ============  ============

                                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable.............................................................    $  1,717      $    782
   Accrued compensation.........................................................       1,886         1,202
   Accrued warranty.............................................................          45           191
   Other accrued expenses.......................................................         995           955
   Notes payable................................................................          32           379
                                                                                  ------------  ------------
      Total current liabilities.................................................       4,675         3,509

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.001 par value:
     Authorized shares: 5,000,000                                                         --            --
  Common stock, $0.001 par value
     Authorized shares: 30,000,000
      Issued and outstanding shares: 11,035,422 in 1999 and 10,731,089 in 1998..          11            11
   Additional paid-in capital...................................................      81,427        79,433
   Accumulated other comprehensive income (loss)................................         (31)           --
   Accumulated deficit..........................................................     (36,219)      (41,763)
   Deferred compensation........................................................        (273)         (739)
                                                                                  ------------  ------------
Total stockholders' equity......................................................      44,915        36,942
                                                                                  ------------  ------------
Total liabilities and stockholders' equity......................................    $ 49,590      $ 40,451
                                                                                  ============  ============
</TABLE>
                                                    See accompanying notes.




                                      F-2
<PAGE>

                                                     PERCLOSE, INC.

                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                        (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED MARCH 31,
                                                                        ----------------------------------------------
                                                                             1999            1998            1997
                                                                        --------------  --------------  --------------
<S>                                                                     <C>             <C>             <C>
Net revenues..........................................................       $ 43,340       $ 10,631         $ 4,456
Cost of goods sold....................................................         13,979          7,783           4,703
                                                                        --------------  --------------  --------------
Gross profit (loss)...................................................         29,361          2,848            (247)

Operating expenses:
   Research and development...........................................          7,957          5,449           4,745
   Selling, general and administrative................................         17,153         12,530           6,301
                                                                        --------------  --------------  --------------
      Total operating expenses........................................         25,110         17,979          11,046
                                                                        --------------  --------------  --------------

Income (loss) from operations.........................................          4,251        (15,131)        (11,293)

Other income (expense):
   Interest income ...................................................          1,662          1,466           1,747
   Interest expense...................................................            (17)          (186)           (118)
   Other income (expense).............................................            (60)            55               6
                                                                        --------------  --------------  --------------
      Total other income..............................................          1,585          1,335           1,635
                                                                        --------------  --------------  --------------

Income (loss) before income taxes.....................................          5,836        (13,796)         (9,658)

Provision for income taxes............................................            292             --              --
                                                                        --------------  --------------  --------------

Net income (loss).....................................................       $  5,544       $(13,796)        $(9,658)
                                                                        ==============  ==============  ==============

Basic earnings (loss) per common share................................       $   0.51       $  (1.38)        $ (1.02)
                                                                        ==============  ==============  ==============

Diluted earnings (loss) per common share..............................       $   0.47       $  (1.38)        $ (1.02)
                                                                        ==============  ==============  ==============

Shares used in computing basic earnings (loss) per share..............         10,829          9,967           9,471
                                                                        ==============  ==============  ==============

Shares used in computing diluted earnings (loss) per share............         11,725          9,967           9,471
                                                                        ==============  ==============  ==============
</TABLE>

                                                    See accompanying notes.

                                                             F-3
<PAGE>

                                                      PERCLOSE, INC.

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (In thousands)

<TABLE>
<CAPTION>

                                                                                         YEARS ENDED MARCH 31,
                                                                            -------------------------------------------------
                                                                                1999              1998             1997
                                                                            --------------   ---------------  ---------------
<S>                                                                         <C>              <C>              <C>
OPERATING ACTIVITIES
   Net income (loss).......................................................     $  5,544         $ (13,796)       $  (9,658)
  Adjustments to reconcile net income (loss) to net cash provided by
        (used in) operating activities:
      Depreciation and amortization........................................        1,519             1,523              668
      Deferred compensation amortization...................................          466               324              262
        Compensation expense related to consultants' stock options.........          147                --               --
  Changes in operating assets and liabilities:
      Accounts receivable..................................................       (4,307)           (1,925)            (606)
      Inventories..........................................................         (930)             (875)            (214)
      Prepaid expenses.....................................................         (196)           (1,078)              (5)
      Accounts payable.....................................................          935               359              105
       Accrued compensation................................................          684               350              438
      Accrued warranty.....................................................         (146)             (133)             245
      Accrued clinical trial costs.........................................           --              (310)             310
      Other accrued expenses...............................................           40               537              (18)
                                                                            --------------   ---------------  ---------------
        Net cash provided by (used in) operating activities................        3,756           (15,024)          (8,473)

INVESTING ACTIVITIES
   Purchases of short-term investments.....................................      (16,869)          (17,864)         (22,443)
   Proceeds from sales and maturities of short-term investments............       12,323            24,587           25,551
   Purchases of equipment and leasehold improvements.......................       (4,604)           (1,690)          (1,333)
   Other assets............................................................       (2,405)              217              109
                                                                            --------------   ---------------  ---------------
        Net cash provided by (used in) investing activities................      (11,555)            5,250            1,884

FINANCING ACTIVITIES
   Payments under notes payable............................................         (347)             (377)            (365)
   Proceeds from issuance of common stock, net of issuance costs...........        2,704            20,906              227
   Repurchase of common stock..............................................         (857)               --               --
   Repayment of and (issuance of) officer notes receivable.................          400              (200)            (400)
                                                                            --------------   ---------------  ---------------
        Net cash provided by (used in) financing activities................        1,900            20,329             (538)
                                                                            --------------   ---------------  ---------------

   Net increase (decrease) in cash and cash equivalents....................       (5,899)           10,555           (7,127)

   Cash and cash equivalents at beginning of year..........................       13,232             2,677            9,804
                                                                            --------------   ---------------  ---------------
   Cash and cash equivalents at end of year................................     $  7,333         $  13,232        $   2,677
                                                                            ==============   ===============  ===============

  Supplemental disclosures of cash flow information:
   Cash paid for interest..................................................     $    251         $      32        $      68
   Cash paid for income taxes..............................................     $    200         $      --        $      --
  Non-cash financing activities:
   Issuance of common stock for license agreement..........................     $     --         $      48        $      --
</TABLE>

                                                    See accompanying notes.




                                                              F-4
<PAGE>

                                                  PERCLOSE, INC.

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                  (In thousands)

<TABLE>
<CAPTION>

                                                                        ACCUMULATED
                                          COMMON STOCK      ADDITIONAL     OTHER                                     TOTAL
                                          ------------       PAID-IN   COMPREHENSIVE  ACCUMULATED    DEFERRED    STOCKHOLDERS'
                                         SHARES  AMOUNT      CAPITAL   INCOME (LOSS)    DEFICIT     COMPENSATION    EQUITY
                                         ------  ------      -------   -------------    -------     ------------    ------
<S>                                      <C>     <C>        <C>        <C>            <C>           <C>          <C>
Balance at April 1, 1996 .............    9,502   $  10      $57,372      $  (128)     $(18,309)     $  (445)      $ 38,500
Net loss .............................       --      --           --           --        (9,658)          --         (9,658)
Unrealized gain on short-term ........       --      --           --           51            --           --             51
   investments                                                                                                     --------
Comprehensive income (loss) ..........                                                                               (9,607)
                                                                                                                   --------
Issuance of common stock under
   employee stock purchase and option
   plans, net of repurchases .........       64      --          227           --            --           --            227
Deferred compensation related to
   cancellation of stock options .....       --      --         (193)          --            --          193             --
Deferred compensation related to
   consultants' stock options ........       --      --          903           --            --         (903)            --
Amortization of deferred compensation
   related to stock options ..........       --      --           --           --            --          263            263
                                      ---------------------------------------------------------------------------------------
Balance at March 31, 1997 ............    9,566      10       58,309          (77)      (27,967)        (892)        29,383
Net loss .............................       --      --           --                    (13,796)          --        (13,796)
Unrealized gain on short-term ........       --      --           --           77            --           --             77
   investments                                                                                                     --------
Comprehensive income (loss) ..........                                                                              (13,719)
                                                                                                                   --------
Issuance of common stock under
   employee stock purchase and option
   plans .............................      163      --        1,489           --            --           --          1,489
Issuance of common stock in connection
   with a public offering, net of
   issuance costs of $1,583 ..........    1,000       1       19,416           --            --           --         19,417
Issuance of common stock for payment
   of license ........................        2      --           48           --            --           --             48
Deferred compensation related to
   consultants' stock options ........       --      --          171           --            --         (171)            --
Amortization of deferred compensation
   related to stock options ..........       --      --           --           --            --          324            324
                                      ---------------------------------------------------------------------------------------
Balance at March 31, 1998 ............   10,731      11       79,433           --       (41,763)        (739)        36,942
Net income ...........................       --      --           --           --         5,544           --          5,544
Unrealized loss on short-term
   investments........................       --      --           --          (31)                        --            (31)
                                                                                                                   --------
Comprehensive income (loss) ..........                                                                                5,513
                                                                                                                   --------
Issuance of common stock under
   employee stock purchase and option
   plans .............................      361      --        2,704           --            --           --          2,704
Repurchase of common stock ...........      (57)     --         (857)          --            --           --           (857)
Compensation expense related to
   consultants' stock options ........       --      --          147           --            --           --            147
Amortization of deferred compensation
   related to stock options ..........       --      --           --           --            --          466            466
                                      ---------------------------------------------------------------------------------------
Balance at March 31, 1999 ............   11,035   $  11      $81,427      $   (31)     $(36,219)     $  (273)      $ 44,915
                                      =======================================================================================
</TABLE>
                                                    See accompanying notes.




                                      F-5
<PAGE>

                                 PERCLOSE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


ORGANIZATION.

          Perclose, Inc. (the "Company") was incorporated in California in
March 1992 and was reincorporated in Delaware in October 1995. The Company is
a medical device company which designs, manufactures and markets less
invasive vascular surgical devices for closing femoral artery access sites
following angioplasty and angiography procedures. The Company commenced
initial sales of its products to customers in Europe and Canada during the
fourth quarter of fiscal year 1995. Sales in the United States began in the
first quarter of fiscal year 1998.

         The Company's first product family, the Prostar-Registered
Trademark- and Techstar-Registered Trademark- products, which are marketed
worldwide, surgically close the arterial access site in the femoral artery
after catheterization procedures such as angioplasty, stenting, atherectomy
and diagnostic angiography. A second group of products, The Heartflo-TM-
System, is under development and is designed to automate the surgical
connection of blood vessels in conventional and minimally invasive coronary
artery bypass surgery.

BASIS OF PRESENTATION

         The Company's fiscal year ends on the last Friday in March. For ease
of presentation, the accompanying financial statements have been shown as
ending on March 31 of each year.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of
Perclose, Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH
formed in June 1998. All significant intercompany balances and transactions
have been eliminated in consolidation.

CURRENCY TRANSLATION

         The financial statements of the Company's non-U.S. subsidiary are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets
and liabilities of this subsidiary are translated at the rates of exchange in
effect at the end of the period. Revenues and expenses are translated using
the average exchange rates in effect during the period. Gains and losses from
currency translation are included in stockholders' equity and were not
material for fiscal year 1999. Foreign currency transaction gains or losses
on customer accounts receivable are recognized in current operations and have
not been significant to the Company's operating results.


                                      F-6
<PAGE>

CASH AND CASH EQUIVALENTS

         The Company invests its excess cash in government and corporate
securities. Highly liquid investments with maturities of three months or less
at the date of acquisition are considered by the Company to be cash
equivalents. Investments with maturities beyond three months at the date of
acquisition are considered to be short-term investments.

         The Company maintains its cash, cash equivalents and short-term
investments in a range of fixed income securities from various issuers with
original maturities not exceeding twenty four months and a minimum S&P rating
of A. This diversification of risk is consistent with the Company's
investment policy, which is to maintain liquidity and to ensure the safety of
principal.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts reported in the balance sheet for cash, cash
equivalents and short-term investments approximate fair value. The fair value
of short-term investments is based on quoted market prices.

         The carrying amount of the Company's notes payable approximates
their fair value. The fair values of the Company's notes payable are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.

AVAILABLE-FOR-SALE SECURITIES

         At March 31, 1999 and 1998, all short-term investments are
designated as available-for-sale. Available-for-sale securities are carried
at fair value with unrealized gains and losses, net of tax, reported in
accumulated other comprehensive income. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income.

         Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
income and expense. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.

         The following is a summary of available-for-sale securities at March
31, 1999 (in thousands):

<TABLE>
<CAPTION>

                                                                             GROSS
                                                         AMORTIZED        UNREALIZED       ESTIMATED FAIR
                                                           COST             LOSSES             VALUE
                                                      ----------------  ----------------  -----------------
<S>                                                   <C>               <C>               <C>
Corporate obligations, principally commercial paper
   and corporate notes...............................       $  22,895          $   (31)         $   22,864
Money market accounts................................           4,431               --               4,431
                                                      ----------------  ----------------  -----------------
   Total.............................................       $  27,326          $   (31)         $   27,295
                                                      ================  ================  =================

Amounts included in short-term investments...........       $  22,895          $   (31)         $   22,864
Amounts included in cash and cash equivalents........           4,431               --               4,431
                                                      ----------------  ----------------  -----------------
   Total.............................................       $  27,326          $   (31)         $   27,295
                                                      ================  ================  =================
</TABLE>


                                      F-7
<PAGE>

         The following is a summary of available-for-sale securities as of March
31, 1998 (in thousands):

<TABLE>
<CAPTION>

                                                                             GROSS
                                                                          UNREALIZED
                                                         AMORTIZED           GAINS         ESTIMATED FAIR
                                                           COST             (LOSSES)            VALUE
                                                      ----------------  ----------------  -----------------
<S>                                                   <C>               <C>               <C>
Obligations of federal government agencies...........       $   2,442        $       2          $    2,444

Corporate obligations, principally commercial paper
   and corporate notes...............................          16,905               (2)             16,903
Money market accounts................................          11,010                               11,010
                                                      ----------------  ----------------  -----------------
   Total.............................................       $  30,357        $      --          $   30,357
                                                      ================  ================  =================

Amounts included in short-term investments...........       $  18,349        $      --          $   18,349
Amounts included in cash and cash equivalents........          12,008               --              12,008
                                                      ================  ================  =================
   Total.............................................       $  30,357        $      --          $   30,357
                                                      ================  ================  =================
</TABLE>


         Available-for-sale securities at March 31, by contractual maturity, are
shown below (in thousands):

<TABLE>
<CAPTION>

                                                                                   ESTIMATED FAIR VALUE
                                                                                    1999          1998
                                                                                -------------  ------------
<S>                                                                             <C>            <C>
Due in one year or less........................................................      $13,759      $ 24,134
Due between one and two years..................................................       13,536         6,223
                                                                                -------------  ------------
   Total.......................................................................      $27,295      $ 30,357
                                                                                =============  ============
</TABLE>

INVENTORIES

         Inventories are stated at the lower of cost (first-in, first-out
method) or market and are comprised of the following at March 31 (in thousands):

<TABLE>
<CAPTION>

                                                                                 1999             1998
                                                                             --------------  ---------------
<S>                                                                          <C>             <C>
Raw materials...............................................................      $    700         $    409
Work-in-process.............................................................           967              552
Finished goods..............................................................           882              658
                                                                             ==============  ===============
   Total Inventory..........................................................      $  2,549         $  1,619
                                                                             ==============  ===============
</TABLE>

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

         Equipment and leasehold improvements are stated at cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets, ranging from one to five years, or
over the term of the lease, if shorter. Equipment and leasehold improvements
are comprised of the following at March 31 (in thousands):



<TABLE>
<CAPTION>

                                                                                   1999            1998
                                                                               --------------  --------------
<S>                                                                            <C>             <C>
Equipment.....................................................................     $  5,520        $  3,924
Furniture and fixtures........................................................        1,069             626
Leasehold improvements........................................................        2,636             193
                                                                               --------------  --------------
                                                                                      9,225           4,743
Less accumulated depreciation and amortization................................       (3,458)         (2,466)
                                                                               --------------  --------------
   Equipment and leasehold improvements, net..................................     $  5,767        $  2,277
                                                                               ==============  ==============
</TABLE>




                                      F-8
<PAGE>

OTHER ASSETS

         At March 31, 1999, the Company had approximately $1.5 million of
restricted deposits associated with a lease agreement and related letter of
credit for the Company's facility in Redwood City, California. At March 31,
1998, there was $108,000 of restricted deposits supporting leasehold
improvements related to the Company's former facility in Menlo Park,
California.

REVENUE RECOGNITION

         Revenues from sales of products are recognized at the time of
shipment with allowances provided for estimated returns and warranty costs.

ADVERTISING EXPENSES

         The Company expenses the costs of advertising as incurred.
Advertising expense was approximately $239,000, $132,000 and $156,000 for the
fiscal years ended March 31, 1999, 1998 and 1997, respectively.

RESEARCH AND DEVELOPMENT

         Research and development costs, which include clinical testing and
regulatory costs, are expensed as incurred.

ACCOUNTING FOR INCOME TAXES

         The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the liability method is
used in accounting for income taxes.

NET INCOME (LOSS) PER SHARE

         The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings (loss) per share ("EPS") computations (in
thousands):

<TABLE>
<CAPTION>

                                                                       FISCAL YEAR ENDED MARCH 31,
                                                                  ---------------------------------------
                                                                     1999          1998          1997
                                                                  -----------   ------------  -----------
<S>                                                               <C>           <C>           <C>
Numerator:
   Net income (loss) for basic and diluted EPS...............         $5,544       $(13,796)    $ (9,658)
                                                                  -----------   ------------  -----------

Denominator for basic EPS -- Weighted-average  shares........         10,829          9,967        9,471

Effect of dilutive securities -- Stock options...............            896             --           --
                                                                  -----------   -----------   ------------

Denominator for diluted EPS --
   Adjusted weighted-average  shares outstanding and
   assumed conversions.......................................         11,725          9,967        9,471
                                                                  ===========   ============  ===========
</TABLE>

         For the fiscal years ended March 31, 1998 and 1997, the effect of
the assumed exercise of stock options was antidilutive, therefore basic and
diluted loss per share as presented on the statements of operations are the
same. For additional disclosures regarding potential dilutive stock options,
see Note 5.



                                      F-9
<PAGE>

COMPREHENSIVE INCOME

         The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income" effective for the 1999 fiscal year. SFAS No. 130 establishes rules
for the reporting and display of comprehensive income and its components.
Specifically, SFAS No. 130 requires unrealized gains and losses on the
Company's available-for-sale securities which are currently reported
separately in stockholders' equity, to be included in other comprehensive
income and the disclosure of total comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130. The tax effects for other comprehensive income were immaterial for all
periods presented.

SEGMENT INFORMATION

         In fiscal 1999, 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" and establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its revenues by product, revenues by geographic area and
revenues by major customer. Under SFAS No. 131, the Company operates as one
segment defined as Percutaneous Vascular Surgery ("PVS") products and sells
its products primarily to hospitals and medical device distributors. During
fiscal 1998 the Company received FDA approvals for commercial sale in the
United States for the Prostar and Techstar family of products. The Company
markets its products outside the United States (mainly Europe and Japan)
through its sales organizations and distributors. The Company only reports
profit and loss information on an aggregate basis to chief operating decision
makers of the Company.

         Geographic sources of net revenues based on the location of
customers are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                 FISCAL YEAR ENDED MARCH 31,
                                                      ---------------------------------------------------
                                                           1999               1998             1997
                                                      ----------------   ---------------  ---------------
<S>                                                   <C>                <C>              <C>
United States net revenues.......................        $  38,948          $  9,035         $     --
Foreign net revenues.............................            4,392             1,596            4,456
                                                      ================   ===============  ===============
Total net revenues...............................        $  43,340          $ 10,631         $  4,456
                                                      ================   ===============  ===============
</TABLE>

         During the fiscal year ended March 31, 1997, sales to major
customers as a percentage of total revenues were 59% to a German distributor,
15% to a Japanese distributor and 15% to a French distributor. In the fiscal
years ended March 31, 1999 and March 31, 1998 no single customer contributed
10% or more of the Company's net revenues.

RECENT ACCOUNTING PRONOUNCEMENT

         In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company currently does not make use of derivatives
and management anticipates that the adoption of SFAS No. 133 will not have a
significant effect on earnings or the financial position of the Company.

RECLASSIFICATIONS

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


                                      F-10
<PAGE>

2. COMMITMENTS

         In June 1998, the Company entered into a new facility lease
agreement for approximately 80,000 square feet of office, laboratory,
cleanroom and manufacturing space in Redwood City, California. The new lease
expires in 2008. In addition to the base rent, the lease agreement requires
the Company to pay taxes, insurance and maintenance expenses. Occupation of
the new facility commenced in March 1999. In addition, the Company will
continue to incur rent on a portion of its prior facilities through September
1999. Rental expense was approximately $1,000,000, $514,000 and $397,000 in
fiscal years 1999, 1998 and 1997, respectively.

         A $1.0 million certificate of deposit for the establishment of a
$1.0 million letter of credit was made in connection with the Company's new
facility lease. The letter of credit designates the landlord as beneficiary
and provides that the landlord may draw down the letter of credit in the
amount equal to any default under the lease. The letter of credit will be
required for a minimum of eighteen months; upon the Company's achievement of
certain financial criteria, the letter of credit and certificate of deposit
will be released. As of March 31, 1999, no amounts have been advanced to the
lessor from the letter of credit.

         In March 1999, the Company entered into an agreement to sublease to
a third party approximately 13,000 square feet of space in its new facility.
Rental income under the sublease will total approximately $418,000 for fiscal
year 2000.

         The annual minimum rental commitments under all noncancelable
operating lease arrangements, exclusive of sublease income, are as follows at
March 31, 1999 (in thousands):

<TABLE>

<S>                                                              <C>
2000.........................................................       $   2,384
2001.........................................................           2,176
2002.........................................................           2,241
2003.........................................................           2,308
2004.........................................................           2,377
Thereafter...................................................          11,145
                                                              ----------------
    Total....................................................       $  22,631
                                                              ================
</TABLE>

3. FINANCING ARRANGEMENTS

         The Company had a $1,750,000 equipment credit and loan agreement
with a bank that expired on March 31, 1996. Loans under the agreement bear
interest ranging from 9.07% to 10.60% and are secured by the equipment
purchased. The final maturities under the financing arrangements are $32,000
in the year ended March 31, 2000. The total value of the lease maturities has
been included in current liabilities.

4. STOCKHOLDERS' EQUITY

STOCK REPURCHASE PLAN

         In September 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. During the
fiscal year ended March 31, 1999 the Company repurchased 56,800 shares at an
aggregate cost of $857,000 under this repurchase program. All of the
repurchased shares were subsequently canceled and returned to the status of
authorized, unissued shares.


                                      F-11
<PAGE>

PUBLIC OFFERING OF COMMON STOCK

         In November 1997, the Company sold a total of 1,000,000 shares of
common stock at $21.00 per share. The net proceeds (after underwriters'
commissions and other expenses associated with the offering) totaled
approximately $19,417,000.

PREFERRED STOCK

         The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. Preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the rights,
preferences, privileges, and restrictions granted to and imposed upon any
wholly unissued series of preferred stock and to fix the number of shares of
any series of preferred stock and the designation of any such series without
any vote or action by the Company's stockholders. There were no shares of
preferred stock issued or outstanding at March 31, 1999.

COMMON STOCK

         Shares of common stock reserved for future issuance under the
Company's stock compensation plans are as follows at March 31, 1999 (in
thousands):

<TABLE>

   <S>                                                                                  <C>
     Stock option plans:
     Options outstanding..........................................................         1,809
     Option shares reserved for future option grants..............................           543
                                                                                   --------------
     Total shares of common stock reserved under stock option plans...............         2,352

     Shares of common stock reserved under the employee stock purchase plan.......            77
                                                                                   --------------
     Total shares of common stock reserved for future issuance....................         2,429
                                                                                   ==============
</TABLE>

5. STOCK PLANS

STOCK OPTION PLANS

         The Company currently has three stock option plans for employees,
directors and others-- the 1992 Stock Plan, the 1995 Director Option Plan and
the 1997 Stock Plan.

         Under the Company's 1992 Stock Plan, the Board of Directors may
grant options for the purchase of up to 2,100,000 shares of common stock by
directors, employees and others. Nonqualified stock options are generally
granted with an exercise price equal to the fair market value of the common
stock on the date of grant but may be granted at a lower price as determined
by the plan administrator. Options are exercisable at such times and under
such conditions as determined by the Board of Directors. Options granted
under this plan generally become exercisable over a four-year period and
generally expire ten years from the date of grant. Unexercised options are
canceled upon termination of employment and become available under the plan.

         Under the Company's 1995 Director Option Plan (the "1995 Plan")
directors who are not employees of the Company receive options to purchase up
to 15,000 shares of common stock upon joining the Board of Directors.
Subsequent to receiving initial grants under the 1995 Plan, directors are
eligible to receive additional discretionary grants. A total of 400,000
shares may be granted over the term of the plan. Options may only be granted
at the estimated fair value of the common stock at the date of grant. Options
under this plan generally become exercisable over a four-year period and
generally expire ten years from the date of grant. Unexercised options are
canceled upon the director leaving the Board.


                                      F-12
<PAGE>

         The Company's 1997 Stock Plan (the "1997 Plan") was approved by the
stockholders in July 1997 and provides for awards of incentive stock options,
nonqualified stock options and stock rights to employees, directors and
consultants of the Company. The 1992 Plan remains in effect until it expires
on its own terms and the Company will continue to grant options available
thereunder. An aggregate of 500,000 shares of common stock were reserved for
issuance under the 1997 Plan. The 1997 Plan provides for an annual increase
on each anniversary date of the adoption of the plan of 5% of the Company's
outstanding shares or such lesser amount as determined by the Board of
Directors. A total of 1,040,227 shares have been reserved for issuance under
the 1997 Plan. A maximum of 15,000,000 shares may be issued under the 1997
Plan over its ten year term. Nonqualified stock options are generally granted
with an exercise price equal to the fair market value of the common stock on
the date of grant but may be granted at a lower price as determined by the
plan administrator. Options granted under this plan generally become
exercisable over a four-year period and generally expire ten years from the
date of grant. Unexercised options are canceled upon termination of
relationship as a service provider. Stock purchase rights may be issued
alone, in addition to, or in tandem with other awards granted under this plan.

REPRICING

         In January 1998, the Company offered employees, excluding executive
officers, the option to exchange options to purchase 376,255 shares of common
stock with an aggregate exercise price of $8,747,000 million for new options
to purchase 376,255 shares with an exercise price of $19.31 per share and an
aggregate exercise price of $7,267,000 million. All of the repriced options
continue to vest under the original terms of the option grant. In exchange
for the offer to reprice stock options, employees agreed to a moratorium on
exercising repriced options until July 1, 1998. To the extent an employee
voluntarily terminated employment with the Company prior to July 1, 1998, all
vested shares at the date of termination relating to repriced stock options
were canceled and forfeited.

         In September 1998, the Company offered employees and executive
officers the option to exchange stock options to purchase 1,342,168 shares of
common stock with an aggregate exercise price of $28,643,000 million for new
options to purchase 1,342,168 shares with an exercise price of $11.50 per
share and an aggregate exercise price of $15,435,000 million. All of the
repriced options have vesting provisions consistent with the terms of the
original option grant. In exchange for the offer to reprice stock options,
employees agreed to a moratorium on exercising re-priced options until March
16, 1999. To the extent an employee voluntarily terminated employment with
the Company prior to March 16, 1999, all vested shares at the date of
termination relating to repriced stock options were canceled and forfeited.


                                      F-13
<PAGE>

The following table summarizes all stock option activity for the three years
ended March 31, 1999:
<TABLE>
<CAPTION>
                                                              OUTSTANDING OPTIONS
                                                           ---------------------------
                                               SHARES                      WEIGHTED
                                             AVAILABLE       NUMBER        AVERAGE
                                                FOR            OF          EXERCISE
                                               GRANT         SHARES          PRICE
                                            -------------  ------------  -------------
                                              (000'S)        (000'S)
<S>                                             <C>            <C>          <C>
Balance at April 1, 1996...................         338           842          $ 8.57
   Shares authorized.......................         450            --              --
   Options granted.........................        (681)          681          $21.06
   Options exercised.......................          47           (95)         $ 0.78
   Options canceled........................          32           (32)         $18.38
                                            -------------  ------------

Balance at March 31, 1997..................         186         1,396          $14.83
   Shares authorized.......................         700            --              --
   Options granted.........................      (1,021)        1,021          $20.54
   Options exercised.......................          --          (139)         $ 8.23
   Options canceled........................         493          (493)         $22.67
                                            -------------  ------------

Balance at March 31,1998...................         358         1,785          $16.45
   Shares authorized.......................         540            --              --
   Options granted.........................      (1,803)        1,803          $15.84
   Options exercised.......................          --          (331)         $ 6.56
   Options canceled........................       1,448        (1,448)         $21.08
                                            -------------  ------------

Balance at March 31,1999...................         543         1,809          $13.93
                                            =============  ============
</TABLE>

         The following table summarizes information about stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                        --------------------------------------------------  ---------------------------------------
                                           WEIGHTED
                            NUMBER          AVERAGE          WEIGHTED            NUMBER              WEIGHTED
RANGE OF                 OUTSTANDING       REMAINING         AVERAGE           EXERCISABLE            AVERAGE
EXERCISE                    AS OF         CONTRACTUAL        EXERCISE             AS OF              EXERCISE
PRICES                     3/31/99           LIFE             PRICE              3/31/99               PRICE
------                  ---------------  --------------  -----------------  ------------------   ------------------
                           (000's)          (years)                              (000's)
<S>                           <C>              <C>              <C>                   <C>               <C>
$ 0.10 - $ 6.00........            136            4.90             $ 1.28                 131                $1.08
$11.50 ................          1,206            8.21             $11.50                 434               $11.50
$13.00 -$25.00.........            263            7.72             $17.92                 151               $16.91
$26.50 -$43.75.........            199            8.88             $31.26                  40               $26.63
$44.66 -$49.62.........              5            9.95             $47.44                  --                   --
                        ===============                                     ==================
$0.10  - $49.62.........         1,809            7.97             $13.93                 756               $11.58
                        ===============                                     ==================
</TABLE>

         At March 31, 1998 and 1997, 636,514 and 355,581 shares were
exercisable at weighted average exercise prices of $11.02 and $5.87,
respectively.

1995 EMPLOYEE STOCK PURCHASE PLAN

         In September 1995, the 1995 Employee Stock Purchase Plan (the
"ESPP") was adopted by the Company. An aggregate of 150,000 shares of the
Company's common stock have been reserved for issuance under this plan. In
accordance with Section 423 of the Internal Revenue Code, this plan permits
eligible employees to authorize payroll deductions of up to 15% of their base
compensation to purchase shares of the Company's common stock at the lower of
85% of the fair market value of the common stock

                                      F-14
<PAGE>

on first day of the offering period or the purchase date. For the years ended
March 31, 1999, 1998 and 1997, 30,753, 23,699 and 16,689 shares,
respectively, were issued under the ESPP.

DEFERRED COMPENSATION

         During the fiscal years ended March 31, 1998 and 1997 the Company
recorded deferred compensation with respect to stock options granted to
consultants of $171,000 and $903,000, respectively. Additionally, during
fiscal 1997, the Company repurchased 47,396 shares of common stock resulting
from the exercise of unvested stock options and reduced related unamortized
deferred compensation by $193,000.

         Deferred compensation is amortized ratably over the period that the
options vest and is adjusted for options which have been cancelled. Deferred
compensation expense was $466,000, $324,000, and $263,000 for the years ended
March 31, 1999, 1998 and 1997, respectively.

         During fiscal year 1999, the Company granted 35,000 options in
connection with consulting agreements. The stock options were valued using
the Black-Scholes option valuation model and the Company recorded $93,000 of
compensation expense for fiscal year 1999. The Company expects to record
compensation expense of $247,000, $247,000 and $165,000 for fiscal years
2000, 2001 and 2002, respectively.

STOCK-BASED COMPENSATION

         As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in
accounting for stock-based awards to employees and directors. Under APB No.
25, the Company generally recognizes no compensation expense with respect to
such awards.

         Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after March 31, 1995 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS No. 123. The fair value of the Company's stock-based
awards to employees was estimated using the minimum value model for awards
prior to the Company's initial public offering on November 7, 1995 and the
Black-Scholes model subsequent to the initial public offering. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards
to employees. The fair value of the Company's stock-based awards to employees
was estimated assuming no expected dividends and the following
weighted-average assumptions:

<TABLE>
<CAPTION>

                                                   OPTIONS                      ESPP
                                           -------------------------  -------------------------
                                             1999    1998    1997       1999     1998    1997
                                             ----    ----    ----       ----     ----    ----
<S>                                         <C>     <C>     <C>        <C>      <C>     <C>
Expected life (years).....................     5.00    5.00    5.00        .50      .50    .50
Expected volatility.......................      .67     .62     .70        .94      .45    .77
Risk-free interest rate %.................     4.66    5.52    6.49       5.40     5.40   5.47
</TABLE>

         For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the purchase period (for stock purchases under the ESPP).
The Company's pro forma information is as follows (in thousands, except for
per share information):


                                      F-15
<PAGE>

<TABLE>
<CAPTION>
                                                                  1999           1998            1997
                                                               ------------  -------------   -------------
<S>                                                               <C>           <C>             <C>
Pro forma net loss............................................    $(3,494)      $(17,662)       $(11,538)
Pro forma basic and diluted net loss per share................    $ (0.32)      $  (1.77)       $  (1.22)
</TABLE>

         The weighted average fair value of options granted during 1999, 1998
and 1997 was $9.43, $11.96 and $13.50 per share, respectively.

         The weighted average fair value of shares issued under the ESPP
during 1999, 1998 and 1997 was $16.74, $8.49 and $10.79 per share,
respectively.

6. INCOME TAXES

         The components of the provision for income taxes were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                  1999          1998            1997
                                               ------------  ------------   -------------
<S>                                            <C>            <C>             <C>
Federal.................................          $  171         $  --           $  --
State...................................              86            --              --
Foreign.................................              35            --              --
                                               ------------  ------------   -------------
   Total................................          $  292         $  --           $  --
                                               ============  ============   =============
</TABLE>

         The reconciliation of income tax expense (benefit) attributable to
continuing operations computed at the U.S. federal statutory rates to income
tax expense (benefit) is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    1999          1998            1997
                                                                 ------------  ------------   -------------
<S>                                                              <C>         <C>              <C>
Tax provision (benefit) at U.S. statutory rates.................    $ 2,043      $ (4,828)       $ (3,284)
State taxes.....................................................         56            --              --
Loss for which no tax benefit is currently recognizable.........         --         4,828           3,284
Benefit of net operating losses.................................     (1,807)           --              --
                                                                 ------------  ------------   -------------
                                                                    $   292      $     --        $     --
                                                                 ============  ============   =============
</TABLE>

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           YEARS ENDED MARCH 31,
                                                       -----------------------------
                                                           1999            1998
                                                       --------------  -------------
      <S>                                              <C>             <C>
         Deferred tax assets:
         Net operating loss carryforwards.............     $ 14,000       $ 13,700
         Tax credit carryforwards.....................          700            370
         Other, net...................................        2,200          2,100
                                                       -----------------------------
            Total.....................................       16,900         16,170
         Valuation allowance..........................      (16,900)       (16,170)
                                                       -----------------------------
            Net.......................................     $     --       $     --
                                                       ==============  =============
</TABLE>


         Realization of deferred tax assets is dependent on future earnings,
if any, the timing and amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax asset at
March 31, 1999 and 1998, has been established to reflect these uncertainties.
The change in the valuation allowance was a net increase of $730,000,
$5,280,000 and $3,660,000 for the fiscal years 1999, 1998 and 1997,
respectively.


                                      F-16
<PAGE>

         At March 31, 1999 the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $39,000,000 and
$14,000,000, respectively, which will expire from 2000 through 2012, if not
utilized. At March 31, 1999, the Company also had research and development
tax credit carryforwards of approximately $400,000 and $350,000,
respectively, for federal and state tax purposes expiring from 2007 through
2019, if not utilized. As of March 31,1999 the future use of net operating
loss and tax credit carryforwards are not subject to material limitations
resulting from the ownership change limitations provided by the Internal
Revenue Code and similar state provisions.

         Included in the valuation allowance is $3,000,000 related to the
exercise of stock options which are not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance related to this amount will be credited directly to equity and not
reflected as an income tax benefit in the statement of operations.

7. EMPLOYEE BENEFIT PLAN

         The Company adopted the Perclose 401(k) Retirement Plan to provide
retirement benefits for its employees in December 1994. As allowed under
Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred
salary deductions for eligible employees. Full time employees who are at
least 21 years of age are eligible to participate in the next quarter
enrollment period. Participants may make voluntary contributions to the plan
up to 15% of their compensation, subject to certain Internal Revenue Service
restrictions. The Company does not provide a matching contribution at this
time.

8. CONCENTRATIONS OF CREDIT AND OTHER RISKS

         The Company operates in a single industry segment and sells its
products primarily to hospitals and medical device distributors. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. There have been no material losses on customer
receivables.

DEPENDENCE ON PROSTAR AND TECHSTAR PRODUCTS

         The Prostar and Techstar products are currently the Company's only
marketed products. There can be no assurance as to when or whether the
Company will receive FDA clearance or approval for sale of other products in
the United States. There can be no assurance that the Company's development
efforts will be successful or that any further products developed by the
Company will be safe or effective, capable of being manufactured in
commercial quantities at acceptable costs, approved by appropriate regulatory
and reimbursement authorities or successfully marketed.

DEPENDENCE ON KEY SUPPLIERS

         The Company purchases certain key components from single source
suppliers. Any significant component supply delay or interruption could
require the Company to qualify new sources of supply, if available, and could
have a material adverse effect on the Company's financial condition and
results of operations.

9. LEGAL PROCEEDINGS

         In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company counter-sued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
counter-defendants have engaged in antitrust


                                      F-17
<PAGE>

and unfair competition violations. In March 1999, Tyco sold the marketing
rights to the competitive product to St. Jude Medical, Inc. The case is
presently set for trial in September 1999. The Company believes that the case
is without merit and intends to defend itself and its intellectual property
rights vigorously.

10. RELATED PARTY TRANSACTIONS

         In December 1998, the Company entered into a consulting agreement
with Life Science Advisors ("LSA"). A member of the Company's Board of
Directors also serves as the President of LSA. A total of 8,155 stock options
have been granted to the director in connection with the consulting
agreement. For the fiscal year ended March 31, 1999, the Company has made no
payments to either LSA or the director in connection with the consulting
agreement.


                                      F-18
<PAGE>

                                  SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                           BALANCE AT
                                          BEGINNING OF                                      BALANCE AT
                                             PERIOD         ADDITIONS      DEDUCTIONS      END OF PERIOD
                                          ------------      ---------      ----------      -------------
<S>                                        <C>              <C>             <C>              <C>
(Year Ended March 31)
1997................................           $   20,000      $ 761,000       $ 605,000        $  176,000
1998................................           $  176,000      $ 683,000       $ 558,000        $  301,000
1999................................           $  301,000      $  29,000       $  29,000        $  301,000
</TABLE>




                                      F-19