KENSEY NASH CORP - 10-K Annual Report

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

FORM 10-K

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

For the Fiscal Year Ended: June 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 0-27120

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes X No __

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of December 31, 2002 (the last business day
of the registrant's most recently completed second fiscal quarter) was
$196,791,614, based on the closing price per share of Common Stock of $18.27 as
of such date reported by the NASDAQ National Market. Shares of the registrant's
Common Stock held by each executive officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of September 19, 2003 was 11,448,325.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement, to be filed pursuant to
Regulation 14A
under the Securities Exchange Act of 1934, in connection with the registrant's
2003 Annual
Meeting of Stockholders scheduled to be held on December 3, 2003.

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PART I

ITEM 1. BUSINESS

This discussion below contains forward-looking statements relating to future
events or our future financial performance. These statements are only
predictions and actual events or results may differ materially. In evaluating
such statements, you should carefully consider the various factors identified in
this report which could cause actual results to differ materially from those
indicated in any forward-looking statements, including those set forth in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors" in this Annual Report on Form 10-K. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward-Looking Statements".

OVERVIEW

We are a leader in cardiovascular medical technology and have significant
experience and expertise in the design, development, manufacture and processing
of absorbable biomaterials for medical applications. The Angio-Seal(TM) Vascular
Closure Device (Angio-Seal), of which we were the original designer, developer
and manufacturer, is currently the leader in the arterial puncture closure
device market, estimated to be a potential $1 billion annual market. The
Angio-Seal device is designed to seal and close femoral artery punctures made
during diagnostic and therapeutic cardiovascular catheterizations. St. Jude
Medical, Inc. (St. Jude Medical) acquired the worldwide license to the
Angio-Seal device in March of 1999. St. Jude Medical develops, manufactures,
markets and distributes the product worldwide.

Additionally, we have developed the TriActiv(R) Balloon Protected Flush
Extraction System (the TriActiv), a device designed to provide embolic
protection during diseased saphenous vein graft treatment. This market
opportunity is currently estimated at $300 million annually. The TriActiv was
commercially launched in Europe in May 2002 and is in clinical trials in the
United States. Future generations of the TriActiv currently in development and
in clinical trials, will address additional markets. These future applications
will include the treatment of diseased carotid and native coronary arteries and
acute myocardial infarction (AMI) or a heart attack. Industry estimates indicate
that the addition of these applications broadens the potential market for the
TriActiv platform to over $1 billion.

We also have significant experience in designing, developing, manufacturing and
processing proprietary biomaterials products for the orthopaedics, cardiology,
drug/biologics delivery, periodontal, general surgery and wound care markets. We
intend to continue to leverage our proprietary knowledge and expertise in all of
these markets to develop new products and technologies and to explore additional
applications for our existing products.

THE TRIACTIV(R) BALLOON PROTECTED FLUSH EXTRACTION SYSTEM -- EMBOLIC PROTECTION
MARKET OVERVIEW

SAPHENOUS VEIN GRAFT APPLICATION

There are approximately 550,000 coronary bypass surgeries performed annually
worldwide and approximately half of all these bypass grafts become diseased or
occluded within ten years of surgery. The market for the treatment of these
occluded grafts is currently estimated at $300 million annually. During many
coronary bypass procedures, the saphenous vein is removed from the patient's leg
and is surgically implanted to bypass a diseased or occluded native coronary
artery. The saphenous vein graft (SVG) is used as a replacement for the diseased
or occluded native coronary artery to restore blood flow. Current treatment
options for diseased SVGs include drug therapy, device-based therapies
(including angioplasty and the placement of stents) or repeat bypass surgery.
There are significant risks involved with these treatments ranging from
continued progression of disease, heart attack and possible death. Specifically,
during the treatment of diseased SVGs via device-based therapy, the rate of
major complication (known as the MACE (major adverse coronary event) rate) is
approximately 15 to 20%. These complications occur primarily because the
material clogging the SVG is dislodged during the treatment and released into
the vasculature causing clots or heart attack. Embolic protection is a method of
preventing this debris from going downstream during device based therapy

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procedures. Current devices in the embolic protection market include filter and
balloon based therapies. These protection devices have been clinically proven to
reduce the MACE rates associated with device based therapies.

ADDITIONAL APPLICATIONS

In addition to its application for the treatment of SVG disease, embolic
protection is being tested for effectiveness in reducing complication rates
during the treatment of diseased carotid arteries and diseased native coronary
arteries and AMI.

CAROTID ARTERIES

Each year, there are over 200,000 surgical endarterectomies performed
worldwide to treat carotid artery disease. An endarterectomy is an open
invasive surgical procedure performed to remove debris from the carotid
artery. It is also known that a significantly larger number of patients are
affected by carotid artery disease, with many going untreated due to the
invasiveness of the surgical procedure. With the advent of carotid stenting
in combination with embolic protection devices continuing to show promising
results, it is believed that carotid stenting with embolic protection could
become the standard of care for the treatment of carotid artery disease.

NATIVE CORONARY ARTERIES AND AMI

Distal embolization of plaque is increasingly recognized as a contributor
to complication rates in common percutaneous transluminal coronary
angioplasty (PTCA) and stent placement procedures. This seems to be
particularly apparent in AMI or heart attack patients where a significant
amount of blood clot (thrombus) is often present. If the thrombus is
dislodged and collects downstream, it generally leads to adverse short-term
and/or long-term outcomes for the patients. Embolic protection devices are
being studied as tools for lowering complication rates in these patients.

THE TRIACTIV

We have designed the TriActiv, a balloon based embolic protection therapy, to
provide distal protection during SVG treatment procedures. In addition to the
balloon protection, the TriActiv utilizes active flushing and extraction to
remove debris from the vessel after a treatment procedure. Clinical data from
our pilot study demonstrated that the use of the TriActiv reduced the MACE rate
to 6.9% for patients treated within our clinical protocol. Documented studies
have shown that MACE rates in non-protected SVG procedures are approximately 15
to 20%.

We believe the TriActiv is currently the only device, in clinical trials or
commercially available, which offers all three of the following features:

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

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

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

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

We received CE Mark approval for the TriActiv in January 2002. The CE Mark is an
international symbol of adherence to quality assurance standards established by
the European Union and compliance with applicable European medical device
directives. The commercial launch of the device occurred at the Paris Course on
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Revascularization (PCR) in May 2002 and we shipped our first product in June
2002. Effective January 2002, we established a subsidiary in Germany, Kensey
Nash Europe GmbH, and hired a Vice President of European sales. We have
established a European sales and marketing team and will continue to add
personnel to this team as required to meet our clinical and sales goals. This
team sells the product direct in the German market and supports our distributor
relationships in the rest of Europe.

In December 2001, we initiated the PRotection during Saphenous Vein Graft
Intervention to Prevent Distal Embolization (PRIDE) Trial in the U.S. The PRIDE
Trial is a randomized, controlled study of up to 800 patients at up to 80
investigational sites in the U.S. and in Europe. We anticipate enrollment
completion and submission to the FDA for 510(k) approval of the device (the
approval, which allows the commercial sale of the device in the U.S.) between
December 2003 and February 2004. If the submission meets the requirements of the
FDA, we would anticipate receiving approval for commercial sale of the device by
June 2004.

FUTURE GENERATIONS OF THE TRIACTIV

We have modified the design of the TriActiv to improve the ease-of-use for SVG
applications as well as to address additional applications where distal
embolization is a concern. These additional applications include the treatment
of native coronary and carotid arteries as well as AMI. Testing of these
additional designs will occur during our years ended June 30, 2004 and 2005
(fiscal 2004 and 2005).

The second generation SVG application device has been designed to improve the
ease-of-use of the original device. We have submitted for CE Mark approval for
the 2nd generation TriActiv and will commence sales in Europe upon receipt of
approval. We expect to receive approval in the second quarter of fiscal 2004.

We completed a six patient pilot study, the TRACER study, on the carotid artery
application in September 2003. This study was completed at one clinical site in
Costa Rica. The TriActiv carotid application device was successfully used to
provide protection from potential stroke-causing emboli by actively removing
debris during carotid stenting procedures. We plan to begin enrollment in a CE
Mark study for the TriActiv carotid application in our third fiscal quarter of
fiscal 2004.

We also plan to initiate a CE Mark study for the native coronary/AMI application
by the end of fiscal 2004.

THE ANGIO-SEAL(TM) DEVICE

ARTERIAL PUNCTURE CLOSURE -- MARKET OVERVIEW

Arterial puncture closure is the closing and sealing of femoral artery punctures
made during cardiovascular catheterizations. Current treatment options include
manual pressure, the current standard of care, and device based therapy.
Existing device based treatment options consist of either suture or
biomaterial-based devices. Leading cardiology industry journals currently
estimate that there are approximately 7.0 million cardiovascular catheterization
procedures performed annually, which translates to a potential worldwide
arterial puncture closure market of approximately $1 billion annually. The U.S.
market represents approximately 70-75% of this total market opportunity.
Industry estimates of current market penetration for arterial puncture closure
devices are approximately 41% and 27%, for the U.S. and the international
markets, respectively.

THE ANGIO-SEAL SYSTEM

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

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

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

- an absorbable suture; and

- a delivery system consisting of an insertion sheath, puncture locator,
guidewire and tamper tube.
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The anchor and suture act as a pulley to position the collagen into the puncture
tract adjacent to the outside of the artery wall to seal and close the puncture.
A tamper tube is used to further position and secure the closure device. The
anchor, collagen and suture are all designed to be absorbed into the patient's
body within 60 to 90 days after the procedure. We believe that this mechanical
(anchor and collagen) and biochemical (collagen) approach offer physicians a
method for sealing and closing punctures with significant advantages over
traditional manual or mechanical compression methods, as well as over other
competitive products. The Angio-Seal product has been proven to have several
advantages over traditional manual or mechanical compression procedures,
including: reduced time to ambulation and hemostasis, reduced staffing and
hospital time, possible reduction in procedure costs, increased patient comfort,
greater flexibility in post-procedure blood thinning therapy and increased blood
flow to the leg.

The Angio-Seal device is manufactured, marketed, sold and distributed by St.
Jude Medical. We receive a royalty on every unit sold. In addition, we
manufacture components for the Angio-Seal device and have augmented St. Jude
Medical's manufacturing of completed devices in the past. We believe the impact
of continued sales and marketing efforts by St. Jude Medical, along with product
enhancements planned by St. Jude Medical, will provide continued growth
opportunities. These efforts and enhancements include the launch of the product
in the Japanese market and the launch of the STS Plus platform in the U.S. in
the first quarter of fiscal 2004.

With the launch of the latest generations of the Angio-Seal product line, the
Self Tightening Suture (STS) and STS Plus platforms in March 2002 and September
2003, respectively, the Angio-Seal device has become the leading product in the
worldwide arterial puncture closure market. The Angio-Seal has been sold in
Europe since 1995 and in the U.S. since 1996. There have been approximately
three million Angio-Seal devices sold as of June 30, 2003. Industry estimates
show the Angio-Seal worldwide market share at June 30, 2003 was approximately
55%, compared to approximately 48% at June 30, 2002.

BIOMATERIALS

BIOMATERIALS -- MARKET OVERVIEW

Biomaterials, which are substances that treat, augment, or replace tissue,
organs or body functions, are used regularly as components and elements in a
wide variety of absorbable and permanent implants. Advances in materials
technology and a better understanding of the biological processes involved in
tissue formation and remodeling have led to the introduction of absorbable
biomaterials-based products to address long-standing deficiencies of traditional
products and therapies. This trend has been observed in many markets, including
orthopaedics, cardiology, drug/biologics delivery, wound care, surgery,
periodontics and urology. Generally, absorbable biomaterials-based products have
proven attractive solutions for a number of reasons. First, physicians generally
prefer to use an implant which will not require a second surgery to remove the
device. In addition, the rate of absorption of products can be carefully
engineered to promote healing as the biomaterials-based products work with the
body's natural healing response. Finally, absorbable biomaterials offer
potential for drug delivery. The ability to provide staged and sustained release
of drugs and biologics offers significant potential for growth in the use of
absorbable biomaterials-based products.

OUR BIOMATERIALS TECHNOLOGY AND PRODUCTS

Biomaterials continue to be a source of new emerging technologies for our
company. Alongside our Angio-Seal and TriActiv platforms, we have built a solid
reputation and significant market presence in the development of biomaterials
for use in medical implants. The technological challenges involved in developing
biomaterials products are substantial. Developing products made from absorbable
and nonabsorbable biomaterials, such as polymers, collagen, polysacharides and
ceramics, requires an understanding of the mechanical integrity,
biocompatibility, and absorption rates, as well as the ability to sterilize
these products without jeopardizing their material properties. Our expertise in
biomaterials enables us to design, develop and manufacture proprietary
biomaterials products. These products are characterized by their ability to be
absorbed or incorporated in the body's own tissue. Our particular expertise is
in the properties, usage and processing of polymers, collagen, ceramics and
other absorbable and nonabsorbable materials. We believe that

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our diverse platforms in, and significant experience with, biomaterials
technology give us a competitive advantage because many participants in the
market specialize in only one biomaterial or have far less experience in
biomaterials. Our background with multiple materials enables us to provide
essential biomaterials building blocks across multiple biomaterials platforms to
address specific product needs in a wide variety of markets.

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

Our polymer technology platform includes a porous tissue matrix (PTM)
technology which allows us to create porous implants which support cell
growth, tissue regeneration and the delivery of biologics, growth factors
and drugs. The implants are designed to facilitate wound healing in both
bone and soft tissue and are bioabsorbable at controlled rates for
specific functions and tissues. We have a series of products and
development programs utilizing intellectual property related to our porous
biodegradable regeneration matrices. Specifically, we are researching
applications for articular cartilage regeneration, vascular grafts, bone
growth scaffolds for spinal and trauma indications and for the delivery of
drugs and growth factors.

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

We have completed extensive biocompatibility and viral inactivation
studies on our collagen products. We have established, and currently
maintain, device master files which contain the data from these studies.
Unlike many of our competitors, we allow customers who incorporate our
collagen products into their products to reference our device master files
in their regulatory submissions, thereby eliminating the extensive and
time consuming process of independently generating their own data. We
believe our policy of making our device master files available to our
customers provides us with a significant competitive advantage.

- Ceramics Products. We have experience using ceramic materials, primarily
with calcium phosphate salts such as hydroxyapatite. These materials can
be designed to replicate bone structure and support new bone growth or as
osteoconductive implants. Ceramics are also useful for enhancing the
material properties of products, such as strength, when used in
combination with other biomaterials. We have expertise in the compounding
of ceramic materials with various absorbable polymers to enhance strength
characteristics primarily for orthopaedic applications. We are currently
working with select orthopaedic customers to incorporate this enhanced
material into their existing products or to develop new products. In
addition, we are independently developing blended materials, using
ceramics in combination with other biomaterials, for applications in
filling of bone defects and fracture repair.

We participate in this biomaterials market in several ways:

- We manufacture biomaterials products for our customers who incorporate
them into their products;

- We manufacture a complete product incorporating our biomaterials and
provide the finished product to our customers for distribution;

- These products are provided in a variety of forms ranging from components
to final packaged products which are then marketed and sold to end users;

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- We independently design and develop biomaterials products that may
enhance the features and benefits of our customers' products;

- We design and develop potential enhancements to our customers' products.

A majority of our biomaterials sales are concentrated among a few strategic
customers and partners. The relationship with these customers and partners is
generally long-term and contractual in nature, with contracts specifying the
characteristics of the product to be supplied and pricing. Our products often
represent a key strategic source for these customers and partners. In many
cases, the technology incorporated in the product is our proprietary technology
and, therefore, the "switching costs" for customers are thought to be high.
These would include identification and testing of alternative technology, time
to develop specifications with new suppliers, and, in many cases, regulatory
modifications. As a result, we view the nature of our customer relationships as
a long-term sustainable competitive advantage.

We have established several strategic partnerships with companies selling
biomaterials based products. We act as a strategic partner and are often the
exclusive supplier of certain biomaterials technology to our customers. Our
biomaterials customers include St. Jude Medical, to whom we supply the
Angio-Seal components, in addition to a leading manufacturer of sports medicine
products and multiple other leading orthopaedic companies, among others. In the
case of our proprietary periodontal or dental products, it has entered into
multi-year distribution agreements with OraPharma, Inc. (now a subsidiary of
Johnson & Johnson) in the U.S. and CurasanAG for certain markets outside the
United States (OUS). In March 2003, we also entered into a joint development
agreement with Orthovita, Inc. to create new biomaterials-based spine products,
based on Orthovita's VITOSS bone void filling product. Orthovita will sell the
products through its established distribution network.

We continue to independently develop new proprietary products, to pursue other
strategic partnerships in multiple fields of use (orthopaedics, cardiology,
wound repair, aesthetics, general surgery and drug delivery, among others) and
to work with both leading and emerging companies to commercialize
biomaterials-based technology to maximize our return on our increased investment
in these products. As we continue to increase

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our investment in the development of new biomaterials and products, we believe
we will be able to increase our margins on commercialized products using our
biomaterials technology.

BIOMATERIALS MARKETS BIOMATERIALS PRODUCTS PRODUCT STATUS

Orthopaedics:
Sports Medicine Meniscal Repair Tacks Commercial
Anterior Cruciate Ligament Repair Screws Commercial; additional products in
development
Rotator Cuff Repair Screws Commercial
Rotator Cuff Repair Patch Commercial
Spinal Fixation Absorbable Growth Factor Delivery Commercial, international only; clinical
Matrices
Trauma Fixation Bone Void Filler Regulatory review, U.S. only
Joint Replacement ImproVise(TM) Cement Restrictor Commercial
Cartilage Repair Cartilage Regeneration Development
Cardiology:
Arterial Puncture Closure Absorbable Polymer Anchors and Collagen Commercial
Plugs for Angio-Seal(TM)
Vascular Grafts Vascular Graft Coatings Commercial, international only
Vascular Graft Development
Wound Care:
Burn Treatments and Skin Collagen Tissue Engineering Substrates Commercial; regulatory approval
Defects used for Culturing Skin Cells
Wound Dressings Collagen based Wound Dressings Commercial
Periodontal:
Periodontal Drilac(R) Commercial
Periodontal Epi-Guide(R) Commercial
General Surgery:
Cosmetic Surgery Cosmetic Surgery Repair Device Commercial
General Surgery Collagen incorporated in Surgical Repair Commercial
Applications

Product status definitions:
Commercial -- Product approved by the appropriate regulatory agency and/or
available for sale or actively pursuing distribution channel.
Regulatory review -- Regulatory submissions have been made; awaiting response.
Clinical -- Product approved by the appropriate regulatory agency for human
clinical studies.
Development -- Product in-process which has demonstrated feasibility but has not
been approved for clinical trials or sale.

We have products that are commercially available for sale in the U.S. and
international markets, and products that are in various stages of development,
clinical trials or regulatory review. Additionally, we have biomaterials
research programs, which we believe will provide us with opportunities to expand
our product offerings and strategic alliances. The following are descriptions of
the markets into which our biomaterials products are being placed, as well as
the applications for which our products and technology are currently being used
or have future potential use.

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

Orthopaedic applications of biomaterials include repair, regeneration or
augmentation of musculoskeletal tissues, including bone, cartilage, ligaments,
spinal discs and tendons. Companies in this market often look to

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third parties to develop and manufacture their product concepts into marketable
products. Our capabilities and expertise have enabled us to develop
relationships with several major orthopaedic companies, to whom we provide our
biomaterials products or compounded materials. The orthopaedic portion of our
biomaterials business represented 42% of our total biomaterials sales for our
year ended June 30, 2003 (fiscal 2003). Applications in the orthopaedic market
for our biomaterials products include sports medicine, as well as spinal and
trauma fixation. Many of our biomaterials products manufactured from absorbable
materials are designed to replace metallic devices used in the fixation and
repair of musculoskeletal tissues. Use of absorbable biomaterials eliminates the
need for a second surgery which is frequently necessary to remove non-absorbable
metallic implants like bone rods and pins. This benefit provides our customers
with a cost-effective alternative to traditional non-absorbable based products.

Sports Medicine. Sports medicine is a broad area of healthcare that
includes medical management and treatment of injury in persons engaged in
sports and exercise. Sports injuries, once most commonly associated with
professional athletes, are becoming commonplace in our increasingly active
population. This trend is driving the discovery of new products and
technologies to address this fast growing market.

Soft Tissue Fixation. The primary application for our biomaterials in
the sports medicine segment is soft tissue fixation. Soft tissue
fixation includes the repair of tendons and ligaments in the knee, such
as the anterior cruciate ligament, and in the shoulder, such as the
rotator cuff, both markets to which we manufacture products.

Trauma Fixation. Trauma fixation devices are used to repair broken bones
using nails, screws, plates, pins and bone growth stimulation
techniques. We currently manufacture trauma screws for orthopeadic
repair.

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

The healing and growth properties of absorbable biomaterials make them
ideal for use as the foundation for cartilage regeneration, as they are
bioabsorbable at controlled rates for specific tissues. We are
researching the use of our PTM technology for articular cartilage
regeneration. This research started under a grant from the National
Institute of Standards and Technologies (NIST) under which we performed
two large animal studies. Initial results from both of these studies
were very promising. Based on these results, we have sponsored a third
animal study, which began in June 2003 with expected results by June
2004.

Spine. The application of biomaterials is an increasingly important
aspect of the spinal surgery market. Major companies have introduced
growth factors delivered via biomaterials matrices into the market, a
trend that is garnering significant attention. In addition, bone void
fillers and alternatives to autografts (bone harvested from the human
body) are increasingly being used in conjunction with metal cages in
spinal fusion procedures as well as to fill the voids left by bone
harvest procedures.

In March 2003, We entered an agreement with Orthovita, Inc. to
commercialize new products based on Orthovita's proprietary VITOSS bone
graft substitute material in combination with our proprietary
biomaterials.

The new products will build upon the VITOSS technology, a resorbable
porous calcium phosphate scaffold that allows for resorption, cell
seeding and rapid in-growth of host bone. The products will be directed
toward the spinal surgery market, the fastest growing market in
orthopaedics, estimated at $1.2 billion on a world-wide basis. Under the
agreement, we will manufacture the products and Orthovita will market
and sell the products worldwide. Orthovita expects to launch the initial
products for spine applications in 2004.
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Bone. Next to blood, bone is the most commonly transplanted tissue in
humans. It is estimated that more than 500,000 bone-grafting procedures
are performed annually in the U.S. Surgeons today have few choices for
materials used in bone grafting. Therefore, the need for an improved
alternative to currently available materials remains an important issue
in orthopaedic and maxillofacial surgery.

We are developing several different bone graft substitutes fabricated
from collagen, synthetic polymers or composite biomaterials. We also
manufacturer for a strategic partner a resorbable growth factor delivery
matrix that is commercially available outside the U.S. Extensive
pre-clinical study of our synthetic polymer bone graft substitute has
shown it to be an excellent carrier of biologically active agents as
well as suitable substrate for bone formation and healing.

Cardiology Products. Our biomaterials are used in arterial puncture closure
products and coatings for synthetic vascular grafts. These cardiology products
represented 54% of total biomaterials sales in fiscal 2003. In addition, we are
developing an absorbable polymer matrix to deliver angiogenic growth factors to
promote the growth of new blood vessels for use in myocardial revascularization
procedures and are exploring the use of our biomaterials in an arterial stent.
Lastly, we are developing a vascular graft utilizing our PTM technology.

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

Recognizing this significant medical need, we are developing a synthetic
technology that incorporates multiple biomaterials into an "off-the-shelf"
implantable graft. In fiscal 2002, we received a three-year, $1.9 million
award from the Advanced Technology Program (ATP) of NIST to support
development of this technology. Pre-clinical studies are currently being
conducted to assess the capabilities of the graft in a surgical setting.

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

Wound Care Products. While the wound care market is currently dominated by
conventional bandages and dressings and surgical staples or sutures, there is a
new generation of products resulting from recent advances in biomaterials,
tissue engineering and biotechnology. Our biomaterials are used in topical wound
dressing products, which accounted for less than 1% of our total biomaterials
sales for fiscal 2003.

Periodontal Products. Biomaterials are commonly used in the periodontal segment
of the dentistry market. We now have two commercialized products in the
periodontal field, the Drilac(R) product, which prevents dry socket following
tooth extraction, and the Epi-Guide(R) barrier membrane, used in periodontal
restorative procedures to prevent soft tissue cells from growing into space
reserved for bone. These two products accounted for 2% of our total biomaterials
sales in fiscal 2003.

General Surgery and Urology Products. Biomaterials are used in these market
segments in products ranging from cosmetic surgery devices to absorbable sutures
to tissue barriers and stents. The products we place through our customers are
in the surgical repair field and accounted for less than 1% of total
biomaterials sales in fiscal 2003.

10

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

- Develop New Proprietary Biomaterials Products. We continue to leverage
our technology and expertise in polymers, collagen and other absorbable
and nonabsorbable materials to develop new proprietary biomaterials
products. We are using this expertise to develop new biomaterials
products, new formulations and applications of existing materials and
products. We have 510(k) approval from the FDA for our proprietary
product, ImproVise(TM), an absorbable cement flow restrictor for use in
certain orthopaedic surgical procedures. In addition, we are seeking
regulatory approval for another proprietary PTM technology-based product
with application in the orthopaedics market. We are in the final phases
of researching a cartilage regeneration product and are researching a
vascular graft application, both of which utilize our PTM technology.

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

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

We have an agreement with Becton Dickinson under which they market our
three dimensional cell culture scaffolds. These scaffolds enhance a
researcher's ability to study tissue engineering, gene therapy and cell
biology.

In August 2002, we entered into an agreement with OraPharma, Inc. for the
distribution of our proprietary Epi-Guide and Drilac(R) Surgical Dressing
products in the United States and Canada. We also have an agreement with
Curasan AG for European and Middle Eastern distribution of our Epi-Guide
product.

In March 2003, we entered into an agreement with Orthovita to
commercialize new products using Orthovita's proprietary ultra porous
VITOSS bone void filler material in combination with our proprietary
biomaterials in spine applications. Under the agreement, we will be
responsible for manufacturing these products and Orthovita will be
responsible for worldwide sales and marketing.

PATENTS AND PROPRIETARY RIGHTS

Our intellectual property covers technology in the fields of arterial puncture
closure, blood vessel location, arterial revascularization and embolic
protection systems, drug/biologics delivery, wound care, periodontics,
angiogenesis products and surgical instruments. We protect our technology by,
among other things, filing patent applications for the patentable technologies
that we consider material to our business. Our first U.S. patent for arterial
revascularization was issued in 1986 and for the concept of sealing arterial
punctures was issued in 1988. As of September 19, 2003, we held 83 United States
patents and 83 foreign national patents and had various United States patents
and foreign national patent applications pending.

We also rely heavily on trade secrets and unpatented proprietary know-how which
we seek to protect through non-disclosure agreements with corporations,
institutions and individuals exposed to our proprietary information. As a
condition of employment, we require that all full-time and part-time employees
enter into an invention assignment and non-disclosure agreement. Additionally,
non-compete agreements are being utilized for certain employees who are exposed
to our most sensitive trade secrets.
11

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

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

MANUFACTURING

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

We currently manufacture two of the major absorbable components of the
Angio-Seal, the collagen plug and polymer anchor, for St. Jude Medical. Prior to
August 2000, we manufactured complete Angio-Seal devices for St. Jude Medical's
use worldwide in clinical trials and manufactured partially and fully completed
commercial devices for sale in the U.S. and Europe. For fiscal 2003, the plug
and the anchor represented a total of $14.5 million, or 53% of our net sales
revenue. St. Jude Medical has the right to manufacture the absorbable polymer
anchor and intends to manufacture that component in the future. However, we
anticipate we will continue to be a secondary source of anchor requirements
during fiscal 2004. We continue to supply St. Jude Medical with the collagen
requirements for the Angio-Seal under a formal collagen supply agreement with
St. Jude Medical which expires in November 2005.

Our FDA-registered manufacturing facility in Exton, Pennsylvania contains
separate areas for the TriActiv and absorbable collagen and polymer
manufacturing. While our facility is currently adequate to handle ours as well
as our customers product volumes, significant expenditures would have to be made
in order to scale-up to mass manufacture the TriActiv to supply the U.S. market
in addition to increased European demands. Our manufacturing facility is
equipped with multiple ISO class 8 clean room facilities and is certified to
three international quality standards, ISO 13485, ISO 9001 and EN 46001.
Certification is based on adherence to established standards of design, service,
quality assurance and manufacturing process control. Our manufacturing facility
is subject to regulatory requirements and periodic inspection by regulatory
authorities. We have a separate in-house quality assurance department that sets
standards, monitors production, creates and reviews operating procedures and
protocols and performs final testing of sample devices and products manufactured
by or for us.

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

RESEARCH AND DEVELOPMENT

Our research and development and regulatory and clinical staff consisted of 72
individuals at September 19, 2003. Our research and development efforts are
focused on the continued development of the TriActiv and of our biomaterials
capabilities. We incurred total research and development expenses of $14.5
million, $10.8 million, and $7.3 million in fiscal 2003, 2002 and 2001,
respectively.

12

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

OUR RELATIONSHIP WITH ST. JUDE MEDICAL

The Angio-Seal is licensed to St. Jude Medical, which manufactures, markets and
sells the Angio-Seal worldwide. Under our license agreements, St. Jude Medical
has exclusive rights to manufacture, market and distribute all versions of the
patented Angio-Seal for hemostatic puncture closure for cardiovascular use
worldwide. We retain the rights to use this technology for other applications.
We earn a royalty on each Angio-Seal sold by St. Jude Medical. The royalty rate
is based on cumulative volume of Angio-Seal units sold. Our royalty rate was 12%
until October 2000, when it decreased to 9%, based on Angio-Seal unit sales
reaching a cumulative total of one million units sold. The final decrease in
royalty rate, to 6%, will occur when four million cumulative units have been
sold. We expect this decrease will occur sometime during our fourth quarter of
fiscal 2004.

The term of the license agreements extends to the expiration date of the most
recently issued licensed patent, including all continuations or supplements. The
most recent patent for the Angio-Seal technology was issued in July 2000. St.
Jude Medical may terminate the license agreements at any time after the end of
the fifth royalty year, which ended September 30, 2001, for any reason upon
twelve months notice. At such time, we would receive all sales and marketing,
manufacturing and distribution rights to the Angio-Seal product line back.
"Angio-Seal" is a trademark of St. Jude Medical.

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

SALES AND MARKETING

THE TRIACTIV

In January 2002, we established Kensey Nash Europe GmbH in Eschborn, Germany for
the purpose of selling and marketing the TriActiv in Europe. The TriActiv was
commercially launched in Europe in the fourth quarter of the fiscal year ended
June 30, 2002 (fiscal 2002). We are selling the system direct to the market in
Germany and through distributors for the rest of Europe. We have entered into
distribution agreements for sales in the United Kingdom, Ireland, Switzerland,
Austria, and Italy and are in the process of identifying distributors for the
rest of Europe. We have also established our international sales and clinical
specialist team to market and sell the TriActiv. At September 19, 2003 we had
nine individuals on the European sales and marketing team, which includes sales
people and clinical specialists.

In the U.S. we have developed a marketing and clinical specialist team to
increase market awareness, prepare for commercial launch and support the PRIDE
study for the TriActiv. At September 19, 2003, we had 12 individuals on the U.S.
team including 10 clinical specialists. As we near U.S. regulatory approval of
the device, we will be evaluating various options for the commercial marketing,
sale and distribution of the device. These options include, but are not limited
to, creating a direct sales force, establishing distributor relationships or
entering into a licensing arrangement.

BIOMATERIALS

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

13

with a sales and marketing organization to commercialize or advance our
proprietary products and technologies.

We have an agreement with Becton Dickinson under which they market our three
dimensional cell culture scaffolds. These scaffolds enhance a researcher's
ability to study tissue engineering, gene therapy and cell biology.

We have an agreement with Curasan AG for European and Middle Eastern
distribution of our proprietary Epi-Guide product. During fiscal 2003, we
entered into an agreement with OraPharma, Inc. for distribution of the Epi-Guide
and Drilac products in the U.S. and Canada.

Also during fiscal 2003, we entered into an agreement with Orthovita to
commercialize new products using Orthovita's proprietary ultra porous VITOSS
bone void filler material in combination with our proprietary biomaterials in
spine applications. Under the agreement, we will be responsible for
manufacturing these products and Orthovita will be responsible for worldwide
sales and marketing.

COMPETITION

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

Generally, we believe that the principal competitive factors for our products
include:

- the ability to obtain regulatory approvals;

- safety and effectiveness;

- performance and quality;

- ease of use;

- marketing;

- distribution;

- pricing;

- cost effectiveness;

- customer service;

- the development or acquisition of proprietary products and processes;

- the ability to attract and retain skilled personnel;

- improvements to existing technologies;

- reimbursement; and

- compliance with regulations.

Our biomaterials products compete with the products of many of the larger
companies in the industry. In the vascular sealing device market, our products
compete with products sold by Datascope Corporation, Perclose, Inc. (a
subsidiary of Abbott Laboratories) and Vascular Solutions, Inc. While we
consider the Angio-Seal and other sealing devices to be a superior method of
vascular sealing, the majority of vascular sealing is still performed through
manual compression, which represents our primary competition. The TriActiv is
currently

14

only commercially available in Europe, where our competitors include Boston
Scientific Corporation, Johnson and Johnson, Inc., Medtronic, Inc. (which owns
Percu-Surge, Inc.) and Guidant Corporation, among others. If we are successful
in commercializing the TriActiv in the U.S., we anticipate the competitors will
be the same companies against which we are competing in Europe, as well as
others.

CUSTOMERS

In fiscal 2003, we had approximately 23 customers for our biomaterials products,
excluding our periodontal products, which, are sold directly to periodontists
around the country. However, two customers each accounted for more than 10% of
our total revenues for the fiscal year. Royalty income from and sales of
biomaterials to St. Jude Medical, associated with the Angio-Seal, represented
approximately 69% of total revenues. Sales of biomaterials products to one other
customer, a distributor of orthopaedic products, represented approximately 22%
of total revenues. Our TriActiv device is being sold to hospitals throughout
Europe either through our direct sales force or through distributors.

GOVERNMENT REGULATION

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

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

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

In January 2002, we received CE Mark approval from the European regulatory
authority for the TriActiv, which allows commercial sale of the product in the
European Union. In the U.S. TriActiv pilot study data was presented to the
appointed Data Safety Monitoring Board (DSMB) in November 2001. Approval from
the DSMB allowed us to begin our pivotal trial, the PRIDE study, which was
initiated in December 2001. We anticipate enrollment in the PRIDE study and
submission to the FDA for 510(k) approval of the device, the approval which
allows the commercial sale of the device in the U.S., will be completed between
December 2003 and March 2004. We have submitted for CE Mark approval of the next
generation TriActiv, an improved SVG device, and anticipate approval by the end
of our second fiscal quarter of 2004. In addition, we anticipate initiating CE
Mark studies on both the carotid and native coronary/AMI applications of the
TriActiv by the end of fiscal 2004.

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

When human clinical trials of a device are required in connection with our new
proprietary products and the device presents a significant risk, we must file an
investigational device exemption (IDE) application with the FDA in order to
commence human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved, human clinical trials

15

may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. The conduct of human clinical trials is
also subject to regulation by the FDA. Sponsors of clinical trials are permitted
to sell those devices distributed during the course of the trial provided such
compensation does not exceed recovery of the costs of manufacture, research,
development and handling. Similar approvals are required to conduct clinical
trials in foreign countries.

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

Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may be required to incur significant costs
to comply with such laws and regulations in the future and any failure to comply
with such laws or regulations will have a material adverse effect upon our
ability to do business.

EMPLOYEES

As of September 19, 2003, we had 256 employees, including 138 employees in
operations, 72 employees in research and development and clinical and regulatory
affairs, 26 employees in finance and administration and 20 employees in sales
and marketing, including nine employees in Europe. During fiscal 2003, we had
two employees in Duluth, Minnesota who were part of our research and development
team. Effective August 15, 2003, we closed the Duluth, Minnesota facility. All
of our remaining U.S. employees are located at our facility in Exton,
Pennsylvania. We believe that our success depends in large part on our ability
to attract and retain employees in all areas of our business.

ITEM 2. PROPERTIES

We lease approximately 68,000 square feet of executive offices, manufacturing
and research and development facilities in Exton, Pennsylvania, a suburb of
Philadelphia. Our lease expires in fiscal 2006, subject to additional renewal
options. In addition, we currently lease a 10,000 square foot warehouse in
Exton, Pennsylvania for which our lease expires in fiscal 2004. We also lease a
small office space in Eschborn, Germany.

We do not believe our existing facility will support full-scale manufacturing of
the TriActiv device for both Europe and the U.S. There may be a need to obtain
more space to support increased sales of both TriActiv and biomaterials. We do
not anticipate any significant difficulty in obtaining additional or alternate
space or renewing our leases for additional terms, at reasonable rates, in the
event we need additional space or upon the expiration, cancellation or
termination of any of our existing leases.

ITEM 3. LEGAL PROCEEDINGS

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

We, along with St. Jude Medical, filed a patent infringement suit against
Perclose, Inc., a competitor in the puncture closure market. The original suit,
filed in 1998, along with a subsequent amendment filed in 1999, both filed in
Federal District Court for the Eastern District of Pennsylvania, claimed that
Perclose infringed our U.S. patent numbers 5,676,689 and 5,861,004. These
patents cover systems and methods related to sealing

16

percutaneous punctures. We sought damages and an order to permanently enjoin
Perclose from making, using or selling products that infringe these patents. In
November, 1999, Abbott Laboratories acquired Perclose.

Perclose filed four counterclaims against our suit in answer to the complaint.
The first counterclaim sought to declare our patents invalid and not infringed.
The additional counterclaims asserted by Perclose alleged that our claims were
frivolous and asserted various antitrust counter-claims, including price
discrimination, predatory pricing and attempted monopolization of the puncture
closure market.

The U.S. District Court, Eastern District of Pennsylvania, entered a Markman
hearing Order regarding claims interpretation, in favor of the defendant
Perclose. The judge denied our Motion for Reconsideration on August 21, 2001,
and the parties stipulated a Final Judgement, which was entered on October 19,
2001. On November 15, 2001, we filed a timely Notice of Appeal, thereby
initiating an appeal in the Court of Appeals for the Federal circuit (CAFC).
Oral arguments were heard on December 3, 2002. On February 5, 2003, the CAFC
issued its opinion in which it affirmed the District Court's decision. We
decided not to appeal the decision and, therefore, the case is concluded. We
have expensed legal costs, as a component of selling, general and administrative
expenses, as services have been incurred. No further expenses are anticipated in
connection with this lawsuit.

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

No matters were submitted to a vote of security holders in the fourth quarter of
fiscal 2003.

17

PART II

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

Our common stock is listed on the Nasdaq National Market under the symbol "KNSY"
and has been traded publicly since our initial public offering in December 1995.
The following table sets forth the high and low closing sale prices per share of
our common stock as reported by the Nasdaq National Market for the periods
indicated.

On September 19, 2003, the last reported sale price of our common stock in the
Nasdaq National Market was $27.99 per share. As of September 19, 2003, there
were 53 record owners. Such record owners include several owners who are
nominees for an undetermined number of beneficial owners. There were also
approximately 6,000 beneficial owners of the shares of our common stock at that
date.

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

18

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated statement of operations and
consolidated balance sheet data for the fiscal years ended June 30, 2003, 2002,
2001, 2000 and 1999. The selected financial data for each such fiscal year
listed below has been derived from the consolidated financial statements of the
Company for those years, which have been audited by Deloitte & Touche LLP,
independent certified public accountants, whose report for fiscal years 2003,
2002 and 2001 is included elsewhere herein. The following data for fiscal years
2003, 2002, and 2001 should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with our
consolidated financial statements and the related notes and other financial
information included herein.

19

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

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

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

OVERVIEW

REVENUES

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

Net Sales. Net sales is comprised of sales of biomaterials products and the
TriActiv device.

Biomaterials. The biomaterials component of net sales represents the sale
of our biomaterials products to customers for use in the following markets:
orthopaedics, cardiology, drug/biologics delivery, periodontal, general
surgery and wound care. In 1997, our biomaterials sales were comprised
almost 100% of the absorbable and nonabsorbable collagen and polymer
components of the Angio-Seal supplied to our strategic alliance partner.
Since that time, we have experienced significant sales growth in our
biomaterials products as we have expanded our customer base and marketing
activities, increased sales to existing customers and assisted in the
development of new product offerings. For fiscal 2003, the Angio-Seal
components represented 54% of our total biomaterial sales. We believe the
growth in our overall biomaterials sales, which was 54% in fiscal 2003 over
fiscal 2002, will continue because of greater acceptance by the medical
community of biomaterials and technological advances which have expanded
the applications for our biomaterials products.

TriActiv. The TriActiv was commercially launched in Europe in the fourth
quarter of fiscal 2002. We are selling direct to the market in Germany and
through distributors throughout the rest of Europe. We have entered into
distribution agreements for sales in the United Kingdom, Ireland,
Switzerland, Austria, and Italy as of June 30, 2003 and are in the process
of identifying distributors for the rest of Europe. While TriActiv sales
were less than 1% of our total sales for fiscal 2003, we anticipate the
TriActiv will become a more significant component of net sales in fiscal
2004 and beyond as we gain new customers in the European markets, launch
new versions and applications of the product and launch the product in the
U.S. market. We anticipate commercial launch of TriActiv in the U.S. in the
second half of fiscal 2004.

Research and Development Revenue. Fiscal 2001 research and development revenue
was derived entirely from a single NIST grant, under which we are researching
cartilage regeneration utilizing our PTM technology. This grant continued
through fiscal 2002 and we received all remaining funds under this grant in our
second quarter of fiscal 2003. In addition, in October 2001 we received a second
NIST grant, under which we are researching a synthetic vascular graft also
utilizing our PTM technology. This project is expected to continue through early
fiscal 2005. In January 2003, we received a NIH grant, under which we are
researching sustained or controlled release of chemotherapeutic drugs for the
treatment of breast cancer utilizing our PTM technology. This grant will
continue through early fiscal year 2004.

Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We
anticipate sales of the Angio-Seal will continue to grow as St. Jude Medical
continues to expand its sales and marketing efforts, including its launch of the
Angio-Seal product line in the Japanese market, and releases future generations
of the Angio-Seal system, including its recent launch of the STS Plus version of
the device in the U.S. As a result, we expect that royalty income will continue
to be a significant source of revenue. Our current royalty

20

rate is 9%. The original rate of 12% was contractually reduced from 12% to 9%,
in accordance with our licensing agreements during the fiscal quarter ended
December 31, 2000, when a cumulative one million Angio-Seal units had been sold.
There will be one further decrease in the royalty rate, to 6%, upon reaching
four million cumulative units sold. We anticipate that this final rate reduction
will occur in the fourth quarter of our fiscal 2004. As of June 30, 2003
approximately three million Angio-Seal units have been sold.

Cost of Products Sold. We have experienced an overall increase in gross margin
during fiscal 2003 reflecting the continued increase in volume of biomaterials
product sales. This increased volume, from both our existing customers and new
customers, has resulted in manufacturing efficiencies. The volume increase also
results in our fixed costs being spread over a greater number of units. We
anticipate the gross margin on our biomaterials products will continue to
improve with continued increased sales volume. This increase in gross margin
will be partially offset by lower gross margins associated with the TriActiv, as
we expect margins on early sales to be lower than the biomaterials margins due
to the start-up nature of the manufacturing process and low volume. As a result
of this product mix, for fiscal 2004, we believe our total gross margin, across
all product lines, will be only slightly improved over fiscal 2003. As volumes
increase and the manufacturing process matures for the TriActiv, we expect the
gross margin on the product to increase.

Research and Development Expense. Research and development expense consists of
expenses incurred for the development of our proprietary technologies, such as
the TriActiv, absorbable and nonabsorbable biomaterials products and
technologies and other development programs, including expenses under the NIST
and NIH programs. In December 2001, we began our TriActiv U.S. pivotal clinical
study, a planned 500 to 800 patient randomized trial at up to 80 sites around
the U.S. and in Europe. We anticipate completion of trial enrollment and
submission to the Food and Drug Administration (FDA) for 510(k) approval by the
end of the second quarter or early third quarter of fiscal 2004. Clinical
efforts in pursuit of FDA approval and continuing development of the TriActiv,
as well as our continued development of proprietary biomaterials products and
technologies, requires significant research and development spending. We
anticipate research and development expense will continue to increase as we
pursue commercialization of the TriActiv device in the U.S., and explore
opportunities for other indications related to TriActiv as well as our other
technologies, including the continued development of proprietary biomaterials
technologies.

Selling, General and Administrative. Selling, general and administrative
expenses include general and administrative costs as well as costs related to
the sales and marketing of our products. The costs of our patent litigation are
also included within selling, general and administrative expenses. The sales and
marketing component of selling, general and administrative expenses has
increased as we commercialized the TriActiv in Europe in May 2002 and move
toward commercialization of the TriActiv in the U.S. In January 2002, we
received CE Mark approval from the European regulatory authority for the
TriActiv, which allows commercial sale of the product in the European Union.
Effective January 2002, we established a subsidiary in Germany, Kensey Nash
Europe GmbH, and hired a Vice President of European sales. We have established a
European sales and marketing team and will continue to add personnel to this
team as required to meet our clinical and sales goals. This team is selling the
product direct in the German market and supports our distributor relationships
in the rest of Europe. We have entered into distribution agreements for sales in
the United Kingdom, Ireland, Switzerland, Austria and Italy as of June 30, 2003
and are in the process of identifying distributors for the rest of Europe. We
anticipate sales and marketing expenses will continue to increase as we prepare
for U.S. commercial launch. We also continue to evaluate opportunities for
commercialization of the TriActiv in the U.S. and to expand the marketing
efforts for our biomaterials business.

CRITICAL ACCOUNTING POLICIES

Our "critical accounting policies" are those that require application of
management's most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about matters that are inherently uncertain and
may change in future periods. It is not intended to be a comprehensive list of
all of our significant accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by generally
accepted accounting principles, with no need for management's judgment in their
application. There are also areas in which the selection of an available
alternative policy would not
21

produce a materially different result. We have identified the following as our
critical accounting policies: revenue recognition and accounting for stock-based
compensation.

Revenue Recognition. We recognize revenue under the provisions of Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements
(SAB 101). Accordingly, sales revenue is recognized when the related product is
shipped. All of our shipments are Free on Board (F.O.B.) shipping point. Revenue
under research and development contracts is recognized as the related costs are
incurred. Royalty revenue is recognized as the related product is sold. Advance
payments received for products or services are recorded as deferred revenue and
are recognized when the product is shipped or services are performed.

Stock-Based Compensation. We account for stock-based compensation costs under
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended
by SFAS No. 148 which permits continued application of the intrinsic value
method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Under the intrinsic value method, compensation
cost represents the excess, if any, of the quoted market price of the Company's
common stock at the grant date over the amount the grantee must pay for the
stock. Our policy is to grant stock options at the fair market value at the date
of grant. Therefore, we have not recognized any compensation expense for options
granted to employees. We account for stock-based awards to non-employees using
the fair value method in accordance with SFAS No. 123, which requires using
Black-Scholes option-pricing model to determine the fair value of the option at
the original grant date. Options granted to non-employees, as defined under SFAS
123, (as amended by SFAS No. 148) and Emerging Issues Task Force (EITF) 96-18
"Accounting for Equity Instruments that are Other Than Employees for Acquiring
or in Conjunction with Selling, Goods or Services", are recorded as expense over
the service period. The Company did not grant any options to non-employees
during fiscal 2002. See Note 12 to our financial statements for information
regarding options granted to a non-employee, an outside consultant, in October
2002.

RESULTS OF OPERATIONS

COMPARISON OF FISCAL YEARS 2003 AND 2002

Total Revenue and Net Sales. Total revenues increased 53% to $44.4 million in
the year ended June 30, 2003 from $29.0 million in the year ended June 30, 2002.
Net sales of products increased 55% to $27.1 million for fiscal 2003 from $17.5
million for fiscal 2002. While TriActiv sales increased 388% in fiscal 2003 over
fiscal 2002, they represented less than 1% of total sales for fiscal 2003. As
such, the increase in total sales was primarily attributable to increased sales
of the Angio-Seal components and our orthopaedic products.

Research and Development Revenue. Research and development revenues increased
26% to $963,000 for fiscal 2003 from $765,000 for fiscal 2002. Fiscal 2003
revenues were generated under the NIST articular cartilage and synthetic
vascular graft development grants and the NIH breast cancer drug delivery grant.
In the prior fiscal year, revenues were generated under the NIST articular
cartilage and synthetic vascular graft development grants. The NIST articular
cartilage grant provided revenue for four of the twelve months of fiscal 2003,
as the project concluded in October 2002. The NIST vascular graft grant provided
revenue for the entire year. The NIH breast cancer drug delivery grant was
initiated in September 2002. The increase over the prior fiscal year reflects
the addition of the NIH breast cancer grant which provided $46,000 of revenue in
fiscal 2003 and an increase in the activities and expenses related to the NIST
synthetic vascular graft grant. The vascular graft grant revenue increased
$454,000 in fiscal 2003, from fiscal 2002. These increases were offset by a
decrease of $302,000 in the NIST articular cartilage grant due to the conclusion
of the grant in early fiscal 2003.

Royalty Income. Royalty income increased 52% to $16.3 million for fiscal 2003
from $10.8 million for fiscal 2002. This increase reflects a greater number of
units sold as well as an increase in average selling price for the Angio-Seal.
Royalty units increased 44% as approximately 967,000 Angio-Seal units were sold
to end-users during fiscal 2003 compared to approximately 670,000 units sold
during fiscal 2002. We believe that this unit increase was primarily due to St.
Jude Medical's increased sales and marketing efforts, resulting in market

22

share gains for the Angio-Seal product line in both the U.S. and European
markets and the full year impact of the self-tightening suture (STS) version of
the Angio-Seal, which was introduced in the U.S. in March 2002.

Cost of Products Sold. Cost of products sold increased 48% to $12.2 million in
fiscal 2003 from $8.2 million in fiscal 2002 while gross margin increased to 55%
from 53%. The increase in gross margin reflected the higher margins on our
biomaterials products attributable in part to higher volumes which result in
manufacturing efficiencies, as well as continued allocation of overhead across
greater sales volumes, which results in a decrease in per unit costs. The higher
margins on our biomaterials products were slightly offset by lower margins on
the TriActiv. The TriActiv margins will continue to be lower than our
biomaterials product margins until our manufacturing process matures and volumes
increase.

Research and Development Expense. Research and development expense increased 34%
to $14.5 million in fiscal 2003 compared to $10.8 million in fiscal 2002. This
increase was mainly attributable to our continued development efforts on the
TriActiv, including clinical trial expenses. Research and development expenses
related to the TriActiv increased $1.9 million, or 31%, to $8.1 million in
fiscal 2003 from $6.2 million in fiscal 2002. We also continued to expand our
development efforts on our biomaterials products including our work under the
NIST grants. Biomaterials and other proprietary technologies spending increased
$1.8 million, or 39%, to $6.4 million in fiscal 2003 from $4.6 million in fiscal
2002.

Selling, General and Administrative Expense. Selling, general and administrative
expense increased 59% to $7.4 million in fiscal 2003 from $4.7 million, in
fiscal 2002. This increase was partially the result of increased sales and
marketing expenses which increased $1.5 million to $3.3 million in fiscal 2003
from $1.8 million in fiscal 2002. This increase related primarily to European
sales and marketing efforts on the TriActiv. In addition, general and
administrative expenses increased $1.3 million to $4.1 million in fiscal 2003
from $2.8 million in fiscal 2002. This was attributable to $696,000 in increased
personnel costs and $261,000 in increased professional services and public
company expenses, including investor relations and filing fees. These increases
were related to our continued sales and research and development growth, but
primarily to increased costs related to complying with the Sarbanes-Oxley Act of
2002 (SOA). In addition, selling, general and administrative include a $325,000
professional service fee, which relates directly to a research and development
tax credit project performed in our fiscal fourth quarter (see below).

Net Interest Income. Interest expense decreased $78,000, or 35%, to $145,000 in
fiscal 2003 from $223,000 in fiscal 2002. This was due to a lower principal
balance on the THM Acquisition Obligation as we continue to make the required
quarterly payments and as a result of early repayment to certain debt holders.
Interest income decreased by 37% to $1.2 million in fiscal 2003 from $1.9
million in fiscal 2002. Although our cash and investment balances increased,
this was more than offset by lower interest rates.

Other Non-Operating Income (Expense). Other non-operating income was $700 for
fiscal 2003 compared to other non-operating expense of $15,000 for fiscal 2002.
Other non-operating expense (income) for both periods represented primarily the
net loss or gain on the sale of fixed assets.

Net Income. Net income increased 91% to $8.8 million in fiscal 2003 from $4.6
million in fiscal 2002. This was primarily the result of increased sales and
royalty income as described above, offset in part by increased expenses
associated with research and development and sales and marketing efforts related
to the TriActiv, also described above. In addition, the Company recognized $2.5
million in income tax expense in fiscal 2003 compared to $2.4 million of income
tax expense in fiscal 2002. The tax expense in fiscal 2003 was net of a $1.5
million research and development tax credit described below.

COMPARISON OF FISCAL YEARS 2002 AND 2001

Total Revenue and Net Sales. Total revenues increased 25% to $29.0 million in
the year ended June 30, 2002 from $23.2 million in the year ended June 30, 2001.
Net sales of products increased 20% to $17.5 million for fiscal 2002 from $14.6
million for fiscal 2001. This increase was entirely attributable to increased
sales of the Angio-Seal components and our orthopaedic products.

Research and Development Revenue. Research and development revenues increased
132% to $765,000 for fiscal 2002 from $330,000 for fiscal 2001. Fiscal 2002
revenues were generated under the NIST articular
23

cartilage and synthetic vascular graft development grants. As the synthetic
vascular graft grant was received during fiscal 2002, research and development
revenues for the same period a year earlier were generated by work performed on
the NIST articular cartilage development grant only.

Royalty Income. Royalty income increased 31% to $10.8 million for fiscal 2002
from $8.2 million for fiscal 2001. This increase reflects a greater number of
units sold as well as an increase in average selling price for the Angio-Seal
offset by a decrease in the average royalty rate from approximately 9.8% in
fiscal 2001 to 9.0% in fiscal 2002. The decrease in the average rate came as a
result of a drop in the royalty rate from 12% to 9% in October 2000, as
discussed above. Royalty units increased 39% as approximately 670,000 Angio-Seal
units were sold to end-users during fiscal 2002 compared to approximately
483,000 units sold during fiscal 2001. We believe that this unit increase was
primarily due to St. Jude Medical's increased sales and marketing efforts, and
the launch of the new self-tightening suture (STS) version of the Angio-Seal,
which was introduced in the U.S. in March 2002.

Cost of Products Sold. Cost of products sold increased 11% to $8.2 million in
fiscal 2002 from $7.4 million in fiscal 2001 which gross margin increased to 53%
from 49%. The increase in gross margin reflected the higher margins on our
biomaterials products attributable in part to higher volumes which result in
manufacturing efficiencies, as well as continued allocation of overhead across
greater sales volumes, which results in a decrease in per unit costs. The cost
of the initial quantities of the TriActiv were an insignificant portion of cost
of products sold for fiscal 2002.

Research and Development Expense. Research and development expense increased 48%
to $10.8 million in fiscal 2002 compared to $7.3 million in fiscal 2001. This
increase was mainly attributable to our continued development efforts on the
TriActiv, including clinical trial expenses. Research and development expenses
related to the TriActiv increased $3.1 million, or 100%, to $6.2 million in
fiscal 2002 from $3.1 million in fiscal 2001. We also continued to expand our
development efforts on our biomaterials products including our work under the
NIST grants. Biomaterials and other proprietary technologies spending increased
$1.2 million, or 35% to $4.6 million in fiscal 2002 from $3.4 million in fiscal
2001.

Selling, General and Administrative Expense. Selling, general and administrative
expense increased 56% to $4.7 million in fiscal 2002 from $3.0 million, in
fiscal 2001. This increase was primarily the result of increased sales and
marketing expenses which increased $1.1, million to $1.8 million in fiscal 2002
from $703,000 in fiscal 2001. This increase related primarily to European sales
and marketing efforts on the TriActiv. In addition, general and administrative
expenses increased $559,000, to $2.8 million in fiscal 2002 from $2.3 million in
fiscal 2001. This was attributable to $350,000 in increased personnel costs and
$209,000 in increased professional services and public company expenses,
including investor relations and filing fees. These increases were related to
our continued sales and research and development growth.

Net Interest Income. Interest expense decreased $16,000, or 7%, to $223,000 in
fiscal 2002 from $239,000 in fiscal 2001. This was due to a lower principal
balance on the THM acquisition obligation as a result of scheduled repayments.
Interest income was consistent at $1.9 million in fiscal 2002 and 2001. Although
our cash and investment balances increased, this was offset by lower interest
rates.

Other Non-Operating Income (Expense). Other non-operating expense was $15,000
for fiscal 2002 compared to other non-operating income of $24,000 for fiscal
2001. Other non-operating expense (income) for both periods represented
primarily the net gain or loss on the sale of fixed assets.

Net Income. Net income increased 27% to $4.6 million in fiscal 2002 from $3.6
million in fiscal 2001. This was primarily the result of increased sales and
royalty income as described above, offset in part by increased expenses
associated with research and development and sales and marketing efforts related
to the TriActiv, also described above. In addition, the Company recognized $2.4
million in income tax expense in fiscal 2002 compared to a $4.1 income tax
benefit in fiscal 2001. The prior year income tax benefit was recognized when
the valuation allowance related to certain deferred tax assets was reversed.
Based on our projections of taxable income, we believed it was likely we would
be able to utilize our federal net operating loss (NOL) carryforwards. As a
result, the valuation allowance related to these carryforwards was no longer
considered

24

necessary. Lastly, in fiscal 2001 we recognized an in-process research and
development charge (IPR&D) of $7.6 million.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by our operating activities was $14.4 million and $7.3 million
during fiscal 2003 and 2002, respectively. In fiscal 2003, changes in asset and
liability balances resulted in a net $160,000 use of cash, offset by net income
of $8.8 million and non-cash depreciation and amortization of $3.2 million. In
fiscal 2002, changes in asset and liability balances resulted in a net $330,000
use of cash, net income of $4.6 million, and non-cash depreciation and
amortization of $2.1 million.

Our cash, cash equivalents and investments were $48.4 million at June 30, 2003.
As of June 30, 2002, we had $2.1 million in restricted investment accounts. We
had pledged this $2.1 million in investments as collateral to secure a bank loan
to an officer, which was used by the officer for the payment of taxes incurred
as the result of the receipt of Common Stock at the time of our initial public
offering in December 1995. The Company's security pledge related to these loans
was released by the bank in February 2003 when the officer's loans from the bank
were repaid in full. As such, the restriction on the Company's investments was
removed.

We spent approximately $4.9 million, primarily on machinery, equipment and
leasehold improvements. These expenditures were related to the continued
expansion of our manufacturing capabilities for our biomaterials and new
TriActiv product lines. We have an $8.0 million capital spending plan for fiscal
2004 which will continue to be expended primarily on the expansion of our
manufacturing capabilities and space for all product lines.

In conjunction with our acquisition of THM in September of 2000, we incurred a
note payable to the shareholders of THM in the amount of $4.5 million (the
Acquisition Obligation). Of that amount, $1.1 million had not been paid as of
June 30, 2003. The obligation was due in equal quarterly installments of
$281,250, which began on December 31, 2000 and was scheduled to end on September
30, 2004. As of February 28, 2003, due to repayments to certain former
shareholders of THM, we reduced our remaining quarterly installments to $223,256
through September 30, 2004. The cash outflow related to the Acquisition
Obligation will be $893,023 in fiscal year 2004 and $223,256 in fiscal 2005,
when the obligation will be fully repaid.

We received $6.1 million of proceeds and a tax benefit of $2.6 million from
employee stock option exercises during fiscal 2003.

Our operating leases, primarily on our facility in Exton, Pennsylvania, also
represent a significant cash outflow. Lease expense under non-cancelable
operating leases over the next three years will be as follows: $742,212 in
fiscal 2004; $711,696 in fiscal 2005; and $302,157 in fiscal 2006.

We plan to continue to spend substantial amounts to fund clinical trials, to
gain regulatory approvals and to continue to expand research and development
activities, particularly for the TriActiv and our biomaterials products. We
believe our current cash and investment balances in addition to cash generated
from operations will be sufficient to meet our operating and capital
requirements through at least fiscal 2004. Our future capital requirements and
the adequacy of available funds will depend, however, on numerous factors,
including market acceptance of our existing and future products; the successful
commercialization of products in development; progress in our product
development efforts; the magnitude and scope of such efforts; progress with
pre-clinical studies, clinical trials and product clearance by the FDA and other
agencies; the cost and timing of our efforts to expand our manufacturing
capabilities; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; competing technological and
market developments; and the development of strategic alliances for the
marketing of certain of our products. There can be no assurance that we will
record profits in future periods. See "Risk Factors."

We may need or otherwise decide to seek additional capital in the private and/or
public equity or debt markets to support a higher level of growth, to respond to
competition, to develop more products or for other reasons. The terms of any
future equity financing may be dilutive to our stockholders and the terms of any
debt financing may contain restrictive covenants which limit our ability to
pursue certain courses of action. Our
25

ability to obtain financing is dependent on the status of our future business
prospects as well as conditions prevailing in the relevant capital markets. No
assurance can be given that any additional financing will be made available to
us or will be available on acceptable terms should such a need arise.

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

ACQUISITION OF THM BIOMEDICAL, INC. AND IN-PROCESS RESEARCH AND DEVELOPMENT
CHARGE

In fiscal 2001, the $7.6 million IPR&D charge represented the estimated fair
value of purchased in-process technology which has not yet reached technological
feasibility and has no alternative future use and was comprised of the following
projects: Articular Cartilage ($5.4 million), Bone Fusion ($389,000), Other Bone
Applications ($261,000), and Drug Delivery ($1.5 million). Each of the four
projects utilizes the core open-cell poly lactic acid (OPLA) technology, a
porous tissue matrix (PTM) technology developed by THM. PTM technology
facilitates wound healing in both bone and soft tissue and is bioabsorbable at
controlled rates for specific functions and tissues. Each of the IPR&D projects
utilizes these properties of the PTM technology to address its respective
market. For example, the articular cartilage project uses the PTM technology as
the foundation for an articular cartilage repair and regrowth product. The total
IPR&D value was determined by estimating the stage of completion of each IPR&D
project at the date of the acquisition, estimating the costs to develop each
IPR&D project into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to their
present values. The discount rate in each project takes into account the
uncertainty surrounding the successful development and commercialization of the
purchased in-process technology.

The stage of completion for all projects ranged from 48% to 72% as of the
acquisition date with the weighted average completion rate of approximately 56%.
As of that date, the estimated costs to bring the projects under development to
technological feasibility and through clinical trials were approximately $7.3
million.

Since the date of the acquisition of THM, as planned, we have primarily devoted
our development efforts of the acquired PTM technology to an articular cartilage
application, a synthetic vascular graft, and a sustained release
chemotherapeutic drug treatment, and have expended approximately $1,073,000,
$1,110,000, and $49,000, on such efforts during fiscal 2003, 2002 and 2001,
respectively. In addition, we received 510(k) approval for a proprietary PTM
based product, ImproVise(TM), an absorbable cement flow restrictor for use in
certain orthopaedic surgical procedures.

The net cash flows from IPR&D projects were based on management's best estimates
of revenue, cost of sales, research and development costs, general and
administrative costs, and income taxes from such projects. These estimates were
determined considering our historical experience and industry trends and
averages. Sales of products incorporating these technologies were forecasted to
commence between fiscal 2003 and fiscal 2005, depending on the project, with
projected revenue growth rates in the 50% range in the immediate years following
worldwide market launch, declining to the 5% range as each market nears
maturity. These projections were based on our best estimates of market size and
growth, expected trends in technology and the nature and expected timing of new
product introductions by us and our competitors. The cash flows from revenues in
each period are reduced by related expenses, capital expenditures, the cost of
working capital and an assigned contribution to the core technology serving as a
foundation for the research and development.

The discount rates used in discounting the net cash flows from purchased
in-process technology were 80% for articular cartilage, 85% for bone fusion, 78%
for other bone applications and 83% for drug delivery. These discount rates for
each project were determined upon consideration of the stage of completion of
the project, the assumptions, nature and timing of the remaining efforts for
completion and risks and uncertainties of the project.

26

Substantial further research and development, pre-clinical testing and clinical
trials will be required to determine the technical feasibility and commercial
viability of the products under development. There can be no assurance such
efforts will be successful. If these projects are not successfully developed,
our revenue and profitability may be adversely affected in future periods. We
are continuously monitoring our development projects and believe that the
assumptions used in the valuation of purchased in-process technology reasonably
estimate the future benefits attributable to such purchased in-process
technology. No assurance can be given that actual results will not deviate from
those assumptions in future periods.

RESEARCH AND DEVELOPMENT TAX CREDIT

During the fourth quarter of fiscal 2003, the Company recorded a research and
development tax credit of $1.5 million. The tax credit relates to qualified
research and development activities of the Company.

27

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

WE CANNOT ASSURE YOU THAT THE CLINICAL TRIALS FOR THE TRIACTIV WILL BE
SUCCESSFUL OR THAT WE WILL BE ABLE TO OBTAIN THE NECESSARY REGULATORY APPROVALS
FOR THE TRIACTIV IN THE UNITED STATES.

We need to conduct additional human clinical trials for the TriActiv. It is
possible that, during these trials, the TriActiv may be found to be ineffective
or unsafe or we may encounter other problems that cause us to delay or suspend
development of the product. The TriActiv has not been approved for marketing by
the FDA. We will require substantial additional expenditures to develop the
product, conduct clinical trials and gain the necessary regulatory approval for
the TriActiv in the U.S. Prior to granting approval, the FDA may require
clarification of information provided in our regulatory submissions, more
information or more clinical studies. If granted, FDA approval may impose
limitations on the uses for which our product may be marketed or how our product
may be marketed. Should we experience delays or be unable to receive approval
from the FDA, our growth prospects will be diminished.

ALTHOUGH WE HAVE RECEIVED CE MARK APPROVAL AND EVEN IF WE RECEIVE FDA APPROVAL,
WE MAY NOT BE SUCCESSFUL COMMERCIALIZING THE TRIACTIV.

If the TriActiv clinical trials are completed successfully and we obtain the
necessary governmental approvals, we will need to commercialize the product. We
cannot assure you that we will be able to find a suitable partner and/or develop
and train our own sales force to sell and market the TriActiv. We recently began
to build a sales and marketing force, but had no prior experience hiring or
training a sales and marketing force. We may not be able to expand and maintain
an internal sales and marketing force with technical expertise and supporting
distribution capabilities. If we are unable to successfully commercialize the
TriActiv, our growth prospects will be diminished.

WE DERIVE A SUBSTANTIAL MAJORITY OF OUR REVENUES FROM ONLY TWO CUSTOMERS.

A substantial majority of our total revenues are derived from only two
customers. Royalty income from, and sales of biomaterials to, St. Jude Medical
associated with the Angio-Seal represented approximately 69% of our total
revenue for fiscal 2003 while sales of biomaterials products to one other
customer, a distributor of orthopaedic products, represented approximately 22%
of total revenues. It is not possible for us to predict the future level of
demand for our products that will be generated by these customers or the future
demand for the Angio-Seal from customers of St. Jude Medical. Our customer
concentration exposes us to the risk of changes in the business condition of
either our major customers and to the risk that the loss of a major customer
would adversely affect our results of operations. Our relationship with these
customers is subject to change at any time.

WE ANTICIPATE THAT A SUBSTANTIAL PORTION OF OUR REVENUES WILL CONTINUE TO COME
FROM THE ANGIO-SEAL, WHICH IS MANUFACTURED, MARKETED AND DISTRIBUTED BY ST. JUDE
MEDICAL.

Under our license agreements with St. Jude Medical, the Angio-Seal is
manufactured, marketed and sold on a worldwide basis by St. Jude Medical. Two of
our significant sources of revenue for the future are expected to be sales of
collagen to St. Jude Medical for use in the Angio-Seal and royalty income from
the sale of the Angio-Seal product line. Our success with the Angio-Seal depends
in part on the time, effort and attention that St. Jude Medical devotes to the
Angio-Seal product line and on their success in manufacturing, marketing and
selling the Angio-Seal product line. Under the terms of our agreements with St.
Jude Medical, we have no control over the pricing and marketing strategy for the
Angio-Seal product line. In addition, we depend on St. Jude Medical to
successfully maintain levels of manufacturing sufficient to meet anticipated
28

demand, abide by applicable manufacturing regulations and seek reimbursement
approvals. St. Jude Medical can terminate our arrangement at any time for any
reason upon 12 months notice. At such time, we would receive all sales and
marketing, manufacturing and distribution rights to the Angio-Seal product line
back. St. Jude Medical may not successfully pass future inspections of its
manufacturing facility or adequately perform its manufacturing, marketing and
selling duties. Any such failure by St. Jude Medical may negatively impact
Angio-Seal unit sales and therefore reduce our royalties.

IF OUR BIOMATERIALS PRODUCTS ARE NOT SUCCESSFUL, OUR OPERATING RESULTS AND
BUSINESS MAY BE SUBSTANTIALLY IMPAIRED.

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

WE DEPEND ON OUR CUSTOMERS TO MARKET AND OBTAIN REGULATORY APPROVALS FOR THEIR
BIOMATERIALS PRODUCTS.

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

WE MAY BE REQUIRED TO DELAY, REDUCE OR ELIMINATE SOME OR ALL OF OUR EFFORTS TO
DEVELOP AND MARKET THE TRIACTIV IF WE FAIL TO OBTAIN ADDITIONAL FUNDING THAT MAY
BE REQUIRED TO SATISFY OUR FUTURE CAPITAL NEEDS.

We plan to continue to spend substantial funds to develop and market the
TriActiv. Our future liquidity and capital requirements will depend upon
numerous factors, including the progress and success of our clinical trials, the
timing and cost involved in obtaining regulatory approvals, the timing and cost
of developing sales and marketing strategies, our ability to enter into
strategic alliances, manufacturing and research and development activities, the
extent to which the TriActiv gains market acceptance and competitive
developments. Any additional required financing may not be available on
satisfactory terms, if at all. If we are unable to obtain financing, we may be
required to delay, reduce or eliminate some or all of our research and
development activities or sales and marketing efforts, in which case our
operating results and business may be substantially impaired.

THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND ARE LIKELY TO BECOME
MORE COMPETITIVE, AND OUR COMPETITORS MAY BE ABLE TO RESPOND MORE QUICKLY TO NEW
OR EMERGING TECHNOLOGIES AND CHANGES IN CUSTOMER REQUIREMENTS.

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

29

Our biomaterials products compete with the products of many of the larger
companies in the industry. In the vascular sealing device market, our products
compete with products sold by Datascope Corporation., Perclose, Inc. (a
subsidiary of Abbott Laboratories) and Vascular Solutions, Inc. The majority of
vascular sealing is performed through manual compression, which represents our
primary competition. The TriActiv is currently only commercially available in
Europe where our competitors include Boston Scientific Corporation, Johnson and
Johnson, Inc., Medtronic, Inc. (which owns Percu-Surge, Inc.) and Guidant
Corporation, among others. If we are successful in commercializing the TriActiv
in the U.S., we anticipate the competitors will be the same companies against
which we are competing in Europe as well as others.

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

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

IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MEDICAL COMMUNITY OR IF OUR PRODUCTS ARE
REPLACED BY NEW TECHNOLOGIES, OUR BUSINESS MAY SUFFER.

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

THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS COULD LIMIT OUR ABILITY
TO MANUFACTURE OUR PRODUCTS.

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

WE MAY HAVE PROBLEMS MANUFACTURING AND DELIVERING OUR BIOMATERIALS PRODUCTS IN
THE FUTURE.

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

30

OUR USE OF HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF MATERIAL ENVIRONMENTAL
LIABILITIES.

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

ST. JUDE MEDICAL'S INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT
COULD HARM FUTURE INTERNATIONAL SALES OF ANGIO-SEAL AND THEIR ABILITY TO
SUCCESSFULLY COMMERCIALIZE NEW PRODUCTS IN INTERNATIONAL MARKETS.

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

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

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

- weaker intellectual property rights protection in some countries;

- fluctuations in exchange rates;

- potentially adverse tax consequences; and

- political and economic instability.

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

OUR SUCCESS DEPENDS ON KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR OUR
OPERATING RESULTS AND BUSINESS.

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

OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT ANTICIPATED
GROWTH OR INTEGRATE FUTURE ACQUISITIONS COULD SERIOUSLY HARM OUR OPERATING
RESULTS AND BUSINESS.

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

ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS.

We may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise. The process of
integrating any acquired business, technology, service or product into our
business and operations may result in unforeseen operating difficulties and
expenditures. Integration of any acquired company also may consume much of our
management's time and attention that could otherwise be available for ongoing
development of our business. Moreover, the anticipated benefits of

31

any acquisition may not be realized. Furthermore, we may be unable to identify,
negotiate or finance future acquisitions successfully. Future acquisitions could
result in potentially dilutive issuances of equity securities or the incurrence
of debt, contingent liabilities or amortization expenses related to goodwill and
other intangible assets.

OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY VARY SIGNIFICANTLY
FROM QUARTER TO QUARTER.

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

- market perception and customer acceptance of our products;

- market perception and acceptance of our customer's products;

- our efforts to increase sales of our biomaterials products;

- our efforts to gain FDA approval and commercialize the TriActiv;

- our efforts to gain CE Mark and FDA approval for future generations of
the TriActiv device;

- the loss of significant orders;

- changes in our relationship with St. Jude Medical;

- our establishment of strategic alliances or acquisitions;

- timely implementation of new and improved products;

- delays in obtaining regulatory approvals;

- increased competition; and

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

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

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR REPUTATION
AND COMPETITIVENESS IN THE MARKETPLACE MAY BE MATERIALLY DAMAGED.

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

We and St. Jude Medical were plaintiffs in a patent infringement lawsuit against
Perclose, which was acquired by Abbott Laboratories, and we were co-defendants
against counterclaims filed by Perclose in response to our complaint. We spent
substantial resources on this litigation and a Markman hearing order was entered
against us which, was upheld on appeal, and our claims against Perclose were
denied. See "Item 3. Legal Proceedings."

WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS AND ANY
RELATED LITIGATION COULD MATERIALLY DAMAGE OUR OPERATING RESULTS AND BUSINESS.

Third parties may claim that we have violated their intellectual property
rights. An adverse determination in any intellectual property litigation or
interference proceedings brought against us could prohibit us from selling
32

our products, subject us to significant liabilities to third parties or require
us to seek licenses from third parties. The costs associated with these license
arrangements may be substantial and could include ongoing royalties.
Furthermore, the necessary licenses may not be available to us on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products. Any of these claims, with or without
merit, could subject us to costly litigation and divert the attention of key
personnel.

WE DO NOT OWN OR CONTROL THE USE OF THE ANGIO-SEAL DEVICE TRADEMARK.

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

RISKS RELATED TO OUR INDUSTRY

WE MAY FACE PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY LITIGATION AND
SIGNIFICANT LIABILITIES.

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

WE FACE UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS.

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

OUR PRODUCTS AND MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE GOVERNMENTAL
REGULATION THAT COULD MAKE IT MORE EXPENSIVE AND TIME CONSUMING FOR US TO
INTRODUCE NEW AND IMPROVED PRODUCTS.

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

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

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

- comply with all applicable manufacturing regulations; and

- undergo rigorous inspections by these agencies.

Compliance with the regulations of these agencies may delay or prevent us from
introducing any new or improved products, including the TriActiv. Furthermore,
we may be subject to sanctions, including temporary
33

or permanent suspension of operations, product recalls and marketing
restrictions if we fail to comply with the laws and regulations pertaining to
our business.

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

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

RISKS RELATED TO OUR SECURITIES

THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO FLUCTUATE SUBSTANTIALLY IN
THE FUTURE.

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

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

- quarter to quarter variations in our operating results;

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

- general conditions in the medical device industry;

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

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

- general economic conditions.

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

FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY MANAGEMENT AND OTHER
STOCKHOLDERS WITH SIGNIFICANT HOLDINGS COULD CAUSE OUR STOCK PRICE TO FALL.

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

OUR SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND DELAWARE LAW
MAY DISCOURAGE AN ACQUISITION OF OUR COMPANY.

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

34

FORWARD-LOOKING STATEMENTS

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

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

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

- the impact of competition;

- anticipated trends in our business;

- existing and future regulations affecting our business;

- strategic alliances and acquisition opportunities; and

- other risk factors set forth under "Risk Factors" above.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our investment portfolio consists primarily of high quality U.S. government,
municipal and corporate securities, the majority of which have maturities
ranging from 3-14 years. Also, there are certain municipal variable rate demand
obligations that have maturities ranging 20 to 30 years. These municipal
variable-rate demand obligations are putable weekly and callable on a monthly
basis. We mitigate default risk by investing in what we believe are safe and
high credit quality securities and by monitoring the credit rating of investment
issuers. Our portfolio includes only marketable securities with secondary or
resale markets and we have an audit committee approved investment strategy which
currently limits the duration of our investments. These available-for-sale
securities are subject to interest rate risk and decrease in market value if
interest rates increase. At June 30, 2003, our total portfolio consisted of
approximately $33.4 million of investments. While our investments may be sold at
anytime because the portfolio includes available-for-sale marketable securities
with secondary or resale markets, we generally hold securities until the earlier
of their call date or their maturity. Therefore, we do not expect our results of
operations or cash flows to be materially impacted due to a sudden change in
interest rates. We had $1.1 million in outstanding debt at June 30, 2003,
related to the acquisition of THM.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

35

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of June 30, 2003, our disclosure controls and
procedures were effective to provide reasonable assurance that the information
required to be disclosed by us in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.

Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.

36

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the
information under the captions "Proposal 1 -- Election of Directors,"
"-- Nominees," "-- Other Directors," "-- Executive Officers," and "-- Section
16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy
Statement in connection with our 2003 Annual Meeting of Stockholders scheduled
to be held on December 3, 2003 (the 2003 Proxy Statement), which will be filed
with the Securities and Exchange Commission on or before October 28, 2003.

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this item is incorporated by reference to the
information under the caption "Proposal 1 -- Election of Directors -- Director
Compensation" and "-- Executive Compensation" in the 2003 Proxy Statement.

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

The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Management and Certain
Stockholders," and "-- Equity Compensation Plan Information" in the 2003 Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the 2003 Proxy
Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated by reference to the
information under the caption "Proposal 2 -- Ratification of Appointment of
Auditors -- Independent Auditor Fees" in the 2003 Proxy Statement.

37

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

15(a) 1. FINANCIAL STATEMENTS

The following financial statements are included in this report:

Independent Auditors' Report

Consolidated Balance Sheets as of June 30, 2003 and 2002

Consolidated Statements of Income for the Years Ended June 30, 2003, 2002
and 2001

Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the Years Ended June 30, 2003,
2002 and 2001

Notes to Consolidated Financial Statements

38

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
KENSEY NASH CORPORATION:

We have audited the accompanying consolidated balance sheets of Kensey Nash
Corporation and its subsidiaries (the "Company") as of June 30, 2003 and 2002,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania

August 15, 2003

F-1

KENSEY NASH CORPORATION

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

F-2

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

F-3

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

F-4

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL DISCLOSURE OF FINANCING INFORMATION:

During the year ended June 30, 2001, the Company entered into an Acquisition
Obligation in connection with the acquisition of THM Biomedical, Inc. (see Note
4). The present value of this Acquisition Obligation at the date of acquisition
was $2,309,386.

See notes to consolidated financial statements.

F-5

KENSEY NASH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS -- Kensey Nash is a leader in the development and manufacturing of
cardiovascular medical technology devices for embolic protection and arterial
puncture closure. The Company is developing the TriActiv(R) Balloon Protected
Flush Extraction System (TriActiv), a device designed to provide embolic
protection during saphenous vein graft treatment. We received European (CE) mark
approval for the TriActiv in January 2002 and commercialized the device during
the fourth quarter of the fiscal year ended June 30, 2002 (fiscal 2002). We are
marketing and selling the device in Europe through a direct sales force in
Germany and through distributors throughout the rest of Europe. Clinical trials
are underway in the United States. We are also developing additional
applications for the TriActiv, including the treatment of diseased carotid and
native arteries as well as AMI.

Additionally, the Company is the original designer, developer and manufacturer
of the Angio-Seal Vascular Closure Device (Angio-Seal), the leading product in
arterial puncture closure, which is manufactured, marketed and sold by St. Jude
Medical, Inc. This device is designed to seal and close femoral artery punctures
made during diagnostic and therapeutic cardiovascular catheterizations.

We have developed, assisted in developing and are manufacturing absorbable
biomaterials products for leading companies in the orthopaedic, cardiology,
drug/biologics delivery, periodontal, general surgery and wound care markets for
incorporation into their products. We are also, independently or on behalf of
our customers, designing and developing various new absorbable biomaterials
products for all of these markets.

The Company was incorporated in Delaware on August 6, 1984.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION -- The consolidated
financial statements include the accounts of Kensey Nash Corporation, Kensey
Nash Holding Company and Kensey Nash Europe GmbH. All intercompany transactions
and balances have been eliminated. Kensey Nash Holding Company, incorporated in
Delaware on January 8, 1992, was formed to hold title to certain Company patents
and has no operations. Kensey Nash GmbH, incorporated in Germany in January
2002, was formed for the purpose of European sales and marketing of the
TriActiv, which was commercially launched in Europe in May 2002.

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of financial
instruments including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and debt approximated fair value as of
June 30, 2003 and 2002. The fair value of short-term investments is based on
quoted market prices.

INVESTMENTS -- Investments at June 30, 2003 consisted primarily of high quality
U.S. government, municipal and corporate obligations. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115), the Company has
classified its entire investment portfolio as available-for-sale marketable
securities with secondary or resale markets. The Company's entire investment
portfolio is reported at fair value with unrealized gains and losses included in
stockholders' equity (see Comprehensive Income).

F-6

The following is a summary of available-for-sale securities at June 30, 2003 and
2002.

The majority of the above investments have maturities ranging from 3-14 years.
Also, there are certain municipal variable rate demand obligations that have
maturities ranging from 20 to 30 years. These municipal variable-rate demand
obligations are putable weekly and callable on a monthly basis. There were no
realized gains or losses on investments in the years ended June 30, 2003, 2002
and 2001. For the year ended June 30, 2002 certain securities were pledged as
collateral and were presented as restricted investments (see Note 11).

COMPREHENSIVE INCOME -- The Company accounts for comprehensive income under the
provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS 130).
Accordingly, accumulated other comprehensive (loss) income is shown in the
consolidated statements of shareholders' equity at June 30, 2003, 2002 and 2001,
and is comprised of net unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation adjustments. The
tax effect for 2003, 2002, and 2001 of other comprehensive income was $68,073,
$21,006, and $131,504, respectively.

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

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

GOODWILL -- Goodwill represents the excess of cost over the fair value of the
identifiable net assets of THM Biomedical, Inc. (THM), a company acquired in
September 2000 (see Note 4, THM Acquisition and Note 3, Goodwill). Effective
July 1, 2001, the Company adopted SFAS No. 141, Business Combinations (SFAS 141)

F-7

and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations subsequent to June 30, 2001 and specifies criteria for recognizing
intangible assets acquired in a business combination. Under SFAS 142, goodwill
and intangible assets with indefinite useful lives are no longer amortized, but
are subject to annual impairment tests. Intangible assets with definite useful
lives will continue to be amortized over their respective useful lives. The
Company recorded $100,036 in goodwill amortization expense for the year ended
June 30, 2001. Goodwill amortization expense for the years ended June 30, 2002
and 2003 would have been $205,111, respectively, if the Company had not adopted
SFAS 142. Adoption of SFAS 142 did not result in the reclassification of any
intangible assets, changes in the amortization periods for those intangible
assets with definite lives or in the impairment of any intangible assets.

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

ACCOUNTS RECEIVABLE ALLOWANCE -- The Company had trade receivable allowances of
$131,582 and $42,500 at June 30, 2003 and 2002, respectively. The Company
established trade receivable allowances of $93,474 and $68,357 and wrote off
amounts totaling $4,392 and $26,857 in the years ended June 30, 2003 and 2002,
respectively. These amounts are included in selling, general and administrative
expense for the years ended June 30, 2003 and 2002.

PATENTS -- The costs of internally developed patents are expensed when incurred
due to the long development cycle for patents and the Company's inability to
measure the recoverability of these costs when incurred. The entire cost of
acquired patents is being amortized over the remaining period of economic
benefit, ranging from 6 to 11 years at June 30, 2003. The gross carrying amount
of such patents at June 30, 2003 was $4,096,366 with accumulated amortization of
$1,422,718. Amortization expense on these patents was $263,026 for the fiscal
year ended June 30, 2003. Amortization expense on the Company's acquired patents
is estimated at $263,026 for each of the years ending June 30, 2004, 2005, 2006,
2007 and 2008.

REVENUE RECOGNITION -- The Company recognizes revenue under the provisions of
Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements
(SAB 101). Accordingly, sales revenue is recognized when the related product is
shipped. All product is shipped free on board shipping point. Revenue under
research and development contracts is recognized as the related expenses are
incurred. Advance payments received for products or services are recorded as
deferred revenue and are recognized when the product is shipped or services are
performed.

The Company receives a 9% royalty on every Angio-Seal unit sold by St. Jude
Medical, its licensee. The original rate of 12% was contractually reduced from
12% to 9%, in accordance with our licensing agreements during the quarter ended
December 31, 2000, when a cumulative one million Angio-Seal units had been sold.
There will be one further decrease in the royalty rate, to 6%, upon reaching
four million cumulative units sold. We anticipate that this final rate reduction
will occur in the fourth quarter of our fiscal 2004. As of June 30, 2003
approximately three million Angio-Seal units have been sold. The Company
recognizes the royalty revenue, in accordance with the Licensing Agreement
between the Company and St. Jude Medical, at the end of each month when St. Jude
Medical advises the Company of their total Angio-Seal sales dollars for the
month. Royalty payments are received within 45 days of the end of each calendar
quarter.

INCOME TAXES -- The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income Taxes, (SFAS 109) (see Note 10).

EARNINGS PER SHARE -- Earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share (SFAS 128), which requires the Company to report
both basic and diluted earnings per share (EPS). Basic and diluted EPS are
computed using the weighted average number of shares of common stock

F-8

outstanding, with common equivalent shares from options included in the diluted
computation when their effect is dilutive (see Note 17).

STOCK-BASED COMPENSATION -- Stock-based compensation cost is accounted for under
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), which permits
(i) recognition of the fair value of stock-based awards as an expense, or (ii)
continued application of the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company accounts for its stock-based employee and director compensation plans
under the recognition and measurement principles of APB 25. Under the intrinsic
value method, compensation cost represents the excess, if any, of the quoted
market price of the Company's common stock at the grant date over the amount the
grantee must pay for the stock. The Company's policy is to grant stock options
at the fair market value at the date of grant (see Note 16). Options granted to
non-employees, as defined under SFAS 123, are recorded as compensation expense.
See Note 12 for options granted to an outside consultant of the Company in
October 2002. The Company did not grant any options to non-employees (other than
non-employee directors) during the fiscal years ended June 30, 2002 and 2001.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment to FASB Statement No.
123, Accounting for Stock-Based Compensation (SFAS 148). The Company implemented
the "disclosure only" provisions of SFAS 148 in the period ended December 31,
2002. Accordingly, no compensation cost has been recognized for the Company's
two stock option plans. Had compensation cost for the plans been determined
based on the fair market value of the options at the grant date, consistent with
the provisions of SFAS 123, as amended by SFAS 148, the Company's fully-taxed
net income and earnings per share would have been reduced to the pro forma
amounts below:

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- The Company recognizes all
derivatives as either assets or liabilities in the balance sheet, depending on
the Company's rights or obligations under the applicable derivative contract,
and measures those instruments at fair value. The Company did not have any
derivative instruments during the fiscal years ended June 30, 2003, 2002, or
2001.

NEW ACCOUNTING PRONOUNCEMENTS -- In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 addresses
accounting standards for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and was effective
for the Company's fiscal year ended June 30, 2003. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). SFAS 144 retains the requirements of
SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, to (a) recognize an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and (b) measure

F-9

an impairment loss as the difference between the carrying amount and fair value
of the asset. SFAS No. 144 establishes a single model for accounting for
long-lived assets to be disposed of by sale and was effective for the Company's
fiscal year ended June 30, 2003. The adoption of SFAS 144 did not have a
material impact on the Company's financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146), which requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of a commitment to an exit or
disposal plan and nullifies Emerging Issues Task Force (EITF) 94-3. SFAS 146
applies to exit or disposal activities initiated after December 31, 2002. SFAS
146 did not have a material impact on the Company's financial position or
results of operations.

In November 2002, the FASB issued Financial Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Others. FIN 45 requires that a liability be recorded in
the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosure about the guarantees that an entity has issued, including a
reconciliation of changes in the entity's product warranty liabilities. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year end. The disclosure requirements of
FIN 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 did not have a material
impact on the Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation (SFAS 148), to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results, which was effective for the Company's interim periods beginning January
1, 2003. As of June 30, 2003, we have adopted the disclosure-only provisions of
SFAS 148 and will continue to account for stock-based compensation under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of SFAS
No. 148 had no impact on our financial position or results of operations.

In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin 51, Consolidated Financial Statements. FIN 46 requires that
unconsolidated variable interest entities be consolidated with their primary
beneficiaries and applies immediately to variable interest entities created
after January 31, 2003 and to existing entities in periods beginning after June
15, 2003. The Company is not affiliated with a variable interest entity.
Currently, FIN 46 will not have an impact on our financial position or results
of operations; however, we will adopt the provisions of FIN 46, at such time as
they become applicable to our business.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 149 is effective for contracts entered into or modified, and
for hedging relationships designated, after June 30, 2003. Other provisions of
SFAS 149 that relate to SFAS 133 implementation issues should continue to be
applied in accordance with their respective dates. The Company's adoption of
SFAS 149 is not expected to have a material impact on the Company's financial
position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003,
F-10

and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company's adoption of SFAS No. 150 is not
expected to have a material impact on the Company's financial position or
results of operations.

PRESENTATION -- Certain items in the 2002 consolidated financial statements have
been reclassified to conform with the presentation in the 2003 consolidated
financial statements.

2. STRATEGIC ALLIANCE AGREEMENTS

The Company has a strategic alliance with St. Jude Medical, Inc. (St. Jude
Medical) which incorporates United States and foreign license agreements
(together, the License Agreements) and a Collagen Supply Agreement (see below).

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

THE COLLAGEN SUPPLY AGREEMENT -- Pursuant to an agreement with St. Jude Medical,
the Company manufactures collagen to be used in the Angio-Seal. The agreement
contains a minimum purchase requirement from St. Jude Medical, the price of
which fluctuates based on product size and cumulative quantities sold, for three
years ended November 30, 2005.

3. GOODWILL

The Company adopted all provisions of SFAS 142 on July 1, 2001. Under SFAS 142,
goodwill is no longer amortized but is subject to annual impairment tests. The
Company has established its annual impairment testing date to be June 30th of
each fiscal year.

There were no changes to the net carrying amount of goodwill for the year ended
June 30, 2003 from June 30, 2002. The Company completed its initial required
goodwill impairment test under SFAS 142 in the first quarter of fiscal 2002. The
most recent tests in fiscal 2003 and 2002 indicated that goodwill was not
impaired.

The following table reconciles net income and basic and diluted earnings per
share for the fiscal years ended June 30, 2003, 2002 and 2001 had this statement
been effective July 1, 1999:

F-11

4. THM ACQUISITION

On September 1, 2000 the Company acquired THM, a developer of porous,
biodegradable, tissue-engineering devices for the repair and replacement of
musculoskeletal tissues, for approximately $10.5 million plus acquisition costs
of approximately $239,000. The transaction was financed with $6.6 million of the
Company's cash and a note payable to the shareholders of THM in the amount of
$4.5 million (the Acquisition Obligation). The Acquisition Obligation was due in
equal quarterly installments of $281,250 beginning on December 31, 2000 and
ending on September 30, 2004. Accordingly, the present value of the cash
payments (discounted based upon the Company's then available borrowing rate of
7.5%) of $3,833,970 was recorded as a liability on the Company's consolidated
financial statements, with a remaining balance of $1,056,136 at June 30, 2003.
During the quarter ended March 31, 2003, the Company repaid certain debt
holders, thereby reducing the Company's remaining quarterly installments to
$223,256 through September 30, 2004.

The acquisition was accounted for under the purchase method of accounting and
THM's results of operations are included in those of the Company since the date
of acquisition. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the date of
acquisition. The allocation resulted in goodwill of approximately $3.4 million.
The following is a summary of the allocation (in thousands):

Assets...................................................... $ 400
Accrued expenses and other liabilities...................... (702)
In-process research and development......................... 7,594
Excess of cost over net assets acquired (goodwill).......... 3,384
-------
$10,676
=======

A significant portion of the purchase price was identified as acquired
in-process research and development (IPR&D). The valuation of IPR&D was
performed in an independent appraisal using proven valuation procedures and
techniques and represented the estimated fair market value based on
risk-adjusted cash flows related to the IPR&D programs. The IPR&D consists of
four primary research and development programs that are expected to reach
completion between late 2003 and 2005. At the date of acquisition, the
development of these programs had not yet reached technological feasibility and
the IPR&D had no alternative future uses. Accordingly, these costs were
immediately expensed in the consolidated statement of operations as of the
acquisition date.

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

The pro forma fiscal year 2001 financial information reflects an IPR&D charge of
$7.6 million. These pro forma results are based on certain assumptions and
estimates. The pro forma results do not necessarily represent results that would
have occurred if the acquisition had taken place at the beginning of the
specified periods, nor are they indicative of the results of future combined
operations.

F-12

5. LEASES

At June 30, 2003, future minimum annual rental commitments under non-cancelable
lease obligations were as follows:

Rent expense for operating leases consists of rent for the Company's facilities
in Exton, Pennsylvania, Duluth, Minnesota and Eschborn, Germany. Rent expense
for the fiscal years ended June 30, 2003, 2002 and 2001 was approximately
$697,000, $511,000, and $402,000, respectively.

6. OFFICER LOANS

The Company had granted loans to a current officer of the Company totaling $2.0
million, which were for personal use and were collateralized by the officer's
stock. Interest on the loans ranged from 5.25% to 7% and was based on the prime
rate of interest. Total interest income earned by the Company on these loans was
$91,607, $92,092 and $66,166 for the fiscal years ended June 30, 2003, 2002 and
2001, respectively, and was capitalized into the loan balance. No additional
principal amounts were loaned in the annual period ended June 30, 2003. Interest
and principal on the loans were due at the earlier of the sale of a portion of
the officer's stock or March 2003. Under the Sarbanes-Oxley Act of 2002, the
SOA, these loans could not be renewed or extended after their due date. As of
June 30, 2003, the officer had repaid the entire loan amount in full.

7. PATENT ACQUISITION AGREEMENT

In November 1997, the Company entered into an agreement (the Patent Acquisition
Agreement) to acquire a portfolio of puncture closure patents and patent
applications as well as the rights of the seller under a pre-existing licensing
agreement. The acquired patents were valued at the share price per share of the
Company's common stock, multiplied by the number of shares issued, on the date
of the Patent Acquisition Agreement plus the present value of the cash payments
and the legal and related costs incurred to acquire the patents. The patents are
being amortized over the average remaining useful life of the acquired portfolio
at the time of the acquisition which was approximately 15 years. At June 30,
2003, the remaining period of amortization was approximately 9 years.

8. DEBT

ACQUISITION OBLIGATION -- As of June 30, 2003, the Company had $1,056,136
outstanding under its Acquisition Obligation (see Note 4), of which $836,989 was
current at June 30, 2003.

9. RETIREMENT PLAN

The Company has a 401(k) Salary Reduction Plan and Trust (the 401(k) Plan) in
which all employees that are at least 21 years of age are eligible to
participate. Contributions to the 401(k) Plan are made by employees through an
employee salary reduction election. Effective October 1, 1999, the Company
implemented a 25% discretionary matching contribution, on up to 6% of an
employee's total compensation, for all employee contributions. Employer
contributions to the 401(k) plan for 2003, 2002 and 2001 were $117,796, $87,500
and $70,234, respectively.

10. INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, which generally
provides that deferred tax assets and liabilities be recognized for temporary
differences between the financial reporting basis and the tax

F-13

basis of the Company's assets and liabilities and expected benefits of utilizing
net operating loss (NOL) carryforwards. The impact on deferred taxes of changes
in tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled are reflected in the financial statements
in the period of enactment.

During the fourth quarter of the fiscal year ended June 30, 2003, the Company
recorded a research and development tax credit of $1.5 million. The tax credit
relates to qualified research and development activities of the Company. For its
2001 fiscal year the Company recognized a tax benefit related to the realization
of certain deferred assets which were previously offset by a valuation
allowance.

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

The Provision for income taxes is composed of the following:

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

F-14

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

A portion of the Company's deferred tax asset is offset by a valuation allowance
relating to the state NOL carryforwards due to the restrictions imposed by the
state and the uncertainty surrounding its use. The valuation allowance reduces
deferred tax assets to an amount that represents management's best estimate of
the amount of such deferred tax assets that more than likely will be realized.
At June 30, 2003, the Company had NOL carryforwards for state tax purposes
totaling $20.0 million, which will expire though 2013. In addition, the Company
has a foreign net operating loss of $0.3 million at June 30, 2003, which will
not expire.

11. COMMITMENTS AND CONTINGENCIES

As of June 30, 2002, the Company had pledged $2,113,072 in investments as
collateral to secure a bank loan to an officer, which was used by the officer
for the payment of taxes incurred as the result of the receipt of Common Stock
at the Company's initial public offering in December 1995. In exchange for the
Company pledging collateral for such loans, the affected officer had pledged his
Common Stock as collateral to the Company. The Company's security pledge, which
was $2,161,999 including interest that accrued, related to these loans was
released by the bank on February 13, 2003, when the officer's loans from the
bank were repaid in full.

12. CONSULTING CONTRACTS

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

The Company has calculated the fair value of these non-employee options in
accordance with SFAS 123 as $375,550 using the Black-Scholes option-pricing
model. This amount was recorded as prepaid consulting expense and an increase to
additional paid in capital at December 31, 2002. The prepaid expense is being
amortized to research and development expense over the five-year term of the
agreement. Accordingly, $56,333, was recorded as a component of research and
development expense for the year ended June 30, 2003.

F-15

13. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and accounts receivable. The Company places its cash, cash
equivalents and investments with high quality financial institutions and has
established guidelines relative to diversification and maturities to maintain
safety and high liquidity. No single component of the Company's investment
portfolio represented more than 11% or 13% of the total investments at June 30,
2003 and June 30, 2002, respectively. With respect to trade and royalty
receivables, such receivables are primarily with St. Jude Medical (42% and 100%,
and 36% and 100% of trade and royalty receivables, respectively, at June 30,
2003 and 2002) (see Note 2). The trade receivable from one other customer was
35% of trade receivables at June 30, 2003. If either one of these customers'
receivable balances should be deemed uncollectable, it would have a material
adverse effect on the Company's results of operations and financial condition.
The Company performs ongoing credit evaluations on the remainder of its
customers' financial conditions, but does not require collateral to support
customer receivables.

14. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain of its officers,
which provide for aggregate annual base salaries of $680,000 through June 30,
2003.

15. PREFERRED STOCK

The Company has an authorized class of undesignated Preferred Stock consisting
of 100,000 shares with a $.001 par value. The Board of Directors may authorize
the issuance of Preferred Stock, which ranks senior to the common stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights, which could adversely affect the voting power of
the holders of Common Stock. At June 30, 2003 and 2002, no shares of Preferred
Stock were outstanding. The Company has no present intention to issue shares of
Preferred Stock.

16. STOCK OPTION PLANS

The Company has an Employee Incentive Compensation Plan (the Employee Plan), a
flexible plan that provides the Employee Plan Committee (the Committee) with
broad discretion to award eligible participants with stock-based and
performance-related incentives as the Committee deems appropriate. The persons
eligible to participate in the Employee Plan are officers and employees of the
Company who, in the opinion of the Committee, contribute to the growth and
success of the Company.

The Compensation Committee of the Board of Directors oversees the Committee and
may grant nonqualified stock options, incentive stock options or a combination
thereof to the participants. The Employee Plan provides for a total of 3.2
million shares available for option grants. Options granted will provide for the
purchase of Common Stock at prices determined by the Compensation Committee, but
in no event less than the closing price of the stock on the date of grant. As of
June 30, 2003, awards consist solely of stock options as summarized in the table
below.

The Company also has a Non-employee Directors' Stock Option Plan (the Directors'
Plan). The Directors' Plan grants nonqualified stock options for the purchase of
Common Stock to directors who are not employees. Under the Directors' Plan, a
total of 410,000 shares are available for option grants.

Each non-employee director was granted an option to purchase 5,000 shares of
Common Stock on the Directors' Plan's effective date. In addition, the
Director's Plan provides for the grant of an option to purchase 7,500 shares of
Common Stock to each non-employee director on the date of each regular annual
stockholder meeting. The participant must either be continuing as a non-employee
director subsequent to the meeting or

F-16

have been elected at such meeting to serve as a non-employee director. Options
granted under the Directors' Plan must provide for the purchase of Common Stock
at the closing price of the stock on the date of grant.

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

A summary of the stock option activity under both plans for the years ended June
30, 2003, 2002 and 2001, is as follows:

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

F-17

The following table summarizes significant option groups outstanding at June 30,
2003 and related weighted average exercise price and remaining contractual life
information as follows:

17. EARNINGS PER SHARE

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

F-18

18. SEGMENT REPORTING

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

The Company's primary products are all medical devices and include Biomaterials,
Puncture Closure (the Angio-Seal) and Embolic Protection (the TriActiv).
Puncture closure primarily represented Angio-Seal device component sales to St.
Jude Medical. With respect to biomaterials products, the Company designs and/or
manufactures and markets various absorbable polymer and collagen products for
use in numerous applications including orthopaedic, cardiology, drug/biologics
delivery, periodontal, general surgery and wound care. The Company also receives
royalty revenue from the sale of Angio-Seal units by St. Jude Medical and
research and development revenue under certain research and development
contracts or grants. The TriActiv was commercially launched in Europe in the
fourth quarter of fiscal 2002. Net sales by product line and a reconciliation to
total revenue is as follows:

For the years ended June 30, 2003, 2002 and 2001, revenues from St. Jude Medical
represented the following percentages of revenues to the Company:

The Company's revenues from external customers are summarized below. Revenues
are attributed to a country based on the location of the customer. No one
country other than the U.S. represented more than 10% of the Company's revenues.
In addition, all of the Company's long-lived assets are located in the U.S.

F-19

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

The summarized quarterly results of operations of the Company for the years
ended June 30, 2003 and June 30, 2002 are presented below:

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

20. LITIGATION

The Company, along with St. Jude Medical, filed a patent infringement suit
against Perclose, Inc., a competitor in the puncture closure market. The
original suit, filed in 1998, along with a subsequent amendment filed in 1999,
both filed in Federal District Court for the Eastern District of Pennsylvania,
claim that Perclose infringes the Company's U.S. patent numbers 5,676,689 and
5,861,004. These patents cover systems and methods related to sealing
percutaneous punctures. The Company sought damages and an order to permanently
enjoin Perclose from making, using or selling products that infringe these
patents. In November, 1999, Abbott Laboratories acquired Perclose.

Perclose filed four counterclaims against The Company's suit in answer to the
complaint. The first counterclaim sought to declare the Company's patents
invalid and not infringed. The additional counterclaims asserted by Perclose
alleged that the Company's claims are frivolous and asserted various antitrust
counter-claims, including price discrimination, predatory pricing and attempted
monopolization of the puncture closure market.

The U.S. District Court, Eastern District of Pennsylvania, entered a Markman
hearing Order regarding claims interpretation, in favor of the defendant
Perclose. The judge denied the Company's Motion for Reconsideration on August
21, 2001, and the parties stipulated a Final Judgement, which was entered on
October 19, 2001. On November 15, 2001, The Company filed a timely Notice of
Appeal, thereby initiating an appeal in the Court of Appeals for the Federal
circuit (CAFC). Oral arguments were heard on December 3, 2002. On February 5,
2003 the CAFC issued its opinion in which it affirmed the District Court's
decision. The Company decided not to appeal the decision and, therefore, the
case is concluded. The Company expensed legal costs, as a component of selling,
general and administrative expenses, as services were incurred. No further
expenses related to this lawsuit are anticipated.

* * * * *

15(a) 2. FINANCIAL STATEMENT SCHEDULES

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

F-20

15(a) 3. EXHIBITS

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

* This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Current Report on Form 8-K filed with the SEC on
November 30, 2000.

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

*** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2001.

**** This exhibit is incorporated by reference to Exhibit 4.3 or 4.4 in our
Registration Statement on Form S-8, Registration No. 333-71050.

***** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2001.

****** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Registration Statement on Form S-3, Registration
No. 333-35494.

+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.

15(b). REPORTS ON FORM 8-K

We filed a Form 8-K on August 13, 2003 to furnish our press release announcing
our results of operations and financial position as of, and for the three month
period and fiscal year ended June 30, 2003 (pursuant to Items 7 and 12 of Form
8-K).

F-21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 29th day of
September 2003.

KENSEY NASH CORPORATION

By: /s/ WENDY F. DICICCO
------------------------------------
Wendy F. DiCicco
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 29th day of September 2003.