10-K

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, 2006

OR

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

For the transition period from              to             .

Commission File Number: 0-27120

KENSEY NASH CORPORATION

(Exact name of registrant as specified in its charter)

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

735 Pennsylvania Drive, Exton, Pennsylvania 19341

(Address of principal executive offices and zip code)

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

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

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

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

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

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

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

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

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

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

FORWARD LOOKING STATEMENTS

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

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

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

PART I

ITEM 1. BUSINESS

Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

Biomaterials

Biomaterials – Market Overview

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

Our Biomaterials Business, Technology and Products

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

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

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

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

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

• Ceramic Products. We have significant experience using various ceramic materials, primarily with calcium salts such as hydroxyapatite, Beta Tri-Calcium Phosphate, DiCalcium Phosphate

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

We participate in the biomaterials market in several ways:

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

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

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

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

• We design and develop potential enhancements to our customers’ products.

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

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

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

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

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

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Orthopaedic Products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cardiology Products.

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

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

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

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Drug/Biologics Delivery Products.

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

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

Periodontal Products.

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

Our Strategy for Growth of Our Biomaterials Business.

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

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

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

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

Our Endovascular Business, Technology and Products

Our TriActiv^® Embolic Protection Platform

Embolic Protection – Market Overview

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

Saphenous Vein Graft Market

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

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Carotid Artery Market

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

Native Coronary Arteries and AMI Markets

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

The TriActiv^® FX System

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

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

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

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

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

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

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

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

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

The TriActiv^® ProGuard^™ System

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

Our Thrombus Removal Product Platform

Thrombus Removal – Market Overview

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

The ThromCat^™ Thrombectomy Catheter System

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

The QuickCat^™ Extraction Catheter

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

Our Endovascular Business

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

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Future Generations of Endovascular Products

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

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

Chronic Total Occlusion

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

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

The Angio-Seal™ Device

Vascular Puncture Closure – Market Overview

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

The Angio-Seal System

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

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

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

• an absorbable suture; and

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

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

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

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

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

Patents and Proprietary Rights

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

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

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

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

Manufacturing

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

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

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

Research and Development

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

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

Our Relationship with St. Jude Medical

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

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

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

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

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Sales and Marketing

Endovascular Products

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

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

Biomaterials

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

Competition

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

• the ability to obtain regulatory approvals;

• safety and effectiveness;

• performance and quality;

• ease of use;

• marketing;

• distribution;

• pricing;

• cost effectiveness;

• customer service;

• the development or acquisition of proprietary products and processes;

• the ability to attract and retain skilled personnel;

• improvements to existing technologies;

• reimbursement; and

• compliance with regulations.

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

Customers

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

Government Regulation

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

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

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

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

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

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

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

Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with such laws and regulations in the future and any failure to comply with such laws or regulations could have a material adverse effect upon our ability to do business. Currently and for the known future, there are no environmental laws or regulations that will require a significant investment in capital expenditures and therefore we do not expect our earnings or competitive position to be affected by such laws or regulations.

Employees

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

Corporate Governance and Internet Address

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

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

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

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

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• weaker intellectual property rights protection in some countries;

• fluctuations in exchange rates;

• potentially adverse tax consequences; and

• political and economic instability.

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

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

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

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

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

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

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

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

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

• market perception and customer acceptance of our products;

• market perception and acceptance of our customer’s products;

• our efforts to increase sales of our biomaterials products;

• our efforts to commercialize our endovascular products through our existing and developing sales force;

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

• the loss of significant orders;

• changes in our relationship with St. Jude Medical;

• our establishment of strategic alliances or acquisitions;

• timely implementation of new and improved products;

• delays in obtaining regulatory approvals;

• reimbursement for our products;

• increased competition; and

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

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

Risks Related to Our Intellectual Property

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

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

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

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

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

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

Risks Related to Our Industry

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

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

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

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

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

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

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

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

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• comply with all applicable manufacturing regulations; and

• undergo rigorous inspections by these agencies.

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

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

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

Risks Related To Our Securities

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

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

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

• quarter to quarter variations in our operating results;

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

• general conditions in the medical device industry;

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

• our customers and licensees’ ability to meet or exceed the forecasts or expectations of analysts or investors;

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

• general economic conditions.

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

	Number of Votes For	Number of Votes Withheld	Number of Votes Against	Abstentions	Broker Non-Votes
To approve the Fifth Amended and Restated Kensey Nash Corporation Employee Incentive Compensation Plan	3,819,127	—	6,223,152	15,256	—

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PART II

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

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

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

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

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

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

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

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

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

Overview

Revenues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

Comparison of Fiscal Years 2006 and 2005

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

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

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

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

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

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

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Cost of Products Sold.

	Fiscal Year Ended 6/30/06			Fiscal Year Ended 6/30/05			% Change Prior Period to Current Period
Cost of products sold	$	20,645,091		$	17,654,147		17	%
Gross Margin		45	%		56	%

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

Research and Development Expenses.

	Fiscal Year Ended 6/30/06			Fiscal Year Ended 6/30/05			% Change Prior Period to Current Period
Research & Development	$	18,990,302		$	15,130,679		26	%
% of Revenue		31	%		25	%

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

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

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Selling, General and Administrative Expense.

	Fiscal Year Ended 6/30/06			Fiscal Year Ended 6/30/05			% Change Prior Period to Current Period
Selling, general & administrative expense	$	17,259,160		$	11,794,730		46	%
% of Revenue		29	%		19	%

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

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

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

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

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

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

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

Comparison of Fiscal Years 2005 and 2004

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Liquidity and Capital Resources

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

Operating Activities

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

Opportunity Grant

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

Investing Activities

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

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

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

New Facility

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

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

Financing Activities

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

Debt

Secured Commercial Mortgage

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

THM Acquisition Obligation

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

45

Stock Repurchase Program

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

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

Research and Development Tax Credit

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

General

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

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

46

Off-Balance Sheet Arrangements

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

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

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

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

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

• the impact of competition;

• anticipated trends in our business;

• existing and future regulations affecting our business;

• strategic alliances and acquisition opportunities; and

• other risk factors set forth under “Risk Factors” above.

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

47

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Portfolio

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

Debt

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

48

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

Changes In Internal Control Over Financial Reporting

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

Management’s Report on Internal Control Over Financial Reporting

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

Inherent Limitations on the Effectiveness of Controls

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

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

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

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Kensey Nash Corporation

Exton, Pennsylvania

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

49

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

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

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

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

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

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

September 13, 2006

ITEM 9B. OTHER INFORMATION

Not applicable.

50

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

51

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15 (a) 1. FINANCIAL STATEMENTS

The following financial statements are included in this report:

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

52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Kensey Nash Corporation:

Exton, Pennsylvania

We have audited the accompanying consolidated balance sheets of Kensey Nash Corporation and subsidiaries (the “Company”) as of June 30, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kensey Nash Corporation and subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

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

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

September 13, 2006

53

KENSEY NASH CORPORATION

CONSOLIDATED BALANCE SHEETS

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

See notes to consolidated financial statements.

54

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

See notes to consolidated financial statements.

55

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

See notes to consolidated financial statements.

56

KENSEY NASH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See notes to consolidated financial statements.

57

KENSEY NASH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2006, 2005 AND 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Construction of New Facility

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

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

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

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

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

60

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

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

Revenue Recognition

Sales Revenue

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

Research and Development Revenue

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

Royalty Income

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

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

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

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

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

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

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

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

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

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

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

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Stock Options

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

Nonvested Stock Awards

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

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

Non-Employee Stock Options

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

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

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

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

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

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

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

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

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

Cash Flow Hedge

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

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

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

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

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

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

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

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

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

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

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

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

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

2. STRATEGIC ALLIANCE AGREEMENTS

St. Jude Medical, Inc.

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

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

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

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

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

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

Orthovita

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

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

3. GOODWILL

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

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

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

4. ACCRUED EXPENSES

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

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

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5. LEASES

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

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

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

6. PATENT AND PROPRIETARY RIGHTS AGREEMENTS

The Patent Acquisition Agreement

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

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

The Assignment Agreement

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

The Technology Purchase Agreement

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

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

7. DEBT

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

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

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

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

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

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

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

8. RETIREMENT PLAN

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

9. INCOME TAXES

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

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

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

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

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The Provision for income taxes is composed of the following:

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

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

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

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

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

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

10. CONSULTING CONTRACTS

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

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

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

11. STOCK REPURCHASE PROGRAM

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

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

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

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

12. CONCENTRATION OF CREDIT RISK

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

13. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS

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

14. PREFERRED STOCK

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

15. STOCK OPTION PLANS

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

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

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

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

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

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

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

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

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

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

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number at June 30, 2006	Remaining Contractual Life	Wghtd Avg Exercise Price		Number at June 30, 2006	Wghtd Avg Exercise Price
$7.625 - $14.120	867,851	3.25	$	10.35	867,851	$	10.35
$14.510 - $21.930	854,013	5.52		15.79	836,013		15.66
$22.900 - $34.360	761,243	8.37		29.49	562,646		30.34
	2,483,107				2,266,510

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

16. NONVESTED STOCK

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

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

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

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

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

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

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

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

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

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17. EARNINGS PER SHARE

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

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

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

18. SEGMENT REPORTING

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

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

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

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

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

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

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

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

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

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

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

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19. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

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

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

20. OPPORTUNITY GRANT

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

21. ACQUISITION OF INTRALUMINAL THERAPEUTICS, INC.

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

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

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

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

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

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

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

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

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

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

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

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

* * * * *

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15 (a) 2. FINANCIAL STATEMENT SCHEDULES

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

15 (a) 3. EXHIBITS

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

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of September 2006.

KENSEY NASH CORPORATION
By:	/s/ WENDY F. DICICCO, CPA
	Wendy F. DiCicco, CPA
	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 13th day of September 2006.

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

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EX-2.1

Exhibit 2.1

ASSET PURCHASE AGREEMENT

BY AND BETWEEN

KENSEY NASH CORPORATION,

A DELAWARE CORPORATION,

SOLELY FOR PURPOSES OF SECTION 7.17 HEREOF,

AND

THM ACQUISITION SUB, INC.,

A DELAWARE CORPORATION,

AND

THM BIOMEDICAL, INC., A MINNESOTA CORPORATION,

AND

THE STOCKHOLDERS OF THM BIOMEDICAL, INC.,

SOLELY FOR PURPOSES OF SECTIONS 6.4 AND 7.16 HEREOF

SEPTEMBER 1, 2000

TABLE OF CONTENTS

		Page
ARTICLE I PURCHASE AND SALE OF ASSETS		1
1.1	Assets	1
1.2	Assumption of Liabilities	4
1.3	Conveyance	4
ARTICLE II CONSIDERATION AND MANNER OF PAYMENT		5
2.1	Purchase Price
2.2	Other Agreements	5
2.3	Purchase Price Allocation	5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY		6
3.1	Authority	6
3.2	Organization and Qualification of the Company	6
3.3	Capital Stock; Title to Shares	6
3.4	Subsidiary	7
3.5	Transaction Not a Breach	7
3.6	No Consent Required	7
3.7	Financial Statements	7
3.8	Absence of Undisclosed Liabilities	8
3.9	Assets	8
3.10	Compliance with Laws; Permits	9
3.11	Real Property	9
3.12	Personal Property Leases	10
3.13	Contracts	10
3.14	Personal Property	11
3.15	Intellectual Property	11
3.16	Employee Benefit Plans	12
3.17	Employees	14
3.18	Labor and Employment Matters	14
3.19	Workers Compensation	15
3.20	Suppliers	15
3.21	Customers	16
3.22	Distributors and Representatives.	16
3.23	Affiliate Transactions	16
3.24	Insurance Policies	16
3.25	Bank Accounts	17
3.26	Taxes	17
3.27	Litigation	18
3.28	Product Warranties	19
3.29	Defects in Products or Designs; Product Safety	19
3.30	Environmental and Safety Requirements	19

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3.31	Conduct of the Business	21
3.32	Absence of Questionable Payments	22
3.33	Government Contracts	22
3.34	Corporate Name; Business Location	22
3.35	Disclosure	23
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER		23
4.1	Organization and Good Standing	23
4.2	Authorization	23
4.3	No Violation	23
4.4	No Consent Required	23
4.5	Disclosure	24
ARTICLE V CLOSING		24
5.1	Closing	24
5.2	Deliveries by the Company	24
5.3	Deliveries by Buyer	25
ARTICLE VI COVENANTS AFTER CLOSING		25
6.1	The Company’s Access to Information	25
6.2	Intentionally Omitted	26
6.3	Liability for Taxes; Retention of Records	26
6.4	Indemnification	26
6.5	Restrictive Covenants	31
6.6	Name Change	33
ARTICLE VII MISCELLANEOUS		33
7.1	Notices, Consents, etc	33
7.2	Public Announcements	34
7.3	Severability	34
7.4	Amendment and Waiver	34
7.5	Counterparts	34
7.6	Expenses	35
7.7	Headings	35
7.8	Governing Law; Arbitration	35
7.9	Assignment	35
7.10	Definitions	35
7.11	Entire Agreement	38
7.12	Third Parties	38
7.13	Interpretative Matters	38
7.14	Brokers and Transaction Payments	38
7.15	Further Assurances	38
7.16	Stockholder Representative	39
7.17	Guaranty	40

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GLOSSARY OF TERMS

	Section
“AAA”	7.8
“Affiliate”	7.10
“Affiliate Transactions”	3.23
“Alternate Stockholders’ Representative”	7.16
“Assets”	1.1
“Assumed Liabilities”	1.2
“Basket Amount”	6.4
“Beneficiaries”	7.17
“Bill of Sale”	1.3
“Business”	Preamble
“Buyer”	Introduction
“Buyer Indemnification Ceiling Amount”	6.4
“Buyer Indemnified Party”	6.4
“Buyer Transaction Documents”	7.10
“Ceiling Amount”	6.4
“Change of Control”	7.10
“Claim Notice”	6.4
“Closing”	5.1
“Closing Date”	5.1
“Closing Date Balance Sheet”	3.7
“Closing Date Balance Sheet Date”	3.7
“COBRA”	3.16
“Code”	7.10
“Company”	Introduction
“Company Indemnified Party”	6.4
“Company Transaction Documents”	7.10
“Confidential Information”	6.5
“Defense Counsel”	6.4
“Defense Notice”	6.4
“Direct Claim”	6.4
“Employment Agreement”	2.2
“Employee Benefit Plans”	3.16
“Environmental and Safety Requirements”	3.30
“ERISA”	7.10
“Excluded Assets”	1.1
“Excluded Liabilities”	1.2
“Financial Statements”	3.7
“GAAP”	7.10
“Guaranty”	7.17
“Hazardous Materials”	3.30
“Indemnified Party”	6.4

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	Section
“Indemnifying Party”	6.4
“Initial Cash Payment”	2.1
“IP Ceiling Amount”	6.4
“Knowledge”	7.10
“KNSY”	Introduction
“Leased Improvements”	3.11
“Leased Real Property”	3.11
“Liens”	1.1
“Losses”	6.4
“Material Adverse Effect”	7.10
“Material Contracts”	3.13
“Non-Competition Agreements”	2.2
“Notes”	2.1
“Obligations”	7.17
“Permits”	1.1
“Permitted Liens”	7.10
“Person”	7.10
“Plan Affiliate”	3.19
“Products”	3.28
“Proprietary Rights”	1.1
“Purchase Price”	2.1
“Quarterly Payments”	2.1
“Restricted Period”	6.5
“Rules”	3.5
“Stockholders”	Introduction
“Stockholders’ Representative”	7.16
“Tax”	7.10
“Tax Returns”	7.10
“Territory”	6.5
“Third Party Claim”	6.4
“Transaction Documents”	7.10
“WARN Act”	3.18

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ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “AGREEMENT”) is made on this 1st day of September, 2000, by and among THM Biomedical, Inc., a Minnesota corporation (the “COMPANY”), and Kensey Nash Corporation, a Delaware corporation, solely for purposes of SECTION 7.17 hereof (“KNSY”), and THM Acquisition Sub, Inc. (“BUYER”), a Delaware corporation and wholly-owned subsidiary KNSY, and the stockholders of the Company whose names are set forth on the signature pages hereto (the “STOCKHOLDERS”), solely for purposes of SECTIONS 6.4 and 7.16 hereof.

WHEREAS, the Company is engaged in the business of developing and commercializing technology and products based on synthetic polymer porous materials (the “BUSINESS”);

WHEREAS, the Company desires to sell to Buyer, and Buyer desires to purchase from the Company, all of the assets used in the Business and assume substantially all of the liabilities of the Business, upon the terms and conditions set forth below; and

WHEREAS, certain capitalized terms have the meanings respectively indicated in SECTION 7.10 herein.

NOW THEREFORE, in consideration of the mutual covenants of the parties set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

PURCHASE AND SALE OF ASSETS

1.1 ASSETS.

(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Company shall sell, transfer and deliver to Buyer, free and clear of all liens, hypothecations, mortgages, charges, security interests, pledges or other encumbrances or adverse claims or interests of any nature (“LIENS”) other than Permitted Liens and those liabilities being assumed by Buyer pursuant to this Agreement, and Buyer shall purchase from the Company, the Business and all the Company’s right, title and interest in and to all of its assets (other than the Excluded Assets), wherever located and whether or not all or any of said assets appear on or are reflected upon the Company’s books, records or financial statements (collectively, the “ASSETS”), including, but not limited to, the following (to the extent such categories of assets or properties are owned by the Company):

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(i) Movable/Tangible Personal Property. All molds, fixtures, tooling, equipment and machinery, tools, vehicles (whether or not registered under motor vehicle registration laws), furniture, computer hardware and software, office furniture and equipment and other similar personal or movable property of the Company;

(ii) Inventories and Supplies. All inventory of the Company used in connection with the Business, including, without limitation, raw materials, work-in-process, finished goods, merchandise for resale, spare parts, packaging and shipping materials and office, operating and other supplies, whether or not located at the Company’s principal place of business;

(iii) Receivables. All notes and accounts receivable of the Company and all notes, bonds and other evidences of indebtedness of any entity or person held by any of the Company, including, without limitation, all trade, employee, officer and other accounts and monies receivable;

(iv) Contracts. All rights and benefits that the Company may have in connection with the Business under the Material Contracts (as defined in SECTION 3.13) and any and all other agreements, contracts, purchase orders, forward commitments for works-in- progress, licenses and leases, whether written or oral, pertaining to the Business, to the extent assignable;

(v) Intellectual Property. All intellectual property, confidential information, and proprietary information in the world owned or used by the Company in connection with the Business including, without limitation, (a) the Company’s registered corporate names and assumed names wherever used, including, without limitation, the name “THM Biomedical”; (b) all patents, patent applications, patent disclosures and inventions (whether or not patentable and whether or not reduced to practice); (c) all trademarks, service marks, trade dress, trade names and corporate names presently or previously used by the Company in connection with the Business, whether or not registered by the Company; (d) all registered and unregistered statutory and common law copyrights; (e) all registrations, applications, extensions and renewals for any of the foregoing; (f) all trade secrets, confidential information, ideas, formulae, compositions, know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, improvements, proposals, technical and computer data, databases, internet domain names, documentation and software, financial, business and marketing plans, and customer and supplier lists and related information; (g) all agreements, commitments, contracts, understandings, licenses, assignments or indemnities relating or pertaining to an asset, property or right of the character described in the preceding clauses to which the Company is a party; (h) all licenses or agreements pertaining to mailing lists, know-how, trade secrets, inventions, disclosures or uses of ideas used in or relating to the Business to which the Company is a

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party; (i) all correspondence and memoranda between the Company and its intellectual property counsel relating to Proprietary Rights; and (j) all other intellectual property, confidential information and proprietary rights (collectively, “PROPRIETARY RIGHTS”);

(vi) Records. Subject to the Company’s right to review such items in accordance with SECTION 6.1 hereof, all records, files, and papers of the Company (other than those records described in SECTION 1.1(B)), including, but not limited to, sales and purchase correspondence, past and current insurance policies, customer and supplier lists, books of account and employment records;

(vii) Licenses, Permits and Approvals. All rights of the Company in and to permits, licenses, approvals and authorizations by or of governmental authorities or third parties issued or granted or otherwise received in connection with the Business, including, without limitation, FDA approvals, if any (“PERMITS”), to the extent assignable;

(viii) Claims. All causes of actions, claims, warranties, guarantees, refunds (other than federal tax refunds) covenants, indemnities and the like, rights of recovery and set-off of every kind and character of the Company related to the Business, including, without limitation, rights and claims against suppliers of inventory and other Assets transferred hereunder;

(ix) Customer Property. The right to custody of all assets owned by a customer of the Business or other person and held by the Company on behalf of such customer or other person, subject to the rights of such third party with respect to such assets;

(x) Prepaids. All advances, deposits, credits, transferable insurance policies, prepaid royalties and other prepaid assets and expenses of the Company in connection with the Business;

(xi) Goodwill. All goodwill associated with the Business, along with the right of Buyer to hold itself out as the successor of the Company in the conduct of the Business;

(xiii) Securities. All securities that the Company may have an interest in, including, without limitation, the capital stock of any subsidiary of the Company;

(xiv) Cash. All cash and cash equivalents of the Company, including, but not limited to, lockbox receipts; and

(xvi) Other Assets. All other properties and assets owned or held by the Company and used in connection with the Business, whether or not of a type falling within any of the categories of assets or properties described above, unless specifically forming part of the Excluded Assets.

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(b) Notwithstanding the foregoing, the following assets of the Company shall be retained by the Company and are expressly excluded from the purchase and sale contemplated by this Agreement (collectively, the “EXCLUDED ASSETS”):

(i) Records. The Company’s formal records, including its governing documents, minute books, stock books and other records having exclusively to do with the corporate organization of the Company and all of the Company’s Tax Returns and financial records;

(ii) This Agreement. The Company’s rights, and the rights of the Stockholders, pursuant to this Agreement and the Transaction Documents;

(iii) Nonassignable Permits. Any Permits which may not be transferred without the consent, novation, waiver or approval of a third person or entity and for which such consent, novation, waiver or approval has not been obtained; and

(iv) Employee Benefit Plans. All monies, rights and other assets (including any insurance policy, annuity contract or trust) maintained under, pursuant to or in direct connection with any Employee Benefit Plan.

1.2 ASSUMPTION OF LIABILITIES.

(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing the Buyer shall assume and agree to perform, pay and discharge all of the liabilities of the Company as of the Closing Date including liabilities and claims of which the Company does not have knowledge prior to the Closing Date but which are asserted as liabilities of the Company after the Closing Date (the “ASSUMED LIABILITIES”), subject to Buyer’s right to seek indemnification in accordance with SECTION 6.4 for alleged breaches of the Company’s representations and warranties set forth in ARTICLE III pertaining to such liabilities.

(b) Notwithstanding SECTION 1.2(A) hereof, and notwithstanding any disclosures made to Buyer or its agents in the conduct of their due diligence investigations of the Company and its business and further notwithstanding any matters disclosed on any Schedules hereto, Buyer shall not assume any of the liabilities of the Company, and the Company shall remain unconditionally liable for those liabilities of the Company set forth on Schedule 1.2(b) of this Agreement (the “EXCLUDED LIABILITIES”).

1.3 CONVEYANCE. At the Closing, the Company and Buyer shall execute and deliver a Bill of Sale, Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit 1.3 (the “BILL OF SALE”), pursuant to which the Company shall convey to the Buyer the Assets and the Buyer shall assume the Assumed Liabilities.

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ARTICLE II

CONSIDERATION AND MANNER OF PAYMENT

2.1 PURCHASE PRICE. The aggregate purchase price (the “PURCHASE PRICE”) to be paid by Buyer for the Assets, and the rights and benefits conferred hereunder, is payable as follows:

(a) The Company hereby assigns its right to receive the Purchase Price to the Stockholders pro-rata based upon their percentage ownership of common stock of the Company (as set forth on Schedule 3.3). Buyer shall pay to the Stockholders at Closing, by wire transfer of immediately available funds to the bank accounts of the Stockholders as designated on Schedule 2.1 attached hereto, an aggregate of $6,600,000 (the “INITIAL CASH PAYMENT”).

(b) Buyer shall pay to the Stockholders an aggregate of $4,500,000, payable in equal quarterly installments of $281,250 on the last business day of each of the first sixteen (16) calendar quarters following the Closing Date, with the first payment being made on December 31, 2000, by wire transfer of immediately available funds to the Payees’ designated bank accounts (the “QUARTERLY PAYMENTS”). At Closing, Buyer shall evidence its obligation to pay the Quarterly Payments by issuing to each of the Payees a promissory note, substantially in the form attached hereto as Exhibit 2.1(b) (the “NOTES”), in the amount set forth on Schedule 2.1 for each such Payee, payable in sixteen (16) equal quarterly installments. The Notes may be prepaid by Buyer, in whole or part, without penalty. In the event of a Change of Control (as defined in SECTION 7.10) of Buyer prior to September 30, 2004, the outstanding principal balance under the Notes shall immediately accelerate, and such outstanding amounts shall be payable concurrently with the closing of such Change of Control transaction.

2.2 OTHER AGREEMENTS. At the Closing, KNSY shall enter into the following agreements:

(a) Non-competition agreements, to be executed by each of Thomas Maas and William Maas, substantially in the forms of Exhibit 2.2(a)(i) and Exhibit 2.2(a)(ii) attached hereto (the “NON-COMPETITION AGREEMENTS”); and

(b) Employment agreement, to be executed by John Brekke, having a three (3) year term, substantially in the form of Exhibit 2.2(b) attached hereto (the “EMPLOYMENT AGREEMENT”).

2.3 PURCHASE PRICE ALLOCATION. The Purchase Price shall be allocated for tax purposes amongst the Assets and the other consideration provided by the Company as set forth on Schedule 2.3. The parties shall file their respective tax returns in accordance with such allocation and shall not take any position or action inconsistent with such allocation.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As a material inducement to Buyer to enter into this Agreement, the Company makes to Buyer the representations and warranties set forth in this ARTICLE III, which representations and warranties are made and shall be true and correct as of the date hereof. On the date of this Agreement, the Company has delivered schedules to certain of the following representations and warranties listing any exceptions to the representations and warranties in this ARTICLE III in order to make the representations and warranties in this ARTICLE III accurate and complete. The schedules pertaining to this ARTICLE III describe any such required exceptions in reasonable detail and are arranged according to the sections contained in this ARTICLE III, provided that any exceptions described in response to any section of this Agreement shall be deemed to be exceptions to all relevant sections of this Agreement, to the extent a reasonable person could infer that such exception should be deemed to be an exception to the relevant section of this Agreement.

3.1 AUTHORITY. The Company has full power, right and authority to enter into and perform its obligations under this Agreement and each of the Company Transaction Documents. The execution, delivery and performance of this Agreement and each of the Company Transaction Documents and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite action, and no other proceedings are necessary to authorize the execution, delivery and performance of this Agreement and each of the Company Transaction Documents. This Agreement and each of the Company Transaction Documents have been duly executed and delivered by the Company and constitute the valid and binding obligations of the Company and are enforceable against the Company in accordance with their respective terms. Complete and correct copies of the Company’s charter documents and bylaws, and all amendments thereof to date, have previously been delivered to Buyer.

3.2 ORGANIZATION AND QUALIFICATION OF THE COMPANY. The Company is duly organized, validly existing, and in good standing under the laws of the State of Minnesota. The Company has full power and authority to carry on its business as it is now being conducted and to own or hold under lease the properties and assets it now owns or holds under lease. The Company is not required to be qualified to do business as a foreign corporation in any other jurisdiction.

3.3 CAPITAL STOCK; TITLE TO SHARES. Schedule 3.3 sets forth the entire authorized capital stock and the total number of issued and outstanding shares of capital stock of the Company. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and non-assessable and owned, beneficially and of record, in the amounts listed on Schedule 3.3 and no shares of capital stock of the Company are subject to, nor have been issued in violation of preemptive or similar rights. Except as set forth on Schedule 3.3, the Company has no outstanding stock or other securities convertible into or exchangeable for shares of its capital stock or containing profit participation features, and the Company has no outstanding options, warrants

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or rights to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for capital stock. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock. All issuances, sales and repurchases by the Company of its capital stock have been effected in compliance with all applicable laws, including, without limitation, applicable federal and state securities laws.

3.4 SUBSIDIARY. The Company has no subsidiaries and the Company does not own, directly or indirectly, any stock, partnership interest, joint venture interest or other equity interest in any other corporation, trust, partnership, joint venture or other entity.

3.5 TRANSACTION NOT A BREACH. Neither the execution and delivery of this Agreement or any Company Transaction Document by the Company nor the performance by the Company of the transactions contemplated hereby or thereby will:

(a) violate or conflict with or result in a breach of any provision of any law, statute, rule, regulation, requirement, order, permit, judgment, injunction, decree or other decision (collectively, “RULES”) of any court or other tribunal or any governmental entity or agency binding on the Company or its properties, or conflict with or result in the breach of any of the terms, conditions or provisions thereof;

(b) constitute a default under the governing documents of the Company or of any Material Contract (as defined below) or any agreements in connection with the Leased Real Property;

(c) constitute an event which would permit any party to terminate, modify, or accelerate the maturity of any indebtedness or other obligation under, any Material Contract; or

(d) result in the creation or imposition of any Lien upon the Assets.

3.6 NO CONSENT REQUIRED. Except as set forth on Schedule 3.6, no consent, approval, order or authorization of, or declaration, filing or registration with, any person, entity or governmental authority is required to be made or obtained by the Company in connection with the authorization, execution, delivery, performance or lawful completion of this Agreement, the other Company Transaction Documents or the transaction contemplated hereby.

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3.7 FINANCIAL STATEMENTS. Schedule 3.7 contains the following consolidated financial statements of the Company (the “FINANCIAL STATEMENTS”):

(a) the audited balance sheets as of December 31, 1999 and December 31, 1998, and the related audited statements of income and cash flows for the twelve (12) month periods then ended;

(b) the unaudited balance sheet as of June 30, 2000, and the related unaudited statement of income and cash flows for the six (6) month period then ended; and

(c) the unaudited statement of income and cash flows for the twelve (12) month period ended June 30, 2000.

Schedule 3.7 includes an unaudited balance sheet as of August 31, 2000 (the “CLOSING DATE BALANCE SHEET”). Except as set forth on Schedule 3.7, each of the Financial Statements and the Closing Date Balance Sheet is complete and correct in all material respects, is consistent with the books and records of the Company and fairly and accurately presents the Company’s financial condition, assets and liabilities as of the respective dates and the results of operations and cash flows for the periods related thereto in accordance with GAAP consistently applied throughout the periods covered thereby, except that the Financial Statements and the Closing Date Balance Sheet lack the footnote disclosure otherwise required by GAAP which, if provided, would not reflect a Material Adverse Effect on the Company.

3.8 ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no debts, liabilities or obligations of any nature affecting the Business or the Assets (whether accrued, absolute, contingent, direct, indirect, perfected, inchoate, unliquidated or otherwise and whether due or to become due) arising out of transactions entered into on or prior to the date hereof, or any transaction, series of transactions, action or inaction occurring on or prior to the date hereof, or any state of facts or condition existing on or prior to the date hereof (regardless of when such liability or obligation is asserted), including, but not limited to, liabilities or obligations on account of Taxes or governmental charges or penalties, interest or fines thereon or in respect thereof, except (a) as and to the extent clearly and accurately reflected and accrued for or reserved against in the Closing Date Balance Sheet of the Company, (b) for liabilities specifically delineated on Schedule 3.8, and (c)for liabilities and obligations which have arisen in connection with the Business after August 31, 2000 (the “CLOSING DATE BALANCE SHEET DATE”) in the ordinary course of business consistent with past custom and practice.

3.9 ASSETS.

(a) Title. The Company has the exclusive right to possess and convey, and upon the consummation of the transactions contemplated by this Agreement, the Company will have conveyed and Buyer will be vested with, good and marketable title and interest in and to the Assets, free and clear of all Liens (other than Permitted Liens). The Company owns all assets reflected as being owned by it on the Closing Date Balance Sheet or purchased by it after the Closing Date Balance Sheet Date except for those assets which were disposed of by the Company.

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after the Closing Date Balance Sheet Date in the ordinary course of business consistent with past custom and practice. The Assets constitute all of the assets and properties used in connection with the conduct of the Business and are sufficient to operate the Business as presently operated.

(b) Inventories. The inventories of the Company consist of items of a quality and quantity useable or saleable in the ordinary course of business, except for items of obsolete material or materials below standard quality, all of which have been determined and written down to net realizable value in the Financial Statements.

(c) Accounts Receivable. The Company’s accounts receivable have arisen in bona fide arm’s-length transactions in the ordinary course of business. Except to the extent of any reserves for bad debts set forth in the Financial Statements, all such receivables are valid and binding obligations of the account debtors without any counterclaims, set-offs or other defenses thereto and are collectible in the ordinary course of business.

(d) Condition and Location. Except as set forth on Schedule 3.9, all of the tangible assets of the Company which are part of the Assets have been properly maintained in accordance with industry standards, are in good operating condition and repair and are useable in the ordinary course of business. Except as set forth on Schedule 3.9, none of the tangible assets of the Company requires any material repair or replacement, except for maintenance in the ordinary course of business. Except as set forth on Schedule 3.9, none of the personal or movable property owned or leased by the Company is located other than at the Leased Real Property.

3.10 COMPLIANCE WITH LAWS; PERMITS. The Company is not in violation of any material Rules applicable to it, its assets, any Employee Benefit Plans or the operation of the Business and the Company has received no written notice of any violation or alleged or potential violation; provided, that to the extent the representations contained in other sections of this Agreement address compliance with specific Rules (including without limitation, representations contained in SECTIONS 3.11, 3.16 and 3.26), any representations contained in this SECTION 3.10 are qualified to the extent set forth in such other sections of this Agreement. The Company holds and at all times has held all of the material Permits necessary, desirable or useful for the current use, occupancy or operation of the Business or ownership of the Assets, all of which are set forth on Schedule 3.10. The Company is and at all times has been in full compliance with each of such Permits, all of which are in full force and effect.

3.11 REAL PROPERTY.

(a) The Company does not own any real property. Schedule 3.11(a) contains a complete and correct list of all the real property that is leased by the Company or that the Company has agreed (or has an option) to lease, or may be obligated to lease in connection with the conduct of the Business, as well as a correct and complete description of each lease pursuant to which such real property is leased. Such real property is hereinafter referred to as “LEASED REAL PROPERTY,” and the improvements and fixtures thereon are hereinafter referred to as the “LEASED IMPROVEMENTS.”

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(b) Except as set forth on Schedule 3.11(a), the Company is the sole legal and equitable owner of the leasehold interests in the Leased Real Property and the Leased Improvements, free and clear of all Liens (other than Permitted Liens) that could impair the ability of the Company to realize the benefits of the rights provided to it under its lease of the Leased Real Property and the Leased Improvements. The lease applicable to the Leased Real Property is valid and in full force and effect and no event has occurred which with the giving of notice or the passage of time or both could constitute a default under such lease.

(c) There are no adverse or other parties in possession of the Leased Real Property, the Leased Improvements, or any portion or portions thereof, and the leasehold interests in the Leased Real Property and the Leased Improvements are free and clear of any and all lessees, licensees, occupants or tenants except as set forth on Schedule 3.11(a). To the knowledge of the Company, there are no pending or threatened condemnation, eminent domain or similar proceedings, or litigation or other proceedings affecting the Leased Real Property, the Leased Improvements or any portion or portions thereof. To the knowledge of the Company, there are no pending or threatened requests, applications or proceedings to alter or restrict any zoning or other use restrictions applicable to the Leased Real Property or the Leased Improvements that would interfere with the conduct of the Business, which interference would have a Material Adverse Effect. Except as set forth on Schedule 3.11(a), all water, sewer, gas, electric, telephone, drainage and other utility equipment, facilities and services required by law or necessary for the operation of the Leased Improvements are installed and connected, and no notice has been received by the Company regarding the termination or material impairment of any such service. All equipment and fixtures associated with the Leased Improvements have been properly maintained in accordance with industry standards and are in good operating condition and repair. To the knowledge of the Company, all necessary easements exist and are in full force and effect. The Leased Real Property has access, in accordance with past practice, to and from a public right of way or road dedicated for public use and no notice has been received by the Company relating to the termination or impairment of such access (including applicable parking requirements).

3.12 PERSONAL PROPERTY LEASES. The Company is not a party to any lease of personal or movable property.

3.13 CONTRACTS. Schedule 3.13 is a correct and complete list of every Material Contract, correct and complete copies of which previously have been furnished to Buyer (except for oral contracts, written descriptions in detail of which have been previously furnished to Buyer). Each Material Contract is enforceable against the Company and against any third parties in accordance with its terms. The Company is not in default, and no event has occurred which with the giving of notice or the passage of time or both would constitute a default by the Company, under any Material Contract. The Company has performed all obligations required to

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be performed by it under the Material Contracts and, to the knowledge of the Company, no other party to the Material Contracts is in default, and no event has occurred which with the giving of notice or the passage of time or both could constitute a default by any other party to any such Material Contract under any of such Material Contracts. The Company is not a party to any Material Contract containing late penalties or loss provisions. For purposes of this Agreement, the term “MATERIAL CONTRACTS” shall mean all contracts, agreements, instruments, purchase orders, relationships or commitments, written or oral, arising out of or related to the Business, to which the Company is a party or by which the Company or any of the Assets are bound, including, without limitation, those which (i) have or are reasonably expected to require aggregate payments to or by the Company in excess of $25,000, (ii) have a term or effective period longer than one (1) year in duration, (iii) incur or guaranty any obligation for borrowed money or otherwise (other than endorsements made for collection in the ordinary course of business), (iv) are license or royalty agreements, (v) are non- disclosure or confidentiality agreements, (vi) are agreements relating to the ownership of or investments in any business or enterprise, including investments in joint ventures and minority equity investments, (vii) are powers of attorney or other similar agreements or grant of agency or (viii) are contracts or agreements prohibiting the Company from freely engaging in any business or competing anywhere in the world.

3.14 PERSONAL PROPERTY. Schedule 3.14 is a true and complete list of all trucks, automobiles, machinery, equipment, furniture, supplies, tools, dies, fixtures, patterns, drawings, test equipment and all other tangible or intangible personal property, rights and assets owned or leased by, in the possession of, or used by the Company in connection with the Business (other than Excluded Assets) with a current fair market value in excess of $25,000 individually and, with respect to similar or related properties or assets, $25,000 in the aggregate, which list indicates the location of such items, and any Liens imposed thereon.

3.15 INTELLECTUAL PROPERTY.

(a) Schedule 3.15 sets forth a list and a description of all Proprietary Rights of the Company other than trade secrets and, in each instance, immaterial Proprietary Rights arising in the ordinary course of business. Except as set forth on Schedule 3.15, all of the Proprietary Rights are valid, in good standing and in full force and effect, and all applications for registrations or patents are pending and in good standing, and to the knowledge of the Company are all without challenge of any kind. The Company is not aware of any facts or circumstances adversely impacting the patentability, validity, registerability or enforceability of any of the Proprietary Rights. Except as set forth on Schedule 3.15, the Company owns the entire right, title and interest in and to the Proprietary Rights without qualification, limitation, burden or encumbrance of any kind.

(b) Complete and accurate copies of all Proprietary Rights other than trade secrets and, in each instance, immaterial Proprietary Rights arising in the ordinary course of

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business, including, but not limited to, patents, patent rights, trademarks, trade names, service marks and copyrights and registrations, applications or deposits therefor, registered assumed name filings and licenses set forth on Schedule 3.15 have been delivered to Buyer by the Company.

(c) Except as set forth on Schedule 3.15, the Company owns all of the Proprietary Rights or has under valid agreement, the royalty-free, perpetual right to make, use and sell, and to sublicense others to make, use and sell any items, products or processes covered by any of the Proprietary Rights without restriction. Except as set forth on Schedule 3.15: (i) the Company’s operation of the Business prior to the Closing (other than possibly in research and development activities) does not give rise to and has not given rise to any infringement of the intellectual property rights of any third party; (ii) no claim or, to the Company’s knowledge, threat of any infringement has been made or implied in respect of the representations set forth in subparagraph (i) above; (iii) no proceedings are pending or, to the Company’s knowledge, threatened against the Company which challenges the validity or ownership of any patent, patent right, trademark, trade name, service mark or copyright or the ownership of any of the Proprietary Rights; and (iv) there is no infringing commercial use of any Proprietary Rights by any third parties. Copies of all legal opinions, if any, (i) questioning the validity of any of the Company’s Proprietary Rights or commenting adversely upon the patentability, validity, registerability, or enforceability of any to the Proprietary Rights or (ii) commenting upon the infringement or possible infringement of any intellectual property rights of any third parties by the Company have been delivered to Buyer, along with written summaries of any oral opinions received by the Company relating to the Proprietary Rights. After the Closing, the Company shall make available to Buyer all other correspondence and memoranda between the Company and its intellectual property counsel relating to Proprietary Rights and any potential infringement of intellectual property rights of third parties after the Closing and shall not remove such materials from their current location at the Company’s offices. The Company has not licensed, attempted to license, collected royalties on or attempted to collect royalties on any patent beyond such patent’s expiration date.

3.16 EMPLOYEE BENEFIT PLANS.

(a) Except as set forth in Schedule 3.16, the Company has not maintained, sponsored, adopted, made contributions to or obligated itself to make contributions to or to pay any benefits or grant rights under or with respect to any “Employee Pension Benefit Plan” (as defined in Section 3(2) of ERISA), “Employee Welfare Benefit Plan” (as defined in Section 3(1) of ERISA), “Multi-Employer Plan” (as defined in Section 3(37) of ERISA), pension plan, plan of deferred compensation, medical plan, life insurance plan, long-term disability plan, dental plan or other plan providing for the welfare of any of the employees or former employees or beneficiaries thereof of the Company, personnel policy (including, but not limited to, vacation time, holiday pay, bonus programs, moving expense reimbursement programs and sick leave), excess benefit plan, bonus or incentive plan (including, but not limited to, stock options, restricted stock, stock bonus and deferred bonus plans), salary reduction agreement, change-of-control

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agreement, employment agreement, consulting agreement or any other benefit, program or contract (collectively, “EMPLOYEE BENEFIT PLANS”), whether or not written or pursuant to a collective bargaining agreement, which could give rise to or result in the Company having any material debt, liability, claim or obligation of any kind or nature, whether accrued, absolute, contingent, direct, indirect, known or unknown, perfected or inchoate or otherwise and whether or not due or to become due unless properly recorded on the Financial Statements or unless such obligation or liability arose after the Closing Date Balance Sheet Date in the ordinary course of business.

(b) There has been no waiver (or application for a waiver) of the minimum funding standards imposed by Section 412 of the Code with respect to any Employee Benefit Plan other than any multi-employer plans, and there are no facts or circumstances that would materially change the funded status of any such Employee Benefit Plan other than any multi-employer plans. No asset of the Company is subject to any lien under ERISA or the Code. The Company (i) has not incurred any liability on account of a “partial withdrawal” or a “complete withdrawal” (within the meaning of Sections 4205 and 4203, respectively, of ERISA) from any Employee Benefit Plan subject to Title IV of ERISA which is a “multi-employer plan” (as such term is defined in Section 3(37) of ERISA), and no such liability has been asserted; and (ii) is not bound by any contract or agreement or has any obligation or liability described in Section 4204 of ERISA.

(c) Each Employee Benefit Plan other than any multi-employer plan that is intended to be qualified under Section 401(a) of the Code has received a determination from the Internal Revenue Service that such Employee Benefit Plan is so qualified, and nothing has occurred since the date of such determination that could adversely affect the qualified status of such Employee Benefit Plan. No Employee Benefit Plan is a multi-employer plan or is subject to Title IV of ERISA.

(d) Each of the Employee Benefit Plans other than any multi-employer plan and all related trusts, insurance contracts and funds have been maintained, funded and administered in material compliance with their terms and the terms of any applicable collective bargaining agreement, and in compliance with the applicable provisions of ERISA, the Code, and any other applicable laws. With respect to each Employee Benefit Plan, all required payments, premiums, contributions, distributions, or reimbursements for all periods ending prior to or as of the date hereof have been made or properly accrued.

(e) Neither the Company nor any other “disqualified person” (within the meaning of Section 4975 of the Code) or any “party in interest” (within the meaning of Section 3(14) of ERISA) has engaged in any “prohibited transaction” (within the meaning of Section 4975 of the Code or Section 406 of ERISA) with respect to any of the Employee Benefit Plans other than any multi-employer plans which could subject any such Employee Benefit Plans, the Company or any officer, director or employee of the Company to a penalty or tax under Section 502(i) of ERISA or Section 4975 of the Code.

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(f) To the knowledge of the Company, other than any multi-employer plan, each Employee Benefit Plan which is subject to the health care continuation requirements of Part 6 of Subtitle B of Title I of ERISA or Section 4980B of the Code (“COBRA”) has been administered in material compliance with such requirements. No Employee Benefit Plan provides medical or life or other welfare benefits to any current or future retired or terminated employee (or any dependent thereof) of the Company other than as required pursuant to COBRA or applicable state law.

(g) With respect to each Employee Benefit Plan other than any multi-employer plans, the Company has provided Buyer with true, complete and correct copies of (to the extent applicable): (i) all documents pursuant to which the Employee Benefit Plan is maintained, funded and administered (including the plan and trust documents, any amendments thereto, the summary plan descriptions, and any insurance contracts or service provider agreements); (ii) the three most recent annual reports (IRS Form 5500 series) filed with the Internal Revenue Service (with applicable attachments); and (iii) the most recent determination letter, if any, received from the Internal Revenue Service.

(h) The Company does not have any liability (or potential liability, including potential liability under, because of another entity’s participation in a defined benefit plan or multi- employer plan) with respect to any “employee benefit plan” (as defined in Section 3(3) of ERISA) solely by reason of being treated as a single employer under Section 414 of the Code with any trade, business or entity other than the Company.

3.17 EMPLOYEES. Schedule 3.17 is a complete and correct list setting forth (i) the names and current compensation rate and compensation of all individuals presently employed by the Company on a salaried basis whose current annual compensation is in excess of $25,000 and (ii) the names and total annual compensation for all independent contractors who render services on a regular or seasonal basis to the Company whose current annual compensation is in excess of $25,000. Except as set forth on Schedule 3.17, no person listed thereon has received any bonus or increase in compensation since and there has been no “general increase” in the compensation or rate of compensation payable to any such employees since the Closing Date Balance Sheet Date nor since such date has there been any promise to the employees listed on Schedule 3.17, orally or in writing, of any bonus or increase in compensation, whether or not legally binding.

3.18 LABOR AND EMPLOYMENT MATTERS. Except as set forth on Schedule 3.18: (i) the Company is not party to or bound by any collective bargaining agreement; (ii) to the knowledge of the Company, no executive or manager of the Company is a party to any confidentiality, non- competition, proprietary rights or other such agreement between such employee and any other person other than the Company that would be material to the performance of such employee’s employment duties, or the ability of the Company to conduct its business in the ordinary course of business; (iii) no labor organization or group of employees has filed any representation petition

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or made any written demand for recognition; (iv) no organizing or decertification efforts are underway or, to the knowledge of the Company, threatened; (v) since January 1, 1994, no labor strike, work stoppage, slowdown, or other material labor dispute has occurred, and none is underway or, to the knowledge of the Company, threatened; (vi) there is no employment-related charge (including, but not limited to, an unfair labor practice charge), complaint, grievance, investigation, inquiry or obligation of any kind, pending or, to the knowledge of the Company, threatened, in any forum, relating to an alleged violation or breach by the Company (or its officers or directors) of any law, regulation or contract; (vii) all amounts due or accrued for all salary, wages, bonuses, commissions, vacation with pay, pension benefits or other employee benefits as of the Closing Date Balance Sheet Date are reflected in the Closing Date Balance Sheet; (viii) no employee of the Company has any agreement as to length of notice or severance payment required to terminate his or her employment, other than such as results by law from the employment of an employee without an agreement as to notice or severance; and (ix) the Company will not have any material liability under any benefit or severance policy, practice, agreement, plan, or program which exists or arises, or may be deemed to exist or arise, under any applicable law or otherwise, as a result of the transactions contemplated hereunder. With respect to the transactions contemplated herein, any notice required under any law or collective bargaining agreement has been, or prior to Closing will be, given, and all bargaining obligations with any employee representative have been, or prior to the Closing will be, satisfied. Within the past three (3) years, the Company has not implemented any plant closing or mass layoff of employees as those terms are defined in the Worker Adjustment and Retraining Notification Act of 1988, as amended, or any similar foreign, state or local law, regulation or ordinance (“WARN ACT”).

3.19 WORKERS COMPENSATION. There have been no expenses, obligations, duties or liabilities relating to any claims by employees and former employees (including dependents and spouses) of the Company or any Person with whom the Company constitutes all or part of a controlled group (as defined in Section 4.14 of the Code) (“PLAN AFFILIATE”) (or predecessors) since the Closing Date Balance Sheet Date for (a) costs, expenses and other liabilities under any workers compensation laws in the United States, regulations, requirements or programs and (b) any other medical costs and expenses. Except as set forth on Schedule 3.19, to the Company’s knowledge no claims, injuries, fact, event or condition exists which would give rise to a material claim (individually or in the aggregate) by employees and former employees (including dependents and spouses) of the Company or Plan Affiliate under any United States workers compensation laws, regulations, requirements or programs.

3.20 SUPPLIERS. Schedule 3.20 is a complete and correct list of the ten (10) largest suppliers to the Company (in terms of the Company’s purchases from such suppliers during the two (2) most recently completed fiscal years) of key materials and services and commodities, exclusive of utility services. In the last twelve (12) months, no such supplier has canceled or otherwise terminated, or threatened to cancel or terminate, its relationship with the Company. The Company has received no written notice, nor does the Company have knowledge that any

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such supplier intends to cancel or otherwise adversely modify its relationship with the Company on account of the acquisition of the Assets by Buyer or otherwise.

3.21 CUSTOMERS. Schedule 3.21 is a complete list by dollar volume of sales made or services provided during the two (2) most recently completed fiscal years, to the ten (10) largest customers of the Company. Except as set forth on Schedule 3.21, in the last twelve (12) months, no customer has canceled or otherwise terminated, or threatened to cancel or otherwise terminate, its relationship with the Company, or reduced, or threatened to reduce, its business with the Company. The Company has received no written notice nor does the Company have any knowledge that any such customer intends to cancel or otherwise adversely modify its relationship with the Company.

3.22 DISTRIBUTORS AND REPRESENTATIVES. Schedule 3.22 is a complete list of all distributors, representatives and agents for the sale of the products of the Business made during the two (2) most recently completed fiscal years and all distributors, representatives and agents to whom the Company has given any exclusive rights with respect to territories or products in connection with the Business, indicating in each case the existing contractual arrangements, if any, with such distributor, representative or agent. Except as set forth on Schedule 3.22, in the last twelve (12) months, there has been no termination of any independent distributor, wholesaler, sales representative or agent relationship, nor has any present independent distributor, wholesaler, sales representative or agent indicated any intention to terminate or materially change the terms of its relationship with the Company or reduce future purchases from the Company.

3.23 AFFILIATE TRANSACTIONS. Schedule 3.23 sets forth the parties to and the date, nature and amount of each transaction involving the transfer of any cash, property or rights to or from the Company from, to or for the direct or indirect benefit of any Affiliate or former Affiliate of the Company (“AFFILIATE TRANSACTIONS”) since January 1, 1998. Except as set forth on Schedule 3.23, no officer, director, employee, stockholder or Affiliate or any entity in which any such Person or individual is an officer, director or the owner of fifteen percent (15%) or more of the beneficial ownership interests, is a party to any agreement, contract, commitment or transaction with the Company or has any interests in any property used by the Company. Each Affiliate Transaction was effected on terms equivalent to those which would have been established in an arms-length negotiation, except as disclosed on Schedule 3.23. Except as set forth in Schedule 3.23, neither the Company nor any of its Affiliates has any direct or indirect interest in any competitor.

3.24 INSURANCE POLICIES. Schedule 3.24 contains a correct and complete list and description of all present insurance policies owned by the Company pertaining to the Business or its assets. The present insurance policies are in full force and effect, and the Company is not in default under any of them. The Company has received no written notice of cancellation or intent to cancel or increase premiums with respect to present insurance policies nor, to the knowledge of the Company, is there any basis for any such action.

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3.25 BANK ACCOUNTS. Schedule 3.25 is a complete and correct list of each bank in which the Company has an account, safe deposit box, or lockbox pertaining to the Business, the number of each such account or box and the names of all persons authorized to draw thereon or to have access thereto.

3.26 TAXES.

(a) The Company has filed all Tax Returns that it is required to have filed prior to the date hereof, including any extension of time for the filing thereof, and such returns are true and correct in all material respects and have been prepared in a manner consistent with prior periods. All Taxes owed as of the Closing Date Balance Sheet Date by the Company (whether or not shown on any Tax Return) have been paid or are accrued for on the Closing Date Balance Sheet in accordance with GAAP consistent with past practice. All Taxes owed by the Company will be paid or accrued on the Company’s books and records (in accordance with GAAP and the past custom and practice of the Company) for the ordinary course transactions of the Company through the Closing Date.

(b) There are no security interests on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax.

(c) There are no agreements, waivers or other arrangements providing for extension of filing with respect to any Tax Return. There are no unexpired waivers of any statute of limitations with respect to any Taxes.

(d) No claim has ever been made by an authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(e) Except for amounts which have been withheld and not paid, but which have been accrued on the Company’s books in the ordinary course of business, the Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

(f) The Company is not a party to any action or proceedings by any governmental authority for the collection or assessment of Taxes.

(g) There is no dispute or claim concerning any Tax liability of the Company either (i) claimed or raised by any authority in writing or (ii) as to which any of the stockholders and the directors and officers (and employees responsible for Tax matters) of the Company has knowledge based upon personal contact with any agent of such authority.

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(h) The Company has delivered to Buyer correct and complete copies of all federal and state income and sales Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company since December 31, 1997.

(i) The Company has not made any payments, is not obligated to make any payments, nor is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Code ss.280G. The Company is not a party to any Tax allocation or sharing agreement. The Company has no liability for the Taxes of any Person under Reg. ss.1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. The Company has not been a United States real property holding corporation within the meaning of Code ss.897(c)(2) during the applicable period specified in Code ss.897(c)(1)(A)(ii).

(j) The Company has not made any change in any method of accounting which could give rise to the recognition of income or to Tax liability following the date hereof. The Company has not made any closing adjustment in connection with an audit which could give rise to the recognition of income or to Tax liability following the date hereof. The Company has not entered into any installment sale transaction which could give rise to the recognition of income or to Tax liability following the date hereof.

(k) The unpaid Taxes of the Company did not, as of the Closing Date Balance Sheet, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Closing Date Balance Sheet, and do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company in filing its Tax Returns.

3.27 LITIGATION. Except as set forth on Schedule 3.27, there are no claims, counter- claims, actions, suits, grievances, arbitrations, orders, proceedings or, to the knowledge of the Company, investigations pending or, to the knowledge of the Company, threatened, against or involving the Company (or pending or, to the knowledge of the Company, threatened against any of the officers, directors or key employees of the Company with respect to their business activities on behalf of the Company), the Assets, any Employee Benefit Plan, or relating to the transactions contemplated hereby, before any court, agency, arbitrator or other governmental body; nor, to the knowledge of the Company, is there any reasonable basis for any such claim, action, suit, proceeding or governmental investigation. Except as set forth in Schedule 3.27, the Company is not directly subject to or affected by any order, judgment, decree or ruling of, or settlement enforceable in, any court or governmental agency. Except as set forth on Schedule 3.27, the Company is not engaged in any legal action to recover monies due it or for damages sustained by it.

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3.28 PRODUCT WARRANTIES. Except as set forth on Schedule 3.28, all products designed, manufactured, sold, serviced, leased or distributed by the Company (the “PRODUCTS”) at any time on or prior to the date hereof have been in conformance with all applicable contractual commitments and all express or implied warranties of the Company, and no liability exists for replacement thereof, recall or other damages in connection with such sales or deliveries at any time prior to the date hereof (except as may be reflected or reserved for in the Financial Statements). Except as set forth on Schedule 3.28, the Company has not been notified in writing of any claims for and, to the knowledge of the Company, there are no threatened claims for any product returns, recalls, warranty obligations or product services relating to any of its Products (including, without limitation, information products) or services.

3.29 DEFECTS IN PRODUCTS OR DESIGNS; PRODUCT SAFETY.

(a) There has been no pattern of defects in the design, construction, manufacturing or installation of any Product by the Company or its employees or agents in connection with the Business that would adversely affect the performance or quality of such Product. Each Product has been designed, manufactured, packaged and labeled in compliance with all regulatory, engineering, industrial and other codes applicable thereto and the Company has received no written notice of any alleged noncompliance with any such code. Each Product advertised or represented as being rated or approved by a rating organization, such as Underwriters’ Laboratories or other similar organizations, complies with all conditions of such rating or approval. The amounts reflected as product liability reserves in the Financial Statements are sufficient to satisfy any claims, whether known or unknown, fixed or contingent, which have been or may be made against the Company with respect to product liability claims.

(b) The Company has not been required to file, nor has it filed, a notification or other report with the United States Consumer Product Safety Commission or any other governmental agency concerning actual or potential hazards with respect to any Product.

3.30 ENVIRONMENTAL AND SAFETY REQUIREMENTS. Except as set forth on Schedule 3.30:

(a) To the knowledge of the Company, the Company has complied and is in compliance with all applicable Environmental and Safety Requirements, and the Company possesses all required Permits and has filed all notices or applications, required thereby.

(b) (i) The Company has never generated, transported, treated, stored, disposed of, arranged for the disposal of or otherwise handled any Hazardous Materials at any site, location or facility owned or operated or used by the Company in the Business or at any offsite location and (ii) no Hazardous Materials are present on, in, under or emanating from the Leased Real Property, and the Leased Real Property contains no Hazardous Materials except as, for either (i) or (ii), would not result in a condition in violation of, or any liability under, any applicable Environmental and Safety Requirements. To the knowledge of the Company, there are no underground storage tanks on the Leased Real Property.

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(c) The Company has not been subject to, nor has the Company received any notice (written or oral) of, any private, administrative or judicial action, order, or investigation or any notice (written or oral) of any intended private, administrative, or judicial action, order or investigation relating to any violation of Environmental and Safety Requirements or the presence or alleged presence of Hazardous Materials in, under, upon, or emanating from any real or immovable property now or previously owned or used by the Company in the Business or any offsite location, and, to the knowledge of the Company, there is no reasonable basis in fact or law for any such notice or action; and there are no pending or threatened actions, investigations or, to the knowledge of the Company, orders or proceedings (or notices of potential actions or proceedings) from any governmental agency or any other entity regarding any matter relating to Environmental and Safety Requirements.

(d) To the knowledge of the Company, no facts, events or conditions with respect to the past or present operations or facilities of the Company, its assets or the Business exist which would reasonably be expected to interfere with or prevent continued compliance with, or would give rise to any common law or statutory liability or otherwise form the basis of any claim, action, suit, proceeding, hearing or investigation against or involving its assets or the Business under any Environmental and Safety Requirement based on any such fact, event or circumstance, including, without limitation, liability for cleanup costs, personal injury or property damage.

(e) There are no engineering or environmental studies with respect to the Company, the Leased Real Property or the Business of which the Company has possession or control.

(f) For purposes of this Agreement, “ENVIRONMENTAL AND SAFETY REQUIREMENTS” means all federal, state and local or municipal laws, rules, regulations, ordinances, orders, statutes and requirements, and all common law, relating to public health and safety, worker health and safety, pollution or protection of the environment, all as amended or hereafter amended. For purposes of this Agreement, “HAZARDOUS MATERIALS” means (A) hazardous materials, hazardous substances, extremely hazardous substances or hazardous wastes, as those terms are defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. ss.6901 et seq., and any other Environmental and Safety Requirements; (B) petroleum, including, without limitation, crude oil or any fraction thereof which is liquid at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute); (C) any radioactive material, including, without limitation, any source, special nuclear, or by-product material as defined in 42 U.S.C. ss.2011 et seq.; (D) asbestos in any form or

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condition; and (E) any other material, substance or waste to which liability or standards of conduct may be imposed under any Environmental and Safety Requirements.

3.31 CONDUCT OF THE BUSINESS. Except as set forth on Schedule 3.31, since the Closing Date Balance Sheet Date, the Company has conducted the Business only in the ordinary course of business consistent with past custom and practice, and has incurred no liabilities other than in the ordinary course of business consistent with past custom and practice and there has been no Material Adverse Change. Without limitation of the foregoing and except as set forth on Schedule 3.31, since the Closing Date Balance Sheet Date, the Company has not:

(a) accelerated or delayed the manufacture, shipment or sale of any product in a manner inconsistent with past practices;

(b) sold, assigned or transferred any asset or property right (other than inventory in the ordinary course of business), or mortgaged, pledged or subjected such asset or property right to any Lien, charge or other restriction, except for Liens for current property taxes not yet due and payable;

(c) sold, assigned, transferred, abandoned or permitted to lapse any licenses or permits which are required for the operation of the Company, or any of the Proprietary Rights or other intangible assets, or disclosed any material proprietary confidential information to any person, granted any license or sublicense of any rights under or with respect to any Proprietary Rights or other intangible assets;

(d) made or granted any increase in, or amended (except as may be required by law) or terminated, any existing plan, program, policy or arrangement, including, without limitation, any Employee Benefit Plan or arrangement or adopted any new Employee Benefit Plan or arrangement, or entered into, modified or terminated any new collective bargaining agreement or multiemployer plan;

(e) undertaken any employee layoffs that could implicate the WARN Act, as defined in SECTION 3.18 hereof;

(f) conducted the cash management customs and practices (including the timing of collection of receivables and payment of payables and other current liabilities) or maintained the books and records of the Company other than in the usual and ordinary course of business consistent with past custom and practice;

(g) made any loans or advances to, or guarantees for the benefit of, or entered into any transaction with any stockholder, employee, officer or director of the Company other than ordinary course advances for travel and entertainment;

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(h) suffered any extraordinary loss, damage, destruction or casualty loss to the Business or waived any rights of value in excess of $25,000, whether or not covered by insurance and whether or not in the ordinary course of business;

(i) received notification that any customer or supplier will stop or decrease in any material respect the rate of business done with the Company;

(j) issued any security of the Company or granted any rights to purchase any securities of the Company;

(k) declared, set aside or paid any dividend or distribution of cash or other property or purchased, redeemed or otherwise acquired any shares of the Company’s capital stock, or made any other payments to any stockholder;

(l) amended or authorized the amendment of the governing documents of the Company;

(m) entered into any other material transaction, other than in the ordinary course of business consistent with past custom and practice; or

(n) committed to any of the foregoing.

3.32 ABSENCE OF QUESTIONABLE PAYMENTS. Neither the Company nor, to the knowledge of the Company, any manager, officer, agent, employee or other Person acting on behalf of the Company has (a) used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 104 of the Foreign Corrupt Practices Act of 1977 (15 U.S.C. ss.79dd-2), as amended, or any other applicable foreign, federal or state law; or (b) accepted or received any unlawful contributions, payments, expenditures or gifts.

3.33 GOVERNMENT CONTRACTS. Except as set forth on Schedule 3.33, the Company is not party to, or bound by the provisions of, any contract (including purchase orders, blanket purchase orders and agreements and delivery orders) with the United States government or any department, agency, or instrumentality thereof or any state or local governmental agency or authority.

3.34 CORPORATE NAME; BUSINESS LOCATION. During the past ten (10) years, except as set forth on Schedule 3.34, the Company has not been known as or used any corporate, fictitious or trade name except “THM Biomedical, Inc.” Except as set forth on Schedule 3.34, the Company has not been the surviving corporation of a merger or consolidation nor has it acquired

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all or substantially all of the assets of any Person. During the past ten (10) years, the Company has not had an office or place of business other than as listed on Schedule 3.34.

3.35 DISCLOSURE. This Agreement, the Company Transaction Documents, the schedules and exhibits hereto, and the financial statements and other materials referred to herein as having been delivered to Buyer, do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained therein or herein not misleading in light of the circumstances under which they were made. There is no fact known to the Company, Thomas Maas, William Maas and/or John Brekke relating to the business, affairs, assets, prospects, operations, employee relations or condition, financial or otherwise, of the Company that may materially adversely affect the same which has not been disclosed in writing to Buyer by the Company.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby represents and warrants to the Company as follows:

4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has full power and authority to execute and deliver this Agreement and the other Buyer Transaction Documents, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

4.2 AUTHORIZATION. The execution and delivery of this Agreement and the Buyer Transaction Documents, and the performance by Buyer of its obligations hereunder and thereunder, have been duly authorized by all necessary corporate action. This Agreement and the other Buyer Transaction Documents constitute the legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms.

4.3 NO VIOLATION. The execution, delivery and performance by Buyer of this Agreement and the other Buyer Transaction Documents and the consummation of the transactions contemplated herein and therein will not:

(a) result in the breach of any of the terms or conditions of, or constitute a default under, or in any manner release any party thereto from any obligation under, any mortgage, note, bond, contract, indenture, agreement, license or other instrument or obligation of any kind or nature to which Buyer is now a party or by which any of its properties or assets may be bound;

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(b) violate any order, writ, injunction regulation, statute or decree of any court, administrative agency or governmental body specifically applicable to Buyer; or

(c) violate any provision of the governing documents of Buyer.

4.4 NO CONSENT REQUIRED. No consent, approval, order or authorization of, or declaration, filing or registration with, any person or governmental authority is required to be made or obtained by Buyer in connection with the authorization, execution, delivery or performance of this Agreement, the other Buyer Transaction Documents or the transactions contemplated hereby and thereby.

4.5 DISCLOSURE. This Agreement, the Buyer Transaction Documents, the schedules and exhibits hereto, and the financial statements and other materials referred to herein as having been delivered to the Company, do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained therein or herein not misleading in light of the circumstances under which they were made. There is no fact known to Buyer relating to the business, affairs, assets, prospects, operations, employee relations or condition, financial or otherwise, of Buyer that may materially adversely affect the same which has not been disclosed in writing to the Company by Buyer.

ARTICLE V

CLOSING

5.1 CLOSING. The transactions that are the subject of this Agreement shall be consummated at a closing (the “CLOSING”) which shall be held at the offices of Katten Muchin Zavis, 525 West Monroe Street, Chicago, Illinois 60661 (or at such other place as the parties may mutually agree), on a date reasonably designated by the Buyer (the “CLOSING DATE”). Notwithstanding the foregoing, the transactions that are the subject of this Agreement shall be deemed to have occurred as of the close of business on August 31, 2000.

5.2 DELIVERIES BY THE COMPANY. At the Closing, the Company shall execute and deliver to Buyer:

(a) Instruments of Conveyance. The Bill of Sale in the form attached hereto as Exhibit 1.3(a).

(b) Opinion of Counsel. An opinion of counsel of the Company, dated as of the Closing Date, in the form of Exhibit 5.2(b) attached hereto.

(c) Certificate of Thomas Maas, William Maas and John Brekke; Resolutions. A certificate of Thomas Maas, William Maas and John Brekke certifying as to (i) the accuracy

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and completeness of the representations and warranties of the Company set forth herein; (ii) resolutions of the Board of Directors and Stockholders of the Company authorizing the execution and delivery of this Agreement and the Company Transaction Documents and the performance of the transactions contemplated hereby and thereby; (iii) a certificate of good standing of the Company, dated as of a date not more than fifteen (15) days prior to the Closing Date, issued by the Secretary of State of Minnesota; (iv) its By-laws and (v) its Articles of Incorporation, certified by the Secretary of State of the State of Minnesota.

(d) Third Party Consents. Third party consents in the form attached hereto as Exhibit 5.2(d) for those contracts identified on Schedule 3.6.

(e) Non-Competition Agreements. The Non-Competition Agreements, executed by each of Thomas Maas and William Maas.

(f) Employment Agreement. The Employment Agreement, executed by John Brekke.

5.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver to the Company:

(a) Instruments of Assumption. The Bill of Sale, executed by Buyer.

(b) Initial Cash Payment. The Initial Cash Payment wired to the bank account(s) designated by the Company.

(c) Notes. The Notes, executed by Buyer.

(d) Resolutions. Resolutions of Buyer authorizing the execution and delivery of this Agreement and the Buyer Transaction Documents and the performance of the transactions contemplated hereby and thereby certified by the Secretary of Buyer.

(e) Other Agreements. The Non-Competition Agreements and the Employment Agreement, each executed by KNSY.

ARTICLE VI

COVENANTS AFTER CLOSING

6.1 THE COMPANY’S ACCESS TO INFORMATION. After the Closing Date, Buyer will give, or cause to be given, to the Company, its officers, directors and stockholders and their representatives, during normal business hours, such reasonable access to the personnel, properties, titles, contracts, books, records, files and documents and at the Company’s expense copies of titles, contracts, books, records, files and documents as is necessary to allow the Company and

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its officers, directors and stockholders to obtain information in connection with the preparation and any audit of the Company’s Tax Returns and any claims, demands, other audits, suits, actions or proceedings by or against the Company as the previous owners and operators of the Business. Buyer agrees to cooperate fully with the Company after the Closing Date, at the Company’s expense, with respect to any claims, demands, tax or other audits, suits, actions and proceedings by or against the Company as the previous owners and operators of the Business.

6.2 INTENTIONALLY OMITTED.

6.3 LIABILITY FOR TAXES; RETENTION OF RECORDS. In accordance with SECTION 6.4, the Company shall indemnify and hold Buyer harmless from and against all liabilities for Taxes imposed upon, or incurred by, the Company at any time or attributable to the operation of the Business prior to the Closing Date. Buyer and the Company shall retain all books, records and other data pertaining to Tax matters for all open periods through the Closing Date. In particular, Buyer and the Company shall retain all Tax Returns, schedules and work papers, and all material records and other documents relating thereto with respect to the operation of the Company prior to the Closing Date, until the expiration of the statute of limitations (and, to the extent notified by Buyer or the Company, any extensions thereof) of the respective Tax periods.

6.4 INDEMNIFICATION.

(a) Indemnification by the Company and the Stockholders. Subject to the indemnification limits described under subparagraph 6.4(h) below, from and after the Closing, the Company and the Stockholders, severally (based upon their proportionate ownership of Company common stock set forth on Schedule 3.3) and not jointly, agree to indemnify, defend and save Buyer, KNSY and their Affiliates and Plan Affiliates, and each of their respective officers, directors, employees, attorneys, agents, Employee Benefit Plans and fiduciaries, plan administrators or other parties dealing with such plans (each, a “BUYER INDEMNIFIED PARTY”), forever harmless from and against, and to promptly pay to a Buyer Indemnified Party or reimburse a Buyer Indemnified Party for, any and all liabilities, obligations, deficiencies, demands, claims, suits, actions, or causes of action, assessments, losses, costs, expenses, interest, fines, penalties, actual or punitive damages or costs or expense of any and all investigations, proceedings, judgments, environmental analysis, remediations, settlements and compromises (including reasonable fees and expenses of attorneys, accountants and other experts) (individually and collectively, the “LOSSES”) sustained or incurred by any Buyer Indemnified Party relating to, resulting from, arising out of or otherwise by virtue of any of the following:

(i)any misrepresentation or breach of a representation or warranty made herein or in the Company Transaction Documents by the Company;

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(ii) any non-compliance with or breach by the Company of any of the covenants or agreements contained in this Agreement or the Company Transaction Documents to be performed by the Company;

(iii) any liability or obligation of the Company or any assertion against a Buyer Indemnified Party, arising out of or relating, directly or indirectly, to any of the Excluded Liabilities; and

(iv) any claim for payment of fees and/or expenses as a broker or finder in connection with the origin, negotiation, execution or consummation of this Agreement based upon an alleged agreement between claimant and the Company or any of its Affiliates.

(b) Indemnification by Buyer. From and after the Closing, Buyer agrees to indemnify, defend and save the Company, its Affiliates, the Stockholders, and the Company’s officers, directors, employees, attorneys, agents and fiduciaries (each, a “COMPANY INDEMNIFIED PARTY”) forever harmless from and against, and to promptly pay to a Company Indemnified Party or reimburse a Company Indemnified Party for, any and all Losses sustained or incurred by any Company Indemnified Party relating to, resulting from, arising out of or otherwise by virtue of any of the following:

(i) any misrepresentation or breach of a representation or warranty made herein or in the Transaction Documents by Buyer;

(ii) non-compliance with or breach by Buyer of any of the covenants or agreements contained in this Agreement or the Buyer Transaction Documents to be performed by Buyer;

(iii) any liability or obligation of Buyer or any assertion against a Company Indemnified Party, arising out of or relating, directly or indirectly, to any of the Assumed Liabilities;

(iv) any claim for payment of fees and/or expenses as a broker or finder in connection with the origin, negotiation, execution or consummation of this Agreement based upon any alleged agreement between the claimant and Buyer; and

(v) any obligation of Buyer arising out of the conduct of the Business after the Closing Date.

(c) Indemnification Procedure for Third Party Claims. In the event that subsequent to the Closing any person or entity entitled to indemnification under this Agreement (an “INDEMNIFIED PARTY”) receives notice of the assertion of any claim or of the commencement

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of any action or proceeding by any person or entity who is not a party to this Agreement or an Affiliate of a party to this Agreement (including, but not limited to, any domestic or foreign court or governmental authority, federal, state or local) (a “THIRD PARTY CLAIM”) against such Indemnified Party, against which a party to this Agreement is required to provide indemnification under this Agreement (an “INDEMNIFYING PARTY”), the Indemnified Party shall give written notice together with a statement of any available information regarding such claim (and attaching a copy of all papers served with respect to such claim) to the Indemnifying Party within fifteen (15) days after learning of such claim (or within such shorter time as may be necessary to give the Indemnifying Party a reasonable opportunity to respond to such claim) (the “CLAIM NOTICE”). The Indemnifying Party shall have the right, upon written notice to the Indemnified Party (the “DEFENSE NOTICE”) within fifteen (15) days after receipt from the Indemnified Party of notice of such claim, which notice by the Indemnifying Party shall specify the counsel it will appoint to defend such claim (“DEFENSE COUNSEL”), to conduct at its expense the defense against such claim in its own name, or if necessary in the name of the Indemnified Party; provided, however, that the Indemnified Party shall have the right to approve the Defense Counsel, and in the event the Indemnifying Party and the Indemnified Party cannot agree upon such counsel within ten (10) days after the Defense Notice is provided, then the Indemnifying Party shall propose an alternate Defense Counsel, which shall be subject again to the Indemnified Party’s approval, provided that the Indemnifying Party shall be entitled to take such action as is reasonable under the circumstances to protect its rights pending agreement upon the selection of Defense Counsel. Notwithstanding the foregoing, the Indemnifying Party shall not be entitled to assume control of a Third Party Claim and shall pay the reasonable fees and expenses of counsel retained by the Indemnified Party if the Third Party Claim seeks injunctive or other equitable relief or if the Indemnified Party, in the Claim Notice, states that, based on advice of counsel, it believes that its interests in the Third Party Claims are or can reasonably be expected to be adverse to the interests of Indemnifying Party.

(i) In the event that the Indemnifying Party shall fail to give the Defense Notice within the time period described above, it shall be deemed to have elected not to conduct the defense of the subject claim, and in such event the Indemnified Party shall have the right to conduct such defense in good faith and to compromise and settle the claim without prior consent of the Indemnifying Party and such Indemnifying Party will be liable for all costs, expenses, settlement amounts or other Losses paid or incurred in connection therewith. If the Indemnifying Party is not entitled to assume the defense of a Third Party Claim because of reasons set forth in the last sentence of the preceding paragraph, the Indemnified Party may not settle the Third Party Claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld, if such settlement would lead to any liability or create any other obligation of the Indemnifying Party.

(ii) In the event that the Indemnifying Party does deliver a Defense Notice within the time period described above and thereby elects to conduct the defense of the subject claim, the Indemnifying Party shall diligently conduct such defense and the Indemnified Party will cooperate with and make available to the Indemnifying Party such

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assistance and materials as it may reasonably request, all at the expense of the Indemnifying Party, and the Indemnified Party shall have the right at its expense to participate in the defense assisted by counsel of its own choosing.

(iii) The Indemnifying Party may enter into any settlement of any Third Party Claim or cease to defend against such claim; provided, however, the Indemnifying Party may not enter into any settlement of any Third Party Claim or cease to defend against such claim without the prior written consent of the Indemnified Party if pursuant to or as a result of such settlement or cessation, (A) injunctive or other equitable relief would be imposed against the Indemnified Party, or (B) such settlement or cessation would lead to liability or create any financial or other obligation on the part of the Indemnified Party for which the Indemnified Party is not entitled to indemnification hereunder.

(iv) Any final judgment entered or settlement agreed upon in the manner provided herein shall be binding upon the Indemnifying Party, and shall conclusively be deemed to be an obligation with respect to which the Indemnified Party is entitled to prompt indemnification hereunder.

It is understood and agreed that if the Indemnifying Party is the Company and/or the Stockholders collectively for purposes of this paragraph (c) the Stockholders’ Representative shall be the agent of such persons respect to the matters arising hereunder in accordance with the provisions of SECTION 7.16.

(d) Direct Claims. It is the intent of the parties hereto that all direct claims by an Indemnified Party against a party hereto not arising out of Third Party Claims shall be subject to and benefit from the terms of this SECTION 6.4. Any claim under this SECTION 6.4 by an Indemnified Party for indemnification other than indemnification against a Third Party Claim (a “DIRECT CLAIM”) will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, and the Indemnifying Party will have a period of thirty (30) calendar days within which to satisfy such Direct Claims, which satisfaction shall, in the case of the Indemnifying Party being the Company and the Stockholders, be in accordance with the offset provisions of SECTION 6.4(H). If the Indemnifying Party disputes the Direct Claim asserted by the Indemnified Party, such dispute shall be resolved in accordance with the provisions of SECTION 7.8 herein. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have rejected such claim, in which event the Indemnified Party will be free to pursue such remedies as may be available to the Indemnified Party under this SECTION 6.4 or otherwise.

(e) Failure to Give Timely Notice. A failure by an Indemnified Party to give timely, complete or accurate notice as provided in SECTION 6.4(C) will not affect the rights or obligations of any party hereunder except and only to the extent that, as a result of such failure, any party entitled to receive such notice was deprived of its right to recover any payment under its applicable insurance coverage or was otherwise damaged as a result of such failure to give timely notice.

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(f) Survival of Representations and Warranties: Time Limits on Indemnification Obligations. All of the representations and warranties set forth in this Agreement or in any of the other Transaction Documents shall survive the execution and delivery of this Agreement and the consummation of the transactions until they expire and terminate on the fourth (4th) anniversary of this Agreement, except the representations and warranties contained in (i) SECTION 3.1 (AUTHORITY), SECTION 3.2 (ORGANIZATION AND QUALIFICATION) and SECTION 3.9(A) (TITLE TO ASSETS) shall survive indefinitely, (ii) SECTION 3.26 (TAXES) shall survive until thirty (30) days after the expiration of all applicable statutes of limitations (including extensions of said statutes) and (iii) SECTION 3.15 (INTELLECTUAL PROPERTY) shall survive until the third (3rd) anniversary of the date of this Agreement. In the event Buyer incurs a Loss (or asserts that a Loss may result from a contingent or unliquidated claim) and a claim is filed, prior to the end of such applicable period, the termination date shall be extended until such claim is fully resolved and Buyer appropriately indemnified for such Loss.

(g) Adjustment to Purchase Price. Any indemnification received under SECTION 6.3 or this SECTION 6.4 shall be, to the extent permitted by law, an adjustment to the Purchase Price.

(h) Indemnification Limits. The foregoing provisions of this SECTION 6.4 notwithstanding:

(i) the Company and the Stockholders shall not be liable under the indemnification obligations set forth in SECTION 6.4(A)(I) of this Agreement until, and then only to the extent that, the aggregate amount of such indemnification obligation of the Company and the Stockholders exceeds $110,000 (the “BASKET AMOUNT”); provided, however, that the Basket Amount shall not apply to any indemnification arising under SECTION 6.4(A)(I) as a direct or indirect result of any fraudulent acts committed by the Company, or arising as a result of a breach of SECTION 3.7 (with regard to breaches relating to the Closing Date Balance Sheet), SECTION 3.9(A) (TITLE TO ASSETS), or SECTION 3.26 (TAXES);

(ii) with respect to all indemnification obligations of the Company and the Stockholders other than for fraudulent acts committed by the Company or arising as a result of a breach of SECTION 3.1 (AUTHORITY), SECTION 3.2 (ORGANIZATION), SECTION 3.9(A) (TITLE TO ASSETS) and SECTION 3.26 (TAXES) the aggregate indemnification obligation of the Company and the Stockholders shall not be greater than the remaining aggregate Quarterly Payments owed the Stockholders pursuant to SECTION 2.1(B) (the “CEILING AMOUNT”) and the only source of recovery for such indemnification obligations shall be to withhold payment of and offset amounts due under the Notes severally payable to the Stockholders, which Buyer is hereby authorized to do, subject to the provisions of SECTION 7.8;

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(iii) the Ceiling Amount with respect to a breach of SECTION 3.15 shall be, notwithstanding the provisions of subparagraph (ii) above, $4,500,000 (the “IP CEILING AMOUNT”), at all times during the three year period ending on the third anniversary date of the Closing Date except that the IP Ceiling Amount shall not apply with respect to a breach of SECTION 3.15 resulting, directly or indirectly, from any fraudulent acts committed by the Company; and

(iv) Buyer shall not be liable under the indemnification obligations set forth in SECTION 6.4(B)(I) of this Agreement after the aggregate amount of such indemnification obligation of Buyer exceeds $4,500,000 (the “BUYER INDEMNIFICATION CEILING AMOUNT”); provided, however, that the Buyer Indemnification Ceiling Amount shall not apply to any indemnification arising under SECTION 6.4(B)(I) as a direct or indirect result of any fraudulent acts committed by Buyer.

6.5 RESTRICTIVE COVENANTS.

(a) Company’s Acknowledgment. The Company agrees and acknowledges that it is necessary that the Company undertake not to utilize its special knowledge of the Business and its relationships with customers and suppliers of the Company to compete with Buyer and the Company.

(b) Non-Compete. The Company hereby agrees that for a period commencing on the Closing Date and ending five (5) years from the Closing Date (the “RESTRICTED PERIOD”), the Company will not, directly or indirectly, as agent, consultant, stockholder, manager, partner or in any other capacity, own, operate, manage, control, engage in, invest in or participate in any manner in, act as a consultant or advisor to, render services for (alone or in association with any Person), or otherwise assist any Person that engages in or owns, invests in, operates, manages or controls any venture or enterprise that directly or indirectly engages or proposes to engage in the Business anywhere in the world (the “TERRITORY”).

(c) Non-Solicitation. Without limiting the generality of the provisions of SECTION 6.5(B) above, the Company hereby agrees that during the Restricted Period they will not, directly or indirectly, solicit, or participate as agent, consultant, stockholder, manager, partner or in any other capacity in any business which solicits, business from any Person which is or was a customer or supplier of the Business during the three (3) year period preceding the date of such solicitation, or from any successor in interest to any such Person for the purpose of securing business or contracts related to the Business. In addition, the Company hereby agrees that during the Restricted Period they will not directly or indirectly buy or engage in any discussions with any acquisition candidate with which the Company has engaged in discussions in the two (2) year period preceding the Closing.

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(d) Confidential Information. During the term of this Agreement and thereafter, the Company shall keep secret and retain in strictest confidence, and shall not, without the prior written consent of Buyer, furnish, make available or disclose to any third party or use for the benefit of the Company or any third party, any Confidential Information. As used in this SECTION 6.5(D), “CONFIDENTIAL INFORMATION” shall mean any information relating to the business or affairs of Buyer or the Business, and information relating to financial statements, customer identities, potential customers, employees, suppliers, servicing methods, equipment, programs, strategies and information, analyses, profit margins or other proprietary information used by the Company or the Buyer in connection with the Business; provided, however, that Confidential Information shall not include any information which is in the public domain or enters the public domain through no wrongful act on the part of the Company.

(e) Interference with Relationships. During the Restricted Period, the Company shall not, directly or indirectly, as agent, consultant, stockholder, manager, partner or in any other capacity without the prior written consent of Buyer employ, or engage, recruit or solicit for employment or engagement, any person who is employed or engaged by the Company on the date hereof and who is employed by the Buyer following the Closing, or otherwise seek to influence or alter any such person’s relationship with Buyer.

(f) Blue-Pencil. If any court of competent jurisdiction shall at any time deem the term of any particular restrictive covenant contained in this SECTION 6.5 too lengthy or the Territory too extensive, the other provisions of this SECTION 6.5 shall nevertheless stand, the Restricted Period shall be deemed to be the longest period permissible by law under the circumstances and the Territory shall be deemed to comprise the largest territory permissible by law under the circumstances. The court in each case shall reduce the Restricted Period and/or Territory to permissible duration or size.

(g) Property of the Business. All memoranda, notes, lists, records and other documentation or papers (and all copies thereof), including such items stored in computer memories, or microfiche or by any other means, which will become Buyer’s property (after the consummation of transactions contemplated by this Agreement), shall become Buyer’s property and shall be delivered to Buyer promptly on the request of Buyer.

(h) Remedies. The Company acknowledges and agrees that the covenants set forth in this SECTION 6.5 hereof are reasonable and necessary for the protection of Buyer’s business interests, that irreparable injury will result to Buyer if the Company breaches any of the terms of this SECTION 6.5, and that in the event of the Company’s actual or threatened breach of any of the provisions contained in this SECTION 6.5, Buyer will have no adequate remedy at law. The Company accordingly agrees that in the event of any actual or threatened breach by it of any of the provisions contained in this SECTION 6.5, Buyer shall be entitled to such injunctive and other equitable relief, without the necessity of showing actual monetary damages or posting of a bond, as may be deemed necessary or appropriate by a court of competent jurisdiction. Nothing contained herein shall be construed as prohibiting Buyer from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of any damages which it is able to prove.

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6.6 NAME CHANGE. The Company shall, as soon as practicable after the Closing, either (i) cease to use the name “THM Biomedical” and commence dissolution proceedings, or (ii) change its legal name to a name dissimilar to “THM Biomedical”.

ARTICLE VII

MISCELLANEOUS

7.1 NOTICES, CONSENTS, ETC. Any notices, consents or other communication required to be sent or given hereunder by any of the parties shall in every case be in writing and shall be deemed properly served if (a) delivered personally, (b) sent by registered or certified mail, in all such cases with first class postage prepaid, return receipt requested, (c) delivered by a recognized overnight courier service, or (d) sent by facsimile transmission with a confirmation copy sent by overnight courier, in each case, to the parties at the addresses as set forth below or at such other addresses as may be furnished in writing.

(a) If to Buyer:

THM Acquisition Sub, Inc.

c/o Kensey Nash Corporation

55 East Uwchlan Avenue

Exton, Pennsylvania 19341

Fax No.: (610) 524-0265

Attention: Holly C. Harrity

with a copy to:

Katten Muchin Zavis

525 West Monroe Street, Suite 1600

Chicago, Illinois 60661-3693

Fax No.: (312) 902-1061

Attention: David R. Shevitz, Esq.

(b) If to the Company:

THM Biomedical, Inc.

c/o Lakeside Mills

325 Lake Avenue South

Suite 612

Duluth, Minnesota 55802-2397

Fax No.: (218) 723-1539

Attention: Thomas H. Maas

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with copies to:

Lindquist & Vennum, P.L.L.P.

4200 IDS Center

Minneapolis, Minnesota 55402

Fax No.: (612) 371-3207

Attention: Richard A. Primuth, Esq.

(c) If to the Stockholders:

Thomas H. Maas

Stockholders’ Representative

2900 London Road

Duluth, Minnesota 55804

Date of service of such notice shall be (w) the date such notice is personally delivered, (x) three (3) days after the date of mailing if sent by certified or registered mail, (y) one (1) day after date of delivery to the overnight courier if sent by overnight courier or (z) the next succeeding business day after transmission by facsimile.

7.2 PUBLIC ANNOUNCEMENTS. The Company shall not make any public announcement or filing with respect to the transactions provided for herein without the prior consent of Buyer. Any press release or other announcement or notice regarding the transactions contemplated by this Agreement shall be made by Buyer, subject to prior review by the Company, if practical.

7.3 SEVERABILITY. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision.

7.4 AMENDMENT AND WAIVER. This Agreement may be amended, or any provision of this Agreement may be waived, provided, that, any such amendment or waiver will be binding on Buyer only if such amendment or waiver is set forth in a writing executed by Buyer, and provided, that, any such amendment or waiver will be binding upon the Company only if such amendment or waiver is set forth in a writing executed by the Company. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach.

7.5 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to the other.

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7.6 EXPENSES. Each of the parties shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement.

7.7 HEADINGS. The subject headings of Articles and Sections of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions.

7.8 GOVERNING LAW; ARBITRATION. This Agreement shall be construed and governed in accordance with the internal laws of the State of Minnesota without regard to the principles of conflicting laws. The parties shall negotiate in good faith to resolve any controversy, dispute or disagreement arising out of or relating to this Agreement or the breach of any provision of this Agreement. Any matter not resolved by negotiation shall be settled (a) first, by the parties trying in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association (“AAA”) (such mediation session to be held in Chicago, Illinois and to commence within thirty (30) days of the appointment of the mediator by the AAA), and (b) if the controversy, claim or dispute cannot be settled by mediation, then by arbitration administered by the AAA under its Commercial Arbitration Rules (such arbitration to be held in Chicago, Illinois before a single arbitrator and to commence within thirty (30) days of the appointment of the arbitrator by the AAA or such later date as is reasonable under the circumstances), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Nothing in this SECTION 7.8 shall be construed to prevent Buyer from seeking equitable relief through a court of law for violations of SECTION 6.5 of this Agreement.

7.9 ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable or delegable by any party without the prior written consent of the other party, provided, however, that Buyer shall be allowed to assign its rights and benefits hereto to (a) an Affiliate so long as the Affiliate assumes Buyer’s obligations hereunder, (b) in connection with a sale of all or substantially all of Buyer’s assets so long as the assignee assumes Buyer’s obligations hereunder and (c) to Buyer’s lenders as collateral for security purposes.

7.10 DEFINITIONS. For purposes of this Agreement, the following terms have the meaning set forth below:

“AFFILIATE” means a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person or body corporate and shall also include, for individuals, any spouse, sibling, direct ancestor, child or grandchild, or any spouse of a sibling, direct ancestor, child or grandchild.

“BUYER TRANSACTION DOCUMENTS” means the Bill of Sale, the Note, the Non-Competition Agreements and the Employment Agreement, and any other agreement, document, certificate or instrument to which the Buyer is a party and which is being delivered pursuant to this Agreement.

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“CHANGE OF CONTROL” means a change in control which would be required to be reported in response to item 6(e) on Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the company is then subject to such reporting requirement, including, without limitation, if:

(a) Any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “EXCHANGE ACT”), becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the company representing 50% or more of the combined voting power of the company’s then outstanding securities;

(b) The company consummates a merger, consolidation, share exchange, division or other reorganization of the company with any corporation or entity, unless the shareholders of the company immediately prior to such transaction beneficially own, directly or indirectly (A) if the company’s is the surviving corporation in such transaction, 50% or more of the combined voting power of the company’s outstanding voting securities as well as 50% or more of the total market value of the company’s outstanding equity securities, or (B) if the company is not the surviving corporation, 51% of the combined voting power of the surviving entity’s outstanding voting securities as well as 51% or more of the total market value of such entity’s outstanding equity securities; or

(c) Any sale or transfer of all or substantially all of the assets of the company to another person.

“CODE” means the Internal Revenue Code of 1986, as amended.

“COMPANY TRANSACTION DOCUMENTS” means the Bill of Sale, and any other agreement, document, certificate or instrument signed by Thomas H. Maas on behalf of the Company to which the Company is a party and which is being delivered pursuant to this Agreement.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable as the date of determination, consistently applied.

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“KNOWLEDGE” means, with respect to (i) the Company, knowledge that is actually possessed by Thomas Maas, William Maas and/or John Brekke, and (ii) any other Person, knowledge that is actually possessed by such Person.

“MATERIAL ADVERSE EFFECT” means any change or effect that (i) individually or when taken together with all other changes or effects that have occurred during any relevant period of time prior to the date of determination of the occurrence of the Material Adverse Effect, is materially adverse to the business, assets (including intangible assets), condition (financial or otherwise), results of operation or prospects of the Company taken as a whole, or (ii) materially adversely affects the ability of the Company to perform their obligations under this Agreement or to consummate the transactions contemplated hereby, or (iii) materially adversely affects the ability of Buyer to conduct the Business after the Closing Date substantially as such Business is being conducted as of the date hereof.

“PERMITTED LIENS” means (i) liens for Taxes not yet due and payable or delinquent, (ii) minor imperfections of title, easements, restrictions and encumbrances of record, (iii) liens in respect of pledges or deposits under workmans’ compensation laws or similar legislation and (iv) carrier’s, warehouseman’s mechanics, laborers’ and materialmen’s and similar liens, if the obligations secured by such liens are not then delinquent or are being contested in good faith by appropriate proceedings disclosed on Schedule 3.28 which, in the case of all of the foregoing (i)- (iv), could not be reasonably expected to, individually or in the aggregate, materially interfere with the present use of or materially impair the value of such assets or properties or otherwise have a Material Adverse Effect.

“PERSON” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated association, corporation, entity or government (whether federal, provincial, state, county, city or otherwise, including, without limitation, any instrumentality, division, agency or department thereof).

“TAX” means any federal, provincial, state, local or foreign income, profits, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, place of business, excise, natural resources, capital, severance, stamp, occupation, premium, windfall profit, environmental, customs, (or similar) duties, real or immovable property, personal or movable property, intangible property, capital stock, social security, employment, unemployment, disability, payroll, license, deductions at source employee or other withholding, or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing; whether disputed or not.

“TAX RETURNS” means returns, declarations, reports, claims for refund, information returns or other documents (including any related or supporting schedules, statements

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or information and any amendment thereof) filed or required to be filed in connection with the determination, assessment or collection of any Taxes of any party or the administration of any laws, regulations or administrative requirements relating to any Taxes.

“TRANSACTION DOCUMENTS” means the Buyer Transaction Documents and the Company Transaction Documents.

7.11 ENTIRE AGREEMENT. This Agreement, the Preamble and all the Schedules and Exhibits attached to this Agreement (all of which shall be deemed incorporated in the Agreement and made a part hereof) and the Transaction Documents set forth the entire understanding of the parties, and supersede and preempt all prior oral or written understandings and agreements with respect to the subject matter hereof (including, without limitation, the term sheet), and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof, and may be modified only by instruments signed by all of the parties hereto.

7.12 THIRD PARTIES. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity, other than the parties to this Agreement and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement.

7.13 INTERPRETATIVE MATTERS. Unless the context otherwise requires, (a) all references to Articles, Sections or Schedules are to Articles, Sections or Schedules in this Agreement, (b) each accounting term not otherwise defined in this Agreement has the meaning assigned to it in accordance with GAAP, (c) words in the singular or plural include the singular and plural, pronouns stated in either the masculine, the feminine or neuter gender shall include the masculine, feminine and neuter and (d) the term “including” shall mean by way of example and not by way of limitation. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or questions of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement.

7.14 BROKERS AND TRANSACTION PAYMENTS. Except as set forth on Schedule 7.14, each party warrants to the other that it has not employed or used the services of or incurred any liability to any broker, finder or other third party in connection with the transaction contemplated by this Agreement. The Company and the Stockholders shall indemnify Buyer for any claims made by those Persons set forth on Schedule 7.14 in accordance with SECTION 6.4(A)(IV) of this Agreement.

7.15 FURTHER ASSURANCES. The Company will execute and deliver such further instruments of conveyance and transfer and take such additional action as Buyer may reasonably request to effect, consummate, confirm, or evidence the transactions contemplated hereby. The Company and Buyer will also do such acts as are necessary to perform their representations, warranties, covenants and agreements herein.

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7.16 APPOINTMENT OF STOCKHOLDERS’ REPRESENTATIVE. Each of the Stockholders signing this Agreement hereby appoints Thomas H. Maas (the “STOCKHOLDERS’ REPRESENTATIVE”) with full power and authority to act as the representative, agent and attorney-in-fact of each such Stockholder in connection with fulfilling the obligations of such Stockholders under this Agreement and to perform all acts required hereunder, including, but not limited to, (i) making all decisions relating to the resolution and settlement of any disputes under this Agreement, whether relating to such Stockholders’ indemnification obligations hereunder or otherwise, and, in connection therewith, without limitation, receiving and delivering all notices, giving all approvals and waivers, signing and entering into all agreements, releases, certificates and instruments and exercising all rights of each such Stockholder in regard to his rights and obligations under this Agreement, (ii) directing Buyer to pay funds otherwise payable pursuant to the Notes delivered under SECTION 2.1, paragraph (b) to the Stockholders’ Representative to enable Stockholders’ Representative to have funds available to pay expenses incurred in the performance of his duties hereunder; and (iii) taking in general all action which the Stockholders’ Representative, in his sole discretion, considers necessary or proper in connection with or to carry out the transactions contemplated herein. Each of the Stockholders signing this Agreement acknowledges and agrees that any payment made to the Stockholders’ Representative pursuant to clause (ii) of the preceding sentence shall be deemed payment of such amount to the Stockholder for purposes of discharging Buyer’s obligation to such Stockholder. If the Stockholders’ Representative shall die, become totally incapacitated, shall otherwise be unable to perform his or her duties or shall resign from such position, the Stockholders holding a majority of the Company’s stock on the date hereof shall appoint the new Stockholders’ Representative to fill such vacancy (“ALTERNATE STOCKHOLDERS’ REPRESENTATIVE”) and shall notify Buyer concurrent with making such appointment. All decisions and actions of the Stockholders’ Representative or the Alternate Stockholders’ Representative shall be binding upon all of the Stockholders and no Stockholder shall have the right to object, dissent from, protest or otherwise contest the same. The Buyer shall be permitted to rely upon any written instrument or document executed by the Stockholders’ Representative or Alternative Stockholders’ Representative. Buyer agrees and acknowledges that the Stockholders’ Representative, the Alternate Stockholders’ Representative and their respective affiliates shall have no liability to Buyer for any act or omission in their capacity as the Stockholders’ Representative and the Alternate Stockholders’ Representative. Each Stockholder agrees and acknowledges that the Stockholders’ Representative, the Alternate Stockholders’ Representative and their respective affiliates shall have no liability to such Stockholder for any act or omission in their capacity as the Stockholders’ Representative and the Alternate Stockholders’ Representative except acts or omissions of the Stockholders’ Representative or the Alternate Stockholders’ Representative which constitute gross negligence, fraud or willful violation of law. To the extent Stockholders’ Representative requires funds to fulfill his obligations under this SECTION 7.16 in addition to funds derived from Buyer’s payment obligations under the Notes, each Stockholder severally covenants to reimburse the Stockholders’ Representative or the Alternate Stockholders’ Representative on demand for such Stockholder’s pro rata share (determined in proportion to the percentage of Company shares owned as shown on Schedule 3.3) of all expenses incurred by the Stockholders’ Representative or the Alternate

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Stockholders’ Representative in the performance of his duties hereunder. The Stockholders’ Representative, the Alternate Stockholders’ Representative and their affiliates shall be and hereby are indemnified and held harmless by each Stockholder from and against any and all claims, demands, liabilities, costs, expenses, damages, losses, suits, proceedings and actions, whether judicial, administrative, investigative or otherwise, of any nature whatsoever known or unknown, liquidated or unliquidated, that may be asserted against the Stockholders’ Representative, the Alternate Stockholders’ Representative or any of their affiliates or in which any of such persons may become involved, as a party or otherwise, arising out of the performance of the duties set forth in this SECTION 7.16; provided, that, the maximum liability of any Stockholder pursuant to this SECTION 7.16 to the Stockholders’ Representative shall be limited to and not exceed the portion of the Purchase Price payable to such Stockholder less the amount paid to Buyer to fulfill the indemnification obligation of such Stockholder pursuant to this Agreement (it being understood that nothing in this SECTION 7.16 shall affect or diminish any Stockholder’s indemnification obligation to Buyer pursuant to this Agreement), provided further, that, neither the Stockholders’ Representatives, the Alternate Stockholders’ Representative nor any of their affiliates shall be entitled to indemnification hereunder if it shall have been determined by a court of competent jurisdiction or as part of a settlement that such person acted so as to be liable for gross negligence, fraud or willful violation of law.

7.17 GUARANTY. KNSY hereby unconditionally guarantees (the “GUARANTY”) to the Company and the Stockholders (collectively, the “BENEFICIARIES”) the full and complete performance and observance by Buyer of all covenants, conditions and agreements contained in this Agreement to be performed and/or observed by Buyer hereunder, including, without limitation, the obligations of Buyer to make the Quarterly Payments pursuant to SECTION 2.1(B) (the “OBLIGATIONS”). The undersigned further covenants and agrees that this Guaranty shall remain and continue in full force and effect as to any amendment or modification of this Agreement.

KNSY hereby agrees that its liability under this Guaranty shall not be affected or reduced by any agreement between the Beneficiaries and Buyer in regard to the compromise, settlement, surrender, release, discharge, renewal, extension, modification, amendment, alteration, subordination, or indulgence with respect to or failure, neglect or omission to collect or enforce the Obligations. KNSY hereby expressly waives diligence in collection or prosecution, presentment, demand or protest or in giving notice to anyone of protest, dishonor, default, or nonpayment or of the creation or existence of any Obligation or of the acceptance of this Guaranty or any other matters or things whatsoever relating to the Obligations. In their discretion, Beneficiaries may proceed to collect any and all Obligations directly from KNSY without first making demand upon Buyer.

This is a continuing Guaranty and shall not be revoked by dissolution, merger, bankruptcy or insolvency of KNSY with respect to all Obligations arising prior to any such event. In the event that this Guaranty is revoked by KNSY, said revocation shall have no effect on the continuing liability of KNSY to guarantee unconditionally the prompt payment of all Obligations

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which arose before the revocation became effective, including such prior Obligations which were subsequently renewed, modified, or extended after the revocation became effective. If KNSY shall become the subject of any bankruptcy or insolvency proceedings, KNSY’s liability hereunder to pay the Obligations shall become immediately due and payable whether or not the Obligations are then due and payable by the Buyer.

This Guaranty shall inure to the benefit of the Beneficiaries, their successors and assigns and shall be binding on the administrators, successors and assigns of KNSY.

Upon request, KNSY shall deliver a guaranty, substantially the same as the foregoing, specifically applicable to each of the Notes.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

THE COMPANY:

THM Biomedical, Inc., a Minnesota corporation

By:

Name:

Its:

BUYER:

THM Acquisition Sub, Inc., a Delaware corporation

By:

Name:

Its:

KNSY:

Kensey Nash Corporation, a Delaware corporation

By:

Name:

Its:

THE STOCKHOLDERS:

Thomas Maas

James Rhude

Edward Szachowicz

John Brekke

William Maas

Randall Maas

Michael Maas

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SCHEDULES

Schedule 1.2(b)	-	Excluded Liabilities
Schedule 2.1	-	Allocation of Payments
Schedule 2.3	-	Purchase Price Allocation
Schedule 3.3	-	Capital Stock
Schedule 3.6	-	Consents
Schedule 3.7	-	Financial Statements
Schedule 3.8	-	Liabilities
Schedule 3.9	-	Condition & Location of Assets
Schedule 3.10	-	Compliance with Laws; Permits
Schedule 3.11(a)	-	Leased Real Property
Schedule 3.13	-	Material Contracts
Schedule 3.14	-	Personal Property
Schedule 3.15	-	Intellectual Property
Schedule 3.16	-	Employee Benefit Plans
Schedule 3.17	-	Employees
Schedule 3.18	-	Labor and Employment Matters
Schedule 3.19	-	Workers Compensation
Schedule 3.20	-	Suppliers
Schedule 3.21	-	Customers
Schedule 3.22	-	Distributors and Representatives
Schedule 3.23	-	Affiliate Transactions
Schedule 3.24	-	Insurance
Schedule 3.25	-	Bank Accounts
Schedule 3.27	-	Litigation
Schedule 3.28	-	Product Warranties
Schedule 3.30	-	Environmental
Schedule 3.31	-	Conduct of Business
Schedule 3.33	-	Government Contracts
Schedule 3.34	-	Corporate Name; Business Location
Schedule 7.14	-	Brokers

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EXHIBITS

Exhibit 1.3	-	Form of Bill of Sale, Assignment and Assumption Agreement
Exhibit 2.1(b)	-	Form of Promissory Note
Exhibit 2.2(a)(i)	-	Form of Non-Competition Agreement for Thomas Maas
Exhibit 2.2(a)(ii)	-	Form of Non-Competition Agreement for William Maas
Exhibit 2.2(b)	-	Form of Employment Agreement
Exhibit 5.2(b)	-	Form of the Company’s Counsel Opinion
Exhibit 5.2(d)	-	Form of Third Party Consent

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EX-10.5

Exhibit 10.5

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”), is made and entered into as of the 11^th of May, 2006, by and between Kensey Nash Corporation, a Delaware corporation (the “Company”), and Wendy F. DiCicco (“Executive”). Capitalized terms are defined in Exhibit C. In addition, certain other capitalized terms used herein have the definitions given to them in the first places in which they are used.

WHEREAS, the Company wishes to retain Executive as an executive employee, and Executive wishes to be employed by the Company in such capacity, all upon the terms and conditions hereinafter set forth;

WHEREAS, the Company and Executive entered into that certain Employment Agreement dated as of October 1, 2003 and that certain Termination and Change in Control Agreement dated as of September 1, 2003; and

WHEREAS, the Company and Executive desire to amend and restate that Employment Agreement and that Termination and Change in Control Agreement in one single document as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants of parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. EMPLOYMENT OF EXECUTIVE. The Company engages and employs Executive in an executive capacity and Executive accepts such employment and agrees to act as an employee of the Company in accordance with the terms of employment hereinafter specified. Executive shall hold the office of Chief Financial Officer and shall, subject to the direction and supervision of the Board, (a) have the responsibilities and authority customarily associated with such office, and (b) perform such other duties and responsibilities as the Board shall from time to time assign to her. Executive agrees diligently and faithfully to serve the Company and to devote her best efforts, her full business time and her highest talents and skills to the furtherance and success of the Company’s business.

2. COMPENSATION. As full and complete compensation to Executive for all services to be rendered by Executive hereunder, the Company shall pay Executive as follows:

(a) The Company shall, during the term of Executive’s full-time employment, pay or cause to be paid to Executive a base salary at the rate of $197,600 per annum, or Executive’s most recent per annum base salary, whichever is greater (the “Base Salary”). Such Base Salary shall be paid in periodic installments at the discretion of the Company (but not less frequently than monthly) in accordance with the Company’s normal mode of executive salary payment.

(b) The Company may, during the term of Executive’s employment, pay or cause to be paid to Executive an annual cash bonus not to exceed 75% of Executive’s Base Salary for the applicable Performance Period. Such annual cash bonus, if any, shall be paid following the end of the applicable Performance Period, but in no event shall such annual cash bonus be paid later than March 15 following the calendar year in which the applicable Performance Period ends (e.g., the annual cash bonus for the Performance Period ending June 30, 2008 must be paid no later than March 15, 2009). The amount of the Executive’s cash bonus will be determined on an annual basis, in connection with the applicable Company bonus compensation plan (a “Bonus Plan”) and based upon specified goals and objectives, at the discretion of the Chief Executive Officer and the Chief Operating Officer. In addition, Restricted Stock, Stock Options and other equity-based awards may be awarded to the Executive in accordance with the applicable Company incentive compensation plan (an “Incentive Plan”).

3. TERM OF EMPLOYMENT; SEVERANCE.

(a) The term of Executive’s employment hereunder (the “Employment Term”) shall commence on the date hereof and shall expire two (2) years after such date. Thereafter, as of the date the Employment Term would otherwise end, the Employment Term may be extended by the Company for a period of at least one (1) year (a “Renewal Term”). Any such Renewal Term shall also be referred to in the Agreement as the Employment Term. The Company shall provide written notice to the Executive of its intent to extend the Employment Term at least sixty (60) days prior to the end of the Employment Term or a subsequent Renewal Term.

(b) Termination of Executive’s employment pursuant to this Agreement or voluntary termination of employment shall not constitute a waiver of any of Executive’s obligations hereunder that survive termination hereof, including without limitation those arising under Paragraphs 6 through 10 inclusive hereof.

(c) In the event Executive’s employment is terminated by the Company without Cause during the Employment Term, the Company shall pay to Executive a severance fee equal to the greater of (i) any amount of Base Salary remaining until the expiration of the original two-year Employment Term and a payment equal to one Estimated Bonus for each year of the original two-year Employment Term for which the Executive has not yet received such a bonus payment and to which the Executive would otherwise be entitled but for such termination, or (ii) twelve (12) months worth of Executive’s Base Salary and a payment equal to one Estimated Bonus. Such severance fee shall be paid in a lump sum within ten (10) days of the Termination Date, subject to the effectiveness of a release agreement executed by the Executive as described in Paragraph 3(j) below. If such release agreement is not effective within such ten (10) day period, such severance fee shall be paid in a lump sum within five (5) days of the effectiveness of a release agreement executed by the Executive as described in Paragraph 3(j) below. Additionally, the Executive shall continue to be entitled to receive those severance fringe benefits enumerated in Exhibit B hereof until the expiration of the original Employment Term or twelve (12) months, whichever is longer following the Executive’s Termination Date.

In addition, upon the termination of Executive’s employment by the Company without Cause during the Employment Term, all of the Executive’s Stock Options and Restricted Stock shall immediately vest and such Stock Options shall remain exercisable for a period of time (the “Extended Exercise Period”) until the later of (i) the 15th day of the third month following the date at which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan or (ii) December 31 of the calendar year in which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan; provided however, the Extended Exercise Period shall not be extended past the term of the Stock Option as such term is defined in the applicable Grant Agreement or Incentive Plan. Upon the expiration of the Extended Exercise Period, all of the Executive’s outstanding and unexercised Stock Options shall be immediately cancelled.

(d) In the event Executive’s employment is terminated either by the Company with Cause or by the Executive other than for reasons provided in Paragraphs 3(e) or 3(f) below during the Employment Term, the Company shall have no further obligations hereunder or otherwise with respect to Executive’s employment from and after the Termination Date, except for the payment of Executive’s Base Salary accrued through the Termination Date.

(e) In the event, following a Change in Control, the Company terminates the Executive’s employment for a reason other than Cause or the Executive quits her employment with the Company for Good Reason during the Employment Term, the Company shall pay to Executive a severance fee equal to the greater of (i) the amount Executive would be entitled to receive under Paragraph 3(c) of this Agreement for a termination without Cause, or (ii) the sum of (x) two times her regular Base Salary or two times her most recent per annum Base Salary, whichever is greater, and (y) a payment in an amount equal to two times the Estimated Bonus. Such severance fee, subject to the effectiveness of a release agreement executed by the Executive as described in Paragraph 3(j) below, shall be paid in monthly installments for a period of twenty-four (24) months with the first payment, equal to six monthly payments, being made at the beginning of the seventh (7th) month following the Termination Date and subsequent payments being made on a monthly basis

thereafter. Additionally, the Executive shall continue to be entitled to receive those severance fringe benefits enumerated in Exhibit B hereof for a period of twenty-four (24) months following the Executive’s Termination Date. Such severance fee shall be in addition to any other compensation or benefits to which the Executive may be entitled under any other plan, program or payroll practice of the Company, other than any applicable severance plan of the Company.

In addition, upon a Change in Control which occurs during the Employment Term, vesting of all unvested Stock Options granted and Restricted Stock awarded to Executive shall accelerate such that Executive shall be immediately one hundred percent (100%) vested in all equity awarded. Following a Change in Control, in the event of Executive’s termination without Cause or Executive’s resignation for Good Reason, the Executive’s Stock Options shall remain exercisable for a period of time (the “Extended Exercise Period”) until the later of (i) the 15th day of the third month following the date at which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan or (ii) December 31 of the calendar year in which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan; provided however, the Extended Exercise Period shall not be extended past the term of the Stock Option as such term is defined in the applicable Grant Agreement or Incentive Plan. Upon the expiration of the Extended Exercise Period, all of the Executive’s outstanding and unexercised Stock Options shall be immediately cancelled.

(f) In the event Executive’s employment is not renewed by the Company upon the expiration of the Employment Term for a Renewal Term or in the event the Executive’s employment is not renewed by the Company upon the expiration of a subsequent Renewal Term, the Company shall, upon the termination of the Executive’s employment occurring on or within sixty days after (i) the expiration of a Renewal Term, if any, or (ii) the expiration of the Employment Term in the event there is no Renewal Term, unless, prior to any such expiration of the Renewal Term or Employment Term, as applicable, the Company renews the Executive’s employment pursuant to Section 3(a) for substantially the same terms as set forth herein for a period of at least one year from the date of expiration, pay to Executive a severance fee equal to the sum of (x) one half (1/2) of Executive’s Base Salary and (y) one half (1/2) of the Estimated Bonus. Such severance fee shall be paid in a lump sum within ten (10) days of the Termination Date, subject to the effectiveness of a release agreement executed by the Executive as described in Paragraph 3(j) below. If such release agreement is not effective within such ten (10) day period, such severance fee shall be paid in a lump sum within five (5) days of the effectiveness of a release agreement executed by the Executive as described in Paragraph 3(j) below. Additionally, the Executive shall continue to be entitled to receive those severance fringe benefits enumerated in Exhibit B hereof for a period of twelve (12) months following the Executive’s Termination Date. In addition, the Executive’s Stock Options that are vested as of the Termination Date shall remain exercisable for a period of time (the “Extended Exercise Period”) until the later of (i) the 15th day of the third month following the date at which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan or (ii) December 31 of the calendar year in which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan; provided however, the Extended Exercise Period shall not be extended past the term of the Stock Option as such term is defined in the applicable Grant Agreement or Incentive Plan. Upon the Termination Date due to the Company’s non-renewal of the Executive’s employment, all of the Executive’s unvested Stock Options and Restricted Stock shall be immediately cancelled unless otherwise provided in the applicable Grant Agreement and Incentive Plan. Upon the expiration of the Extended Exercise Period, all of the Executive’s remaining outstanding and unexercised Stock Options shall be immediately cancelled.

(g) In the event any payments or benefits received by the Executive upon her Termination Date (which payments shall include, without limitation, the vesting of an equity award or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or any affiliated company (collectively, the “Total Payments”) would be subject (in whole or in part) to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any similar tax as may hereafter be imposed (the “Excise Tax”), the provisions as attached in Exhibit D shall apply.

(h) In the event Executive’s employment is terminated by the Executive due to the Executive’s Retirement during the Employment Term, the Executive’s Stock Options that are vested as of the Termination Date shall remain exercisable for a period of time (the “Extended Exercise Period”) until the later of (i) the 15th day of the third month following the date at which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan or (ii) December 31 of the calendar year in which the Stock Option exercise period would otherwise have expired (without extension) under the terms of the applicable Grant Agreement or Incentive Plan; provided however, the Extended Exercise Period shall not be extended past the term of the Stock Option as such term is defined in the applicable Grant Agreement or Incentive Plan. Upon the Termination Date due to the Executive’s Retirement, all of the Executive’s unvested Stock Options and Restricted Stock shall be immediately cancelled unless otherwise provided in the applicable Grant Agreement and Incentive Plan. Upon the expiration of the Extended Exercise Period, all of the Executive’s remaining outstanding and unexercised Stock Options shall be immediately cancelled.

(i) The severance fringe benefits the Executive is entitled to receive, if any, under Paragraphs 3(c), 3(e) or 3(f), will cease immediately upon Executive becoming gainfully employed and being eligible for benefits at her new place of employment. The Executive shall notify the Company in writing promptly after Executive’s commencement of such other employment.

(j) Notwithstanding anything in this Agreement to the contrary, Executive agrees, as a condition to the receipt of the payment of any severance fee or other benefit as provided for in Paragraphs 3(c), 3(e) or 3(f), that she will execute a release agreement, in the form attached as Exhibit E, releasing any and all claims arising out of Executive’s employment. Executive also agrees that she shall not be entitled to receive any severance fee or other benefits under this Agreement if Executive breaches any of her obligations arising under Paragraphs 8 through 10 hereof. Executive acknowledges that such release agreement must be signed and become effective (if subject to any legally required waiting periods or revocation periods) before the Company will be obligated to make any severance payments or provide any other benefits due under this Agreement following the Executive’s Termination Date. The Executive further acknowledges that if such release agreement is not signed and effective within sixty (60) days of the Termination Date, the severance payments and other benefits described in Paragraphs 3(c), 3(e) or 3(f) shall be forfeited.

(k) Any severance fee shall be paid in accordance with the Company’s regular payroll practices as in effect at the time of payment and shall be subject to regular tax and other withholdings in effect with respect to the Executive’s compensation prior to the Executive’s Termination Date. The Company, however, shall not be required to provide additional accruals or contributions under any retirement plan qualified under Section 401(a) of the Internal Revenue Code following the Executive’s Termination Date.

(l) The payment of the monthly severance benefit described in Paragraph 3(e) or the provision of any severance fringe benefit as described in this Agreement shall terminate upon the death of Executive if such death occurs prior to the completion of such payments or benefits.

4. FRINGE BENEFITS.

(a) During the Employment Term, Executive shall be entitled to participate in all health insurance and retirement benefit programs normally available to other executives of the Company holding positions similar to that of the Executive (subject to all applicable eligibility rules thereof), as from time to time in effect, and the Executive shall also be eligible to receive the benefits listed on Exhibit A hereto.

(b) During the Employment Term, Executive shall be entitled to paid vacation as listed in Exhibit A. Executive shall make good faith efforts to schedule such vacations so as to least conflict with the conduct of the Company’s business and shall give the Company adequate advance notice of her planned absences. Accumulated, unused vacation time for executives of the Company is not vested and will not be paid to Executive either while employed or upon the Executive’s Termination Date.

5. REIMBURSEMENTS. During the Employment Term, the Company shall reimburse Executive for all business-related expenses incurred by Executive at the Company’s direction. Executive shall submit to the Company expense reports in compliance with established Company guidelines.

6. INVENTIONS. Executive agrees, on behalf of herself, her heirs and personal representatives, that she will promptly communicate, disclose and transfer to the Company free of all encumbrances and restrictions (and will execute and deliver any papers and take any action at any time deemed necessary by the Company to further establish such transfer) all inventions and improvements relating to Company’s business originated or developed by Executive solely or jointly with others during the term of her employment hereunder. Such inventions and improvements shall belong to the Company whether or not they are patentable and whether or not patent applications are filed thereon. Such transfer shall include all patent rights (if any) to such inventions or improvements in the United States and in all foreign countries. Executive further agrees, at the request of Company, to execute and deliver, at any time during the term of her employment hereunder or after termination thereof, all assignments and other lawful papers (which will be prepared at the Company’s expense) relating to any aspect of the prosecution of such patent applications and rights in the United States and foreign countries.

7. EXPOSURE TO PROPRIETARY INFORMATION.

(a) Executive acknowledges and agrees that during the course of her employment by Company, she will be in continuous contact with customers, suppliers and others doing business with the Company throughout the world. Executive further acknowledges that the performance of her duties hereunder will expose her to data and information concerning the business and affairs of the Company, including but not limited to information relative to the Company’s proprietary rights and technology, patents, financial statements, sales programs, pricing programs, profitability analyses and profit margin information, customer buying patterns, needs and inventory levels, supplier identities and other related matters, and that all of such data and information (collectively “the Proprietary Information”) is vital, sensitive, confidential and proprietary to Company.

(b) In recognition of the special nature of her employment hereunder, including but not limited to her special access to the Proprietary Information, and in consideration of her employment, Executive agrees to the covenants and restrictions set forth in Paragraphs 8 through 10 inclusive hereof. As used in Paragraphs 6 though 10, the term “Company” shall include, where applicable, any parent, subsidiary, sub-subsidiary, or affiliate of Company.

8. USE OF PROPRIETARY INFORMATION. Executive acknowledges that the Proprietary Information constitutes a protectible business interest of Company, and covenants and agrees that during the term of her employment hereunder and after the Termination Date, she shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee or agent of any business, or in any other capacity, make known, disclose, furnish, make available or utilize any of the Proprietary Information, other than in the proper performance of her duties during the term of her employment hereunder. Executive’s obligations under this Paragraph with respect to particular Proprietary Information shall terminate only at such time (if any) as the Proprietary Information in question becomes generally known to the public other than through a breach of Executive’s obligations hereunder.

9. RESTRICTION AGAINST COMPETITION AND EMPLOYING OR SOLICITING COMPANY EMPLOYEES, CUSTOMERS OR SUPPLIERS. Executive covenants and agrees that during the Employment Term and for the twelve month period immediately following the Termination Date, she shall not, directly or indirectly, whether individually, as a director, stockholder, partner, owner, employee or agent of any business, or in any other capacity, (i) engage in a business substantially similar to that which is conducted by the Company in any market area in which such business is operated; (ii) solicit any party who is or was a customer or supplier of the Company on the Termination Date or at any time during the six month period immediately prior thereto for the sale or purchase of any type or quantity of products sold by or used in the business of the Company on the Termination Date or at any time within such six month period; or (iii) solicit for employment any person who was or is an employee of the Company on the Termination Date or at any time during the twelve month period immediately prior thereto.

If at any time prior to the end of such twelve-month period, the Company determines that the Executive is engaging in Competition, the Company shall have the right to immediately terminate further payments and benefits hereunder.

If the Executive engages in Competition at any time during the twelve month period, the Executive shall return all payments paid under Paragraph 3, and the Company shall be entitled to enforce the return of any payments previously paid to the Executive under Paragraph 3 of this Agreement.

The Executive shall have the right to appeal any benefit suspension or request for return of benefits to the Board and, if it is determined by the Board that the Executive has not engaged in Competition, payment of all amounts due and unpaid shall be made as soon as reasonably practicable after such determination.

10. RETURN OF COMPANY MATERIALS UPON TERMINATION. Executive acknowledges that all price lists, sales manuals, catalogs, binders, customer lists and other customer information, supplier lists, financial information, and other records or documents containing Proprietary Information prepared by Executive or coming into her possession by virtue of her employment by the Company is and shall remain the property of the Company and that upon her Termination Date hereunder, Executive shall return immediately to the Company all such items in her possession, together with all copies thereof.

11. EQUITABLE REMEDIES.

(a) Executive acknowledges and agrees that the covenants set forth in Paragraphs 6 through 10 inclusive hereof are reasonable and necessary for the protection of the Company’s business interests, that irreparable injury will result to the Company if Executive breaches any of the terms of said covenants, and that in the event of Executive’s actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by her of any of said covenants, the Company shall be entitled to immediate injunctive and other equitable relief, without bond and without the necessity of showing actual monetary damages. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove.

(b) Each of the covenants in Paragraphs 6 through 10 inclusive hereof shall be construed as independent of any other covenants or other provisions of this Agreement.

(c) In the event of any judicial determination that any of the covenants set forth in Paragraphs 6 through 10 inclusive hereof is not fully enforceable, it is the intention and desire of the parties that the court treat said covenants as having been modified to the extent deemed necessary by the court to render them reasonable and enforceable, and that the court enforce them to such extent.

12. LIFE INSURANCE. The Company may at its discretion and at any time apply for and procure as owner and for its own benefit and at its own expense, insurance on the life of Executive in such amounts and in such form or forms as the Company may choose. Executive shall cooperate with the Company in procuring such insurance and shall, at the request of Company, submit to such medical examinations, supply such information and execute such documents as may be required by the insurance company or companies to whom the Company has applied for such insurance. Executive shall have no interest whatsoever in any such policy or policies, except that to the extent permitted by such policies, upon the Executive’s Termination Date hereunder, Executive shall have the privilege of purchasing any such insurance from the Company for an amount equal to the actual premiums thereon previously paid by Company.

13. NOTICES. Any notice required or permitted pursuant to the provisions of this Agreement shall be deemed to have been properly given if in writing and when sent by United States mail, certified or registered, postage prepaid, when sent by facsimile or when personally delivered, addressed as follows:

If to Company:
	Kensey Nash Corporation
	735 Pennsylvania Drive
	Exton, PA 19341
	Attention: Joseph W. Kaufmann
With a copy to:
	Katten Muchin Rosenman LLP
	525 West Monroe Street
	Suite 1600
	Chicago, IL 60661-3693
	Attention: David R. Shevitz, Esq.
If to Executive:
	Wendy F. DiCicco
	205 Roberts Road
	Ardmore, PA 19003
After July 1, 2006:
	948 Drovers Lane
	Chester Springs, PA 19425

Each party shall be entitled to specify a different address for the receipt of subsequent notices by giving written notice thereof to the other party in accordance with this Paragraph.

14. WAIVER OF BREACHES. No waiver of any breach of any of the terms, provisions or conditions of this Agreement shall be construed or held to be a waiver of any other breach, or a waiver of, acquiescence in or consent to any further or succeeding breach thereof.

15. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other; provided, however, that this Agreement shall be assignable by the Company to any corporation or entity which purchases substantially all of the assets of or succeeds to the business of the Company (a “Successor Employer”), and the Company agrees to cause this Agreement to be assumed by any Successor Employer as a condition to such purchase or succession. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with laws and judicial decisions of the Commonwealth of Pennsylvania.

17. SEVERABILITY. If any term or provision of this Agreement shall be held to be invalid or unenforceable, the remaining terms and provisions hereof shall not be affected thereby.

18. SOURCE OF PAYMENTS. The Benefits under this Agreement shall be unfunded, and the Company’s obligation under this Agreement shall constitute an unsecured promise of severance pay.

19. MISCELLANEOUS. Paragraph headings herein are for convenience only and shall not affect the meaning or interpretation of the contents hereof. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties and all prior obligations of the Company with respect to the employment of Executive by the Company or the payment to Executive of compensation of any kind whatsoever, including without limitation, the Employment Agreement between the Company and Executive dated effective as of October 1, 2003 and the Termination and Change in Control Agreement between the Company and Executive dated effective as of September 1, 2003. No supplement or modification of this Agreement shall be binding unless in writing and signed by both parties hereto. This Agreement may be executed in counterparts, each of which shall be deemed an original and when taken together shall constitute one agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first hereinabove set forth.

/s/ Wendy F. DiCicco
Wendy F. DiCicco
KENSEY NASH CORPORATION
By:	/s/ Joseph W. Kaufmann
	Joseph W. Kaufmann
Title: President and CEO

Exhibit A

Benefits

Health/prescription, dental, and vision insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees.

Life insurance providing coverage equal to one year’s Base Salary or $200,000, whichever is less.

Short-term disability insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees.

Long-term disability benefits at 40% of Base Salary.

Supplemental long-term disability insurance.

Three weeks annual vacation accrued at 10 hours per month. Accumulated, unused vacation time for Executives of the Corporation is not vested and will not be paid to Executive either while employed or upon her Termination Date.

Six days annual personal leave.

Eleven holidays each year.

401K Plan.

Exhibit B

Severance Fringe Benefits

Health/prescription, dental, and vision insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees.

Life insurance providing coverage equal to one year’s Base Salary or $200,000, whichever is less.

Short-term disability insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees.

Long-term disability benefits at 40% of Base Salary.

Supplemental long-term disability insurance.

Exhibit C

For purposes of this Agreement, the following terms are defined as set forth below:

“Board” shall mean the Board of Directors of Kensey Nash Corporation.

“Cause” for termination shall be deemed to exist upon (i) a determination by the Board that Executive has committed an act of fraud, embezzlement or other act of dishonesty which would reflect adversely on the integrity of the Company or if Executive is convicted of any criminal statute involving breach of fiduciary duty or moral turpitude; (ii) a reasonable determination by the Board that Executive has failed to discharge her duties in a reasonably satisfactory manner which failure is not cured by Executive within thirty (30) days after delivery of written notice to Executive specifying the nature of such failure; (iii) the death of Executive; (iv) a mental or physical disability of Executive which renders Executive, in the reasonable opinion of the Board, unable to effectively perform her duties hereunder for a substantially continuous period of one hundred eighty (180) days; or (v) the Executive’s voluntary termination of her employment hereunder other than as a result of a breach of the Company’s obligations hereunder.

“Change in Control.” For the purpose of this Agreement, a “Change in Control” shall occur if:

(a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act (other than shareholders holding more than 20% of the Company’s voting securities as of the Effective Date), is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the company’s then outstanding securities entitled to vote in the election of directors of the Company; or

(b) during any period of two consecutive years (not including any period prior to the Effective Date of this Plan) individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the stockholders of the Company was approved by a vote of at least three quarters of the directors then still in office who either were directors at the beginning of the period or whose election or nomination was previously so approved, cease for any reason to constitute at least a majority thereof; or

(c) all or substantially all of the assets of the Company are liquidated or distributed.

“Competition” means, for the Payment Period, (i) employment by, being a consultant to, being an officer or director of, or being connected in any manner with, any entity or person in the business of the Company or any affiliate which competes in any market in which the Company does business, either directly or indirectly, (ii) disclosing, using, transferring or selling to any such entity any confidential or proprietary information of the Company or any affiliate, (iii) soliciting or attempting to solicit an employee or former employee of the Company for employment, (iv) diverting or attempting to divert any business or customer of the Company or any affiliate of the Company, or (v) refusing to cooperate with the Company or any affiliate of the Company by making himself available to assist the Company or any affiliate in, or testify on behalf of the Company or any affiliate of the Company in any action, suit, or proceeding, whether civil, criminal or administrative.

“Estimated Bonus” means an amount equal to the average of the value of the cash bonuses and Restricted Stock received by the Executive for the last two full fiscal years for which Executive has received such cash bonuses and Restricted Stock, if any, prior to the Executive’s Termination Date. The value of the Restricted Stock shall equal the product of (i) the fair market value of one share of the common stock of the Company on the date of the grant of the Restricted Stock multiplied by (ii) the number of shares of Restricted Stock granted.

“Good Reason” means (i) reduction in the compensation (regular or bonus compensation formula) of the Executive as in effect as of the date of the Change in Control, (ii) substantial reduction in the Executive’s responsibilities as in effect as of the date of the Change in Control, (iii) any failure of the Company to obtain assumption of the obligation to perform this Agreement by any successor, assignee or distributee of a majority of the Company’s stock or assets (iv) a relocation of the Executive’s location of employment more than 50 miles from the location as of the date of the Change in Control, or (v) adoption or approval of a plan of liquidation, dissolution, or reorganization of the Company by the Board.

“Grant Agreement” means an agreement between the Executive and the Company which grants the Executive a Stock Option, Restricted Stock or other equity award under an Incentive Plan.

“Performance Period” shall mean the Company’s fiscal year beginning on July 1 and ending on June 30 the following year.

“Stock Option” means a stock option granted under an Incentive Plan to the Executive.

“Restricted Stock” means a restricted stock award granted under an Incentive Plan to the Executive.

“Retirement” shall have the meaning as set forth in the applicable Incentive Plan or, if not defined in the applicable Incentive Plan, it shall mean the Executive’s termination of employment upon or after her attaining (i) age 65 or (ii) age 55 with the accrual of 10 years of service.

“Termination Date” means the date that the Executive incurs a “separation from service” as such term is defined under Section 409A of the Code and any applicable IRS or Treasury guidance released thereunder.

Exhibit D

Excise Tax Gross-up Payment

(1) In the event that the Total Payments (as defined in Paragraph 3(g) of the Agreement) cause the Executive’s “parachute payments” within the meaning of Section 280G(b)(2) of the Code to equal or to exceed three times the Executive’s “base amount” within the meaning of Section 280G(b)(3) of the Code (the “Trebled Base Amount”) by an amount which is not greater than 10% of the Trebled Base Amount, the Total Payments shall be reduced (or eliminated) such that no portion of the Total Payments is subject to the Excise Tax (as defined in Paragraph 3(g) of the Agreement). Reductions shall be made first to those Total Payments arising under the terms of this Agreement.

(2) In the event that the Total Payments cause the parachute payments to exceed 110% of the Trebled Base Amount, the Company shall pay to the Executive at the time specified below, an additional amount determined as set forth below (the “Gross-up Payment”). The Gross-up Payment shall be made with respect to the amount which equals 100% of the Executive’s “excess parachute payments” subject to the Excise Tax. The Gross-up Payment shall be an amount such that the net amount retained by Executive with respect to the Total Payments after reduction for any Excise Tax on the Total Payments and any federal, state and local income or employment tax and Excise Tax payable by the Executive on the Gross-up Payment hereunder (provided that such amount is actually paid when due) shall be equal to the amount of the Total Payments that the Executive would retain if the Total Payments did not constitute parachute payments. Such Gross-up Payment shall be estimated by the Company in consultation with independent legal counsel, compensation consultants or auditors of nationally recognized standing (“Independent Advisors”) selected by the Company and reasonably acceptable to the Executive within six (6) months of the Termination Date. Such estimation by the Company shall be a conclusive determination of the amount payable by the Company as a Gross-up Payment under this Agreement.

(3) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of any Excise Tax:

(a) The Total Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except that to the extent that, in the written opinion of Independent Advisors selected by the Company and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax;

(b) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Total Payments or (ii) the total amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying Section 3(g)(iii)(a) above); and

(c) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.

(4) The Gross-up Payment provided for above or any payment made under this Exhibit D shall be paid six (6) months after the Termination Date. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in the Gross-up Payment, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied to initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall not be entitled to any additional payments by the Company.

Exhibit E

GENERAL RELEASE AGREEMENT

This General Release Agreement (the “Release Agreement”) is made by and between Kensey Nash Corporation, a Delaware corporation (the “Company”), and Wendy F. DiCicco (“Executive”) to ensure the protection of the Company and its business, and the protection of the Executive, and to fully settle and resolve any and all issues and disputes arising out of Executive’s employment with and separation from the Company.

WHEREAS, Executive and the Company desire to avoid litigation and controversy and fully settle and compromise any and all claims, charges, actions, causes of action and disputed issues of law and fact that the Executive has, had, or may have against the Company, as of the date of this Release Agreement.

NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements set forth below and in the employment agreement previously entered into by and between Executive and the Company (the “Employment Agreement”), the receipt and sufficiency of which are hereby acknowledged, Executive and the Company agree as follows:

1. Separation Date. Executive’s employment with the Company is terminated effective             , 20     (the “Separation Date”). Executive agrees to return all Company property to the Company no later than the Separation Date. Except as specifically provided below, Executive shall not be entitled to receive any compensation or other benefits of employment following the Separation Date.

2. Consideration of Company. In consideration for the releases and covenants by Executive in this Release Agreement, the Company agrees that following the expiration of the revocation period described in Paragraph 11 below, if Executive has not exercised her right of revocation, the Company will provide Executive with the following:

[Amount to be determined in accordance with Paragraph 3 of the Employment Agreement at the time of Separation.]

3. Executive Release of Rights and Agreement Not to Sue. Executive (defined for purposes of this Paragraph 3 and Paragraphs 6-10 of the Employment Agreement as Executive and Executive’s agents, representatives, attorneys, assigns, heirs, executors, and administrators) fully and unconditionally releases the Company, its subsidiaries and affiliates, and any of their past or present employees, agents, insurers, attorneys, administrators, officers, directors, shareholders, divisions, predecessors, successors, employee benefit plans, and the sponsors, fiduciaries, or administrators of the such employee benefit plans (collectively, the “Released Parties”) from, and agrees not to bring any action, proceeding or suit against any of the Released Parties regarding, any and all liability, claims, demands, actions, causes of action, suits, grievances, debts, sums of money, agreements, promises, damages, back and front pay, costs, expenses, attorneys’ fees, and remedies of any type, including without limitation those arising or that may have arisen out of or in connection with Executive’s employment with or termination of employment from the Company, including but not limited to claims, actions or liability under: (1) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Civil Rights Act of 1866, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Family and Medical Leave Act, the Workers Adjustment and Retraining Notification Act, the Employee Retirement Income Security Act of 1974, the Pennsylvania Human Relations Act, and the Pennsylvania Wage Payment and Collection Law, in each case as such act may be amended; (2) any other federal, state or local statute, ordinance, or regulation regarding employment, termination of employment, or discrimination in employment; and (3) the common law of any state relating to employment contracts, wrongful discharge, defamation, wages or any other matter; provided, however, that said release and agreement not to sue shall not prohibit Executive from bringing an action, proceeding or suit arising out of the Company’s breach of any representation, warranty, or obligation set forth in this Release Agreement.

4. Preservation of Employee Agreement. Notwithstanding any other provision of this Release Agreement, Executive acknowledges and agrees that the provisions of the Employment Agreement, to which this Release Agreement is attached as Exhibit E, shall remain in full force and effect, and Executive agrees to continue to be bound by the terms therein, including, but not limited to, Paragraphs 6-10.

5. No Reinstatement or Reemployment. Executive waives reinstatement and reemployment and agrees never to apply for employment or otherwise seek to be hired, rehired, employed, reemployed, or reinstated by the Company, its subsidiaries, or any of their affiliates.

6. No Disparagement or Encouragement of Claims. Except as required by lawful subpoena or other legal obligation, Executive agrees not to make any oral or written statement that disparages or places the Company and its affiliates (including any of their past or present officers, employees, products or services) in a false or negative light, or to encourage or assist any person or entity who may or who has filed a lawsuit, claim or complaint against the Released Parties (as defined in Paragraph 3 above). If Executive receives any subpoena or becomes subject to any legal obligation that implicates this Paragraph 6, Executive will provide prompt written notice of that fact to the Company with a copy to Katten Muchin Rosenman LLP at the addresses provided in Paragraph 13 of the Employment Agreement, and will enclose a copy of the subpoena and any other documents describing the legal obligation.

7. Non-Admission/Inadmissibility. This Release Agreement does not constitute an admission by the Company that any action it took with respect to Executive was wrongful, unlawful or in violation of any local, state, or federal act, statute, or constitution, or susceptible of inflicting any damages or injury on Executive, and the Company specifically denies any such wrongdoing or violation. This Release Agreement is entered into solely to resolve fully all matters related to or arising out of Executive’s employment with and termination from the Company, and its execution and implementation may not be used as evidence and shall not be admissible in a subsequent proceeding of any kind, except one alleging a breach of this Release Agreement.

8. Violation of Release Agreement. If Executive or the Company prevails in a legal or equitable action claiming that the other party has breached this Release Agreement, the prevailing party shall be entitled to recover from the other party the reasonable attorneys’ fees and costs incurred by the prevailing party in connection with such action.

9. Severability. The provisions of this Release Agreement shall be severable and the invalidity of any provision shall not affect the validity of the other provisions; provided, however, that upon a finding by a court of competent jurisdiction that any release or agreement in Paragraph 3 is illegal, void or unenforceable, the Executive agrees to execute promptly a release, waiver and/or covenant that is legal and enforceable to the extent permitted by law.

10. Governing Law and Jurisdiction. This Release Agreement shall be governed by and construed in accordance with the laws and judicial decisions of the State of Pennsylvania, without regard to its principles of conflicts of laws.

11. Revocation Period. Executive has the right to revoke her release of claims under the Age Discrimination in Employment Act described in Paragraph 3 (the “ADEA Release”) for up to seven days after Executive signs it. In order to do so, Executive must sign and send a written notice of her revocation decision to the Company with a copy to Katten Muchin Rosenman LLP at the addresses provided in Paragraph 13 of the Employment Agreement, and that written notice must be received by the Company no later than the eighth day after Executive signed this Release Agreement. If Executive revokes the ADEA Release, Executive will not be entitled to any of the consideration from the Company described in Paragraph 2 above.

12. Voluntary Execution of Release Agreement. Executive acknowledges that:

a. Executive has carefully read this Release Agreement and fully understands its meaning;

b. Executive had the opportunity to take up to twenty-one (21) days after receiving this Release Agreement to decide whether to sign it;

c. Executive understands that the Company is herein advising her, in writing, to consult with an attorney before signing it;

d. Executive is signing this Release Agreement, knowingly, voluntarily, and without any coercion or duress; and

e. everything Executive is receiving for signing this Release Agreement is described in the Release Agreement itself, and no other promises or representations have been made to cause Executive to sign it.

13. Entire Agreement. This Release Agreement contains the entire agreement and understanding between Executive and the Company concerning the matters described herein, and supersedes all prior agreements, discussions, negotiations, and understandings between the Company and Executive; provided, however, that the Employment Agreement to which this Release Agreement is attached as Exhibit E is specifically preserved in accordance with Paragraph 4 above. The terms of this Release Agreement cannot be changed except in a subsequent document signed by Executive and an authorized representative of the Company.

Kensey Nash Corporation

By:

Dated:     

Dated:     

EX-21.1

Exhibit 21.1

Subsidiaries of Kensey Nash Corporation

Kensey Nash Holding Company

A Delaware Corporation

108 Webster Building

3411 Silverside Road

Wilmington, DE 19810

Kensey Nash Europe GmbH

A German Corporation

Mergenthalerallee 55

D-65760 Eschborn

Germany

ILT Acquisition Sub, Inc.

A Delaware Corporation

Corporation Trust Center

1209 Orange Street

Wilmington, DE 19801

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statement No. 333-117354 on Form S-8 of our reports dated September 13, 2006, relating to the consolidated financial statements of Kensey Nash Corporation and Subsidiaries, and management’s report on the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of Kensey Nash Corporation and Subsidiaries for the year ended June 30, 2006.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

September 13, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph W. Kaufmann, certify that:

1. I have reviewed this annual report on Form 10-K of Kensey Nash Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 13, 2006	By:	/s/Joseph W. Kaufmann
		Joseph W. Kaufmann
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Wendy F. DiCicco, certify that:

1. I have reviewed this annual report on Form 10-K of Kensey Nash Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 13, 2006	By:	/s/ Wendy F. DiCicco, CPA
		Wendy F. DiCicco, CPA
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Kensey Nash Corporation (the “Company”) on Form 10-K for the fiscal year ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph W. Kaufmann, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: September 13, 2006	By:	/s/ Joseph W. Kaufmann
		Joseph W. Kaufmann
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Kensey Nash Corporation (the “Company”) on Form 10-K for the fiscal year ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wendy F. DiCicco, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: September 13, 2006	By:	/s/ Wendy F. DiCicco, CPA
		Wendy F. DiCicco, CPA
		Chief Financial Officer