The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in this report and our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2009 (fiscal 2009), as filed with the Securities and Exchange Commission. As used herein, the terms "the Company," "we," "us" and "our" refer to Kensey Nash Corporation and its consolidated subsidiaries, collectively.

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 under the heading "CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS"
at the end of this Item 2 in this Quarterly Report on Form 10-Q.

OVERVIEW

Kensey Nash Corporation is a medical device company known for innovative product development and unique technology in the fields of resorbable biomaterials and endovascular devices used in a wide variety of medical procedures. We provide an extensive range of products into multiple medical markets, primarily in the cardiology, orthopaedic, sports medicine, spine, endovascular and general surgery markets. Most of the products are based on our significant expertise in the design, development, manufacturing and processing of resorbable biomaterials. We sell our products through strategic partners and do not sell direct to the end-user. Our revenues consist of two components: net sales, which include biomaterials sales and endovascular sales, and royalty income.

Net Sales

Biomaterials Sales

As pioneers in the field of resorbable biomaterials, we have developed significant expertise in the design, development, manufacture and processing of resorbable biomaterials for medical applications. Our biomaterials products, specifically polymer and collagen based products, are in most cases components of finished goods sold by other companies pursuant to contractual arrangements. We sell our biomaterials products to over 30 companies that sell them into the end-user marketplace. Our largest biomaterials customers include St. Jude Medical, to which we supply Angio-Seal™ Vascular Closure Device (Angio-Seal device) components; Arthrex, Inc., to which we supply a broad range of sports medicine and trauma products; and Orthovita, Inc., to which we supply products for use in repair of the spine and orthopaedic trauma injuries. We also supply biomaterials products and development expertise to other orthopaedic companies, including Medtronic, Inc., Zimmer, Inc., Johnson & Johnson, Inc. and its subsidiaries, Stryker Corporation and BioMimetic Therapeutics, Inc. Most recently, we signed a strategic distribution agreement with Synthes, Inc., under which we will supply Synthes with our extracellular matrix (ECM) product for sale for abdominal wall reconstruction, chest reconstruction applications and several other applications for head and neck surgery. We are also evaluating applications of our ECM technology in urogynecology, plastic surgery, wound care, orthopaedics and other markets. We plan to continue to expand relationships with these and other companies targeting new markets, including general, pelvic and urological surgery.

Although a majority of our biomaterials sales are currently concentrated among a few strategic customers, the number of customers has been increasing over the last several years. The relationships with these customers and partners are generally long-term and contractual in nature, with contracts specifying development and regulatory responsibilities, the specifications of the product to be supplied, and pricing. We often work with customers and potential customers at very early stages of feasibility and provide significant input into co-development types of programs. Once a product is approved for sale, we generally provide our customers fully packaged and sterilized products ready for their further distribution or, as in the case with Angio-Seal components, provide a bioresorbable product that is ready to be incorporated into a finished device. Our products often represent a key strategic source for these customers and partners. In many cases, our proprietary technology is incorporated into the product and cannot be replicated by other companies.

The sale of Angio-Seal components to St. Jude Medical and sales of biomaterials orthopaedic products, including products with applications in sports medicine and the spine, continue to be our primary source of revenue. The table below shows the trends in our Angio-Seal component and orthopaedic product sales for the three months ended September 30, 2009 and September 30, 2008, by presenting such sales as a percentage of our total biomaterials sales:

                                   Three months          % of            Three months          % of            % Change Prior
                                       ended         Biomaterials            ended         Biomaterials          Period to
Net Sales of                          9/30/09           Sales               9/30/08           Sales            Current Period
Orthopaedic Products               $   6,421,454               51 %      $   7,957,205               63 %                 (19 )%
Angio-Seal Components                  4,930,668               39 %          3,985,830               31 %                  24 %
Other Products                         1,222,924               10 %            728,904                6 %                  68 %

Total Net Sales - Biomaterials     $  12,575,046              100 %      $  12,671,939              100 %                  (1 )%

Our orthopaedic product sales decreased 19% in the first three months of fiscal 2010 over the comparable prior fiscal year three month period. This was due to a decrease in sales of our current product lines, specifically in our spine and sports medicine product portfolio, in part due to the negative affects of the reduction in elective medical procedures, combined with reduced hospital inventories, which we believe were caused by the current economic environment. In addition the prior year period included cancellation fees of $825,000 charged to a customer for research and development work we performed for that customer. Though we are cautious about the short-term healthcare markets, we expect to see improvement in the second half of our fiscal year due to increased sales forecasts from customers and our belief that most elective medical procedures were delayed, not eliminated. Accordingly, we expect sales of our orthopaedic products for our full fiscal 2010 to decrease compared to fiscal 2009 at a much more moderate rate than the decrease in the first quarter compared to the comparable prior fiscal year quarter, due to the impact of the current economic conditions described above.

Our net sales in the orthopaedic portion of our business are dependent on several factors, including (1) the success of our current partners in the orthopaedic markets of sports medicine, spine and extremities, (2) the continued acceptance of biomaterials-based products in these markets, as well as expanded future acceptance of such products, and (3) our ability to offer new products and technologies and to attract new partners in these markets. Due to these dependencies, and/or other factors, sales to our orthopaedic customers can vary significantly from quarter to quarter.

We manufacture two of the key resorbable components of the Angio-Seal device for St. Jude Medical, 100% of their supply requirements for the collagen plug and at least 30% of their requirements for the polymer anchors, under a supply contract that expires in December 2010. Sales to St. Jude Medical are highly dependent on ordering patterns of components used in the manufacturing of the Angio-Seal device by St. Jude Medical and can vary significantly from quarter to quarter. This variation in ordering patterns is evidenced by our component sales growth of 24% for the three months ended September 30, 2009 over the comparable prior fiscal year three month period, compared to essentially flat St. Jude Medical end-user unit sales during the same period.

Endovascular Sales

Over the last several years, we have devoted significant resources to developing and bringing proprietary endovascular products to market in the U.S. and Europe. These products are focused in the emerging market segments of thrombus (blood clot) management and chronic total occlusions (CTOs) (a complete vessel blockage occurring in both coronary and peripheral vessels) and are sold primarily to interventional cardiologists, but may also be used by interventional radiologists and vascular surgeons. Endovascular sales were 6% of total net sales in each of the three months ended September 30, 2009 and 2008.

In May 2008, we completed the sale of our Endovascular business to Spectranetics. This transaction included the sale of the ThromCat®, QuickCat™ and Safe-Cross® product lines in consideration for a $10.0 million cash payment at closing, with an opportunity for up to an additional $8.0 million in research and development milestone payments, a $6.0 million cumulative sales milestone payment and additional royalty payments based on future sales of the ThromCat and Safe-Cross products after the transition of manufacturing of the products from us to Spectranetics. As of September 2009, we have received $2.5 million of the $8.0 million in research and development milestone payments. Spectranetics has indicated to us that it plans to discontinue sales of the Safe-Cross products. The discontinuance of sales of Safe-Cross products by Spectranetics will negatively impact our ability to achieve the $6.0 million cumulative sales milestone, which is based upon sales of Safe-Cross, ThromCat and QuickCat products. In addition, the QuickCat manufacturing will be transferred to Spectranetics at the end of December 2009. Following the second quarter of fiscal 2010, we expect that our manufacturing of endovascular products will be limited to the ThromCat product. We expect that our related net endovascular sales will decline over the next two years. The Company continues to work with Spectranetics under a milestone driven research and development agreement, and may earn additional milestones and royalties based on future Spectranetics' product sales.

Royalty Income

We also derive a significant portion of our revenue and profitability from royalty income from proprietary products that we have developed or co-developed.

Angio-SealTM Royalty Income. Our Company was the inventor and original developer of the Angio-Seal™, a vascular closure device that reduces recovery time and enhances patient comfort following both diagnostic and therapeutic cardiovascular catheterizations. St. Jude Medical has the exclusive worldwide rights for the development, manufacturing and sales and marketing of the Angio-Seal device, pursuant to an agreement which provides us with an approximate 6% royalty on all end-user product sales. The Angio-Seal device is currently the leading product in sales volume in the vascular closure device market, generating over $350 million in revenue for St. Jude Medical during our fiscal 2009. We anticipate that sales of the Angio-Seal device by St. Jude Medical will continue to grow at a modest growth rate, based on procedure growth, St. Jude Medical's continued expansion in international markets and marketing new generations of the product, including most recently, the introduction of the EvolutionTM Device. Royalty income earned from St. Jude Medical in the three months ended September 30, 2009 was adversely impacted by foreign currency exchange, as compared to foreign currency exchange in the comparable prior year period.

VitossTM Foam, VitossTM, and VitossTM Bioactive Foam Royalty Income. Since 2003, we have partnered with Orthovita, Inc. to co-develop and commercialize a series of unique and proprietary bone void filler products, branded Vitoss Foam, the first of which was launched in March 2004, and the most recent, Vitoss Bioactive Foam technology, which was launched during the fourth quarter of fiscal 2008. We receive a fixed royalty on Orthovita's end-user sales of Vitoss Foam and Vitoss Bioactive Foam products, which are targeted for use in the orthopaedic market. In addition, in August 2004 we entered into an agreement to acquire the proprietary rights of a third party inventor of the Vitoss technology for $2.6 million (the Assignment Agreement). Under the Assignment Agreement, we receive 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 $1.1 million remaining to be received as of September 30, 2009. We believe the unique technology associated with the Vitoss Foam and Vitoss Bioactive Foam products and the growing orthopaedic market will result in the Orthovita component of our Royalty income becoming more significant over the next fiscal year.

We have other royalty generating relationships, none of which materially contributes to revenue at this time, but which we expect to provide increased revenue as the related products gain market acceptance and additional products are commercialized.

Share-Based Compensation

The following table summarizes share-based compensation expense within each
operating expense category of our Condensed Consolidated Statements of Income
for the three months ended September 30, 2009 and 2008:



                                                      Three Months Ended
                                                        September 30,
                                                       2009        2008
           Cost of products sold                    $  149,211   $  65,076
           Research and development                    316,065      96,206
           Selling, general and administrative         218,628     132,400


           Total share-based compensation expense   $  683,904   $ 293,682

Share-based compensation expense consists of (a) stock options granted to employees, non-employee members of our Board of Directors, executive officers and non-employee outside consultants, (b) nonvested stock awards (i.e., restricted stock) granted to non-employee members of our Board of Directors, an executive officer and a non-employee outside consultant, and (c) cash-settled stock appreciation rights (SARs) granted to executive officers and other non-executive employees of our Company. We cannot predict the market value of our Common Stock at the time of exercise for these grants, nor the magnitude of exercises at any particular time over the terms of these grants. Our cash-settled SARs have been, and will continue to be, remeasured at each reporting period until all awards are settled. Fluctuations in the fair value of a liability award are recorded as increases or decreases in compensation cost, either immediately or over the remaining service period, depending on the vested status of the award.

Total share-based compensation expense for the three months ended September 30, 2009 was impacted primarily by the amortized expense related to three years of equity grants versus two years, as well as expense resulting from adjustments for the increase in the fair value of our cash-settled SARs, which were remeasured based on, among other factors, our closing stock price on September 30, 2009. See Note 10 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning our share-based compensation.

The following table summarizes our share-based compensation expense by each fiscal year grant for the three month periods ended September 30, 2009 and 2008.

                                                       Three Months Ended
                                                         September 30,
                                                      2009           2008
        SARs
        Fiscal Year 2007 Grant                      $ 100,466      $ (80,633 )


        Stock Options
        Fiscal Year 2008 Grant                      $ 144,955      $ 203,303
        Fiscal Year 2009 Grant                        308,082         87,447
        Fiscal Year 2010 Grant                         28,223             -
        Other Share-Based Compensation Adjustment     (22,814 )           -

                                                    $ 458,446      $ 290,750


        Nonvested Stock Awards
        Fiscal Year 2008 Grant                      $  64,367      $  83,565
        Fiscal Year 2009 Grant                         60,625             -

                                                    $ 124,992      $  83,565

        Total Share-Based Compensation Expense      $ 683,904      $ 293,682

In fiscal 2010, we expect an increase of approximately $1.8 million in share-based compensation expense over the $2.1 million recorded in fiscal 2009 due to our fiscal 2010 expense including amortized expense related to three years of equity grants, while our fiscal 2009 share-based compensation expense primarily included amortization expense related to two years of equity grants. This was a result of the acceleration of stock awards in fiscal 2008 triggered by a third party's significant open market purchase of our common stock, which resulted in a "Change in Control" as then defined in the Employee Plan.

Cost Reduction Plan

As previously announced on October 22, 2009, we had expected to incur an estimated pre-tax severance charge of $850,000 in our second quarter of fiscal 2010, in connection with a cost reduction plan, primarily associated with our reduced endovascular activities and lower production volume. As of November 9, 2009, we have expanded the cost reduction plan to include a combination of facility shut downs and reduced work schedules over selected periods during the second quarter of fiscal 2010. These actions will increase our overall operational efficiency and generate annualized pre-tax cost savings of approximately $1.8 million. We currently estimate the second quarter pre-tax severance charge will be in a range of $1.0 million to $1.1 million. In addition, as a result of the facility shutdowns and reduced work schedules, we expect to incur an additional second quarter pre-tax unabsorbed overhead expense charge anticipated to be in a range $0.8 million to $1.0 million.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are those that require the 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. There have been no material changes to the critical accounting policies previously reported in our 2009 Annual Report on Form 10-K, as amended. We have updated our critical accounting policies in this Form 10-Q to include the references to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (the Codification). See Note 1 to the Condensed Consolidated Financial Statements included in this Form 10-Q for a description of the Codification effective for our fiscal year 2010. All references to authoritative accounting literature will be referenced in accordance with the Codification.

We have identified the following as our critical accounting policies: revenue recognition, accounting for share-based compensation, accounting for investments in debt and equity securities, valuation of financial instruments, inventory valuation and income taxes.

Revenue Recognition. We recognize revenue in accordance with FASB ASC Topic 605, "Revenue Recognition" (ASC 605-10-S99). We also follow FASB ASC Subtopic 605-25, "Multiple Element Arrangements" (ASC 605-25) for collaborative arrangements containing multiple revenue elements that were entered into, or materially amended, after June 30, 2003. In addition, the Company accounts for certain collaborative arrangements containing multiple revenue elements that were entered into, or materially amended, after June 30, 2003 in accordance with ASC 605-25.

Sales Revenue.Sales revenue is generally recognized when the related product is shipped or the service is completed. Advance payments received for products or services are generally recorded as deferred revenue and are recognized when the product is shipped or services are performed; the timing of the performance of such services could be subjective. We reduce sales for estimated customer returns, discounts and other allowances, if applicable. Our products are primarily manufactured according to our customers' specifications and are subject to return only for failure to meet those specifications.

Royalty Revenue. Royalty revenue is recognized as the related product is sold by our customers to end-users. 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 Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning our royalty revenue recognition.

Accounting for Share-Based Compensation. We use various forms of equity compensation, including stock options, nonvested stock awards, and cash-settled SARs, as a major part of our compensation programs to retain and provide incentives to our top management team members and other employees. We account for equity compensation in accordance with FASB ASC Topic 718, "Compensation - Stock Compensation."

• Fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model, which uses weighted average assumptions. Expected volatilities are based on historical volatility of our Common Stock, and other factors. We use historical data to estimate option exercise and employee termination behavior 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 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.

• Nonvested stock awards (i.e. restricted stock) granted to non-employee members of our Board of Directors, executive officers and a non-employee consultant are accounted for using the fair value method. Fair value for nonvested stock awards is based upon the closing price of our Common Stock on the date of the grant.

• Cash-settled SARs awarded in share-based payment transactions are classified as liability awards, and accordingly, we record these awards as a component of Other current liabilities on our Condensed Consolidated Balance Sheets. The fair value of each SAR is estimated using the Black-Scholes option-pricing model, which uses weighted average assumptions. Expected volatilities are based on the historical volatility of our Common Stock, as well as other factors. For liability awards, the fair value of the award, which determines the measurement of the liability on our Condensed Consolidated Balance Sheet, is remeasured at each reporting period until the award is settled. Fluctuations in the fair value of the liability award are recorded as increases

Revisions to any of our estimates or methodologies could cause a material impact to our financial statements.

Accounting for Investments in Debt and Equity Securities. We account for our investment portfolio in accordance with FASB ASC Topic 320, "Investments - Debt and Equity Securities." We have classified our entire investment portfolio as available-for-sale securities with secondary or resale markets and report the portfolio at fair value with unrealized gains and losses included in Stockholders' equity and realized gains and losses in Other income. We currently have investment securities with fair values that are less than their amortized cost and therefore contain unrealized losses. We have evaluated these securities and have determined that the decline in value is not related to any Company or industry specific event. We have no intent to sell any of these investments until a recovery of the fair value. There is no current requirement to sell any of these investments. We anticipate 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. Revisions to our classification of these investments and/or a determination other than the anticipation of a full recovery of the amortized costs at maturity or sooner, could result in our realizing gains and losses on these investments and, therefore, have a material impact on our financial statements. As of September 30, 2009, we were in compliance with all of our affirmative, restrictive and financial maintenance covenants.

Valuation of Financial Instruments. We adopted the provisions of FASB ASC Topic 820, "Fair Value Measurements and Disclosures," (ASC 820) for financial assets and liabilities, which provides guidance for using fair value to measure financial assets and liabilities by defining fair value as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

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, 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. In the course of estimating our estimated annual effective tax rate and recording our quarterly income tax provisions, we consider many factors, including our expected earnings, state income tax apportionment, estimated manufacturing and research and development tax credits, non-taxable . . .