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 for the fiscal year ended June 30, 2008, as filed with the Securities and Exchange Commission.

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 cardiovascular markets, the orthopaedic markets of sports medicine, spine and extremities, and the endovascular 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. We have also developed and commercialized a series of innovative endovascular products and recently completed the sale of these product lines to The Spectranetics Corporation (Spectranetics) in May 2008. Although we recently sold this portfolio of products to Spectranetics, we still participate directly in the future success of these products through the Manufacturing and Licensing Agreement and the Development and Regulatory Services Agreement, which were entered into in connection with the sale transaction (see below for additional discussion). Our revenues consist of two components: net sales, which includes biomaterials products and endovascular products, and royalty income.

Net Sales

Biomaterial 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 components of, in most cases, finished goods sold by numerous 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 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., Biomet Sports Medicine, Inc., J&J, Stryker and BioMimetic Therapeutics, Inc. In fiscal 2009, we plan to continue to expand relationships with 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 relationship with these customers and partners is 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 biomaterial orthopaedic products, including products with applications in sports medicine and 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, 2008 and September 30, 2007, by presenting such sales as a percentage of our total biomaterial sales:

                                  Three months         % of           Three months         % of           % Change Prior
                                      ended         Biomaterial           ended         Biomaterial         Period to
Sales of                             9/30/08           Sales             9/30/07           Sales          Current Period
Angio-Seal Components             $   3,985,830              31 %     $   3,815,646              38 %                  4 %
Orthopaedic Products                  7,957,205              63 %         6,126,934              60 %                 30 %
Other Products                          728,904               6 %           224,719               2 %                224 %

Total Net Sales - Biomaterial     $  12,671,939             100 %     $  10,167,299             100 %                 25 %

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 and can vary significantly from quarter to quarter. For the quarter ended September 30, 2008, we had component sales growth of 4% over the comparable prior year quarter, compared to St. Jude's end-user sales growth rate of 5% during that same comparable prior year three month period. We expect sales of Angio-Seal components to increase in fiscal 2009 as compared to fiscal 2008 due to an anticipated increase in St. Jude end-user sales for the comparable period.

Our orthopaedic product sales increased 30% over the prior year period. This was due to an increase in sales of our current product lines, in part due to an increase in our customer base, and due to new product lines for our current customers. We expect sales of our orthopaedic products to increase in fiscal 2009 as compared to fiscal 2008 primarily due to our new product launches with current customers, such as the new Vitoss® Bioactive Foam product line with Orthovita.

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 or 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.

Endovascular Sales

Over the last several years, we have devoted significant resources to developing 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 common in both coronary and peripheral vessels) and are sold primarily to interventional cardiologists, but may also be used by interventional radiologists and vascular surgeons. Sales of endovascular products decreased to 6% of total net sales during the quarter ended September 30, 2008 from 12% in the comparable prior year period.

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® products in consideration for a $10.0 million cash payment in 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.

Our Endovascular Relationship with Spectranetics

In connection with the sale of our Endovascular business to Spectranetics in May 2008, we entered into a Manufacturing and Licensing Agreement and Development and Regulatory Services Agreement, under which we will continue to participate in bringing these products to the market.

Manufacturing and Licensing Agreement - Under the terms of the Manufacturing and Licensing Agreement we will manufacture the ThromCat and Safe-Cross products for Spectranetics for an initial three-year period. We will manufacture the QuickCat product for a minimum of six months, after which manufacturing may transition to Spectranetics. All products will be transferred to Spectranetics under this agreement at a defined transfer price and will be classified as product sales in the period shipped. After the three-year initial manufacturing period, the parties have the ability to negotiate an extension to the Manufacturing and Licensing Agreement otherwise the manufacturing will transfer to Spectranetics. At such time as the manufacturing transfers to Spectranetics, we will begin

to earn a royalty on end-user sales of every ThromCat and Safe-Cross unit sold by Spectranetics. Royalty percentages are dependent on the cause of the transfer of manufacturing. Royalties received will be presented within the Royalty Income line of our Condensed Consolidated Statements of Income in the period earned.

We will continue to recognize endovascular product sales revenue as we ship products to Spectranetics for the duration of the Manufacturing and Licensing Agreement. These sales will, however, be at a reduced transfer price compared with the direct to market price reflected in our historic sales figures.

Development and Regulatory Services Agreement -Under the Development and Regulatory Services Agreement, we will continue to perform defined development activities in pursuit of various Food and Drug Administration (FDA) 510(k) approvals for next generation product approvals. All costs related to these activities will be expensed as incurred within the research and development line of our Condensed Consolidated Statements of Income. The agreement also calls for the equal sharing of any human clinical trial costs in pursuit of next generation or expanded indication devices. Upon receipt of FDA approvals for the new versions of the products, we will receive pre-defined milestone payments of up to an aggregate amount equal to $8.0 million, over an anticipated four-year period. These milestones will be recorded as revenue and recognized, in accordance with generally accepted accounting principles (GAAP), over the period of the agreement (including the date of receipt of the latest expected FDA approval). The term of this agreement is currently estimated at approximately four years. In October 2008, we announced the accomplishment of the first milestone under this agreement, the development of the next generation Safe-Cross System, which resulted in a $1.0 million payment received by us in October 2008 and will provide $250,000 in revenue during the remainder of fiscal 2009. During fiscal 2009, we anticipate the completion of at least one additional milestone.

Spectranetics is now exclusively responsible for worldwide sales and marketing of the entire endovascular product line.

See "Item 1A. Risk Factors - Our strategic endovascular relationship could be negatively impacted by adverse results of the FDA and U.S. Immigration and Customs Enforcement (ICE) investigation of Spectranetics" contained in our annual report on Form 10-K for the fiscal year ended June 30, 2008.

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-Seal TM Royalty Income. Our Company was the inventor and original developer of the Angio-Seal™ Vascular Closure Device (Angio-Seal), a 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, 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 $360 million in revenue for St. Jude Medical during our fiscal 2008. We anticipate sales of the Angio-Seal device to continue a modest growth pattern, based on forecasted continued procedure growth, St. Jude Medical's continued expansion in international markets and its success marketing new generations of the product. Royalty income earned from St. Jude Medical was $5.2 million in the three months ended September 30, 2008, compared to $5.0 million for the same period of fiscal 2007, a 4% increase.

Vitoss® Foam, Vitoss®, and Vitoss® 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. We receive a fixed royalty on Orthovita's end-user sales of Vitoss 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 $1.7 million remaining to be received as of September 30, 2008. We believe the unique technology associated with the Vitoss Foam products, the recent successful introduction of the new Vitoss Bioactive Foam products, and the growing orthopaedic market will result in the Orthovita component of our royalty income becoming more significant over the remainder of the current fiscal year and beyond. Royalty income earned from Orthovita was $1.4 million in the three months ended September 30, 2008, compared to $1.0 million for the same period of fiscal 2007, a 38% increase.

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.

Stock-Based Compensation

The following table summarizes stock-based compensation expense under SFAS
123(R) within each operating expense category of our Condensed Consolidated
Statements of Income for the three months ended September 30, 2008 and 2007:



                                                      Three Months Ended
                                                         September 30,
                                                      2008         2007
           Cost of products sold                    $  65,076   $   350,223
           Research and development                    96,206     1,121,917
           Selling, general and administrative        132,400     2,234,923

           Total stock-based compensation expense   $ 293,682   $ 3,707,063

Acceleration of Stock Awards

As we publicly announced on September 26, 2007, there was a "Change in Control" as defined in our Fifth Amended and Restated Kensey Nash Corporation Employee Incentive Compensation Plan, as amended and then in effect, the Employee Plan. As a result, all outstanding unvested stock options, cash-settled stock appreciation rights (SARs) and nonvested stock held by officers, employees, directors and others under this plan automatically became vested (and, in the case of options and SARs, exercisable) in full. The accelerated vesting resulted in a non-cash charge of approximately $3.0 million, or $0.16 per share tax affected, primarily during the quarter ended September 30, 2007. The acceleration removed all future equity compensation expense related to the then outstanding stock options and nonvested shares under the plan as of the date of acceleration. However, all remaining SARs, including the rights in which the vesting was accelerated, will continue to be marked to market on a quarterly basis, as required under U.S. GAAP and equity compensation expense will be incurred related to all new stock compensation awards granted after this event. See "Liquidity and Capital Resources- Stock Appreciation Rights (SARs) Buyback Program" below.

The charge represented a significant portion of our operating expenses in the three months ended September 30, 2007 and therefore we have broken it out in the table below to show the amounts of the acceleration of stock-based compensation charges included within each operating expense category of our Condensed Consolidated Statements of Income for the three months ended September 30, 2007.

                                          Stock-Based
                                          Compensation       Acceleration of
                                           Excluding           Stock-Based         As Reported
                                          Acceleration        Compensation         Stock-Based
                                             Charge              Charge            Compensation
                                                  Three Months Ended September 30, 2007
Cost of products sold                    $       96,344     $         253,879     $      350,223
Research and development                        272,239               849,678          1,121,917
Selling, general and administrative             345,602             1,889,321          2,234,923

Total stock-based compensation
expense                                  $      714,185     $       2,992,878     $    3,707,063

Stock-based compensation expense per
diluted earnings per share               $         0.04     $            0.16     $         0.20

Discontinuance of Embolic Protection Platform

As announced on July 10, 2007, we made a strategic decision to cease all activities related to our embolic protection platform, including the PROGUARD clinical trial, product manufacturing, sales and marketing, and research and development activities. As a result of this action, we recorded certain charges in our fourth quarter of fiscal 2007 totaling approximately $4.7 million, or $0.25 per share tax-effected. All of the remaining charges, related to severance and clinical trial closeout costs, were recorded in our first quarter of fiscal 2008 and totaled approximately $324,000, or $0.02 per share tax-effected. All charges related to the discontinuance are presented within our results of operations in fiscal 2008. We do not anticipate any further charges related to this decision.

The following table is presented to show the amounts of the discontinuance of embolic protection charges included within each category of our Condensed Consolidated Statements of Income for the three months ended September 30, 2007:

                                                           Discontinuance of
                                                           Embolic Protection
                                                                Charges
                                                              Three months
                                                                 Ended
                                                           September 30, 2007
     Cost of products sold                                $            154,726
     Research and development                                           92,630
     Selling, general and administrative                                76,372

     Total discontinuance of embolic protection charges   $            323,728

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. We have identified the following as our critical accounting policies: revenue recognition, accounting for stock-based compensation, accounting for investments in debt and equity securities, 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, Revenue Recognition in Financial Statements (SAB 101). We also follow the provisions of Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables, (EITF 00-21), for certain collaborative arrangements containing multiple revenue elements which were entered into, or materially amended, after June 30, 2003.

Sales Revenue. Sales revenue is recognized when the related product is shipped or the service is completed. 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 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 therefore subject to return only for failure to meet those specifications.

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 (Revenue Recognition) to the Condensed Consolidated Financial Statements included in this Form 10-Q.

Accounting for Stock-Based Compensation. We use various forms of equity-based compensation, including stock options, nonvested stock grants, and cash-settled stock appreciation rights, as a major part of our compensation programs to retain and provide incentives to our management team members and other employees.

• Fair values of option grants are estimated on the date of grant using the Black-Scholes option-pricing model that uses weighted average assumptions. Expected volatilities are based on the historical volatility of our Common Stock, as well as, 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 granted to non-employee members of our Board of Directors, executive officers, other management, and a non-employee consultant is accounted for using the fair value method under SFAS 123(R). Fair value for nonvested stock grants is based upon the closing price of our Common Stock on the date of the grant.

• Cash-settled SARs awarded in stock-based payment transactions are accounted for under SFAS 123(R), which classifies these awards as liabilities. Accordingly, we record these awards as a component of other current liabilities on our Condensed Consolidated Balance Sheet. 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 or decreases in compensation cost, either immediately or over the remaining service period, depending on the vesting status of the award. The expected term of cash-settled SARs has been determined using the simplified method in accordance with Question 6 of SEC Staff Accounting Bulletin Topic 14.0.2, "Expected Term" (SAB 107), until such time that historical exercise behavior can be established. We believe that this calculation provides a reasonable estimate of the expected term. On December 12, 2007, SAB 110 was issued to extend the simplified method beyond 2007 for those companies that have concluded that their own historical exercise experience is not sufficient to provide a reasonable basis.

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. In accordance with the SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), we have classified our entire investment portfolio as available-for-sale marketable 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 included 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 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/or losses on these investments and, therefore, have a material impact on our financial statements.

Inventory Valuation. Our inventory is stated at the lower of cost or market value. 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.

. . .