PERCLOSE INC, 10-K, 1996-06-28

PERCLOSE INC
10-K, 1996-06-28
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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

FORM 10-K

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended March 31, 1996.

/ / 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: 0-26890

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

Delaware 94-3154669
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

199 Jefferson Drive, Menlo Park, CA 94025
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (415) 473-3100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)

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

Indicate by check mark if disclosures 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]

The aggregate value of voting stock held by non-affiliates of the
Registrant was approximately $139,361,053 as of May 31, 1996, based upon the
average of the high and low prices of the Registrant's Common Stock reported for
such date on the Nasdaq National Market. Shares of Common Stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of May 31, 1996, the Registrant
had outstanding 9,485,769 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1996 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K. Certain information is incorporated into Parts II and IV of
this report by reference to the Registrant's annual report to stockholders for
the year ended March 31, 1996.

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PERCLOSE, INC.

INDEX

PAGE
NUMBER
------

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . . . . . . . . . . 2
Industry Overview . . . . . . . . . . . . . . . . . . . . . . 2
Perclose Solution . . . . . . . . . . . . . . . . . . . . . .4
Business Strategy . . . . . . . . . . . . . . . . . . . . . . 4
Products and Technology . . . . . . . . . . . . . . . . . . . 5
Clinical and Regulatory Status. . . . . . . . . . . . . . . . 7
Marketing and Distribution. . . . . . . . . . . . . . . . . . 7
Research and Development. . . . . . . . . . . . . . . . . . . 8
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 8
Competition . . . . . . . . . . . . . . . . . . . . . . . . . 9
Patents and Proprietary Rights. . . . . . . . . . . . . . . . 9
Government Regulation . . . . . . . . . . . . . . . . . . . .10
Third-Party Reimbursement . . . . . . . . . . . . . . . . . .12
Product Liability and Insurance . . . . . . . . . . . . . . .13
Employees . . . . . . . . . . . . . . . . . . . . . . . . . .13
Additional Risk Factors . . . . . . . . . . . . . . . . . . .13
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders . . . . .15

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . .16
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .16
Item 8. Financial Statements and Supplementary Data . . . . . . . . .16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . .16

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 10. Directors And Executive Officers of The Registrant. . . . . .17
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . .18
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . .18
Item 13. Certain Relationships and Related Transactions. . . . . . . .18

PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .19

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PART I

ITEM 1. BUSINESS

THE COMPANY

Perclose, Inc. ("Perclose" or the "Company") was incorporated in
California in March 1992 and reincorporated in Delaware in October 1995.
Perclose designs, develops, manufactures and markets a family of minimally
invasive systems used to surgically close arterial access sites in
catheterization procedures such as angioplasty and angiography. The Company's
proprietary, single-use systems are inserted through the same tract used during
catheterization and enable the clinician to suture closed the access site
immediately following the catheterization. The Company's Prostar, Prostar Plus
and Techstar percutaneous vascular surgery systems are designed to provide
routine, definitive closure by replicating results previously obtainable only
through open surgery, without the associated risks and costs. Over 19,000 of
the Company's systems have been sold since introduction. The Company believes
that the Prostar, Prostar Plus and Techstar systems provide significant clinical
and economic advantages over current compression methods of arterial access site
closure. These advantages include achieving rapid hemostasis, reducing nursing
time required to monitor patients, allowing early patient ambulation and
discharge, enabling more efficient use of the catheterization laboratory and
improving patient comfort. In addition, for certain high risk patients, such as
those who have experienced a heart attack, the Company's products allow
continuation of aggressive anticoagulation, thrombolytic or anti-restenosis drug
therapy without increasing the risk of bleeding complications at the arterial
access site.

The Company commenced international shipments of its Prostar, Techstar
and Prostar Plus systems in December 1994, July 1995 and January 1996,
respectively. These systems are currently marketed in Germany, France, Canada,
the United Kingdom, the Netherlands, South Africa, Spain and Japan under
regulatory approvals where required.

In March 1996, the Company completed a clinical trial of the Prostar
systems in the United States under an IDE approved by the FDA. The randomized
trial was conducted at six investigational sites, involved a total of 500
patients and compared the Prostar system with mechanical compression. The
approved protocol for the IDE trial addressed the collection of clinical data as
well as time to ambulation. The Company plans to file a PMA application for
approval to market the Prostar system in the United States based on the data
obtained from the clinical trial.

The Company is conducting two additional FDA approved IDE clinical
trials in the United States of other Perclose systems. Both trials are being
conducted under protocols similar to that of the Prostar clinical trial. A
trial for the Techstar 6F was initiated in April 1996 and a trial for the
Prostar Plus 8F was initiated in May 1996.

INDUSTRY OVERVIEW

This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events or results
may differ materially as a result of the factors described herein and in the
documents incorporated herein by reference, including, in particular, those
factors described under "Additional Risk Factors."

THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET. More than 6 million
people in the United States have been diagnosed with coronary artery disease,
which is a formation of atherosclerotic plaque that causes blood flow
restrictions, or blockages, within the coronary arteries. These blockages can
occur anywhere within the complex network of arteries that provide blood to the
heart muscle. If left untreated, coronary artery disease can cause severe chest
pain and lead to heart attacks. The principal means of treating coronary artery
disease include coronary artery bypass grafting ("CABG"), a highly invasive open
surgical procedure, and percutaneous transluminal coronary angioplasty ("balloon
angioplasty") as well as other new, percutaneous catheter-based procedures
including atherectomy and stenting. Since its clinical introduction in 1978,
balloon angioplasty has emerged as the principal less invasive alternative to
CABG. Industry sources estimate that during 1994 approximately 850,000 balloon
angioplasty, atherectomy, stenting and intra-aortic balloon pump procedures were
performed worldwide, including approximately 525,000 such procedures in the
United States. Industry sources estimate that the number of therapeutic and

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diagnostic catheter-based coronary procedures worldwide increased at an annual
rate of 13% and 5%, respectively, from 1990 to 1994.

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

Other catheter-based therapeutic coronary procedures include
atherectomy and stenting. The Company believes that the advent of atherectomy
and stenting has been responsible for a significant portion of the growth in
therapeutic, catheter-based coronary procedures. The emergence of these
procedures has emphasized the need for improved arterial access site management
techniques because of the increased use of anticoagulation therapy and the large
diameter of atherectomy catheters.

Atherectomy encompasses several types of devices that are designed to
remove atherosclerotic plaque causing an arterial blockage. These procedures
include directional coronary atherectomy in which plaque is removed with a
miniature cutting system, rotational atherectomy in which a high speed, rotating
burr is used to grind plaque into microscopic particles, and laser atherectomy
in which laser energy delivered through a fiber optic catheter is used to ablate
plaque. Directional and rotational atherectomy devices often require introducer
sheaths and catheters of greater diameter than balloon angioplasty catheters.
Use of atherectomy devices may require more aggressive anticoagulation therapy
than balloon angioplasty.

Stents are implantable metal devices delivered on a balloon catheter
and permanently deployed at a blockage site to maintain increased lumen diameter
by mechanically supporting the artery. In the United States, current labeling
of FDA-approved stent devices requires the use of aggressive, long-term
anticoagulation therapy in order to avoid blood clot formation at the stent site
in the artery. The required anticoagulation therapy has contributed to
increased vascular complications at the arterial access site, often extending
the hospital stay and sometimes requiring open vascular surgery to control
bleeding. Although improved stenting techniques and new stent devices may
reduce the need for aggressive anticoagulation in the weeks following the
procedure, the Company believes that anticoagulation therapy will continue to be
used during stenting procedures in the United States and, in certain high risk
patients, may be required for a period of time following the procedure. In
addition, stenting procedures have been reported to reduce the risk of abrupt
coronary artery closure, thereby creating the possibility for outpatient
stenting due to a reduced need to keep patients under nursing observation
post-procedure. The current potential for outpatient stenting is, however,
limited by the inability to achieve predictable, sustained hemostasis of the
arterial access site.

DIAGNOSTIC CARDIOLOGY MARKET AND OTHER PERCUTANEOUS VASCULAR
PROCEDURES. Patients believed to have coronary artery disease typically undergo
angiography to determine the extent and location of their arterial blockages.
Angiography is a diagnostic procedure in which dye is delivered through a
catheter directly into the coronary arteries. The patient's coronary arteries
can be visualized using an x-ray imaging system that produces a real-time image.
Similar to therapeutic interventional procedures, angiography is performed using
a catheter placed into the vascular system through a puncture in the femoral
artery. Industry sources estimate that angiography was performed on
approximately 3.1 million patients worldwide in 1994, including over 1.8 million
patients in the United States. Angiography procedures represent a significant
market opportunity for arterial closure devices because many of these patients
are kept under nursing observation for several hours following the procedure
primarily to confirm achievement of hemostasis.

Many other catheterization procedures rely on percutaneous access to
the vascular system through a puncture in the femoral artery. These procedures
include peripheral vascular therapeutic and diagnostic procedures, of which
approximately 285,000 and 2.7 million, respectively, were performed worldwide in
1994. These procedures may represent a significant market

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opportunity for arterial closure devices because many of these patients are kept
under nursing observation following the procedure primarily to confirm
achievement of hemostasis. Therefore, the availability of reliable arterial
access site closure devices could facilitate early discharge of these patients.
Percutaneous vascular surgery devices could also be used to close arterial
access sites in interventional neuroradiology catheterization procedures,
electrophysiology procedures to map and ablate cardiac arrhythmias and
intra-aortic balloon pump procedures. In addition, emerging percutaneous
catheterization procedures and other new interventional procedures, including
catheter-based vascular grafts, cardiac pulmonary support procedures and
percutaneous treatment of abdominal aortic aneurysms, may also represent new
market opportunities for the Company's products.

ARTERIAL ACCESS SITE MANAGEMENT. Following catheter-based coronary
procedures such as balloon angioplasty, atherectomy, stenting and angiography,
the physician must close the arterial access site. In current practice,
anticoagulation therapy is discontinued for up to four hours prior to closure of
the access site to allow the patient's clotting function to normalize. During
this period, the introducer sheath is left in place and the patient must remain
immobile in bed to prevent bleeding at the access site. Once the introducer
sheath is removed, intense direct pressure is applied to the puncture site for
at least 20 minutes to over one hour to facilitate formation of a blood clot in
order to seal the arterial access site. This pressure is applied manually or
with a large C-clamp or other pressure device placed around the patient's leg.
A dislodged clot can result in internal or external bleeding, which may
necessitate transfusions or result in other vascular complications if not
immediately controlled. Because any movement may dislodge the clot, the patient
is required to remain immobile under close nursing observation in a coronary
care unit for an additional 4 to 24 hours after the procedure, depending on the
amount of anticoagulation drug therapy used and the type of procedure performed.
Current closure methods may result in substantial costs, limit operating
efficiencies and constrain the scheduling and usage of the catheterization
laboratory by the number of beds and nursing staff in the coronary care unit.

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

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

Several new closure devices have been developed in response to the
need for improved methods of arterial access site closure following
catheterization procedures. These devices include the Company's systems as well
as collagen plug devices manufactured by two other companies. These collagen
plug devices are delivered through a sheath and placed at the site of the
femoral artery puncture. Both collagen plug devices have received
recommendations for PMA approval from an FDA advisory panel and one such device
received PMA approval for United States commercial sale in October 1995.

The Company believes that collagen plug devices do not fully and
satisfactorily address the current need for an improved closure method. These
collagen plugs still rely on the body's clotting function, which is enhanced by
the presence of

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collagen, and may still require external pressure to achieve closure of the
arterial access site. The Company's percutaneous vascular surgery systems
provide a mechanical suture closure which aids in the natural healing process
and, like open surgical repair, does not rely on the body's clotting function.
The Perclose systems should therefore allow more aggressive anticoagulation and
other drug therapy following catheterization.

PERCLOSE SOLUTION

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

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

The Perclose systems, which surgically close the access site and do
not rely on the body's clotting process to achieve hemostasis, are ideally
suited for use in patients who would benefit from aggressive anticoagulation or
other drug therapy. Therefore, cardiologists can optimize drug therapy
independent of arterial access site management requirements. The Company's
products cannot be sold commercially in the United States unless and until FDA
approvals or clearances are obtained, and FDA approvals or clearances may not be
received for several years, if at all.

BUSINESS STRATEGY

The Company's objectives are to become the leader in the design,
development and commercialization of suture-based closure devices and to
establish percutaneous vascular surgery using the Company's products as the
standard of care for post-catheterization arterial access site management. The
following are key elements of the Company's strategy:

- DEMONSTRATE CLINICAL UTILITY AND COST-EFFECTIVENESS. The Company
believes that percutaneous vascular surgical repair of arterial access sites
decreases time to ambulation and discharge with lower treatment costs and
improved comfort for all patients, and can reduce complication rates in high
clinical need patients. The Company intends to use data collected from clinical
trials to demonstrate the anticipated clinical and cost advantages of its
products to physicians and health care payors.

- SEEK EARLY REGULATORY APPROVALS IN TARGETED MARKETS. The Company
seeks to obtain required regulatory approvals as early as possible, particularly
in countries with favorable regulatory environments. The Company has obtained
regulatory approvals for its current Prostar, Prostar Plus and Techstar systems
in several major European markets, Japan, Canada and several other countries.
The Company, through its Japanese distributor, has obtained Japanese regulatory
approval for the Prostar, Prostar Plus and Techstar systems and intends to
commence clinical trials to support reimbursement approval in Japan.

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The Company plans to file a PMA application for each system in the United States
upon completion of the applicable clinical trial.

- FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's
products are currently marketed to interventional cardiologists, radiologists
and catheterization laboratory administrators through leading distributors in
Germany, France, Canada, the United Kingdom, the Netherlands, South Africa,
Spain and Japan. The Company plans to market its products in the United States
through a direct sales organization if and when PMA approval is received. The
Company believes that the majority of interventional catheterization procedures
in the United States are performed in high volume catheterization laboratories,
and that these institutions can be served by a relatively small, focused sales
force. The Company develops and maintains close working relationships with its
customers to address their needs for products and services and to receive input
regarding the Company's product development plans. The Company builds these
relationships through focused physician training, which the Company believes
will also be a key factor in encouraging cardiologists to use the Company's
products. The Company will continue to provide a standardized, in-the-field
training course in the markets it enters.

- ACCESS NEW MARKET OPPORTUNITIES. The Company believes that
several other minimally invasive catheterization procedures, both currently used
and under development, will be candidates for the Company's products. The
Company intends to expand its product marketing efforts to new clinical
applications, including electrophysiology and interventional neuroradiology
catheterization procedures and intra-aortic balloon pump procedures, where
percutaneous surgical closure of arterial access sites can meet significant
clinical needs or achieve cost reductions.

- TECHNOLOGICAL LEADERSHIP. The Company intends to position itself
at the forefront of technological leadership and innovation in percutaneous
vascular surgery. The Company continually evaluates new developments in
percutaneous catheterization procedures and will seek to expand its product
development efforts to address access site closure following these new
procedures, including catheter-based vascular grafts, treatment of abdominal
aortic aneurysms and cardiac pulmonary support procedures. The large diameter
catheter devices required for these procedures make closure of the arterial
access site difficult using conventional compression methods. The Company
believes that larger diameter versions of its current products could be used to
close the arterial access sites in these procedures, making it feasible to
perform such procedures in a minimally invasive manner. The Company also
intends to continue to focus on improving the ease of use and reducing the
manufacturing costs of its products. In order to protect its proprietary
position, the Company will continue to pursue an aggressive patent filing and
prosecution strategy.

The Company's products cannot be sold commercially in the United
States unless and until FDA approvals or clearances are obtained, and FDA
approvals or clearances may not be received for several years, if at all. The
Company's business is also subject to additional significant risks, including
the dependence of the Company on the Prostar, Prostar Plus and Techstar
products, the lack of extensive clinical data demonstrating that certain of the
Company's products are safe and effective and the risk that the Company's
products will not gain market acceptance.

PRODUCTS AND TECHNOLOGY

The Company currently has three product families, the Prostar, Prostar
Plus and Techstar systems. The Prostar and Prostar Plus systems provide two
sutures for closing arterial access sites ranging in diameter from 7 French (7F)
to 11 French (11F). One French size is equal to one-third of a millimeter in
diameter (3F = 1mm). The Techstar systems use single-suture devices for
suturing 6F to 8F arterial access sites.

The following table summarizes the markets addressed by and current
status of each of the Company's products:

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- -------------------------------------------------------------------------------------------------------------------------
PRODUCT
TARGETED APPLICATIONS FAMILY(1) STATUS
- ----------------------------------- --------------- -------------------------------------------------------------
PROSTAR/
PROSTAR PLUS
HIGH CLINICAL NEED (2 SUTURE) UNITED STATES INTERNATIONAL(2)
- ----------------------------------- --------------- --------------------------- --------------------------
<S> <C> <C> <C>
Anticoagulated Stents 8F IDE Clinical Trial Ongoing Commercial Sales
Complicated Angioplasty
Atherectomy 9F IDE Clinical Trial Completed Commercial Sales
Intra-aortic Balloon Pump
Electrophysiology Ablation 10F Product Development Completed Clinical Evaluation
Thrombolytic Drugs
Anti-Restenosis Drugs 11F IDE Clinical Trial Completed Commercial Sales

<CAPTION>
TECHSTAR
EARLY AMBULATION/DISCHARGE (1 SUTURE) UNITED STATES INTERNATIONAL
- ----------------------------------- --------------- --------------------------- --------------------------
<S> <C> <C> <C>
Stents 6F IDE Clinical Trial Ongoing Commercial Sales
Angioplasty
Peripheral Radiology 7F Product Development Commercial Sales
Completed
Interventional Neuroradiology

Diagnostic Angiography 8F Product Development Commercial Sales
Completed

Peripheral Radiology 6 FS Product Development Commercial Sales
Completed
- -------------------------------------------------------------------------------------------------------------------------
(1) "F" refers to French size. 1 French is equal to 1/3 millimeter in diameter. "6FS" refers to a 6F short length
Perclose system.
(2) Commercial sales occur in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain
and Japan.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

PROSTAR SYSTEM AND PROCEDURE. Prostar is a sterile, single-use system
which, as currently configured, consists of a four-needle, two-suture Prostar
Percutaneous Vascular Surgical Device, a Prostar Pre-Dilator (for the 9F and 11F
sizes only), a Perclose Knot Pusher, and a Prostar Guidewire. The Prostar
system is currently marketed internationally in 8F, 9F and 11F sizes. The 8F,
9F and 10F systems are suitable for arterial access sites dilated by 7F to 10F
introducer sheaths used during balloon angioplasty, stenting, and rotational
atherectomy procedures. The 11F system is used to close puncture sites dilated
by 10F or 11F introducer sheaths used during directional coronary atherectomy
and intra-aortic balloon pump procedures.

At the end of the catheterization procedure, the introducer sheath
used in the procedure is removed utilizing a standard over- the-wire exchange
technique. For the Prostar 9F and 11F systems, the Prostar Pre-Dilator is
inserted to expand the tract from the skin incision to the artery to assist in
positioning the Prostar Percutaneous Vascular Surgical Device. Once the
pre-dilation of the tract from the skin incision to the artery is complete,
another over-the-wire exchange is performed. Next, the flexible sheath of the
Prostar Percutaneous Vascular Surgical Device is inserted in the artery over a
guidewire. The unique design of the device allows the physician to maintain
hemostasis throughout the procedure. The device includes two marker ports in
the needle guide, proximal to the tips of the needles. Arterial blood flow into
the marker ports indicates that the device has been properly positioned with the
needles and sutures inside the arterial lumen. Once positioned, the pull handle
is drawn away from the patient, deploying the needles and sutures. As the
needles advance toward the artery wall, they are guided by a ramp that precisely
positions the needles around the arterial access site. The needles are captured
in the barrel of the device which also positions the needles for removal. Two
needles, each attached to the end of a single suture, will create one surgical
stitch. The needles are removed from the device and detached from the sutures
which are then tied in a standard surgical square knot. The device is removed
and the knots are advanced to the arterial access site with the Perclose Knot
Pusher. The knots can be further secured with additional throws, which are also
advanced with the Knot Pusher.

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TECHSTAR SYSTEM. Techstar is a sterile, single-use system which
consists of a two-needle, single-suture Techstar Percutaneous Vascular Surgical
Device and a Perclose Knot Pusher. The Techstar system is currently marketed
internationally in 6F, 7F, 8F and 6FS (short) sizes. The 6F diameter system is
suitable for closure of arterial access sites in therapeutic and diagnostic
procedures having puncture sites dilated by 6F or smaller introducer sheaths.
The 7F diameter system is suitable for closure of sites in therapeutic and
diagnostic procedures having puncture sites dilated by 7F interventional and
diagnostic introducer sheaths. The 8F diameter system is suitable for closure
of sites in therapeutic and diagnostic procedures having puncture sites dilated
by 8F interventional cardiology introducer sheaths. The 6FS diameter system is
a shorter system suitable for use in peripheral diagnostic and interventional
procedures for vascular diseases of the lower legs. The shorter version allows
radiologists to close arterial access sites after these peripheral procedures.

Significant differences of the configuration of the Techstar systems
versus the Prostar 9F and 11F systems include the use of only two needles and a
single suture, a rotating barrel that eliminates the need for a separate
pre-dilator, and a monorail configuration that eliminates the need for an
additional guidewire. These features, together with several other design
changes incorporated into the Techstar system, improve ease of use and ease of
manufacturability and reduce manufacturing cost. The Prostar Plus 8F and 10F
systems incorporate the design improvements of the Techstar systems, but use the
four-needle, two-suture configuration.

CLINICAL AND REGULATORY STATUS

Perclose systems are currently being marketed in Germany, France,
Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan under
regulatory approvals where required. Continued marketing of these products in
member countries of the European Union will require the Company to obtain by
mid-1998 the certifications necessary for the CE mark to be affixed to these
products. The Company has not obtained all such certifications and, although
the Company expects that it will be able to obtain such certifications, there
can be no assurance that the Company will do so in a timely manner.

In March 1996, the Company completed a clinical trial of the Prostar
systems in the United States under an IDE approved by the FDA. The randomized
trial was conducted at six investigational sites, involved a total of 500
patients and compared the Prostar system with mechanical compression. The
approved protocol for the IDE trial addressed the collection of clinical data as
well as time to ambulation and time to discharge. The Company plans to file a
PMA application for approval to market the Prostar system in the United States
based on the data obtained from the clinical trial.

The Company, through Getz Brothers Company Ltd., its Japanese
distributor, has received regulatory approval to market the Prostar, Prostar
Plus and Techstar systems in Japan and intends to commence clinical trials in
Japan that will form the basis for an application for reimbursement approvals in
the Japanese health care system. The Company's distributor will be responsible
for management of clinical trials and obtaining reimbursement approval for the
Prostar and Techstar systems in Japan, and there can be no assurance that such
approvals will be obtained in a timely manner or at all.

MARKETING AND DISTRIBUTION

The Company's initial sales and marketing strategy is to focus on
interventional cardiologists and radiologists through established distributors
in major international markets, subject to required regulatory approvals.
Perclose systems are currently marketed in Germany, France, Canada, the United
Kingdom, the Netherlands, South Africa, Spain and Japan through independent
distributors, and the Company intends to add distributors in other countries as
its sales and marketing efforts are expanded. The Company generally operates
under written distribution agreements with its distributors, although the
Company does not have written agreements with certain distributors, typically
those in smaller markets. Distributors with which the Company has distribution
agreements generally have the exclusive right to sell the Company's products
within a defined territory. These distributors also typically market other
medical products, although the Company generally seeks to obtain covenants from
its distributors prohibiting them from marketing medical devices that compete
directly with the Company's products. The Company's

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distributors typically purchase the Company's products at a discount from list
price and resell the products to hospitals and clinics. Sales to international
distributors are denominated in United States dollars. The end-user price is
determined by the distributor and varies from country to country.

All of the Company's revenues through March 31, 1996 were derived from
export sales to international distributors, primarily in Europe, none of which
are affiliated with the Company. Exports to Europe constituted 87% and 85% of
the Company's net sales in the fiscal years ended March 31, 1995 and 1996,
respectively. Sales to A.D. Krauth & Co. GmbH, Medicorp and Getz Brothers
Company Ltd., the Company's German, French and Japanese distributors,
respectively, accounted for approximately 52%, 25% and 8%, respectively of net
sales for the fiscal year ended March 31, 1996.

The Company plans to market its products domestically through a direct
sales organization if and when PMA approval is received. The Company believes
that the majority of interventional catheterization procedures in the United
States are performed in high volume catheterization laboratories, and that these
institutions can be served by a relatively small, focused sales force. The
Company will seek to develop and maintain close working relationships with its
customers to address their needs for products and services and to receive input
regarding the Company's product development plans. The Company intends to build
these relationships through focused physician training, which the Company
believes will also be a key factor in encouraging cardiologists to use the
Company's products. The Company will continue to provide a standardized,
in-the-field training course in the markets it enters.

As the Company expands existing product lines and introduces systems
for new applications, the Company will broaden its marketing and sales
activities to reach key practitioners, clinicians and administrators in markets
targeted by the Company.

RESEARCH AND DEVELOPMENT

The Company's research and development activities are performed
internally by its 11 person research and development staff. Future research and
development efforts are expected to involve application of the Company's core
arterial access site closure technology to other catheterization procedures,
including vascular grafts, treatment of abdominal aortic aneurysms and cardiac
pulmonary support procedures. The large diameter catheter devices used in these
procedures make closure of the arterial access site difficult with conventional
compression methods. The Company believes that larger diameter versions of its
current products could be used for closure of arterial access sites in these
procedures, making it feasible to perform such procedures in a minimally
invasive manner.

Research and development expenses for fiscal 1994, 1995 and 1996 were
$1.6 million, $3.1 million and $3.1 million, respectively.

MANUFACTURING

The Company manufactures its products at its facility in Menlo Park,
California. To establish a manufacturing presence within the European
Community, the Company has entered into an agreement with AorTech Europe, a
contract manufacturer located in Glasgow, Scotland. AorTech performs final
assembly, packaging, and shipment of the Company's products to distributors
outside the United States. AorTech Europe is ISO 9002 certified and operates a
class 10,000 cleanroom.

The Company purchases components from various suppliers and relies on
single sources for several parts. To date, the Company has not experienced any
significant adverse affects resulting from shortages of components. Delays
associated with any future part shortages, particularly as the Company scales up
its manufacturing activities in support of international distributor orders and,
if FDA approval is received, commercial introduction in the United States, would
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company currently manufactures subassemblies of its products at
its Menlo Park facility with final assembly occurring at AorTech. The Company
does not have experience in manufacturing its products in large scale commercial
quantities. Manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality control
and assurance, component supply and lack of qualified personnel. Difficulties
encountered by

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Perclose in manufacturing scale-up could have a material adverse effect on its
business, financial condition and results of operations.

COMPETITION

Competition in the emerging market for arterial access site closure
devices is expected to be intense and to increase. The Perclose systems compete
against conventional manual compression, compression devices, and newer collagen
plugs. Several companies supply C-clamp devices and C.R. Bard markets the
Femostop compression arch. Datascope has received PMA approval from the FDA
for, and Kensey-Nash has received a favorable FDA advisory panel recommendation
for, products that use collagen plugs to achieve hemostasis. Kensey-Nash may
receive PMA approval for its Angioseal device during 1996. The Company believes
that American Home Products has distribution rights to the Kensey-Nash device in
the United States and internationally. Several other companies are reported to
be developing arterial closure devices, some of which have an established
presence in the field of interventional cardiology, including Boston Scientific
Corporation, Schneider (a subsidiary of Pfizer, Inc.), United States Surgical
Corporation, Global Therapeutics Inc. and Guidant Corporation. Many of the
Company's competitors have substantially greater name recognition and financial
resources than the Company and also have greater resources and expertise in the
areas of research and development, obtaining regulatory approvals, manufacturing
and marketing. There can be no assurance that the Company's competitors will
not succeed in developing and marketing technologies and products that are more
effective than those developed and marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
there is no assurance that the Company will be able to compete effectively
against such competitors in terms of manufacturing, marketing and sales. Also,
there can be no assurance that the Company's products will be able to
demonstrate clinical efficacy or cost effectiveness advantages over competing
products, or that clinical trials will demonstrate such advantages.

The Company believes that the primary competitive factors in the
market for arterial closure devices are clinical need, complications, efficacy,
time to patient ambulation and discharge, ease of use and price. In addition,
the length of time required for products to be developed and to receive
regulatory and, in some cases, reimbursement approval is an important
competitive factor. The medical device industry is characterized by rapid and
significant technological change. Accordingly, the Company's success will
depend in part on its ability to respond quickly to medical and technological
changes through the development and introduction of new products. Product
development involves a high degree of risk and there can be no assurance that
the Company's new product development efforts will result in any commercially
successful products. The Company believes it competes favorably with respect to
these factors, although there is no assurance that it will be able to continue
to do so.

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

PATENTS AND PROPRIETARY RIGHTS

Perclose's policy is to protect its proprietary position by, among
other methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to its business. The
Company has two issued United States patents covering certain aspects of the
percutaneous suturing technology used in the Company's products and has
exclusive licenses under two additional issued patents relating to a different
method of percutaneous suturing not currently employed by the Company's
products. The Company has five United States patent applications pending in the
areas of device design, percutaneous suturing for vascular puncture sites and
accessory devices. The Company has also licensed, on a nonexclusive basis,
certain coating technology used in its products. Under the license, the Company
is obligated to pay royalties on sales of products using this coating
technology. The Company has also filed several international patent
applications corresponding to certain of its United States patent applications.

The patent positions of medical device companies, including those of
the Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patent applications will result in the issuance of
patents, or that the Company's issued or any future patents will provide
significant protection or commercial advantage or will

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not be circumvented by others. Since patent applications are secret until
patents are issued in the United States or corresponding applications are
published in international countries, and since publication of discoveries in
the scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications or that it was the first to file
patent applications for such inventions. There can be no assurance that patents
held by or licensed to the Company or any patents that may be issued as a result
of the Company's pending or future patent applications will be of commercial
benefit, afford the Company adequate protection from competing products or
technologies or will not be challenged by competitors or others or declared
invalid. Also, there can be no assurance that the Company will have the
financial resources to defend its patents from infringement or claims of
invalidity.

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

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

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

GOVERNMENT REGULATION

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

If human clinical trials of a device are required and if the device
presents a "significant risk," the manufacturer or the distributor of the device
is required to file an IDE application prior to commencing human clinical
trials. The IDE application

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

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

Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. No law or regulation specifies the time limit by which
the FDA must respond to a 510(k) notification. At this time, the FDA typically
responds to the submission of a 510(k) notification within 150 to 200 days. An
FDA order may declare that the device is substantially equivalent to another
legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay market
introduction of the products that are the subject of the 510(k) notification.

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

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

The Company plans to file a PMA application with the FDA for approval
to sell the Perclose systems commercially in the United States when clinical
studies are completed. There can be no assurance that the Company will be able
to obtain necessary PMA application approvals to market its systems, or any
other products, on a timely basis, if at all, and delays in receipt or failure
to receive such approvals, the loss of previously received approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the CDHS and to list its
products with the FDA. As such, the Company will be inspected by both the FDA
and the CDHS for compliance with the FDA's GMP and other applicable regulations.
These regulations require that the Company manufacture its products and maintain
its documents in a prescribed manner with respect to manufacturing, testing and
control activities. Further,

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the Company is required to comply with various FDA requirements for design,
safety, advertising and labeling. The Company has not yet undergone an FDA GMP
inspection. In June 1995, the Company's Menlo Park, California facility was
inspected by the CDHS, and the Company was subsequently granted a California
medical device manufacturing license.

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

The advertising of most FDA-regulated products is subject to both FDA
and Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.

Regulations regarding the manufacture and sale of the Company's
products are subject to change. The Company cannot predict what impact, if any,
such changes might have on its business, financial condition or results of
operations.

INTERNATIONAL. International sales of the Company's products are
subject to the regulatory agency product registration requirements of each
country. The regulatory review process varies from country to country. The
Company's distributors have obtained regulatory approval in several European
countries and Canada and have applied for additional approvals. There can by no
assurance, however, that such approvals will be obtained on a timely basis or at
all. At this time, the 8F, 9F and 11F Prostar systems and the 6F, 7F, 8F and
6FS Techstar system are being marketed in Germany, France, Canada, the United
Kingdom, the Netherlands, South Africa, Spain and Japan under regulatory
approvals where required.

The Company is in the process of implementing policies and procedures
which are intended to allow the Company to receive ISO 9001 qualification of its
processes. The ISO 9000 series of standards for quality operations have been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated
rules which require that medical products receive by mid-1998 the right to affix
the CE mark, an international symbol of adherence to quality assurance standards
and compliance with applicable European medical device directives. ISO 9000
certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union. There can be no
assurance that the Company will be successful in meeting certification
requirements.

The Company, through its Japanese distributor, has received regulatory
approval for commercial sale of the Prostar, Prostar Plus and Techstar systems
in Japan and intends to commence clinical trials in Japan that will form the
basis of an application for reimbursement approvals in the Japanese health care
system. The Company's distributor will be responsible for management of
clinical trials and obtaining reimbursement approval for the Prostar and
Techstar systems in Japan. There can be no assurance such approvals will be
obtained in a timely manner or at all.

THIRD-PARTY REIMBURSEMENT

Market acceptance of the Company's products in international markets
may be dependent in part upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country. The main types
of health care payment systems in international markets are government sponsored
health care and private insurance. Countries with government sponsored health
care, such as the United Kingdom, have a centralized, nationalized health care
system. New devices are brought into the system through negotiations between
departments at individual hospitals at the time of budgeting. In most foreign
countries, there are also private insurance systems that may offer payments for
alternative therapies. Although not as prevalent as in the United States,
health maintenance organizations are emerging in certain European countries.
Currently, users of the Company's products in Germany have obtained
reimbursement from certain private payors. The Company's products have also
been purchased by hospitals in nationalized health

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systems in the United Kingdom and Canada. The Company has received governmental
reimbursement approvals for private hospitals in France and intends to undertake
clinical studies in Japan to support governmental reimbursement approvals. The
Company may not receive reimbursement approvals in Japan in a timely manner, or
at all. The Company may seek additional international reimbursement approvals,
although there can be no assurance that any such approvals will be obtained in a
timely manner, or at all, and failure to receive additional international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.

In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of therapeutic and diagnostic catheterization procedures. Reimbursement
for catheterization procedures performed using devices that have received FDA
approval has generally been available in the United States. The Company
anticipates that in a prospective payment system, such as the DRG system
utilized by Medicare, and in many managed care systems used by private health
care payors, the cost of the Company's products will be incorporated into the
overall cost of the procedure and that there will be no separate, additional
reimbursement for the Company's products. The Company anticipates that hospital
administrators and physicians will justify the additional cost of an arterial
access site closure device by the attendant cost savings and clinical benefits
derived from the use of the Company's products.

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

PRODUCT LIABILITY AND INSURANCE

The Company's business involves the risk of product liability claims.
The Company has not experienced any product liability claims to date. Although
the Company maintains product liability insurance with coverage limits of
$1.0 million per occurrence and an annual aggregate maximum of $1.0 million,
there can be no assurance that product liability claims will not exceed such
insurance coverage limits, which could have a material adverse effect on the
Company, or that such insurance will be available on commercially reasonable
terms or at all.

EMPLOYEES

As of May 31, 1996, the Company had 89 full-time employees.
Approximately 11 persons are engaged in research and development activities, 48
persons are engaged in manufacturing and manufacturing engineering, nine persons
are engaged in quality assurance and regulatory affairs, 14 persons are engaged
in sales and marketing and seven persons are engaged in general and
administrative functions. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees. The Company is dependent upon a number of key management and
technical personnel, and the loss of services of one or more key employees would
have a material adverse effect on the Company.

ADDITIONAL RISK FACTORS

LIMITED OPERATING HISTORY. The Company has a limited history of
operations. Since its inception in March 1992, the Company has been primarily
engaged in research and development of its percutaneous arterial access site
closure products. The Company has generated only limited revenues from
international sales in certain markets, which sales commenced in December 1994,
and does not have experience in manufacturing, marketing or selling its products
in quantities necessary for achieving profitability. There can be no assurance
that the Company's product systems will be further commercialized or that the
Company

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will achieve significant revenues from either international or United States
sales. In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future.

HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has
experienced significant operating losses since inception and, as of March 31,
1996, had an accumulated deficit of $18.4 million. The development and further
commercialization of the Company's current products and other new products, if
any, will require substantial development, clinical, regulatory, manufacturing
and other expenditures. The Company expects its operating losses to continue
for at least the next two years as it continues to expend substantial resources
in funding clinical trials in support of regulatory and reimbursement approvals,
expansion of manufacturing, marketing and sales activities and research and
development.

FLUCTUATIONS IN OPERATING RESULTS. The Company's results of
operations may fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including actions relating to regulatory and
reimbursement matters, progress of clinical trials, the extent to which the
Company's products gain market acceptance, introduction of alternative means for
arterial access site closure and competition. Results of operations will also
be affected by the timing of orders received from distributors, the extent to
which the Company expands its international distribution network and the ability
of distributors to effectively promote the Company's products.

DEPENDENCE UPON INTERNATIONAL OPERATIONS AND SALES. All of the
Company's product sales to date have been outside the United States, and the
Company anticipates that substantially all of its revenues will be derived from
international sales until such time, if at all, as its products are approved for
sale in the United States. The Company relies on contract manufacturers in
Europe for final assembly, sterilization, testing, packaging and shipment of
products sold internationally. The Company markets and sells its products
outside the United States primarily through a network of international
distributors, and the Company's international sales are largely dependent on the
marketing efforts of, and sales by, these distributors. Sales through
distributors and use of international contract manufacturers are subject to
several risks, including the risk of financial instability of distributors or
contract manufacturers, the risk of manufacturing and quality control problems
with contract manufacturers and the risk that distributors will not effectively
promote the Company's products. Loss or termination of distribution
relationships could have a material adverse affect on the Company's
international sales efforts and could result in the Company repurchasing unsold
inventory from former distributors by virtue of local laws applicable to
distribution relationships, provisions of distribution agreements or negotiated
settlements entered into with such distributors.

A number of risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in staffing,
coordinating communications among and managing international operations.
Additionally, the Company's business, financial condition and results of
operations may be adversely affected by fluctuations in international currency
exchange rates as well as increases in duty rates, difficulties in obtaining
export licenses, constraints on its ability to maintain or increase prices, and
competition. There can be no assurance that the Company will be able to
successfully commercialize the Prostar or Techstar system or any future product
in any international market.

LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling the Prostar and Techstar systems, and does not
have experience marketing and selling its products in commercial quantities. The
Company currently has a limited network of distributors that cover certain
European countries, Japan and Canada. Should the Company receive FDA approval to
market its products in the United States, the Company intends to establish a
direct sales force. Establishing marketing and sales capability sufficient to
support sales in commercial quantities will require significant resources, and
there can be no assurance that the Company will be able to recruit and retain
direct sales personnel or that future sales efforts of the Company will be
successful.

RISK OF INADEQUATE FUNDING. The Company plans to continue to expend
substantial funds for clinical trials in support of regulatory and reimbursement
approvals, expansion of sales and marketing activities, research and
development, and establishment of commercial-scale manufacturing capabilities.
The Company may be required to expend greater-than-anticipated funds if
unforeseen difficulties arise in the course of clinical trials of the Perclose
systems, in connection with obtaining necessary regulatory and reimbursement
approvals or in other aspects of the Company's business. Although the Company
believes that the proceeds from this offering together with the Company's
current cash balances and cash generated from the future sale of products

-14-

<PAGE>

will be sufficient to meet the Company's operating and capital requirements
through calendar 1997, there can be no assurance that the Company will not
require additional financing within this time frame. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the progress of the Company's clinical trials, actions relating to regulatory
and reimbursement matters, the costs and timing of expansion of marketing,
sales, manufacturing and product development activities, the extent to which the
Company's products gain market acceptance, and competitive developments. Any
additional required financing may not be available on satisfactory terms, if at
all. Future equity financings may result in dilution to the holders of the
Company's Common Stock.

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

DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon a number
of key management and technical personnel. The loss of the services of one or
more key employees would have a material adverse effect on the Company. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. Furthermore, the
Company relies on the services of several medical and scientific consultants,
all of whom are employed on a full-time basis by hospitals or academic or
research institutions. Such consultants are therefore not available to devote
their full time or attention to the Company's affairs.

POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely to
be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock.

ITEM 2. PROPERTIES

The Company leases an approximately 20,000 square foot facility in
Menlo Park, California. This facility includes an environmentally controlled,
class 10,000 clean room for device assembly together with warehouse, laboratory
and office space. The facility is leased through August 1998. The Company
believes its facilities are adequate to meet its current and reasonably
anticipated future requirements.

ITEM 3. LEGAL PROCEEDINGS

The Company is not party to any legal proceedings.

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

Not applicable.

-15-

<PAGE>

PART II

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

The Company's Common Stock is traded on the NASDAQ National Market
(ticker symbol PERC). The number of record holders of the Company's Common
Stock at May 31, 1996 was 197. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.

The Company completed an initial public offering of 2,500,000 shares
of Common Stock in November 1995. Prior to the initial public offering, the
Company's Common Stock was not publicly traded.

Quarterly high and low stock prices are as follows:

Quarter Ended High Low
---------------------------------------- -------- --------
December 31, 1995 (from November 7, 1995) $ 19 1/8 $ 12 3/4
March 31, 1996 26 1/4 15

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Selected Financial Data" and included in Exhibit 13.1 to this report.

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

The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and included in Exhibit 13.1 to this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Financial Statements" and included in Exhibit 13.1 to this report.

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

Not applicable.

-16-

<PAGE>

PART III

Certain information required by Part III is omitted from this Report
on Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A with
respect to the 1996 Annual Meeting of Stockholders (the "Proxy Statement") to be
held September 24, 1996 and certain information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1
- -- Election of Directors" in the Proxy Statement.

The executive officers of the Registrant, who are elected by the board
of directors, are as follows:

Name Age Position
- ---------------------- --- -------------------------------------------------
Henry A. Plain, Jr. 38 President, Chief Executive Officer and Director
Randolph E. Campbell 39 Vice President of Operations
Jeffrey M. Closs 35 Vice President of International Sales and
Marketing, General Manager, Europe
Ronald W. Songer 38 Vice President of Research and Development
Kenneth E. Ludlum 43 Vice President of Finance and Administration and
Chief Financial Officer

MR. PLAIN joined Perclose in February 1993 as President and Chief
Executive Officer and a member of the Company's board of directors. From 1981
until joining the Company, Mr. Plain held various management positions in the
pharmaceutical, agricultural and medical device units of Eli Lilly and Company
("Lilly"), a diversified pharmaceutical and medical products company, serving
most recently as Director of Worldwide Manufacturing Human Resources from
November 1992 to February 1993. Mr. Plain served as Director of Marketing at
DVI from June 1991 to November 1992 and as Human Resource Manager at DVI from
February 1990 through June 1991. Mr. Plain holds a B.S. in Finance from the
University of Missouri.

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

MR. CLOSS joined Perclose in January 1994 as Vice President of
International Sales and Marketing and General Manager, Europe. From 1991 until
joining the Company, Mr. Closs was Director of Sales and Marketing, Europe,
Middle East and Africa for DVI. From June 1985 to May 1991, Mr. Closs held
positions in sales and marketing with the Bentley Laboratories Division of
Baxter Healthcare Corporation. Mr. Closs holds a B.A. in Psychology from the
University of California at Los Angeles and an M.B.A. from Emory University.

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

MR. LUDLUM joined Perclose as Vice President of Finance and
Administration and Chief Financial Officer in May 1996. From November 1995
until joining Perclose, Mr. Ludlum was an independent business and financial
consultant to health care and high growth companies. From November 1993 to
November 1995, Mr. Ludlum was Vice President, Finance & Administration and Chief
Financial Officer of RiboGene, Inc., a biopharmaceutical company. From December
1991 to November 1993, Mr. Ludlum was Vice President, Finance and
Administration, Treasurer, Chief Financial Officer and Secretary to the Board of
Directors of Alteon Inc., a publicly traded biopharmaceutical company
devoloping therapies for diabetes. From

-17-

<PAGE>

1986 to December 1991, Mr. Ludlum held various positions with Montgomery
Securities, most recently as a Partner in the health care finance group. Mr.
Ludlum holds a B.S. in business from Lehigh University and an M.B.A. from
Columbia Business School.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to
the information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

-18-

<PAGE>

PART IV

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

(a) 1. FINANCIAL STATEMENTS

The following Financial Statements of Perclose, Inc. and
Report of Ernst & Young LLP, Independent Auditors are
incorporated by reference in the respective portions of the
Registrant's 1996 annual report to stockholders included in
Exhibit 13.1 to this report:

Report of Ernst & Young LLP, Independent Auditors

Balance Sheets, March 31, 1996 and 1995

Statements of Operations, Years Ended March 31, 1996,
1995 and 1994

Statement of Stockholders' Equity, Years Ended
March 31, 1996, 1995 and 1994

Statements of Cash Flows, Years Ended March 31, 1996,
1995 and 1994

Notes to Financial Statements

2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedule entitled "Valuation and
Qualifying Accounts" is included at page S-1 of this Form
10-K.

All other schedules are omitted because they are not
applicable or the required information is shown in the
Financial Statements or the notes thereto.

3. EXHIBITS

Refer to (c) below.

(b) REPORTS ON FORM 8-K

The Company was not required to and did not file any reports on
Form 8-K during the three months ended March 31, 1996.

EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------
3.1(1) Articles of Incorporation of Perclose, Inc., a California
corporation, as currently in effect.
3.2(1) Certificate of Incorporation of Perclose, Inc., a Delaware
corporation, as in effect immediately following reincorporation.
3.3(1) Form of Restated Certificate of Incorporation of the Company to be
filed after the closing of the offering made under this Registration
Statement.
3.4(1) Bylaws of the Registrant, as currently in effect.
3.5(1) Bylaws of the Registrant, as in effect immediately following
reincorporation.
4.1(1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2(1) 1992 Stock Plan and form of Stock Option Agreement thereunder.

-19-

<PAGE>

EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------
10.3(1) 1995 Director Option Plan.
10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder.
10.5(1) Lease dated July 6, 1993 between Registrant and the David D. Bohanon
Organization for facility located at 199 Jefferson Drive, Menlo Park,
California, as amended by First Amendment to Lease dated January 31,
1994.
10.6(1) Loan and Security Agreement dated September 29, 1994 between the
Registrant, Silicon Valley Bank and MMC/GATX Partnership No. I, as
amended by Loan Modification Agreement.
10.7(1) Shareholder Rights Agreement dated August 23, 1995 between the
Registrant and certain holders of the Registrant's securities.
10.8(1) Employment Agreement dated March 28, 1995 between the Registrant and
Steve Van Dick.
10.9(1) Agreement dated March 30, 1993 between the Registrant and LocalMed,
Inc.
11.1 Calculation of earnings per share.
13.1 Portions of Annual Report to Stockholders Incorporated by Reference.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1(1) Power of Attorney.
27.1 Financial Data Schedule.
- --------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-97128) and incorporated herein by reference.

-20-

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

PERCLOSE, INC.

By: /s/ HENRY A. PLAIN, JR.
------------------------------------------
Henry A. Plain, Jr.,
PRESIDENT AND CHIEF EXECUTIVE OFFICER

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

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

SIGNATURE TITLE DATE
- --------------------------------- ----------------------------- --------------

/s/ HENRY A. PLAIN, JR. President, Chief Executive June 28, 1996
- --------------------------------- Officer and Director
Henry A. Plain, Jr. (Principal Executive Officer)

/s/ KENNETH E . LUDLUM Vice President and Chief June 28, 1996
- --------------------------------- Financial Officer (Principal
Kenneth E. Ludlum Financial and Accounting
Officer)

/s/ ROBERT C. BELLAS, JR. Director June 28, 1996
- ---------------------------------
Robert C. Bellas, Jr.

/s/ VAUGHN D. BRYSON Director June 28, 1996
- ---------------------------------
Vaughn D. Bryson

/s/ TOMOAKI HINOHARA, M.D. Director June 28, 1996
- ---------------------------------
Tomoaki Hinohara, M.D.

/s/ JOHN B. SIMPSON, PH.D., M.D. Director June 28, 1996
- ---------------------------------
John B. Simpson, Ph.D., M.D.

/s/ JAMES W. VETTER, M.D. Director June 28, 1996
- ---------------------------------
James W. Vetter, M.D.

/s/ MARK A. WAN Director June 28, 1996
- ---------------------------------
Mark A. Wan

<PAGE>

PERCLOSE, INC.

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

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1996

BALANCE AT
BEGINNING BALANCE AT
OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
---------- --------- ---------- -------------
<S> <C> <C> <C> <C>
March 31, 1995

Allowance for doubtful accounts $ 0 $40,000 $ 0 $40,000

March 31, 1996

Allowance for doubtful accounts $40,000 $20,000 $40,000 $20,000

</TABLE>

S-1

<PAGE>

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------

11.1 Statement Re: Computation of Per Share Losses

13.1 Portions of Annual Report to Stockholders Incorporated by Reference.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

27.1 Financial Data Schedule.

<PAGE>

PERCLOSE, INC.

EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES

YEAR ENDED MARCH 31,
--------------------
1996 1995(1) 1994
---- ------- ----
<S> <C> <C> <C>
HISTORICAL
Weighted average common shares outstanding . . . . . . . . . . . . . . . . 4,795,295 1,454,454
Shares related to SAB No. 55, 64 and 83. . . . . . . . . . . . . . . . . . 1,229,297 2,107,366
----------- -----------
Number of shares used in computing per share amounts . . . . . . . . . . . 6,024,592 3,561,820
----------- -----------
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,084,019) $(2,624,226)
----------- -----------
----------- -----------
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.34) $ (0.74)
----------- -----------
----------- -----------

PRO FORMA
Weighted average common shares outstanding . . . . . . . . . . . . . . . . 4,795,295 1,476,247
Common equivalent shares attributable to convertible preferred stock . . . 1,828,004 3,133,720
Shares related to SAB No. 55, 64, and 83 . . . . . . . . . . . . . . . . . 1,229,297 2,107,366
----------- -----------

Number of shares used in computing pro forma per share amounts . . . . . . 7,852,596 6,717,333
----------- -----------
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,084,019) $(6,992,858)
----------- -----------
----------- -----------
Pro forma Net loss per share . . . . . . . . . . . . . . . . . . . . . . . $ (1.03) $ (1.04)
----------- -----------
----------- -----------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Pro forma Net loss per share is presented for 1995.

<PAGE>

SELECTED FINANCIAL DATA
-----------------------------------------------------------------------

PERCLOSE, INC.

Years Ended March 31,
-------------------------------------
(in thousands, expect per share data) 1996 1995 1994 1993
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:

Net revenues, product sales $ 2,457 $ 178 $ -- $ --

Loss from operations (8,860) (7,192) (2,676) (615)

Net loss (8,084) (6,993) (2,624) (608)

Net loss per share(1) (1.34) (1.04)

Shares used in per share
calculations 6,025 6,717

March 31,
-------------------------------------
(in thousands) 1996 1995 1994 1993
- -------------------------------------------------------------------------------
BALANCE SHEET DATA:

Cash, cash equivalents and
short-term investments $37,857 $ 8,127 $ 5,539 $ 1,441

Total assets 40,916 10,949 6,386 1,613

Current liabilities 1,095 1,315 487 106

Long-term obligations 511 593 174 --

Total stockholders' equity 38,500 9,041 5,725 1,507

(1) Prior to 1995, statements of operations data omit the historical net loss
per share, as it was not presented in the initial public offering registration
statement pursuant to SEC guidelines. Pro forma net loss per share is presented
for 1995. See Note 1 of Notes to Financial Statements.

-1-

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------------------------

- --------------------------------------------------------------------------------
OVERVIEW

Since its inception in March 1992, the Company has been engaged in the design,
development, clinical testing and more recently the manufacture and sale of a
family of suture-based percutaneous arterial access site closure systems, known
as the Prostar, Prostar Plus and Techstar systems. The Company's products are
designed to close the puncture made in the femoral artery during catheter-based
therapeutic and diagnostic cardiology procedures. The Company has received
regulatory approvals where required to market certain of its Prostar, Prostar
Plus and Techstar systems in several markets in Europe, Canada and Japan.

The Company completed enrollment in its 500-patient randomized clinical study
for the Prostar system in the United States in March 1996. The Company plans to
use the results of the study to file a PMA application. The Company initiated a
clinical study for the Techstar 6F system in the United States in April 1996
under an IDE approved by the FDA.

- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS

FISCAL YEARS ENDED MARCH 31, 1996 AND 1995

Net revenues of $2.5 million in the fiscal year ended March 31, 1996 were the
result of Prostar, Prostar Plus and Techstar shipments to international
distributors, with 53% and 25% of the sales attributable to the Company's German
and French distributor, respectively. The Company commenced international
commercial shipments in December 1994 and for the year ended March 31, 1995 had
total net revenues of $178,000 representing initial shipments of Prostar systems
to the Company's German, English and Canadian distributors.

Cost of goods sold, including manufacturing start-up costs, increased to $4.8
million in the fiscal year ended March 31, 1996 from $2.1 million in the fiscal
year ended March 31, 1995 as a result of direct material costs associated with
products sold, a significant increase in personnel and other costs associated
with the commencement of manufacturing and assembly operations, manufacturing
engineering and support functions, and a materials procurement and handling
function.

Research and development expenses were approximately equal in fiscal 1996 and
fiscal 1995. Fiscal year 1996 had higher costs
associated with additional personnel required for new product development of the
Company's Prostar, Prostar Plus and Techstar systems when compared to fiscal
year 1995 but fiscal 1995 included a license fee totaling $378,000.

Marketing, general and administrative expenses increased 62% to $3.5 million in
the fiscal year ended March 31, 1996 from $2.2 million in the fiscal year ended
March 31, 1995. The increase was due primarily to increases in personnel and
costs associated with the expansion of the Company's European branch office,
marketing expenditures, physician training expenses related to the international
commercial introduction of the Prostar and Techstar systems and increased
administrative personnel in the United States.

Interest income increased to $941,000 for the fiscal year ended March 31, 1996,
from $258,000 for the fiscal year ended March 31, 1995 primarily as a result of
higher cash balances from the Company's initial public offering. Interest
expense increased to $166,000 for the fiscal year ended March 31, 1996 from
$59,000 for the fiscal ended March 31, 1995 due to increases in notes payable
related to the financing of capital equipment.

FISCAL YEARS ENDED MARCH 31, 1995 AND 1994

Net revenues of $178,000 in fiscal 1995 were the result of Prostar shipments to
international distributors, with 47% of the sales attributable to the Company's
German distributor and 38% of the sales attributable to the Company's British
distributor. The Company commenced international commercial shipments in
December 1994 and, accordingly, had no revenues in fiscal 1994.

Cost of goods sold, including manufacturing start-up costs, increased to $2.1
million in fiscal 1995 from $137,000 in fiscal 1994 as a result of direct
material costs associated with products sold, a significant increase in
personnel and other costs associated with commencement of manufacturing and
assembly operations, manufacturing engineering and support functions, and a
materials procurement and handling function.

Research and development expenses increased 92% to $3.1 million for fiscal 1995
from $1.6 million in fiscal 1994. This increase was primarily a result of
additional personnel required for continued development of the Prostar system,
initial clinical studies involving the Prostar system and new product
development of the Prostar and Techstar systems.

Marketing, general and administrative expenses increased 128% to $2.2 million in
fiscal 1995 from $945,000 in fiscal 1994. The increase was due primarily to
increases in marketing, physician training and travel expenses related to the
international commercial introduction of the Prostar system and increased
administrative personnel costs.

Interest and other income increased to $258,000 for fiscal 1995 from $66,000 for
fiscal 1994 primarily as a result of higher cash balances resulting from private
equity financings as well as increases in interest rates. Interest expense
increased to $59,000 for fiscal 1995 from $14,000 for fiscal 1994 due to
increases in notes payable related to the financing of
capital equipment.

-2-
<PAGE>

INCOME TAXES

The Company has not generated any net income to date and therefore has not paid
any federal income taxes since its inception. The Company accounts for income
taxes under Statement of Financial Accounting Standards No.109 ("FAS 109").
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances, in
amounts equal to the net deferred tax assets as of March 31, 1996 and 1995 have
been established in each period to reflect these uncertainties.

At March 31, 1996, the Company had federal and state net operating loss
carryforwards of $17 million and $7 million, respectively, and federal and state
tax credit carryforwards of $190,000 and $120,000, respectively, that will
expire at various dates beginning in 1998 through 2011, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss and tax
credit carryforwards before full utilization.

- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES

Perclose has financed its operations primarily through the sale of equity
securities and, to a lesser extent, through an equipment credit and loan
agreement and product sales. From inception through March 31, 1996, Perclose
raised $22.7 million in net proceeds of private equity financings and stock
option exercises and $34.1 million in an initial public offering. In addition,
the Company borrowed $1.3 million under an equipment credit facility.

During the fiscal years ended March 31, 1996, 1995 and 1994, the Company used
cash to fund operations of $7.3, $7.0 million and $2.4 million, respectively.
The changes in cash used in operations were due primarily to higher expenses
associated with increased research and development activities, initiation of
marketing and sales activities in international markets, increased general and
administrative expenses to support increased operations and purchases of
inventory to support international sales. The Company's expenditures for
equipment and improvements have aggregated $2.0 million since inception.

The Company's principal source of liquidity at March 31, 1996 consists of cash,
cash equivalents and short-term investments of $37.9 million.

The Company anticipates that its operating losses will continue for at least the
next two years since it plans to expend substantial resources in funding
clinical trials in support of regulatory approvals, and continues to expand
research and development and marketing and sales activities. Although Perclose
believes that current cash balances and short-term investments along with cash
generated from the future sales of products will be sufficient to meet the
Company's operating and capital requirements through calendar 1997, there can be
no assurance that the Company will not require additional financing within this
time frame. There can be no assurance that additional financing, if required,
will be available on satisfactory terms or at all. In any event, Perclose may
in the future seek to raise additional funds through bank facilities, debt or
equity offerings or other sources of capital. Perclose's future liquidity and
capital requirements will depend on numerous factors, including progress of the
Company's clinical trials, actions relating to regulatory and reimbursement
matters, the costs and timing of expansion of marketing, sales, manufacturing
and product development activities, the extent to which the Company's products
gain market acceptance, and competitive developments.

- --------------------------------------------------------------------------------
FACTORS AFFECTING OPERATING RESULTS

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

The clinical data obtained to date on the Perclose systems are insufficient
to demonstrate the safety and efficacy of these products under applicable
United States FDA regulatory guidelines. There can be no assurance that the
Company's products will prove to be safe and effective in United States
clinical trials under applicable regulatory guidelines. In addition, the
clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary United States regulatory or United
States and further international reimbursement approvals. If the Prostar,
Techstar or Prostar Plus systems do not prove to be safe and effective in
United States clinical trials or if the Company is otherwise unable to
commercialize the Prostar, Techstar or Prostar Plus systems successfully in
the United States, the Company's business, financial condition and results of
operations could be materially and adversely affected.

The Prostar, Prostar Plus and Techstar systems are currently the Company's only
products. These products will require additional development, clinical trials
and regulatory approvals before they can be marketed in the United States.
There can be no assurance that the Company's development efforts will be
successful or that the Prostar, Prostar Plus and Techstar systems or any other
product developed by the Company will be safe or effective, capable of being
manufactured in commercial quantities at acceptable costs, approved by
appropriate regulatory and reimbursement authorities or successfully marketed.
Furthermore, because the Prostar, Prostar Plus and Techstar systems represent
the Company's sole near-term product focus, the Company's operations could be
materially and adversely affected if these systems are not successfully
commercialized. In addition, continued sales in Europe will require the Company
to obtain by mid-calendar 1998 the certifications needed to affix the CE mark to
the Company's products. The Company, through its Japanese distributor, has
applied for and received regulatory approval to sell the Prostar,Prostar Plus
and Techstar systems in Japan and intends to commence clinical trials in Japan
that will form the basis of an application for Japanese reimbursement approval.
The Company has received certain reimbursement approvals in France and in
certain states in Germany.

-3-

<PAGE>

The Company's products represent a new method of closing arterial access sites
and there can be no assurance that these products will gain any significant
degree of market acceptance among physicians, patients and health care payors,
even if necessary international and United States regulatory and reimbursement
approvals are obtained. The Company believes that factors affecting market
acceptance include; recommendations and endorsements from physicians, that the
products represent an attractive alternative to other means of closing arterial
access sites, that the products reduce the time to ambulation and hospital
stays, and the Company's ability to train interventional cardiologists. Failure
of the Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Perclose has a limited history of operations and has experienced significant
operating losses since inception. As of March 31, 1996, the Company had an
accumulated deficit of $18.4 million. The Company has been primarily engaged in
research and development of its percutaneous arterial access site closure
products. The Company has generated only limited revenues from international
sales in certain markets, which sales commenced in December 1994, and does not
have experience in manufacturing, marketing or selling its products in
quantities necessary for achieving profitability. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. Difficulties encountered by Perclose in
manufacturing scale-up could have a material adverse effect on its business,
financial condition and results of operations.

Perclose anticipates that substantially all of its future revenues from product
sales will be derived from sales to its international distributors, unless and
until it receives approval to market its products in the United States.
Perclose sells its products internationally to distributors who resell to
hospitals. There can be no assurance that the Prostar, Prostar Plus and
Techstar systems will be successfully commercialized or that the Company will
achieve significant revenues from either international or domestic sales. Sales
through international distributors are subject to risks, including the risk of
financial instability and the risk that the distributor will not effectively
promote the Company's products. Loss, termination or ineffectiveness of
distributors could have a material adverse effect on the Company's international
sales efforts and could result in the Company repurchasing unsold inventory from
former distributors by virtue of local laws applicable to distribution
relationships, provisions of distribution agreements or negotiated settlements
entered into with such distributors.

The Company anticipates that its results of operations will fluctuate on a
quarterly basis for the foreseeable future due to several factors, including
actions relating to regulatory and reimbursement matters, progress of clinical
trials, the extent to which the Company's products gain market acceptance,
introduction of alternative means for arterial access site closure, and
competitive developments. Results of operations will also be affected by the
timing of orders received from distributors, the extent to which the Company
expands its international distribution network and the ability of distributors
to effectively promote the Company's products.

Competition in the emerging market for arterial access site closure devices is
expected to be intense and to increase. The Company believes its principal
competition will come from existing compression closure techniques, as well as
newer collagen plug closure devices. Most of the Company's competitors have
significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are technologically superior, more effective or
commercially attractive than any that are being developed by the Company, or
that such competitors will not succeed in obtaining regulatory approval,
introducing or commercializing any such products prior to the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the medical device
market is generally characterized by rapid change and by frequent emergence of
new technologies, products or procedures. There can be no assurance that any
such new technologies, products or procedures will not reduce the number of
coronary catherization procedures performed.

The Company currently manufactures and ships products shortly after receipt of
orders, and the Company anticipates that it will continue to do so in the
future. Accordingly, to date the Company has not developed a significant
backlog and the Company does not anticipate that it will develop a material
backlog in the future.

-4-
<PAGE>

BALANCE SHEETS
------------------------------------------------------------------------

PERCLOSE, INC.

<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
-----------------------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 9,803,777 $ 3,743,592
Short-term investments 28,052,742 4,383,140
Accounts receivable, net of allowance for returns and doubtful
accounts of $20,000 in 1996 and $40,000 in 1995 920,217 109,955
Other receivables 3,212 101,918
Inventories 529,606 957,049
Prepaid expenses 274,364 58,364
----------------------------
Total current assets 39,583,918 9,354,018

Equipment and leasehold improvements 2,050,475 1,595,857
Less accumulated depreciation and amortization 1,068,353 395,797
----------------------------
982,122 1,200,060
Other assets 350,421 395,309
----------------------------
Total assets $ 40,916,461 $ 10,949,387
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 317,222 $ 359,884
Accrued compensation 413,840 246,094
Accrued license fee 188,750 377,500
Other accrued expenses 629,253 92,601
Short-term portion of notes payable 356,153 238,482
----------------------------
Total current liabilities 1,905,218 1,314,561

Long-term portion of notes payable 510,789 593,440

Commitments
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares: 5,000,000 in 1996 and 4,236,073 in 1995
Issued and outstanding shares: none in 1996 and 4,193,640
(convertible) in 1995 -- 4,194
Common stock, $0.001 par value
Authorized shares: 30,000,000 in 1996 and 10,000,000 in 1995
Issued and outstanding shares: 9,501,782 in 1996 and 1,982,242
in 1995 9,502 1,982
Additional paid-in capital 57,372,411 19,552,915
Accumulated deficit (18,436,607) (10,224,755)
Deferred compensation (444,852) (292,950)
----------------------------
Total stockholders' equity 38,500,454 9,041,386
----------------------------
Total liabilities and stockholders' equity $ 40,916,461 $ 10,949,387
----------------------------
----------------------------
</TABLE>

See accompanying notes.

-5-

<PAGE>

STATEMENTS OF OPERATIONS
------------------------------------------------------------------

PERCLOSE, INC.

<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Net revenues, product sales $ 2,457,087 $ 178,152 $ --
Operating expenses:
Cost of goods sold, including manufacturing
start-up expenses 4,772,022 2,149,388 136,534
Research and development 3,058,529 3,065,400 1,594,731
Marketing, general, and administrative 3,486,188 2,155,304 945,018
-----------------------------------------
Total operating expenses 11,316,739 7,370,092 2,676,283
-----------------------------------------
Loss from operations (8,859,652) (7,191,940) (2,676,283)

Interest income 941,389 258,338 66,053
Interest expense (165,756) (59,256) (13,996)
-----------------------------------------
Net interest income 775,633 199,082 52,057
-----------------------------------------
Net loss $(8,084,019) $(6,992,858) $(2,624,226)
-----------------------------------------
-----------------------------------------
Net loss per share $ (1.34)
-----------
-----------
Shares used in computing net loss per share 6,024,592
-----------
-----------
Pro forma net loss per share $(1.04)
-----------
-----------
Shares used in computing pro forma net loss
per share 6,717,333
-----------
-----------
</TABLE>

See accompanying notes.

-6-
<PAGE>

STATEMENTS OF CASH FLOWS
------------------------------------------------------------------

PERCLOSE, INC.

<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES

Net loss $ (8,084,019) $ (6,992,858) $ (2,624,226)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 672,556 336,480 61,470
Deferred compensation amortization 124,994 -- --
Issuance of convertible preferred stock for license -- 60,000
Loss on disposal of equipment -- -- 12,073
Changes in operating assets and liabilities:
Accounts receivable (810,262) (109,955) --
Inventory 427,443 (957,049) --
Other receivables and prepaid expenses (117,294) (118,979) (41,303)
Accounts payable (42,662) 170,585 156,110
Accrued expenses 515,648 631,382 24,550
-------------------------------------------
Net cash used in operating activities (7,313,596) (6,980,394) (2,411,326)

INVESTING ACTIVITIES

Purchases of short-term investments (32,180,575) (7,870,138) (12,712,673)
Proceeds from maturities of short-term investments 8,383,140 6,476,515 9,872,596
Purchases of equipment and improvements (454,618) (996,377) (537,989)
Other assets 44,888 (129,815) (242,102)
-------------------------------------------
Net cash used in investing activities (24,207,165) (2,519,815) (3,620,168)

FINANCING ACTIVITIES

Principal payments under capital lease obligations
and notes payable (299,464) (120,450) (28,212)
Proceeds from borrowing on notes payable 334,484 565,201 374,171
Proceeds from issuance of preferred stock 3,256,690 10,155,655 6,842,001
Proceeds from issuance of common stock 34,289,236 93,413 292
Payments of stock subscriptions receivable -- -- 101,775
-------------------------------------------
Net cash provided by financing activities 37,580,946 10,693,819 7,290,027
-------------------------------------------
Net increase in cash and cash equivalents 6,060,185 1,193,610 1,258,533
Cash and cash equivalents at beginning of year 3,743,592 2,549,982 1,291,449
-------------------------------------------
Cash and cash equivalents at end of year $ 9,803,777 $ 3,743,592 $ 2,549,982
-------------------------------------------
-------------------------------------------
Supplemental disclosures of cash flow information
Cash paid for:
Interest $83,628 $59,256 $13,996
</TABLE>

See accompanying notes.

-7-

<PAGE>

STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------

PERCLOSE, INC.

<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------------------------------------
Shares Amount Shares Amount

--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 1,516,812 $ 1,517 1,452,751 $ 1,453

Issuance of common stock
under option plan -- -- 2,920 3

Issuance of Series C convertible
preferred stock, net of issuance
costs of $29,858 1,616,908 1,617 -- --

Net loss
--------------------------------------------------------------
Balance at March 31, 1994 3,133,720 3,134 1,455,671 1,456
Issuance of common stock
under option plan -- -- 526,571 526

Issuance of Series D convertible
preferred stock, net of issuance
costs of $383,545 1,053,920 1,054 -- --

Issuance of Series D convertible
preferred stock, for
purchase of license 6,000 6 -- --

Deferred compensation related
to stock options -- -- -- --

Net loss -- -- -- --
--------------------------------------------------------------
Balance at March 31, 1995 4,193,640 4,194 1,982,242 1,982
Issuance of common stock
under employee stock
purchase and option plans -- -- 125,113 125

Issuance of Series D convertible
preferred stock, net of
issuance costs of $1,180 325,787 326 -- --

Conversion of preferred stock in
connection with initial public offering (4,519,427) (4,520) 4,519,427 4,520

Issuance of common stock in
connection with initial public offering,
net of issuance costs of $569,969 -- -- 2,875,000 2,875

Deferred compensation related
to stock options -- -- -- --

Amortization of deferred compensation -- -- -- --

Unrealized loss on short-term investments -- -- -- --

Net loss -- -- -- --
--------------------------------------------------------------
Balance at March 31, 1996 -- $ -- 9,501,782 $ 9,502
--------------------------------------------------------------
--------------------------------------------------------------
<CAPTION>
Additional Total
Paid-In Accumulated Deferred Stockholders'
Capital Deficit Compensation Equity
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 $ 2,111,810 $ (607,671) $ -- $ 1,507,109
Issuance of common stock
under option plan 289 -- -- 292
Issuance of Series C convertible
preferred stock, net of issuance
costs of $29,858 6,840,384 -- -- 6,842,001

Net loss (2,624,226) -- (2,624,226)
--------------------------------------------------------------
Balance at March 31, 1994 8,952,483 (3,231,897) -- 5,725,176
Issuance of common stock
under option plan 92,887 -- -- 93,413
Issuance of Series D convertible
preferred stock, net of issuance
costs of $383,545 10,154,601 -- -- 10,155,655
Issuance of Series D convertible
preferred stock, for
purchase of license 59,994 -- -- 60,000
Deferred compensation related
to stock options 292,950 -- (292,950) --

Net loss (6,992,858) -- (6,992,858)
--------------------------------------------------------------
Balance at March 31, 1995 19,552,915 (10,224,755) (292,950) 9,041,386
Issuance of common stock
under employee stock
purchase and option plans 100,330 -- -- 100,455
Issuance of Series D convertible
preferred stock, net of
issuance costs of $1,180 3,256,364 -- -- 3,256,690
Conversion of preferred stock in
connection with initial public offering -- -- -- --
Issuance of common stock in
connection with initial public offering,
net of issuance costs of $569,969 34,185,906 -- -- 34,188,781
Deferred compensation related
to stock options 276,896 -- (276,896) --
Amortization of deferred compensation -- -- 124,994 124,994
Unrealized loss on short-term investments -- (127,833) -- (127,833)

Net loss -- (8,084,019) -- (8,084,019)
--------------------------------------------------------------
Balance at March 31, 1996 $ 57,372,411 $ (18,436,607) $ (444,852) $ 38,500,454
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>

See accompanying notes.

-8-

<PAGE>

NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------

- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Perclose, Inc. (or the "Company") was incorporated in the state of California in
March 1992 and in October 1995 was reincorporated in Delaware. The Company
develops, markets, and sells remote closure devices for increased efficacy and
cost-efficiency in interventional cardiology. The Company was in the development
stage through March 31, 1994, and its activities during that time consisted
primarily of raising capital, recruiting personnel, and performing research and
development. The Company commenced initial sales of its products to customers in
Europe and Canada during the fourth quarter of fiscal 1995.

BASIS OF PRESENTATION

Beginning with fiscal 1995, the Company's fiscal year ends on the last Friday in
March. For ease of presentation, the accompanying financial statements have
been shown as ending on March 31 of each year.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

AVAILABLE-FOR-SALE SECURITIES

At March 31, 1996 and 1995 all short-term investments are designated as
available-for-sale. Available-for-sale securities are carried at fair value
with unrealized gains and losses, net of tax, reported in a separate component
of stockholders' equity. The amortized cost of available-for-sale debt
securities is adjusted for the amortization of premiums and the accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.

The following is a summary of available-for-sale securities at March 31, 1996:

AMORTIZED GROSS UNREALIZED ESTIMATED FAIR
COST LOSSES VALUE
----------------------------------------------
Obligations of federal
government agencies $ 2,966,642 $ -- $ 2,966,642
Corporate obligations,
principally commercial paper
and corporate notes $ 33,180,046 127,833 33,052,213
----------------------------------------------
$ 36,146,688 $ 127,833 $ 36,018,855
----------------------------------------------
----------------------------------------------
Amounts included in short-term
investments $ 28,180,575 $ 127,833 $ 28,052,742
Amounts included in cash and
cash equivalents 7,966,113 -- 7,966,113
----------------------------------------------
$ 36,146,688 $ 127,833 $ 36,018,855
----------------------------------------------
----------------------------------------------

The following is a summary of available-for-sale securities as of March 31,
1995:

AMORTIZED GROSS UNREALIZED ESTIMATED FAIR
COST LOSSES VALUE
----------------------------------------------
Obligations of federal
government agencies $ 1,931,890 $ -- $ 1,931,890
Corporate obligations 2,451,250 -- 2,451,250
----------------------------------------------
$ 4,383,140 $ -- $ 4,383,140
----------------------------------------------
----------------------------------------------
Amounts included in
short-term investments $ 4,383,140 $ -- $ 4,383,140
Amounts included in cash and
cash equivalents -- -- --
----------------------------------------------
$ 4,383,140 $ -- $ 4,383,140
----------------------------------------------
----------------------------------------------

During the year ended March 31, 1996, there were no sales of securities
available-for-sale or gross realized gains or losses. Available-for-sale debt
securities at March 31, 1996, by contractual maturity, are shown below:

ESTIMATED FAIR
VALUE
--------------
Due in one year or less $ 26,319,173
Due after one year to two years 9,699,682
------------
$ 36,018,855
------------
------------

INVENTORIES

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

1996 1995
-------------------------
Raw materials $ 226,808 $ 490,812
Work-in-process 197,583 260,736
Finished goods 105,215 205,501
------------------------
$ 529,606 $ 957,049
------------------------
------------------------

-9-

<PAGE>

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from one to five years, or over the term of the lease, if
shorter.

OTHER ASSETS

At March 31, 1996, the Company had approximately $326,000 of restricted deposits
($381,000 at March 31, 1995) included in other assets supporting leasehold
improvements being performed on the Company's facility.

REVENUE RECOGNITION

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

NET LOSS PER SHARE

Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options and convertible preferred stock are excluded from the
computation as their effect is antidilutive except that, pursuant to the
Securities and Exchange Commission (the SEC) Staff Accounting Bulletins, common
and common equivalent shares issued during the period beginning twelve months
prior to the initial filing of the Company's initial public offering at prices
substantially below the initial public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the assumed public offering price for stock options
and warrants and the if-converted method for convertible preferred stock).
Historical net loss per share is presented for the year ended March 31, 1996.
Historical net loss per share for the year ended March 31, 1994 has not been
presented in the accompanying statement of operations since it was not presented
in the Company's initial public offering registration statement pursuant to SEC
guidelines.

Per share information calculated on the above noted basis for 1994 is as
follows:

Year Ended
March 31, 1994
--------------
Net loss per share $ (0.74)
------------
------------
Shares used in computing net loss per share 3,561,820
------------
------------
PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share has been computed as described above and also gave
effect to common equivalent shares from the convertible preferred stock that
automatically converted upon the closing of the Company's initial offering
(using the if-converted method). Pro forma net loss per share is presented for
the year ended March 31, 1995.

Pro forma share information calculated on the above basis for 1996 is as
follows:

Year Ended
March 31, 1996
--------------
Pro forma net loss per share $ (1.03)
------------
------------
Shares used in computing pro forma net loss per share 7,852,596
------------
------------

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES

Supplemental noncash financing activities are as follows:

Years Ended March 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Acquisition of equipment under
capital lease obligations $ -- $ -- $ 29,112

Issuance of Series D convertible
preferred stock for purchase
of license $ -- $ 60,000 $ --

RECENT PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" which established a fair value based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. The Company will
be required to adopt FAS 123 in fiscal 1997. The Company's intention is to
continue to account for employee stock awards in accordance with APB Opinion No.
25 and to adopt the "disclosure only" alternative described in FAS 123.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset might
not be recoverable. In certain situations, an impairment loss would be
recognized. FAS 121 will become effective for the Company's year ending March
31, 1997. The Company has studied the implications of FAS 121 and, based on its
initial evaluation, does not expect its adoption to have a material impact on
the Company's financial condition or results of operations.

- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS

The Company shared its facilities and certain of its personnel and equipment
with LocalMed, Inc. ("LocalMed"). LocalMed is a corporation that commenced
operations during April 1992 and had common ownership and management with the
Company. The Company's facilities and management arrangement with LocalMed ended
in July 1993 as the Company relocated to another facility. During the period
from April 1992 through July 1993, certain common facilities, personnel and
equipment costs were allocated to the respective companies based on the
percentage utilized by each company. Management of the Company believes the
method used to allocate such common expenses was reasonable.

The following represents a summary of expenses allocated to the Company
pursuant to this arrangement for the year ended March 31, 1994:

Equipment rental $ 8,193
Salaries:
General and administrative 20,276
Research and development 27,949
Facilities, materials, and related expenses 52,536
-----------
$ 108,954
-----------
-----------

-10-
<PAGE>

The Company had no shared costs with LocalMed in fiscal 1996 and 1995.

- --------------------------------------------------------------------------------
3. LEASE ARRANGEMENTS

The Company leases its principal facility under an operating lease agreement
expiring in August 1998. The agreement requires the Company to pay taxes,
insurance, and maintenance expenses. Rental expense was approximately $353,000,
$187,000 and $92,000 in fiscal 1996, 1995 and 1994, respectively.

The annual minimum rental commitments under all noncancelable operating lease
arrangements are as follows at March 31, 1996:

1997 $ 376,000
1998 390,000
1999 208,000
2000 11,000
2001 11,000
-----------
$ 996,000
-----------
-----------

- --------------------------------------------------------------------------------
4. FINANCING ARRANGEMENTS

The Company had a $1,750,000 equipment credit and loan agreement with a bank
that expired on March 31, 1996. Loans under the agreement bear interest ranging
from 9.07% to 10.60% and are secured by the equipment purchased.

Maturities for the next five years under the financing arrangements are as
follows at March 31, 1996:

1997 $ 356,000
1998 384,000
1999 113,000
2000 14,000
-----------
$ 867,000
-----------
-----------

- --------------------------------------------------------------------------------
5. STOCKHOLDERS' EQUITY

PUBLIC OFFERING

In November 1995, the Company sold a total of 2,875,000 shares of common stock
at $13.00 per share through its initial public offering. The net proceeds
(after underwriters' commissions and fees and other costs associated with the
offering) totaled approximately $34,189,000. In connection with the offering,
all convertible preferred stock totaling 4,519,427 shares with an aggregate
paid-in value of approximately $22,391,000 were converted into 4,519,427 shares
of common stock of the Company.

CONVERTIBLE PREFERRED STOCK

Convertible preferred stock at March 31, 1995 was as follows:

LIQUIDATION DESIGNATED SHARES ISSUED
SERIES PREFERENCE SHARES AND OUTSTANDING
- --------------------------------------------------------------------------------
A $ 1.00 769,722 769,722
B $ 1.75 747,090 747,090
C $ 4.25 1,619,261 1,616,908
D $ 10.00 1,100.000 1,059,920
------------------------
Total preferred stock 4,236,073 4,193,640
------------------------
------------------------

PREFERRED STOCK

In September 1995, the Board of Directors amended, and the stockholders
subsequently approved, the Company's Articles of Incorporation to authorize
5,000,000 shares of undesignated preferred stock. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges, and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series without any vote or action by the Company's stockholders.

COMMON STOCK

In 1995 the Board of Directors and stockholders approved the reincorporation of
the Company in Delaware and authorized capital stock of 30,000,000 shares of
common stock and the 5,000,000 shares of preferred stock discussed above.

Shares of common stock reserved for future issuance are as follows at March 31,
1996:

STOCK OPTION PLANS:
Outstanding 841,743
Reserved for future grants 337,761
---------
Total stock option plans 1,179,504
Stock purchase plan 148,141
---------
1,327,645
---------
---------

- --------------------------------------------------------------------------------
6. STOCK PLANS

STOCK OPTION PLANS

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

Under the Company's 1992 Stock Plan, the Board of Directors may grant options
for the purchase of up to 1,650,000 shares of common stock by directors,
employees, and others. Options may be granted at an exercise price of not less
than 85% of the estimated fair value of the common stock, at the date of grant,
as determined by the Board of Directors. Options are exercisable at such times
and under such conditions as determined by the Board of Directors. Options
granted under this plan generally become exercisable over a four-year period and
generally expire ten years from the date of grant. Unexercised options are
canceled upon termination of employment and become available under the plan.

The Company's 1995 Director Option Plan grants options automatically each year
to non-employee directors of the Company. Options may only be granted at the
estimated fair value of the common stock at the date of grant. Options under
this plan generally become exercisable over a four-year period and generally
expire ten years from the date of grant. Unexercised options are canceled upon
the director leaving the Board.

-11-

<PAGE>

Activity under the plans is as follows:

OUTSTANDING OPTIONS
---------------------------------------------
SHARES AGGREGATE
AVAILABLE FOR NUMBER OF PRICE PER EXERCISE
GRANT SHARES SHARE PRICE
------------------------------------------------------------
BALANCE AT
March 31, 1993 364,578 267,671 $ 0.10 $ 26,766

Shares authorized 300,000 -- $ -- --
Options granted (636,000) 636,000 $ 0.175 - $0.425 147,050
Options exercised -- (2,920) $ 0.10 (292)
Options canceled 8,762 (8,762) $ 0.10 (876)
------------------------------------------------------------
BALANCE AT
March 31, 1994 37,340 891,989 $ 0.10 - $0.425 172,648

Shares authorized 300,000 -- $ -- --
Options granted (253,750) 253,750 $ 0.425 - $1.00 175,981
Options exercised -- (526,571) $ 0.10 - $0.425 (93,413)
Options canceled 18,229 (18,229) $ 0.175 (3,190)
------------------------------------------------------------
BALANCE AT
March 31, 1995 101,819 600,939 $ 0.10 - $1.00 252,026

Shares authorized 600,000 -- $ -- --
Options granted (398,000) 398,000 $ 4.00 - $23.50 7,122,500
Options exercised -- (123,254) $ 0.10 - $1.00 (79,913)
Options canceled 33,942 (33,942) $ 0.10 - $13.75 (39,867)
-----------------------------------------------------------
BALANCE AT
March 31, 1996 337,761 841,743 $ 0.10 - $23.50 $ 7,254,746
------------------------------------------------------------
------------------------------------------------------------

At March 31, 1996, options to purchase 220,458 shares of common stock were
exercisable. Additionally, 203,597 shares exercised under stock options were
subject to repurchase, at the option of the Company, at March 31, 1996.

DEFERRED COMPENSATION

For certain options granted, the Company recognized $569,846 as deferred
compensation for the excess of the deemed value for accounting purposes of the
common stock issuable upon exercise of such options over the aggregate exercise
price of such options. The deferred compensation expense is amortized ratably
over the vesting period of the options. For the year ended March 31, 1996,
$124,994 was charged to operations.

1995 EMPLOYEE STOCK PURCHASE PLAN

In September 1995, the 1995 Employee Stock Purchase Plan was adopted by the
Company. An aggregate of 150,000 shares of the Company's common stock have been
reserved for issuance under this plan. This plan permits eligible employees to
purchase common stock through payroll deductions (which cannot exceed 15% of the
employee's compensation) at 85% of its fair market value on specified dates.
For the year ended March 31, 1996, 1,859 shares were issued at a price of $11.05
per share.

- --------------------------------------------------------------------------------
7. INCOME TAXES

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

Years Ended March 31,
----------------------------
1996 1995
----------------------------
Deferred tax assets:
Net operating loss carryforwards $ 6,200,000 $ 3,300,000
Tax credit carryforwards 270,000 250,000
Other, net 760,000 400,000
------------ ------------
7,230,000 3,950,000
Valuation allowance (7,230,000) (3,950,000)
------------ ------------
$ -- $ --
------------ ------------
------------ ------------

Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, a valuation allowance, in
an amount equal to the net deferred tax asset at March 31, 1996 and 1995, has
been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $3,280,000, $2,750,000 and $1,100,000 for the
fiscal years 1996, 1995 and 1994, respectively.

At March 31, 1996, the Company had net operating loss carryforwards for federal
and California tax purposes of approximately $17,000,000 and $7,000,000,
respectively, which will expire from 1998 through 2011, if not utilized. At
March 31, 1996, the Company also had research and development tax credit
carryforwards of approximately $190,000 and $120,000, respectively, for federal
and California tax purposes expiring from 2007 through 2011, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in expiration of net operating loss and tax
credit carryforwards before full utilization.

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

YEARS ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
Tax provision (benefit) at
U.S. statutory rates $ (2,748,566) $ (2,377,300) $ (891,965)
Loss for which no tax benefit
is currently recognizable 2,748,566 2,377,300 891,965
------------------------------------------
$ -- $ -- $ --
------------------------------------------
------------------------------------------

8. CONCENTRATIONS OF CREDIT AND OTHER RISKS

The Company operates in a single industry segment and sells its products
primarily to hospitals. The Company markets its products in foreign countries
(mainly Europe, Canada, and Japan) through its sales organizations and
distributors. Sales to international distributors are denominated in U.S.
dollars. In the fiscal year ended March 31, 1996, 87%, 3%, and 8% (85%, 15%,
and 0% in the fiscal year ended March 31, 1995) of the Company's net revenues
were to Europe, Canada, and Japan, respectively.

-12-
<PAGE>

Sales to significant customers as a percentage of total revenues are as follows:

Years Ended March 31,
1996 1995
---------------------
German Distributor 53% 47%
Distributor A 5% 38%
Distributor B 3% 15%
French Distributor 25% --

The Company performs ongoing credit evaluations of its customers but does not
require collateral. There have been no material losses on customer receivables.

DEPENDENCE ON SYSTEMS

The Company has been engaged primarily in researching, developing, testing and
obtaining regulatory clearances for its Prostar, Prostar Plus and Techstar
systems. The Company believes that these systems are currently the Company's
only significant potential products and these systems will require additional
development, clinical trials and regulatory approvals before they can be
marketed in the United States and internationally.

There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed.

DEPENDENCE ON INTERNATIONAL DISTRIBUTORS

Currently, substantially all of the Company's revenues from product sales are
derived from sales to its international distributors. Loss, termination or
ineffectiveness of distributors to effectively promote the Company's products
could have a material adverse effect on the Company's financial condition and
results of operations.

DEPENDENCE ON KEY SUPPLIERS

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

Report of Ernst and Young LLP, Independent Auditors

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

THE BOARD OF DIRECTORS AND STOCKHOLDERS
PERCLOSE, INC.

We have audited the accompanying balance sheets of Perclose, Inc. as of March
31, 1996 and 1995, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended March 31,
1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Perclose, Inc. at March 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.

/s/ Ernst & Young LLP

San Jose, California
May 1, 1996

-13-

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Perclose, Inc. of our report dated May 1, 1996, included in the 1996 Annual
Report to Stockholders of Perclose, Inc.

Our audits also included the financial statement schedule of Perclose, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-56) pertaining to the 1992 Stock Plan, 1995 Employee Stock
Purchase Plan, and 1995 Director Option Plan of Perclose, Inc. of our report
dated May 1, 1996 with respect to the financial statements incorporated herein
by reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Perclose, Inc.

ERNST & YOUNG LLP

San Jose, California
June 25, 1996

<PAGE>
<ARTICLE> 5
<CIK> 0000934438
<NAME> PERCLOSE, INC.

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 9,803,777
<SECURITIES> 28,052,742
<RECEIVABLES> 940,217
<ALLOWANCES> 20,000
<INVENTORY> 529,606
<CURRENT-ASSETS> 39,583,918
<PP&E> 2,050,475
<DEPRECIATION> 1,068,353
<TOTAL-ASSETS> 40,916,461
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<BONDS> 510,789
0
0
<COMMON> 38,500,454
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<SALES> 2,457,087
<TOTAL-REVENUES> 2,457,087
<CGS> 4,772,022
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<INTEREST-EXPENSE> 775,633
<INCOME-PRETAX> 8,084,019
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,084,019
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<EXTRAORDINARY> 0
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<NET-INCOME> 8,084,019
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<EPS-DILUTED> 1.34

</TABLE>