PERCLOSE INC, 10-K, 1999-06-24

PERCLOSE INC
10-K, 1999-06-24
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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

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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 26, 1999

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

COMMISSION FILE NUMBER: 0-26890

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

DELAWARE 94-3154669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

400 SAGINAW DRIVE, REDWOOD CITY, CA 94063
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (650) 473-3100

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

Common Stock, $0.001 par value
(Title of class)

Preferred Share Purchase Rights
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes [ X ] No [ ]

The aggregate value of voting stock held by non-affiliates of the
registrant was approximately $293,296.00 as of April 30, 1999, based upon the
closing price of the Registrant's Common Stock reported for such date on the
Nasdaq Stock 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 April 30, 1999, the
registrant had outstanding 11,074,101 shares of Common Stock.

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TABLE OF CONTENTS

PAGE
NUMBER
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<S> <C>
PART I......................................................................................................... 3
Item 1. BUSINESS....................................................................................... 3
Company Overview............................................................................... 3
Industry Overview.............................................................................. 4
Arterial Access Site Management................................................................ 5
Perclose Solution.............................................................................. 6
Minimally Invasive CABG Surgery Products....................................................... 6
Business Strategy.............................................................................. 7
Products and Technology........................................................................ 8
Clinical and Regulatory Status................................................................. 9
Marketing and Distribution..................................................................... 9
Research and Development....................................................................... 10
Manufacturing.................................................................................. 10
Competition.................................................................................... 11
Patents and Proprietary Rights................................................................. 12
Government Regulation.......................................................................... 13
Third-Party Reimbursement...................................................................... 16
Product Liability and Insurance................................................................ 17
Employees...................................................................................... 17
Item 2. PROPERTIES..................................................................................... 17
Item 3. LEGAL PROCEEDINGS.............................................................................. 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................ 18
PART II........................................................................................................ 18
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................... 18
Item 6. SELECTED FINANCIAL DATA........................................................................ 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................... 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........... 29
PART III....................................................................................................... 29
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 29
Item 11. EXECUTIVE COMPENSATION......................................................................... 32
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................. 38
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 40
PART IV........................................................................................................ 41
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................... 41
SIGNATURES..................................................................................... 43
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PART 1

ITEM 1. BUSINESS

COMPANY OVERVIEW

Perclose, Inc. ("Perclose" or the "Company") designs, manufactures
and markets less invasive medical devices that automate the surgical closure
or connection of blood vessels. The Company's first product family, the
Prostar-Registered Trademark- and Techstar-Registered Trademark- products,
which are marketed worldwide, surgically close the arterial access site in
the femoral artery after catheterization procedures such as angioplasty,
stenting, atherectomy and diagnostic angiography. A second group of products,
The Heartflo-TM- System, is under development and is designed to automate the
surgical connection of blood vessels in conventional and minimally invasive
coronary artery bypass surgery.

The Prostar and Techstar percutaneous vascular surgery ("PVS")
products are designed to provide routine, definitive closure that replicates
results previously obtainable only through open surgery, without the
associated risks and costs. Randomized clinical trials of the Prostar and
Techstar products have demonstrated significant clinical and economic
advantages over conventional compression methods of arterial access site
closure. These advantages include achieving rapid hemostasis (the cessation
of bleeding), reducing nursing time required to monitor patients, allowing
earlier patient ambulation, enabling more efficient use of the
catheterization laboratory, reducing overall treatment costs 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 an increased risk of bleeding complications at the
arterial access site.

The Company commenced international shipments of its Prostar and
Techstar products in 1994 and 1995, respectively. During fiscal 1998, the
Company received a FDA premarket approval ("PMA") and several PMA supplement
approvals for commercial sale in the United States of versions of its Prostar
and Techstar PVS products. The Company is developing a new generation of PVS
product trademarked as the Closer-TM-. The Company has recently completed a
200 patient, randomized multi-center clinical trial for this product and has
submitted a PMA supplement application to the FDA for the purpose of
obtaining approval to market this product in the United States.

The Company is developing the Heartflo Anastomosis System to allow
cardiac surgeons to automate the rapid placement of sutures in blood vessels
during coronary artery bypass graft ("CABG") surgery. The success of a
coronary artery bypass surgery procedure is largely determined by the quality
of the anastomosis (attachment), which dictates the long-term patency, or
blood flow, through the vein graft to the coronary arteries. While cardiac
surgeons have developed effective surgical techniques to perform hand-sewn
anastomoses of coronary blood vessels in conventional CABG surgeries, the
recent emergence of minimally invasive CABG procedures introduces additional
challenges for performing hand-sewn anastomoses during such procedures. Since
the opening to the chest cavity created by ports or mini-thoracotomies used
in minimally invasive CABG procedures is small, accessing and suturing the
bypass graft to the coronary artery is more difficult, may take longer to
perform and may not achieve the same therapeutic results as in conventional
open chest CABG surgery. The Heartflo Anastomosis System is being designed to
deploy an ideal suture pattern in a rapid, consistent and automated fashion
while still allowing the surgeon ultimate control over the tensioning and
tying of the sutures to complete attachment of the bypass graft. The Heartflo
Anastomosis System is being designed for use with conventional, open chest
CABG procedures and the newer, minimally invasive, beating heart and stopped
heart procedures. The Heartflo system is currently undergoing human clinical
testing.

This Report on Form 10-K contains certain forward-looking statements
regarding future events with respect to the Company. Actual events and/or
future results of operations may differ materially as a result of

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the factors described herein and in the documents incorporated herein by
reference, including, in particular those factors described under
"Business--Manufacturing", "--Competition," "--Patents and Proprietary
Rights", "--Government Regulations", "--Third Party Reimbursement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Factors Affecting Future Operating Results."

INDUSTRY OVERVIEW

THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET

CORONARY ARTERY DISEASE. 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 when
diet, exercise or drug therapy fail to achieve therapeutic results include
CABG, a highly invasive open surgical procedure, and percutaneous
transluminal coronary angioplasty ("balloon angioplasty") as well as other
percutaneous catheter-based procedures including stenting and atherectomy.
Prior to the late 1970's, CABG was the only alternative for treating coronary
artery disease that did not respond to non-invasive therapy. Since its
clinical introduction in 1978, balloon angioplasty, either alone or in
conjunction with stents, has emerged as the principal less invasive
alternative to CABG. Industry estimates in 1997 indicate that there are
approximately 540,000 CABG procedures performed annually worldwide, with
approximately 320,000 of those occurring in the United States. Industry
sources estimate that there are approximately 675,000 balloon angioplasty,
stenting and atherectomy procedures performed annually worldwide, including
approximately 425,000 such procedures in the United States. In addition,
minimally invasive forms of CABG have been recently introduced and continue
to be developed. These procedures attempt to reduce the invasiveness of CABG
by minimizing the size of the incisions required.

BALLOON ANGIOPLASTY AND STENTING PROCEDURES. At the beginning of a
balloon angioplasty procedure, the physician initiates anticoagulation drug
therapy to prevent formation of blood clots, which can cause arterial
blockages. Anticoagulation therapy is typically 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. During this
procedure, anticoagulation drug therapy is ordinarily used to prevent clot
formation in the coronary arteries. At the conclusion of the procedure, the
cardiologist decides if the benefits of continued anticoagulation therapy
outweigh the increased risk of bleeding at the femoral artery 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
stenting and atherectomy. Stents are implantable, metal, tube shaped devices
delivered on a balloon catheter and permanently deployed at a blockage site
to maintain increased lumen diameter by mechanically supporting the artery.
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 post-procedure nursing observation.
The current potential for outpatient stenting is, however, limited by the
inability to achieve predictable, sustained hemostasis of the arterial access
site. Atherectomy encompasses several types of devices that are designed to
remove atherosclerotic plaque that blocks blood flow in the arteries.

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DIAGNOSTIC ANGIOGRAPHY AND OTHER PERCUTANEOUS VASCULAR PROCEDURES

Patients believed to have coronary artery disease typically undergo
diagnostic angiography to determine the extent and location of their arterial
blockages. Angiography is a procedure in which radiopaque dye visible under
x-ray is delivered through a catheter directly into the coronary arteries,
allowing real-time visualization with an x-ray imaging system. Like
therapeutic angioplasty, angiography is also performed using a catheter
placed into the vascular system through a puncture in the femoral artery.
Industry estimates in 1997 indicated that angiography is performed annually
on approximately 2.9 million patients worldwide including approximately 1.7
million patients in the United States. Angiography procedures represent a
significant market opportunity for arterial closure devices because under
conventional treatment protocols 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 1.0 million and 1.3 million, respectively, are
performed annually worldwide. These procedures may represent a significant
market opportunity for arterial closure devices because under conventional
treatment protocols, 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 femoral
artery 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, cardiopulmonary support
procedures and percutaneous treatment of abdominal aortic aneurysms may also
represent new market opportunities for larger versions of the Company's PVS
products.

ARTERIAL ACCESS SITE MANAGEMENT

Following catheter-based coronary procedures such as balloon
angioplasty, stenting, atherectomy or angiography, the physician or nursing
staff must close the arterial access site. With procedures relying on
conventional compression closure techniques, anticoagulation therapy (which
is used in all interventional cases) 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 a period of time ranging from 15 minutes to
over one hour to facilitate formation of a blood clot in order to seal the
arterial access site. This pressure is applied either 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 four to 24 hours after the procedure,
depending on the amount of anticoagulation drug therapy used and the type of
procedure performed. Conventional 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 conventional 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
often experience significant pain and discomfort during compression of the
artery and in the period in which they are required to be immobile, and may
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.

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In addition to the anticoagulation therapy administered during
routine coronary catheterization procedures, post-procedure anticoagulation
or antiplatelet 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 that this group may represent up to 30% of
therapeutic coronary catheterization patients and includes patients who have
experienced a heart attack or undergone complicated balloon angioplasty
characterized by dissection of the arterial wall during expansion of the
balloon. For these patients, optimal treatment usually requires continued
anticoagulation therapy to keep blood clots from forming, new drugs to reduce
the risk of restenosis or thrombolytic drugs to dissolve existing clots. With
conventional arterial access site closure therapies, 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, conventional arterial
access site management options may lead to a greater risk of heart attack,
higher vascular complication rates, significant patient discomfort during
clamping and immobilization, intensive nursing monitoring, extended
hospitalization and increased costs of care.

PERCLOSE SOLUTION

The Company believes that its PVS products, which achieve rapid
closure of arterial access sites following percutaneous catheterization
procedures, overcome the clinical disadvantages of conventional closure
methods and enable catheterization laboratories to achieve increased
operating efficiencies and cost savings. The Company's PVS products enable
the physician to suture arterial access sites percutaneously, providing a
means of closure that has previously been possible only through open vascular
surgery. Since the introduction of catheterization procedures, 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. Perclose PVS products are designed to provide routine, definitive
closure that replicates, through a minimally invasive procedure, the results
previously obtainable only through open surgery without the associated risks
and costs. The products are designed to be easy to use, relying on standard
techniques that are familiar to physicians performing these procedures.

Perclose PVS products are used in the catheterization laboratory to
close the arterial access site as the final step in the catheterization
procedure. By achieving rapid hemostasis, PVS products reduce the need for
the patient to remain immobile under close observation in the coronary care
unit. This minimizes the patient's pain and discomfort 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
conventional 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.

MINIMALLY INVASIVE CABG SURGERY PRODUCTS

The Company's first application of its core technology and technical
competency outside of the PVS area is the Heartflo Anastomosis System for use
in conventional, open chest CABG procedures and the newer minimally invasive
beating heart and stopped heart procedures. The success of a CABG procedure
is largely determined by the quality of the anastomosis (attachment), which
dictates the long-term patency, or blood flow, through the vein graft to the
coronary arteries. While effective surgical techniques which enable cardiac
surgeons to perform hand-sewn anastomoses of coronary blood vessels in
conventional CABG surgeries exist, the recent emergence of minimally invasive
CABG procedures introduces additional

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challenges for hand-sewn anastomoses during such procedures. Since the
opening to the chest cavity created by ports or mini-thoracotomies used in
minimally invasive CABG procedures is small, accessing and suturing the
bypass graft to the coronary artery is more difficult, may take longer to
perform and may not achieve the same therapeutic results as in conventional
open chest CABG surgery.

The Heartflo system is being designed to consistently replicate the
ideal, hand-sewn pattern used by cardiac surgeons during a CABG procedure by
automatically deploying needles and sutures in a precise pattern in both the
bypass vein graft and the coronary artery while still allowing the cardiac
surgeon to maintain control over the joining of the bypass grafts to the
coronary artery. When using the Heartflo system, the surgeon would first
deploy needles and sutures through the bypass graft vessel and then through
the coronary artery. Once the sutures have been deployed by the system, the
cardiac surgeon would then tie the two vessels together using standard
surgical knots.

The Company believes that by automating the placement of the
sutures, the pattern and positioning of the sutures will be more precise,
consistent and reliable, leading to more clinically efficacious attachments
of vein grafts to coronary arteries (i.e. higher patency rates). In addition,
the Company believes that by automating the suture placement process, the
Heartflo system may reduce the time needed to perform an anastomosis,
especially in minimally invasive CABG procedures. Finally, this procedure
also allows the cardiac surgeon to maintain control of the final suture
tensioning and tying which enables the surgeon to make clinical decisions
based upon the anatomy, thickness and calcification of the vessels to be
joined.

Most of the recent product development announcements and
introductions for minimally invasive CABG procedures have focused on
improving access to the chest cavity by reducing the need to perform a medial
sternotomy during the CABG procedure. One of the limitations of minimally
invasive CABG is the inability to bypass all blockages of the arteries of the
heart. During these procedures, the surgeon has a difficult time rotating the
heart to access to all coronary vessels and is often unable to reach the
aorta in order to attach the proximal end of the graft. The Heartflo system
is being designed to facilitate the attachment of bypass grafts for these
more difficult attachments in the smaller working spaces used in minimally
invasive CABG procedures. The Company believes that the Heartflo system will
enable surgeons using the newer minimally invasive CABG procedures to obtain
a quality of anastomosis similar to that obtained in conventional CABG
procedures, whether surgeons perform these newer procedures through ports or
mini-thoracotomies and whether on still or beating hearts. The Company
believes that the availability of tools for improving the quality of the
anastomosis for minimally invasive CABG procedures could encourage the
adoption and enhance the long-term effectiveness of these procedures.

The Company plans to develop three types of anastomosis devices: a
proximal device which would attach one end of the graft to the aorta, a
distal end-to-side device which would attach the distal end of the graft to
the coronary artery and a distal side-to-side device that would attach the
middle of the graft to a coronary artery.

BUSINESS STRATEGY

The Company's objective is to be a leader in the development,
manufacture and marketing of minimally invasive medical devices that automate
the delivery of needles and sutures in cardiovascular surgical procedures.
Key elements of the Company's strategy include:

EMPHASIZE CLINICAL UTILITY AND COST-EFFECTIVENESS. In six randomized
trials with over 2,200 patients enrolled, the Company has established that
percutaneous vascular surgical repair of the arterial access site decreases
time to hemostasis and time to ambulation and improves patient comfort. The
Company uses data collected from clinical trials to demonstrate the clinical
and cost advantages of its products to physicians, administrators and health
care payors.

APPLY FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's
approved products are currently marketed to interventional cardiologists,
radiologists and catheterization laboratory administrators.

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These products are currently marketed in the United States through a direct
sales organization and internationally through distributors in Germany,
France, Japan and other major countries, under regulatory approvals where
required. The Company believes that the majority of interventional
catheterization procedures in the United States are performed in high volume
catheterization laboratories that can be served effectively by a relatively
small, focused sales force. Perclose 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 an important factor in
encouraging cardiologists to use the Company's products. Perclose provides a
standardized, in-the-field training course in the markets it enters.

EXTEND THE TECHNOLOGY PLATFORM. The Company applies its core
technology to other high value cardiovascular surgical areas in which remote
and precise delivery of needles and sutures would improve clinical outcomes
and reduce health care costs. Anastomosis of coronary blood vessels during
CABG procedures represents the first application of the Company's core
technology beyond arterial access site closure. The Company intends to
develop new applications for its technology in other minimally invasive
surgical procedures.

EXPAND MARKETS FOR EXISTING PRODUCTS. The Company believes that
several other minimally invasive catheterization procedures, both currently
used and under development, will be candidates for application of its
existing PVS products. The Company intends to expand its product marketing
efforts into these new clinical applications, including electrophysiology,
interventional neuroradiology and intra-aortic balloon pump procedures, where
percutaneous surgical closure of arterial access sites can meet significant
clinical needs and achieve cost reductions.

MAINTAIN TECHNOLOGICAL LEADERSHIP. 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. Because the large diameter catheter devices required for these
procedures make closure of the arterial access site difficult using
conventional compression methods, open surgical procedures are ordinarily
used to close the access sites. The Company believes that larger diameter
versions of its current PVS products could be used to close the arterial
access sites in these procedures, making it feasible to perform such
procedures in a less invasive manner. The Company also focuses on improving
the performance and ease of use and reducing the manufacturing costs of its
PVS products.

PRODUCTS AND TECHNOLOGY

The Company has introduced two PVS product families, the Prostar and
Techstar. Prostar products provide two sutures for closing arterial access
sites ranging in diameter from 7 French ("F") to 11F. Techstar products are
single-suture devices for suturing 6F and 7F arterial access sites.

PROSTAR PRODUCTS. The Prostar products are single-use, hand-held
medical devices which consist of a four-needle, two-suture Prostar PVS device
and a Perclose Knot Pusher. Prostar products are currently marketed worldwide
in the 8F and 10F sizes and used to close arterial access sites following
balloon angioplasty, stenting and atherectomy 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. Next, the flexible sheath of the PVS device is inserted in the
artery over a guidewire. The unique design of the device allows the physician
to maintain hemostasis throughout the procedure. Properly 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

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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.

TECHSTAR PRODUCTS. Techstar products consist of a two-needle,
single-suture Techstar PVS device and a Perclose Knot Pusher. Techstar
products are currently marketed worldwide in 6F, 7F and 6FS (short) sizes.
The Techstar 6F product is suitable for closure of arterial access sites in
therapeutic and diagnostic procedures having puncture sites dilated by 6F or
smaller introducer sheaths while the 7F diameter product is suitable for
closure of puncture sites dilated by 7F interventional and diagnostic
introducer sheaths. The Techstar 6FS is shorter in length than the Techstar
6F and is suitable for use after peripheral diagnostic and interventional
procedures for vascular disease of the lower legs.

CLINICAL AND REGULATORY STATUS

In April 1997, the Company received PMA approval for commercial sale
in the United States of its Prostar 9F and 11F products. In November 1997,
the Company received PMA supplement approval for commercial sale in the
United States of its Techstar 6F and Techstar XL 6F products. In January 1998
the Company received PMA supplement approval for the Prostar Plus 8F and 10F
and Prostar XL 8F products for commercial sale in the United States. In
September 1998, the Company received PMA supplement approval for commercial
sale in the United States of its Prostar XL 10F product. In May 1999, the
Company filed a PMA supplement application for the Closer 6F for use after
diagnostic angiograms to the FDA for commercial sale in the United States.

Perclose PVS products are currently marketed internationally in
Germany, France, Japan and other major countries under regulatory approvals
where required. The Company obtained CE mark certification in 1996, allowing
it to market its products in all member countries of the European Union and
to ship its products to European Union countries directly from its United
States manufacturing facility.

The Company has received regulatory approval to market the Prostar
and Techstar products in Japan and has completed a clinical trial in Japan
that will form the basis for an application for reimbursement approvals in
the Japanese health care system. There can be no assurance that such
reimbursement approvals will be obtained in a timely manner or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Government
Regulation."

MARKETING AND DISTRIBUTION

The Company markets its PVS products in the United States through a
direct sales organization. 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 effectively 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 physicians to use the Company's
products. The Company provides a standardized, in-the-field training course
in the markets it enters.

The Company's international sales and marketing strategy for PVS
products focuses on interventional cardiologists and radiologists through
established distributors in major international markets, subject to required
regulatory approvals. 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.

9
<PAGE>

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 distributors typically purchase the Company's
products at a discount from the end user list price and resell the products
to hospitals and clinics. Sales to international distributors are denominated
in U.S. dollars, except to the Company's German and French distributors. The
distributor and end-user price varies from country to country. Because
international sales comprise only a relatively small percentage of the
Company's net revenues, foreign currency exchange risks are not material to
the Company's business.

For fiscal years 1999 and 1998, no single customer contributed 10%
or more of the Company's net revenues.

RESEARCH AND DEVELOPMENT

The Company's research and development activities are performed by
an internal research and development staff. The Company has a three-part
strategy in research and development. First, the Company continues to enhance
its existing PVS products to maintain its technological leadership in
percutaneous vascular surgery. Second, the Company plans to apply its core
technology to the closure of other arterial access sites including those for
vascular grafts, treatment of abdominal aortic aneurysms and cardiac
pulmonary support procedures. Third, the Company is applying its core
technology to other high value surgical areas such as coronary anastomosis
with its Heartflo system. Research and development expenses for fiscal 1997,
1998 and 1999 were $4.7 million, $5.4 million and $8.0 million, respectively.

The Company is developing a new generation of PVS product trademarked as the
Closer-TM-. The Company has recently completed a 200 patient, randomized
multi-center clinical trial for this product and has submitted a PMA
supplement application to the FDA for the purpose of obtaining approval to
market this product in the United States.

MANUFACTURING

The Company currently manufactures its PVS products in a Class
10,000 clean room facility in Redwood City, California. 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 commercial sales in the United States
and for international distributor orders, would have a material adverse
effect on the Company's business, financial condition and results of
operations. 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 the Company in manufacturing scale-up
could have a material adverse effect on its business, financial condition and
results of operations. The Company has only recently begun manufacturing its
products in large-scale commercial quantities.

The Company is also required to register as a medical device
manufacturer with the FDA and to list its products with the FDA. As such, the
Company is subject to inspections by the FDA for compliance with the FDA's
good manufacturing practices ("GMP") and other applicable regulations. In
addition, in connection with international sales, the Company is required to
comply with GMP requirements and ISO 9001 standards. These standards require
that the Company maintain processes and documentation in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Failure to either attain or maintain compliance with the applicable
regulatory requirements or standards of various regulatory agencies would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Manufacturing Experience and Scale-Up Risk."

10
<PAGE>

In November 1997, Perclose undertook a voluntary manufacturer's
recall of specific lots of Techstar XL 6F PVS products. The Company traced
the problem resulting in the recall to a defective mold. The problem was not
attributable to a design defect. The Company is not aware any adverse patient
consequences resulting from these product performance issues. The recall and
replacement had only an immaterial effect on its results of operations during
the third and fourth quarters of fiscal 1998. However, there can be no
assurance that future product problems necessitating recalls will not arise
in the future, and any such future recall could have a material adverse
effect on the Company's business, financial condition and results of
operations.

COMPETITION

Competition in the emerging market for arterial access site closure
devices is intense and is expected to continue to increase. The Company
believes its principal competition will come from conventional manual
compression devices, mechanical compression devices and collagen plug closure
devices. Conventional compression products are marketed by several companies
that supply C-clamp closure devices. C.R. Bard markets the Femostop
compression arch, a cuff that imposes pressure on the access site. Several
new collagen-based closure devices have been developed in response to the
need for improved methods of arterial access site closure following
catheterization procedures. These collagen plug devices are delivered through
a sheath and placed at the site of the femoral artery puncture. These
collagen plugs rely on the body's clotting function, which is enhanced by the
presence of collagen, and may still require external pressure to achieve
closure of the arterial access site. In contrast, the Company's percutaneous
vascular surgery products provide a mechanical suture closure which aids in
the natural healing process and, like open surgical repair, do not rely on
the body's clotting function. Datascope and Kensey Nash Corporation have
received PMA approval from the FDA for products that use collagen plugs to
achieve hemostasis. A subsidiary of St. Jude Medical, Inc. has exclusive
worldwide distribution rights to the Kensey Nash device. Several other
companies are reported to be developing or have tried to develop arterial
closure devices, some of which have an established presence in the field of
interventional cardiology, including Boston Scientific Corporation, C.R.
Bard, United States Surgical Corporation and Guidant Corporation. In
addition, several companies are developing fibrin sealants for use as
arterial access site closure devices. The Company believes that the primary
competitive factors in the market for arterial closure devices are clinical
need, complication rates, 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
approvals are important competitive factors.

Competition in the market for conventional and emerging minimally
invasive CABG surgical devices is also intense and is expected to increase.
In September 1997 United States Surgical Corporation received FDA approval to
market an anastomosis device. The Company believes that other companies,
including major cardiovascular device companies focused on both the
conventional and minimally invasive CABG markets, are currently attempting to
develop anastomosis devices.

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,
manufacturing, marketing and regulatory affairs. 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.

In addition, the medical device market is generally characterized by
rapid and significant technological change and 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

11
<PAGE>

catheterization or CABG procedures performed. The Company's success will also
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Operating
Results--Competition and Risk of Technological Obsolescence."

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 nine issued United States patents covering certain
aspects of the percutaneous suturing technology used in the Company's PVS
products and has exclusive licenses under four additional issued patents
relating to a different method of percutaneous suturing. The Company has nine
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 filed two United States patent applications covering its
anastomosis products and intends to file additional patents in the future.
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 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 March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company countersued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
that these counterdefendants have engaged in antitrust and unfair competition
violations.

In March 1999, Tyco sold the marketing rights to the competitive
product to St. Jude Medical, Inc. The case is presently set for trial in
September 1999. The Company believes that the case is without merit and
intends to defend itself and its intellectual property rights vigorously.
Based on currently available information, the Company believes that the
resolution of this matter will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
However, there can be no assurance that this matter will not be determined
adversely to the Company and any adverse determination could have such a
material adverse effect on the Company's business, financial condition

12
<PAGE>

and results of operations. For information regarding this lawsuit, see "Legal
Proceedings."

In the event a third party has 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 an employment or a 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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Operating Results--Reliance on
Patents and Protection of Proprietary Technology."

GOVERNMENT REGULATION

UNITED STATES REGULATION

The Company's products 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
preamendment Class III device (i.e. one that has been in commercial
distribution since before May 28, 1976) 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

13
<PAGE>

manufacturer or the distributor of the device is required to file an
investigational device exemption ("IDE") application prior to commencing
human clinical trials. The IDE application 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 "predicate device" which is a legally
marketed Class I or Class II device or to a preamendment Class III 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 submitting a 510(k)
notification. The 510(k) notification may need to be supported by appropriate
data, including clinical 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
Company believes that the FDA typically responds to the submission of a
510(k) notification within 90 to 120 days, although it can take longer. 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 predicate 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 more than one
year 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.

14
<PAGE>

for commercial sale in the United States. There can be no assurance that the
Company will be able to obtain further PMA application or PMA supplement
approvals to market its products, 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. The Company has been inspected by both the FDA,
the CDHS and international regulatory authorities for compliance with the
FDA's QS Reg. and other applicable regulations that require the Company to
manufacture its products according to elaborate testing, control activities
documentation and other quality assurance procedures. Further, the Company is
required to comply with various FDA requirements for design, safety,
advertising and labeling. In March 1999, the Company moved to a new
manufacturing and headquarters facility in Redwood City, California and has
received all federal, state and international certifications and
authorizations to manufacture products from this facility.

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 change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition
or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Government Regulation."

INTERNATIONAL REGULATION

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 international
markets. At this time, Prostar and Techstar products are being marketed in
Germany, France, Japan and other major countries under regulatory approvals
where required.

Commercial sales of medical devices, including the Company's PVS
products, in member countries of the European Union require the manufacturer
to obtain the right to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable
European medical device directives. In July 1996, the Company received CE
mark certification for its Techstar and Prostar PVS products. In connection
with CE mark certification, the Company received ISO 9001 qualification of
its manufacturing and quality assurance processes. Certification under the
ISO 9000 series of standards is one of the CE mark certification requirements.

15
<PAGE>

The Company, through its Japanese distributor, has received
regulatory approval for commercial sale of its products in Japan and has
completed clinical trials in Japan that will form the basis of an application
for reimbursement approvals in the Japanese health care system. There can be
no assurance such approvals will be obtained in a timely manner or at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Operating Results--Government
Regulation."

THIRD-PARTY REIMBURSEMENT

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 could have a material adverse effect on the Company's
business, financial condition and results of operations.

In international markets, market acceptance of the Company's
products may be dependent in part upon the availability of reimbursement
within prevailing health care payment systems. However, in general, hospitals
using the Company's products do not receive specific, cost-based, direct
reimbursement for the use of Perclose PVS products. 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. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. In Japan, the Company has completed a
clinical study to support governmental reimbursement approvals. The
application for reimbursement has been submitted to the Japanese government,
however, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Uncertainty of Third
Party Reimbursement."

16
<PAGE>

PRODUCT LIABILITY AND INSURANCE

The Company's business involves the risk of product liability
claims. Although the Company maintains product liability insurance, 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 March 26, 1999, the Company had 274 full-time employees.
Approximately 30 persons were engaged in research and development activities,
120 persons were engaged in manufacturing and manufacturing engineering, 28
persons were engaged in quality assurance and regulatory affairs, 76 persons
were engaged in sales and marketing and 20 persons were 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 could have a material adverse effect on the Company.

ITEM 2. PROPERTIES

The Company leases an approximately 80,000 square foot, two-building
facility in Redwood City, California. This facility includes an
environmentally controlled, Class 10,000 clean room for device assembly
together with warehouse, laboratory and office space. The lease will expire
in 2008. Additionally, several leases for approximately 31,000 square feet of
space are in effect through September 1999 relating to the Company's prior
facilities in Menlo Park, California.

ITEM 3. LEGAL PROCEEDINGS

In March 1998, the Company received a patent infringement complaint
stating that it is being sued by Kensey Nash Corporation of Exton,
Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood
Medical Company was Kensey Nash's marketing partner for its Angioseal product
at the time the suit was filed and is a subsidiary of Tyco International,
Ltd. The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. The Company has responded to the patent infringement complaint filed
by Kensey Nash Corporation and Sherwood Medical Company.

In its response in May 1998, to the complaint, Perclose denies that
its Prostar and Techstar devices infringe the Kensey Nash patent. In
addition, Perclose seeks a declaration from the Court that Perclose does not
infringe the Kensey Nash patent, and that the patent is both invalid and
unenforceable. At the same time, the Company countersued Kensey Nash
Corporation, Sherwood Medical Company and Tyco claiming the patent on which
Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not
infringed and also claiming conterdefendants have engaged in antitrust and
unfair competition violations. In March 1999, Tyco sold the marketing rights
to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case is
presently set for trial in September 1999. Management believes the patent
infringement complaint is without merit and intends to defend itself and its
intellectual property rights vigorously.

Based on currently available information, the Company believes that
the resolution of this matter will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
However, there can be no assurance that this matter will not be determined
adversely to the Company and any adverse determination could have such a
material adverse effect on the Company's business, financial condition and
results of operations. See --"Factors Affecting Future Operations
Results--Reliance on Patents and Protection of Proprietory Technology."

17
<PAGE>

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

No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.

PART II

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

The Company's Common Stock is traded on the Nasdaq Stock Market
under the symbol PERC. The number of record holders of the Company's Common
Stock at May 24, 1999 was approximately 198. The approximate number of
beneficial owners at May 24, 1999 was 4,062. The Company has not paid any
dividends since its inception and does not intend to pay any dividends in the
foreseeable future. The following table sets forth, for each quarterly period
indicated, the high and low sales price for the Common Stock as reported by
the Nasdaq Stock Market.

HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 1997
Quarter Ended June 1996........................... $ 24 3/4 $ 20 1/2
Quarter Ended September 1996...................... 23 1/4 13
Quarter Ended December 1996....................... 24 1/4 16
Quarter Ended March 1997.......................... 27 1/2 19

FISCAL YEAR ENDED MARCH 1998
Quarter Ended June 1997........................... 27 1/4 20
Quarter Ended September 1997...................... 27 3/8 21
Quarter Ended December 1997....................... 27 1/2 18
Quarter Ended March 1998.......................... 32 3/8 17 3/4

FISCAL YEAR ENDED MARCH 1999
Quarter Ended June 1998........................... 31 15/16 22 21/32
Quarter Ended September 1998...................... 30 1/4 9 3/8
Quarter Ended December 1998....................... 38 1/16 13 3/8
Quarter Ended March 1999.......................... 50 31 3/8
</TABLE>

18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

PERCLOSE, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues................................ $ 178 $ 2,457 $ 4,456 $ 10,631 $43,340
Gross profit (loss)......................... (1,971) (2,315) (247) 2,848 29,361
Income (loss) from operations............... (7,192) (8,860) (11,293) (15,131) 4,251
Net income (loss)........................... $ (6,993) $(8,084) $ (9,658) $(13,796) $ 5,544

Basic earnings (loss) per common share...... $(5.13) (1) $ (1.76) $ (1.02) $ (1.38) $ 0.51
Diluted earnings (loss) per common share.... $(5.13) (1) $ (1.76) $ (1.02) $ (1.38) $ 0.47
Shares used in computing basic earnings
(loss) per share.......................... 1,362 4,584 9,471 9,967 10,829
Shares used in computing diluted
earnings (loss) per share................. 1,362 4,584 9,471 9,967 11,725

<CAPTION>
MARCH 31,
---------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $8,127 $37,857 $27,672 $31,581 $30,197
Total assets................................ 10,949 40,916 32,514 40,451 49,590
Current liabilities......................... 1,315 1,905 2,903 3,509 4,675
Long-term obligations....................... 593 511 228 -- --
Total stockholders' equity.................. $9,041 $38,500 $29,383 $36,942 $44,915
</TABLE>

(1) Pro forma net loss per share for 1995 was $(1.56) computed assuming the
conversion of preferred stock outstanding.

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

OVERVIEW

Perclose, Inc. (the "Company") designs, manufactures and markets
less invasive medical devices that automate the surgical closure or
connection of blood vessels. The Company's first product family, the Prostar
and Techstar products, which are marketed worldwide, surgically close the
arterial access site in the femoral artery after catheterization procedures
such as angioplasty, stenting, atherectomy and diagnostic angiography. A
second group of products, The Heartflo System, is under development and is
designed to automate the surgical connection of blood vessels in conventional
and minimally invasive coronary artery bypass surgery.

The Company commenced international shipments of its first Prostar
and Techstar Percutaneous Vascular Surgery ("PVS") products in December 1994
and July 1995, respectively. During fiscal year

19
<PAGE>

1998, the Company received several FDA pre-market approvals ("PMA") and PMA
supplement approvals for commercial sale in the United States of various
versions of its Prostar and Techstar products.

The Company's fiscal year ends on the last Friday in March. The
Company's fiscal quarters end on the Friday closest to the end of each
calendar quarter. Fiscal years 1999, 1998 and 1997 ended on March 26, 1999,
March 27, 1998 and March 28, 1997, respectively.

This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the preceding material as well as in the material
set forth under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". We use words such as believes, intends, expects,
anticipates, plans and similar expressions to identify forward-looking
statements. You should not place undo reliance on these forward-looking
statements. Our actual results can differ materially from those anticipated
in the forward-looking statements for many reasons including the risks
described under the "Factors Affecting Operating Results" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

RESULTS OF OPERATIONS

FISCAL YEARS 1999 AND 1998

REVENUES. Net revenues for fiscal year 1999 increased 308% to $43.3
million from $10.6 million for fiscal year 1998. The increase in revenues was
primarily due to significant increased penetration of the domestic market
following receipt of FDA pre-market approval of the Company's Prostar and
Techstar families of products during fiscal 1998. Introductions of new
generations of these products also contributed to the sales increase. New
account growth was the primary factor, however, higher sales volume among
previously established domestic accounts also played an important role.
Domestic revenues for fiscal year 1999 increased 331% to $38.9 million from
$9.0 million for fiscal year 1998. Domestic sales as a percentage of total
net revenue for fiscal year 1999 increased to 90% from 85% for fiscal year
1998. International sales as a percentage of total net revenue for fiscal
year 1999 decreased to 10% from 15% for fiscal year 1998. Prices remained
relatively stable throughout the year in both international and domestic
markets. Combined shipments of Prostar and Techstar units increased to
approximately 190,000 units for fiscal year 1999 from 54,000 units for fiscal
year 1998. Sales of Prostar and Techstar products accounted for 33% and 67%,
respectively, of net revenues for fiscal year 1999; and 46% and 54%,
respectively, of net revenues for fiscal year 1998.

GROSS PROFIT. Cost of goods sold for fiscal year 1999 increased 80%
to $14.0 million from $7.8 million for fiscal year 1998. Gross profit as a
percentage of net revenue for fiscal year 1999 increased to 68% from 27% for
fiscal year 1998. The increase was primarily the result of a decrease in the
unit cost of product shipped from approximately $144 per unit in fiscal year
1998 to approximately $72 per unit in fiscal year 1999. Fiscal year 1998 was
a transitional year for the Company as new products were transferred from
research and development to manufacturing. Cost of goods included material,
labor and overhead costs to set up new production lines and train
manufacturing employees. During fiscal year 1999, the manufacturing process
experienced less transition in its production activity and had higher volumes
to absorb manufacturing overhead. The volume of units produced increased to
206,000 for fiscal year 1999 from 76,000 in fiscal year 1998, an increase of
171%. These increased volumes, together with improvements in manufacturing
process efficiencies, were responsible for the reduction in per unit costs.

RESEARCH AND DEVELOPMENT. Research and development expenses
increased 46% to $8.0 million for fiscal year 1999 from $5.4 million for
fiscal year 1998. The increase in research and development costs was
attributable to a 57% increase in headcount resulting in higher payroll
expense. In addition, materials and services associated with prototype builds
increased significantly due to an accelerated development schedule for the
Company's next generation of PVS product, known as the Closer. The

20
<PAGE>

Company recently completed a clinical trial for this product and has
submitted a PMA supplement application to the FDA to obtain approval to
market this product for certain indications in the United States. FDA
approval of a PMA supplement will be required for U.S. commercial sales of
this product.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 37% to $17.2 million for fiscal year 1999
from $12.5 million for fiscal year 1998. The increase was primarily due to
the expansion of the Company's domestic sales force which resulted in both
higher payroll-related costs as well as increased travel-related expenses and
increased spending on promotional support and training materials to assist
the sales force in acquiring and training new accounts. Total selling,
general and administrative expenses are expected to increase significantly
during fiscal 2000 as a result of further increases in field training
personnel and from anticipated increases in legal costs associated with the
Company's defense of a patent infringement suit.

INTEREST INCOME AND EXPENSE. Interest income increased 13% to $1.7
million for fiscal year 1999 from $1.5 million for fiscal year 1998. The
increase was attributable to a higher average balance of cash and short-term
investments in fiscal year 1999 as compared to the prior year. Interest
expense decreased 91% to $17,000 for fiscal year 1999 from $186,000 for
fiscal year 1998. The decrease was primarily attributable to the expiration
of most of the Company's equipment leases during fiscal year 1999.

FISCAL YEARS 1998 AND 1997

REVENUES. Net revenues for fiscal year 1998 increased 139% to $10.6
million from $4.5 million in fiscal year 1997. Domestic sales comprised 85%
of net revenue for fiscal year 1998. There were no domestic sales in fiscal
year 1997. International sales for fiscal year 1998 decreased 64% from fiscal
year ended 1997 primarily as a result of an increased emphasis by the Company
on the commercial launch of the Company's PVS products in the United States.
This involved a diversion of several international sales employees to the
United States sales efforts, a reorganization and termination of sales
personnel in Europe and changes in international sales management. The above
factors resulted in lower sales volume in Europe.

COST OF GOODS SOLD. Cost of goods sold for fiscal year 1998
increased 65% to $7.8 million for fiscal year 1998 from $4.7 million for
fiscal year 1997. Gross profit increased to $2.8 million for fiscal year 1998
from a negative gross profit of $200,000 for fiscal year 1997. Gross profit
increased to 27% of net revenues for fiscal year 1998 from a negative gross
profit for fiscal year 1997. The increase in gross profit resulted primarily
from higher average selling prices from direct sales to U.S. customers in
fiscal year 1998. All sales in fiscal year 1997 were to international
distributors at lower prices than direct customer prices in the U.S. In
addition, the increase in sales and production volumes contributed to
reductions in fixed overhead cost per unit and enabled the Company to achieve
improvements in manufacturing efficiency.

RESEARCH AND DEVELOPMENT. Research and development expenses
increased 15% to $5.4 million for fiscal year 1998 from $4.7 million for
fiscal year 1997. The increase in research and development costs resulted
primarily from a higher allocation of expenses related to engineers shared by
the manufacturing and research departments. This increase was partially
offset by a decrease in clinical trial expense, which was $1.3 million for
fiscal year 1997 and $64,000 for fiscal year 1998.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 99% to $12.5 million for fiscal year 1998
from $6.3 million for fiscal year 1997. The increase was primarily due to the
hiring of a sales force in the United States just prior to the start of
fiscal year 1998.

INTEREST INCOME AND EXPENSE. Interest income decreased 16% to $1.5
million for fiscal year 1998 from $1.7 million for fiscal year 1997 primarily
due to the lower average cash and short-term investments balances in fiscal
year 1998. The proceeds of the Company's common stock offering, which closed
in November 1997, provided the Company with a higher level of interest income
for the remaining

<PAGE>

four months of fiscal year 1998. Interest expense increased 56% to $186,000
for fiscal year 1998 from $118,000 for fiscal year 1997 primarily as the
result of higher interest payments on equipment leases during fiscal 1998.

INCOME TAXES

The income tax provision for fiscal year 1999 of $292,000 is
attributable to current income taxes and consists principally of state and
federal minimum taxes. No income tax provision was recorded for fiscal years
1998 and 1997 as the Company did not have taxable income. No income tax
benefit has been recorded for the net operating losses or other deferred tax
assets in fiscal years 1999, 1998 and 1997.

As of fiscal year end 1999, the Company had net operating loss
carryforwards for federal and state tax purposes of approximately $31.0
million and $7.0 million, respectively, which will expire from 1999 through
2012 if not utilized. At March 31, 1999, the Company also had research and
development tax credit carryforwards of approximately $400,000 and $350,000,
respectively, for federal and state tax purposes expiring from 2007 through
2014 if not utilized. As of fiscal year end 1999 the future use of the net
operating loss and tax credit carryforwards are not subject to material
limitations resulting from the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions.

The following table sets forth unaudited selected consolidated
quarterly statement of operations data. The financial statements from which
these data have been derived were prepared on substantially the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, that are considered necessary for a fair
presentation of the Company's results of operations for each quarter. The
quarterly statement of operations data include the same adjustments that are
reflected in the financial statements included in this Report on Form 10-K.
Results of operations for any quarter are not necessarily indicative of the
results of operations to be expected in any future period.

PERCLOSE, INC.
UNAUDITED SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

QUARTERS ENDED: QUARTERS ENDED:
-------------------------------------------------- -----------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1998 1998 1998 1999
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data) (As a percentage of net revenues)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ......................... $ 8,364 $ 9,123 $ 11,564 $ 14,289 100% 100% 100% 100%
Gross profit ......................... 5,174 5,853 8,230 10,104 62% 64% 71% 71%

Research and development ............. 1,629 1,883 2,125 2,320 19% 21% 18% 16%
Selling, general and administrative .. 3,633 3,629 4,684 5,207 43% 40% 41% 36%

Income (loss) from operations ........ (88) 341 1,421 2,577 (1)% 4% 12% 18%

Net income ........................... $ 283 $ 755 $ 1,691 $ 2,815 3% 8% 15% 20%

Basic earnings per common share ....... $ 0.03 $ 0.07 $ 0.16 $ 0.26
Diluted earnings per common
share .............................. $ 0.02 $ 0.07 $ 0.14 $ 0.23
Shares used in computing basic
earnings per share ................. 10,752 10,817 10,810 10,938
Shares used in computing diluted
earnings per share ................. 11,425 11,271 11,761 12,221
</TABLE>

22
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's net cash provided by operating activities was $3.8
million for fiscal year 1999 compared to net cash used in operating
activities of $15.0 million and $8.5 million for fiscal years 1998 and 1997,
respectively. The Company became profitable during fiscal year 1999 which
resulted in net income of $5.5 million compared to losses during fiscal years
1998 and 1997 of $13.8 million and $9.7 million, respectively. This current
year profitability was the primary factor resulting in the generation of cash
provided by operating activities for fiscal year 1999.

The Company's net cash used by investing activities was $11.6
million in fiscal year 1999 compared to net cash provided by investing
activities of $5.3 million and $1.9 million in fiscal years 1998 and 1997,
respectively. In fiscal year 1999, net purchases of short-term investments
were $4.5 million compared to net proceeds from short-term investments of
$6.7 million in fiscal year 1998 and $3.1 million in fiscal year 1997. In
fiscal 1999, the Company generated cash from its operating activities and
therefore was able to reinvest the cash from maturing securities. Additions
to property, plant and equipment totaled $4.6 million for fiscal year 1999 of
which $2.4 million related to building improvements for the Company's new
facility. The balance of the cash spent on capital equipment was used
primarily to purchase machinery required to support the increased
manufacturing and prototyping volume of the Company. Capital equipment
purchases were $1.7 million and $1.3 million for fiscal years 1998 and 1997,
respectively.

Other assets increased by $2.4 million for fiscal year 1999
primarily as a result of a $518,000 security deposit and a $1.0 million
certificate of deposit for the establishment of a $1.0 million letter of
credit made in connection with the Company's new facility lease which was
entered into in June 1998. The new lease has a ten year term. The letter of
credit designates the landlord as beneficiary and provides that the landlord
may draw down the letter of credit in the amount equal to any default under
the lease. The letter of credit will be required for a minimum of eighteen
months; upon the Company's achievement of certain financial criteria, the
letter of credit and related certificate of deposit will be released. The
facility lease agreement also requires the security deposit of $518,000 to be
held by the lessor for the term of the lease. In March 1999, the Company
subleased to a third party approximately 13,000 square feet of space in its
new facility. The term of the lease is for one year and includes a renewal
option.

Net cash provided by financing activities was $1.9 million in fiscal
year 1999 compared to $20.3 million in fiscal year 1998 and net cash used of
$538,000 in fiscal year 1997. During fiscal year 1999, proceeds of $2.7
million resulting from the issuance of common stock were partially offset by
the Company's stock repurchase of 56,800 shares of its common stock at a cost
of $857,000. Net cash generated by financing activities during fiscal year
1998 was primarily attributable to net proceeds of $19.4 million from a
common stock offering and $1.5 million from other issuances of common stock.
The Company's principal source of liquidity as of fiscal year ended March
1999 consisted of cash, cash equivalents and short-term investments of $30.2
million. The Company believes that its cash resources at fiscal year ended
March 1999 in addition to the cash the Company expects to generate from
operations, should be sufficient to meet the Company's capital needs for the
foreseeable future.

YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN

The Company is aware of software compatibility issues associated
with existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex, as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value from 99
to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.

23
<PAGE>

The Company recognizes the importance of the Year 2000 issue and has
assigned a project leader to supervise an assessment of the Company's Year
2000 readiness. The scope of the Year 2000 readiness effort includes computer
software and hardware, electronic data interchange, manufacturing and lab
equipment, facilities systems and utilities, as well as supplier readiness.
The Company has reviewed the Year 2000 issue as it may affect the Company's
business activities. The Company has purchased its internal manufacturing and
financial information systems, and installs on an ongoing basis all updates
and patches as they are released by the suppliers to make certain that the
Company's systems and software are up-to-date and Year 2000 compliant
according to supplier representations. The Company has received Year 2000
compliance certifications from all software vendors from whom the Company has
purchased software. The Company is in the process of replacing most of its
hardware, specifically system servers and desktop work stations. The new
equipment will facilitate Year 2000 readiness, however, the equipment is
being acquired for the purpose of replacing older computers. These
expenditures would have been required even if the Year 2000 issue were not a
concern. All hardware and software are currently being internally tested by
the Company's internal computer staff. Final testing is expected to be
completed by July 1999. The Company is relying on the certification of its
suppliers and internal confirmatory testing to ensure Year 2000 compliance
relating to computer hardware and software.

The product which the Company manufactures is a mechanical device
which does not contain software components. Therefore date sensitivity is not
an issue. The Company believes that it has no material exposure to
contingencies directly related to the Year 2000 issue for the products it has
sold or will sell in the future. As of fiscal year ended March 1999, the
Company had not incurred any expenses outside of ordinary operating expenses
in connection with its Year 2000 assessment and compliance plan.

The majority of the Company's production and manufacturing equipment
is non-date dependent table top equipment. The manufacturing equipment that
has date dependent functions have been certified by their vendors as Year
2000 compliant.

The Company recently leased an office and manufacturing headquarters
facility and has installed new building systems throughout the facility. All
such building systems were Year 2000 compliant as certified by the
manufacturer prior to installation.

In addition to internal Year 2000 software and equipment assessment
and remediation activities, the Company has contacted its critical suppliers
in order to assess their compliance. As of fiscal year ended March 1999 all
but one of these suppliers contacted have responded. All responses indicate
that the supplier is aware of the Year 2000 issue and intends to be
compliant. With regard to the one supplier who has not yet responded, if
there is any question as to a supplier's ability to provide product after
December 31, 1999, then a joint effort will be made between quality assurance
and the materials group to assist that supplier in achieving compliance or
qualify another supplier. There can be no absolute assurances that there will
not be a material adverse effect on the Company if third parties do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems. Any Year 2000 compliance problem of either the
Company, its suppliers, or customers could materially adversely affect the
Company's business, results of operations, cash flows, financial condition
and prospects. However, based on currently available information, the Company
does not believe that the Year 2000 matters discussed above related to
internal systems or products sold to customers will have a material adverse
impact on the Company's business, financial condition or results of
operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to financial market risks, including changes
in interest rates and foreign currency fluctuations.

INTEREST RATE RISK. The Company's cash equivalents and short-term
investments are subject to market risk, primarily interest-rate and credit
risk. The Company's investments are managed by outside professional managers
within investment guidelines set by the Company. Such guidelines include
security

24
<PAGE>

type, credit quality and maturity and are intended to limit market risk by
restricting the Company's investments to high quality debt instruments with
relatively short-term maturities. Based upon the weighted average duration of
the Company's investments at fiscal year end 1999, a 1% (100 basis points)
increase in short-term interest rates would result in a decrease in market
value of the Company's investments totaling approximately $180,000. However,
because the Company's debt securities are carried as available for sale, no
gains or losses are recognized by the Company due to changes in interest
rates unless such securities are sold prior to maturity. The Company
generally holds securities until maturity and carries the securities at
amortized cost, which approximates fair market value.

FOREIGN CURRENCY RISK. International revenues from the Company's
foreign distributors comprised 10% of total revenues for the fiscal year
1999. With the exception of the German and French distributors, sales are
denominated in U.S. dollars. Combined French and German sales for fiscal year
1999 comprised 7% of the Company's net revenue. The Company experienced an
immaterial amount of transaction gains and losses through fiscal year 1999.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of its German subsidiary are translated into U.S. dollars
in consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability.
The net effect of foreign exchange rate fluctuations on the Company during
fiscal year 1999 was not material.

FACTORS AFFECTING FUTURE 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 of operations
could vary significantly as a result of the factors described in this section.

DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar
products for percutaneous closure of arterial access sites following
catheterization procedures are currently the Company's only marketed
products. There can be no assurance as to when or whether the Company will
receive FDA clearance or approval for sale of other PVS products or any other
products in the United States. There can be no assurance that the Company's
development efforts will be successful or that any further PVS products 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.

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar 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 sustained
market acceptance among physicians, patients and health care payors.
Physicians will not use the Prostar and Techstar products unless they
determine, based on clinical data and other factors, that these products are
an attractive alternative to other means of closing arterial access sites and
that the clinical benefits to the patient and cost savings achieved through
use of these products outweigh the cost of the products. Such determinations
will depend, in part, on the ability of the Company's products to reduce the
time to ambulation and the length of hospital stays associated with coronary
catheterization procedures. Failure of the Company's products to achieve
significant market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.

UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The markets in which the
Company participates are characterized by rapid innovation and development
and introduction of new products. Accordingly, the Company must innovate and
develop new products to maintain and enhance its market position. The Company
is currently developing the Heartflo System, which is designed to enable
cardiac surgeons to automate the rapid placement of sutures in blood vessels
during coronary artery bypass graft surgery. This product is currently under
development and has not yet entered human clinical trials. The Company is
also developing a new generation PVS product, known as the Closer. The
Company has recently completed a clinical trial for this product and has
submitted a PMA supplement application to the FDA for

25
<PAGE>

the purpose of obtaining approval to market this product in the United
States. The product development process is time-consuming and costly, and
there can be no assurance that product development will be successfully
completed, that necessary regulatory clearances or approvals will be granted
by the FDA on a timely basis, or at all, or that the potential products will
achieve market acceptance. Failure by the Company to develop, obtain
necessary regulatory clearances or approvals for, or successfully market
potential new products could have a material adverse effect on the Company's
business, financial condition and results of operations.

HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a
limited history of profitability. The Company experienced significant
operating losses through fiscal year 1998 and has an accumulated deficit of
approximately $36.2 million as of fiscal year end 1999. Although the Company
recorded net income for each of the four quarters in fiscal year 1999, there
can be no assurance that the Company will be able to increase its level of
profitability or to sustain profitability. Failure to increase or sustain the
level of profitability could have a material adverse effect on the Company's
future operating results.

FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results
of operations will fluctuate significantly from quarter to quarter and will
depend upon numerous factors, including the extent to which the Company's
products gain market acceptance, introduction of alternative means for
arterial access site closure and competitive developments, actions relating
to regulatory and reimbursement matters, and progress and results of clinical
trials. Due to the elective nature of many coronary catheterization
procedures, patients may defer such procedures during the summer vacation
season. As a result, the Company may experience seasonal fluctuations in its
results of operations, particularly in the second fiscal quarter. Results of
operations will also be affected by the timing of orders received from
distributors and the extent to which the Company is able to expand its
manufacturing capabilities. In addition, depending upon the timing of new
product introductions, warranty claims and product returns, the Company may
need to make allowances for product obsolescence, excess inventory, warranty
claims and product returns. While the Company is currently and will likely
continue to make such allowances, there can be no assurance that such
allowances will be adequate to cover all costs associated with such items.

GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of
the Company's products and the certification of its manufacturing facility
are subject to extensive regulation by numerous governmental authorities in
the United States, principally the FDA, and corresponding foreign regulatory
agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other
federal and state statutes and regulations govern or influence the testing,
manufacture, manufacturing process, labeling, advertising, distribution and
promotion of drugs and devices. Noncompliance with applicable requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal to authorize the
marketing of new products or to allow the Company to enter into government
supply contracts, and criminal prosecution. The Company's Prostar and
Techstar PVS products are regulated as Class III medical devices and its
manufacturing facility is subject to FDA regulations.

Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
The Company has obtained the certifications necessary to enable the CE mark
to be affixed to the Company's Prostar and Techstar products for commercial
sales in member countries of the European Union. The Company has not obtained
all other such international certifications and there can be no assurance it
will be able to do so in a timely manner. The Company has received regulatory
approval to market the Prostar and Techstar products in Japan. The Company,
through its Japanese distributor has completed a clinical trial in Japan that
will form the basis of an application for reimbursement approvals in the
Japanese health care system. There can be no assurance Japanese reimbursement
approvals will be obtained in a timely manner or at all.

26
<PAGE>

COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the
emerging market for arterial access site closure devices is intense and is
expected to increase. Most of the Company's competitors have significantly
greater name recognition, experience, 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 and significant technological change and frequent emergence of new
technologies, products and procedures. Accordingly, the Company's success
will also depend in part on its ability to respond quickly to medical and
technological changes.

MANUFACTURING AND SCALE-UP RISK. The Company currently manufactures the
Prostar and Techstar products for domestic and international commercial
sales. There can be no assurance that future manufacturing difficulties,
which could have a material adverse effect on the Company's business,
financial condition and results of operations, will not occur.

In November 1997, Perclose voluntarily recalled specific lots of
Techstar XL 6 french ("F") PVS products. The Company traced the problem
resulting in the recall to a defective mold. The problem was not attributable
to a design defect. The Company is not aware of any adverse patient
consequences resulting from these product performance issues. The recall and
replacement had only an immaterial effect on its results of operations during
the third and fourth quarters of fiscal year 1998. However, there can be no
assurance that future product problems necessitating recalls will not arise
in the future, and any such future recall could have a material adverse
effect on the Company's business, financial condition and results of
operations.

DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its
products from various suppliers and relies on single sources for several
components. For certain of these components, there are relatively few
alternative sources of supply. Establishing additional or replacement
suppliers for any of the components used in the Company's products, if
required, may not be accomplished quickly and could involve significant
additional costs. Any supply interruption from vendors or failure of the
Company to obtain alternative vendors, if required, for any of the components
used to manufacture the Company's products would limit the Company's ability
to manufacture its products and could therefore have a material adverse
effect on the Company's business, financial condition and results of
operations.

RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop
and maintain proprietary aspects of its technology. There can be no assurance
that the Company's issued patents, any patents that may be issued as a result
of the Company's U.S. or international patent applications, or the patent
under which the Company has license rights, will offer any degree of
protection. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not
be challenged, invalidated or circumvented in the future. In addition, there
can be no assurance that competitors, many of which have substantial
resources and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use or sell its products either
in the United States or in international markets.

In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company counter-sued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
counter-defendants

27
<PAGE>

have engaged in antitrust and unfair competition violations. In March 1999,
Tyco sold the marketing rights to the competitive product to St. Jude
Medical, Inc. The case is presently set for trial in September 1999. The
Company believes that the case is without merit and intends to defend itself
and its intellectual property rights vigorously.

The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Any
litigation or interference proceedings, including the proceeding currently
pending against the Company, will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in the current pending
litigation or interference proceedings to which the Company may become a
party could subject the Company to significant liabilities to third parties
or require the Company to seek licenses from third parties. Although patent
and intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms if at all. Adverse
determinations in a judicial or administrative proceeding, including the
currently pending proceedings, or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling its products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care
providers, such as hospitals and physicians that purchase 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
diagnostic related group ("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. 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.

In international markets, market acceptance of the Company's
products may be dependent in part upon the availability of reimbursement
within prevailing health care payment systems. Failure of the Company to
receive 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.

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 further
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.

POSSIBLE VOLATILITY OF STOCK PRICE. The stock market from time to time
experiences 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 Company's common stock is likely
to be highly volatile. Factors such as

28
<PAGE>

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 and related litigation to which the Company is or may become a party,
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Auditors and the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of Perclose,
Inc. that are filed as part of this Report are listed under Item 14,
"Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and are
set forth on pages F-1 through F-19 of this Annual Report on Form 10-K.

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

Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to
the directors and executive officers of the Company:

NAME AGE PRINCIPAL OCCUPATION DIRECTOR
- ---- --- -------------------- SINCE
-----
<S> <C> <C> <C>

John B. Simpson, Ph.D., M.D. 55 Chairman, Perclose, Inc. 1992
Professor, Stanford University
Henry A. Plain, Jr............... 41 President and Chief Executive Officer, Perclose, Inc. 1993
Coy F. Blevins................... 51 Vice President of U.S. Sales --
Randolph E. Campbell............. 42 Vice President of Operations --
Kenneth E. Ludlum................ 46 Vice President of Finance and Administration --
Chief Financial Officer
John G. McCutcheon............... 38 Vice President of Marketing and International Sales --
Ronald W. Songer................. 42 Vice President of Product Development --
Vaughn D. Bryson................. 61 President, Life Science Advisors, LLC 1995
Michael L. Eagle................. 52 Vice President, Manufacturing, 1996
Eli Lilly and Company
Serge Lashutka................... 52 Manager of Organizational Development, Unocal 1996
Corporation
James W. Vetter, M.D............. 42 Staff Cardiologist, Sequoia Hospital Associate 1992
Professor, Stanford University
Mark A. Wan...................... 34 General Partner, Three Arch Partners 1992
</TABLE>

DR. SIMPSON co-founded Perclose in March 1992 and has served as
Chairman of the Board since the Company's inception. Dr. Simpson is a
professor of clinical medicine at Stanford University. He has served as a
Staff Cardiologist at Sequoia Hospital in Redwood City, California since
1981. Dr. Simpson founded Advanced Cardiovascular Systems, Inc. ("ACS") in
1978 and Devices for Vascular Intervention, Inc. ("DVI") in 1984, each of
which are currently divisions of Guidant Corporation.

29
<PAGE>

Dr. Simpson is a director of several privately held companies. Dr. Simpson
holds a B.S. in Agriculture for Ohio State University, a Ph.D. in Biomedical
Sciences from the University of Texas at Houston and an M.D. from Duke
University.

MR. PLAIN joined Perclose in February 1993 as President and Chief
Executive Officer and a member of the Company's board of directors. Prior to
joining Perclose, Mr. Plain was with Eli Lilly and Company ("Lilly") for
twelve years where he held various management positions in Lilly's
pharmaceutical and medical device units in a variety of functional areas
including marketing, sales, finance, human resources, manufacturing and
international operations. Mr. Plain is a director of several private
companies.

MR. BLEVINS joined Perclose as Director of U.S. Sales in January
1994 and was promoted to Vice President, U.S. Sales in July 1996. From 1990
through 1993, Mr. Blevins was a Regional Sales Manager with DVI. Prior to
1990, Mr. Blevins held various sales and sales management positions at Baxter
Healthcare, Inc. Mr. Blevins holds a B.S. in Accounting from Baylor
University.

MR. CAMPBELL joined Perclose 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. LUDLUM joined Perclose as Vice President of Finance and
Administration and Chief Financial Officer in May 1996. From 1995 until
joining Perclose, Mr. Ludlum was an independent business and financial
consultant to health care and high growth companies. From 1993 to 1995, Mr.
Ludlum was Vice President, Finance & Administration and Chief Financial
Officer of RiboGene, Inc., a private biopharmaceutical company. From 1985 to
1991, Mr. Ludlum held various positions with Montgomery Securities in the
health care finance group, most recently as Partner. Mr. Ludlum holds a B.S.
in business from Lehigh University and an M.B.A. from Columbia Business
School.

MR. MCCUTCHEON joined Perclose in January 1994 as Director of
Marketing. In July 1996, Mr. McCutcheon was promoted to Vice President,
Marketing and in July 1997 was promoted to Vice President of Marketing and
International Sales. From 1992 until joining the Company, Mr. McCutcheon was
a Marketing Manager at DVI. From 1985 to 1992, Mr. McCutcheon held positions
in sales and marketing with the Bentley Laboratories Division of Baxter
Healthcare Corporation. Mr. McCutcheon holds a B.A. in Economics and in
Psychology and an M.B.A., both from the University of California, Los Angeles.

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. BRYSON has served as a Director of Perclose since January 1995.
Mr. Bryson is currently President of Life Science Advisors, LLC. Mr. Bryson
was a thirty-two year employee of Lilly and served as President and Chief
Executive Officer of Lilly from 1991 to 1993. He was Executive Vice President
from 1986 until 1991. He served as a member of Lilly's Board of Directors
from 1984 until his retirement in 1993. Mr. Bryson was Vice Chairman of
Vector Securities International from April 1994 to December 1996. Mr. Bryson
is also a Director of Ariad Pharmaceuticals, Chiron Corporation, Fusion
Medical Technologies and Quintiles Transnational Corporation. Mr. Bryson
received a B.S. degree in Pharmacy from the University of North Carolina and
completed the Sloan Program at Stanford University Graduate School of
Business.

30
<PAGE>

MR. EAGLE has served as a Director of Perclose since September 1996.
He has held various management positions in Lilly's pharmaceutical and
medical device units since 1983, and currently serves as Vice President,
Manufacturing. From June 1993 until January 1994, he served as Vice President
of Pharmaceutical Manufacturing for Lilly, and from January 1991 until June
1993, he served as Vice President of the vascular intervention component of
the Medical Devices and Diagnostics Division of Lilly. From 1988 to 1991, Mr.
Eagle was President and Chief Executive Officer of IVAC Corporation, a Lilly
subsidiary. From 1983 to 1988, he held various positions with ACS, a former
Lilly subsidiary, serving most recently as Senior Vice President of
Manufacturing from 1985 to 1988. Mr. Eagle is also a Director of Cardiac
Pathways, Inc. Mr. Eagle holds a B.S. in Mechanical Engineering from
Kettering University and an M.S. in Industrial Administration from Purdue
University.

MR. LASHUTKA has served as a Director of Perclose since September
1996. He is currently a Manager of Organizational Development of Unocal
Corporation, a major oil, gas and chemical company. From 1993 to 1996, Mr.
Lashutka was Director, Organization Development and Senior Consultant of
Pacific Health Systems, Inc., a managed health care organization. From 1979
to 1993, he to was Manager of the Organization Effectiveness Department at
the Kaiser Permanente Medical Care Program, a major managed health care
organization operating in California. Mr. Lashutka holds a B.A. from Ohio
State University, an M.A. in Psychology from the United States International
University and an M.B.A. from the University of California at Berkeley.

DR. VETTER is a co-founder of the Company and has served as a
director of the Company and as a consultant and medical advisor to the
Company since its inception. Since 1989, Dr. Vetter has served as a
Physician-Partner at Cardiovascular Medicine and Coronary Interventions, Inc.
and as a Staff Cardiologist at Sequoia Hospital in Redwood City, California.
Dr Vetter is an associate professor of clinical medicine at Stanford
University.

MR. WAN has served as a Director of Perclose since September 1992.
He has been a General Partner of Three Arch Partners, a venture capital firm
specializing in health care investments since October 1993. From 1987 to
1993, Mr. Wan held various positions at Brentwood Associates, a venture
capital firm, most recently as a General Partner. Mr. Wan has been involved
in the formation of several privately held venture capital-backed health care
companies and serves as a director of several privately held companies. Mr.
Wan holds a B.S. in Electrical Engineering, and a B.A. in Economics from Yale
University and an M.B.A. from Stanford University.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's executive officers and directors
and persons who own more than ten percent of a registered class of the
Company's equity securities to file an initial report of ownership on Form 3
and changes in ownership on Form 4 or Form 5 with the Securities and Exchange
Commission (the "SEC") and the National Associates of Securities Dealers,
Inc. Executive officers, directors and greater than ten percent stockholders
are also required by SEC rules to furnish the Company with copies of all
Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons, the Company
believes that with respect to fiscal year 1999, all filing requirements
applicable to its officers, directors and ten percent stockholders were
complied with except that the Company failed to file on behalf of Mark A.
Wan, a timely Form 4 with respect to one disposition transaction.

31
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION TABLES

SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer and the four
other most highly compensated executive officers of the Company for services
rendered during each of the fiscal years 1997, 1998 and 1999:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
SECURITIES
UNDERLYING
FISCAL ANNUAL COMPENSATION OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS (# OF SHARES COMPENSATION
--------------------------- ---- ---------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Henry A. Plain, Jr..................... 1999 $ 282,596 $ -- 101,000 $ 659 (1)
President and Chief 1998 243,846 21,000 62 ,000 733 (1)
Executive Officer 1997 215,000 19,250 9,000 770 (1)

Coy F. Blevins......................... 1999 169,558 $ -- 55,891 6,950 (2)
Vice President of Sales 1998 140,640 20,000 21,000 20,671 (3)
1997 107,246 11,000 24,500 51,412 (4)
Kenneth E. Ludlum...................... 1999 176,615 $ -- 120,500 659 (1)
Vice President of Finance and 1998 158,404 12,000 36,000 759 (1)
Administration, 1997 127,154 11,000 84,500 1,260 (1)
Chief Financial Officer
John G. McCutcheon..................... 1999 169,558 $ -- 73,500 650 (1)
Vice President of 1998 146,521 20,000 31,000 733 (1)
International Sales and Marketing 1997 113,090 11,000 34,500 736 (1)

Ronald W. Songer....................... 1999 158,500 $ -- 60,500 650 (1)
Vice President of 1998 142,616 12,000 21,000 692 (1)
Product Development 1997 125,577 11,000 24,500 770 (1)
- ------------------------
</TABLE>

(1) Consists of life insurance premiums paid by the Company.
(2) Consists of automobile allowance totaling $6,300 and life insurance
premiums totaling $650, all paid by the Company.
(3) Consists of commissions totaling $15,092, automobile allowance totaling
$4,846, and life insurance premiums totaling $733, all paid by the Company.
(4) Consists of commissions totaling $43,600, automobile allowance totaling
$6,300 and life insurance premiums totaling $1,512, all paid by the
Company.

32
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to each grant of stock options made during the fiscal
year ended March 26, 1999 to each executive officer named in the Summary
Compensation Table above. All of the option grants set forth below were made in
connection with the Company's September 1998 stock option repricing whereby the
original options were canceled and replaced by the grant of new options.

OPTION GRANTS IN FISCAL 1999

% OF TOTAL
NUMBER OPTIONS POTENTIAL REALIZABLE
OF SECURITIES GRANTED TO EXERCISE VALUE AT ASSUMED
UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION
OPTIONS IN FISCAL PRICE (1) EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (1)(3) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ---- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Henry A. Plain, Jr............. 2,625 0.2 11.50 02/18/07 15,359 37,230
3,881 0.2 11.50 07/15/07 24,044 58,944
6,119 0.4 11.50 07/15/07 37,910 92,935
6,375 0.4 11.50 02/18/07 37,301 90,416
11,530 0.7 11.50 01/31/06 57,478 135,346
3,890 0.2 11.50 01/21/08 25,871 64,362
46,110 2.8 11.50 01/21/08 306,658 762,907
18,470 1.1 11.50 01/31/06 92,075 216,812
709 0.0 11.50 05/05/07 4,274 10,421
1,291 0.1 11.50 05/05/07 7,782 18,975

Coy F. Blevins................. 105 0.0 11.50 05/05/07 633 1,543
15,378 1.0 11.50 01/21/08 102,273 254,435
2,515 0.2 11.50 02/18/07 14,715 35,670
7,109 0.4 11.50 07/22/06 38,165 91,039
4,622 0.3 11.50 01/21/08 30,739 76,473
7,500 0.5 11.50 01/31/06 37,388 88,039
1,751 0.1 11.50 02/18/07 10,245 24,834
2,749 0.2 11.50 02/18/07 16,085 38,989
2,891 0.2 11.50 07/22/06 15,520 37,022
7,485 0.5 11.50 02/18/07 43,795 106,159
895 0.0 11.50 05/05/07 5,395 13,154
2,500 0.2 11.50 09/14/08 18,081 45,820
391 0.0 11.50 09/14/08 2,828 7,166

Kenneth E. Ludlum.............. 14,797 0.9 11.50 01/21/08 98,409 244,822
18,388 1.1 11.50 05/08/06 95,623 226,811
61,612 3.8 11.50 05/08/06 320,399 759,967
188 0.0 11.50 02/18/07 1,100 2,666
1,000 0.1 11.50 05/05/07 6,028 14,698
15,000 0.9 11.50 05/05/07 90,424 220,465
5,203 0.3 11.50 01/21/08 34,603 86,086
4,312 0.3 11.50 02/18/07 25,230 61,157
</TABLE>

33
<PAGE>

OPTION GRANTS IN FISCAL 1999-CONTINUED

% OF TOTAL
NUMBER OPTIONS POTENTIAL REALIZABLE
OF SECURITIES GRANTED TO EXERCISE VALUE AT ASSUMED
UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION
OPTIONS IN FISCAL PRICE (1) EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (1)(3) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ---- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John G. McCutcheon ............ 15,818 1.0 11.50 02/18/07 92,552 224,345
4,182 0.3 11.50 02/18/07 24,469 59,313
7,300 0.4 11.50 01/31/06 36,391 85,692
2,084 0.1 11.50 10/06/07 13,323 32,870
7,916 0.5 11.50 10/06/07 50,606 124,856
895 0.0 11.50 05/05/07 5,395 13,154
6,410 0.4 11.50 07/22/06 34,412 82,087
105 0.0 11.50 05/05/07 633 1,543
3,022 0.2 11.50 02/18/07 17,682 42,861
3,590 0.2 11.50 07/22/06 19,273 45,974
200 0.0 11.50 01/31/06 997 2,348
1,699 0.1 11.50 01/21/08 11,299 28,111
18,301 1.1 11.50 01/21/08 121,712 302,797
1,478 0.1 11.50 02/18/07 8,648 20,962
500 0.0 16.94 09/22/08 5,326 13,497

Ronald W. Songer............... 16,219 1.0 11.50 02/18/07 94,899 230,032
15,852 1.0 11.50 01/21/08 105,425 262,277
4,148 0.3 11.50 01/21/08 27,587 68,630
893 0.0 11.50 05/05/07 5,383 13,125
11,972 0.7 11.50 01/31/06 59,682 140,534
3,028 0.2 11.50 01/31/06 15,095 35,544
3,781 0.2 11.50 02/18/07 22,123 53,626
2,145 0.1 11.50 02/18/07 12,551 30,422
107 0.0 11.50 05/05/07 645 1,573
2,355 0.1 11.50 02/18/07 13,779 33,401
</TABLE>

(1) The exercise price and tax withholding obligations related to exercise may
in some cases be paid by delivery of other shares or by offset of the
shares subject to the options.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the SEC and therefore are not intended to
forecast possible future appreciation, if any, of the Company's stock
price. The Company did not use an alternative formula for a grant date
valuation, as the Company does not believe that any formula will determine
with reasonable accuracy a present value based on future unknown or
volatile factors.
(3) Options generally become exercisable as to 25% of the option shares on the
first anniversary of the vesting commencement date and thereafter ratably
on a monthly basis, with full vesting occurring on the fourth anniversary
of the vesting commencement date.

34
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
VALUES. The following table sets forth, for each of the executive officers
named in the Summary Compensation Table above, information with respect to
each exercise of stock options during the fiscal year ended March 26, 1999
and the value of unexercised options at March 26, 1999:

AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND YEAR-END VALUES

VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT FISCAL
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END YEAR-END (2)
EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------- ------------- ---------------------------- --------------------------
(#) ($) (#) ($)
<S> <C> <C> <C> <C>
Henry A. Plain, Jr.... -- -- 45,393 / 55,607 1,344,768 / 1,647,357
Coy F. Blevins........ 21,700 312,578 26,124 / 27,676 810,471 / 819,902
Kenneth E. Ludlum..... -- -- 71,341 / 49,159 2,113,477 / 1,456,335
John G. McCutcheon ... 6,000 227,104 35,702 / 39,298 1,065,922 / 1,161,484
Ronald W. Songer -- -- 29,203 / 31,297 865,139 / 927,174
</TABLE>

(1) Based on the last reported sale price of the Company's Common Stock on the
date of exercise.
(2) Based on a fair market value of $41.125, which was the last reported sale
price of the Company's Stock on March 26, 1999.

REPRICING OF STOCK OPTIONS. In September 1998, the Company offered
employees, including executive officers, the option to exchange stock options
to purchase 1,342,168 shares of common stock with exercise prices ranging
from $13.75 to $30.25 per share and an aggregate exercise price of $28.6
million, for new options to purchase 1,342,168 shares with an exercise price
of $11.50 per share and an aggregate exercise price of $15.4 million. All of
the repriced options have vesting provisions consistent with the terms of the
original option grant. In exchange for the offer to reprice stock options,
employees and executive officers agreed to a moratorium on exercising
repriced options until March 16, 1999.

The following table sets forth, for the period commencing November
7, 1995 (the date of the Company's initial public offering) and ending March
26, 1999, certain information concerning the re-pricing of options held by
the named executive officers and any person who was an executive officer of
the Company at the time of such repricing:

35
<PAGE>

OPTION REPRICINGS

LENGTH OF
NUMBER OF EXERCISE ORIGINAL
SECURITIES MARKET PRICE PRICE AT OPTION TERM
UNDERLYING OF STOCK AT TIME OF REMAINING AT
OPTIONS TIME OF REPRICING OR DATE OF
DATE OF REPRICED REPRICING AMENDMENT REPRICING OR
NAME REPRICING (#) ($) ($) AMENDMENT
------------------------ ------------ -------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Henry A. Plain, Jr..... 9/11/98 11,530 11.50 23.50 139 days
9/11/98 18,470 11.50 23.50 139 days
9/11/98 2,625 11.50 22.75 8 yrs. 157 days
9/11/98 6,375 11.50 22.75 8 yrs. 157 days
9/11/98 709 11.50 20.25 8 yrs. 233 days
9/11/98 1,291 11.50 20.25 8 yrs. 233 days
9/11/98 3,881 11.50 24.63 8 yrs. 304 days
9/11/98 6,119 11.50 24.63 8 yrs. 304 days
9/11/98 3,890 11.50 19.75 9 yrs. 129 days
9/11/98 46,110 11.50 19.75 9 yrs. 129 days

Coy F. Blevins......... 9/11/98 7,500 11.50 23.50 7 yrs. 139 days
9/11/98 7,109 11.50 15.75 7 yrs. 311 days
9/11/98 2,891 11.50 15.75 7 yrs. 311 days
9/11/98 2,749 11.50 22.75 8 yrs. 157 days
9/11/98 1,751 11.50 22.75 8 yrs. 157 days
9/11/98 2,515 11.50 22.75 8 yrs. 157 days
9/11/98 7,785 11.50 22.75 8 yrs. 157 days
9/11/98 105 11.50 20.25 8 yrs. 233 days
9/11/98 895 11.50 20.25 8 yrs. 233 days
9/11/98 4,622 11.50 19.75 9 yrs. 129 days
9/11/98 15,378 11.50 19.75 9 yrs. 129 days

Randolph E. Campbell... 9/11/98 11,842 11.50 23.50 7 yrs. 139 days
9/11/98 3,158 11.50 23.50 7 yrs. 139 days
9/11/98 2,336 11.50 22.75 8 yrs. 157 days
9/11/98 2,164 11.50 22.75 8 yrs. 157 days
9/11/98 356 11.50 20.25 8 yrs. 233 days
9/11/98 644 11.50 20.25 8 yrs. 233 days
9/11/98 8,195 11.50 19.75 9 yrs. 129 days
9/11/98 11,805 11.50 19.75 9 yrs. 129 days

Kenneth E. Ludlum...... 9/11/98 18,388 11.50 21.75 7 yrs. 236 days
9/11/98 61,612 11.50 21.75 7 yrs. 236 days
9/11/98 188 11.50 22.75 8 yrs. 157 days
9/11/98 4,312 11.50 22.75 8 yrs. 157 days
9/11/98 1,000 11.50 20.25 8 yrs. 233 days
</TABLE>

36
<PAGE>

OPTION REPRICINGS-CONTINUED

John G. McCutcheon ...........9/11/98 7,300 11.50 23.50 7 yrs. 139 days
9/11/98 200 11.50 23.50 7 yrs. 139 days
9/11/98 6,410 11.50 15.75 7 yrs. 311 days
9/11/98 3,590 11.50 15.75 7 yrs. 311 days
9/11/98 1,478 11.50 22.75 8 yrs. 157 days
9/11/98 3,022 11.50 22.75 8 yrs. 157 days
9/11/98 4,182 11.50 22.75 8 yrs. 157 days
9/11/98 15,818 11.50 22.75 8 yrs. 157 days
9/11/98 105 11.50 20.25 8 yrs. 233 days
9/11/98 895 11.50 20.25 8 yrs. 233 days
9/11/98 2,084 11.50 22.63 9 yrs. 22 days
9/11/98 7,916 11.50 22.63 9 yrs. 22 days
9/11/98 1,699 11.50 19.75 9 yrs. 129 days
9/11/98 18,301 11.50 19.75 9 yrs. 129 days

Ronald W. Songer .............9/11/98 11,972 11.50 23.50 7 yrs. 139 days
9/11/98 3,028 11.50 23.50 7 yrs. 139 days
9/11/98 2,355 11.50 22.75 8 yrs. 157 days
9/11/98 2,145 11.50 22.75 8 yrs. 157 days
9/11/98 3,781 11.50 22.75 8 yrs. 157 days
9/11/98 16,219 11.50 22.75 8 yrs. 157 days
9/11/98 107 11.50 20.25 8 yrs. 233 days
9/11/98 893 11.50 20.25 8 yrs. 233 days
9/11/98 4,148 11.50 19.75 9 yrs. 129 days
9/11/98 15,852 11.50 19.75 9 yrs. 129 days
</TABLE>

37
<PAGE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

The Company has an employment agreement with Kenneth E. Ludlum, its
Vice President, Finance and Administration and Chief Financial Officer. The
agreement provides that in the event of a change in control of the Company,
all of Mr. Ludlum's then unvested stock options will become fully vested and
that, if Mr. Ludlum's employment were terminated voluntarily or involuntarily
within twelve months following such change in control, he will be entitled to
receive six months severance pay in the event of voluntary termination and
twelve months severance pay in the event of involuntary termination. The
agreement does not provide for any specified term of employment. No payments
have been made to Mr. Ludlum under such agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the year ended March 26, 1999, Messrs. Simpson, Bryson and
Wan served as the Compensation Committee of the Company's board of directors.
Dr. Simpson holds options to purchase up to 60,000 shares of Common Stock of
the Company. Mr. Bryson holds options to purchase up to 63,155 shares of
Common Stock of the Company. Mr. Wan holds options to purchase up to 21,875
shares of Common Stock of the Company. During fiscal year 1999, the Company
entered into a consulting agreement with Life Science Advisors, LLC ("LSA").
Mr. Bryson also serves as the President of LSA. During fiscal year 1999, a
total of 8,155 stock options were granted to Mr. Bryson in connection with
the consulting agreement. For the fiscal year ended March 31, 1999, the
Company has made no payments to either LSA or the Director in connection with
the consulting agreement. No member of the Compensation Committee has a
relationship that would constitute an interlocking relationship with
executive officers or directors of another entity.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to the
Company with respect to the beneficial ownership of the Common Stock of the
Company as of April 30, 1999, by (i) each person who is known to the Company
to beneficially own more than five percent of the outstanding shares of its
Common Stock, (ii) each director of the Company, (iii) each officer named in
the Summary Compensation Table and (iv) all directors and executive officers
as a group. Unless otherwise indicated, the address of each executive officer
and director is the address of the Company's principal executive offices. A
total of 11,074,101 shares of the Company's Common Stock were issued and
outstanding as of April 30, 1999.

38
<PAGE>

SHARES APPROXIMATE
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED (1) OWNED (2)
- ---------------- --------- ---------
<S> <C> <C>
John B. Simpson, Ph.D., M.D. (3)........................................... 1,648,884 14.8%

Putnam Investment Management, Inc. ........................................ 1,197,697 10.8%
One Post Office Square
Boston, MA 02109

TCW Asset Management....................................................... 759,993 6.9%
One Post Office Square
865 South Figueroa Street
Suite 1800
Los Angeles, CA 90017

Deerfield Management ...................................................... 600,000 5.4%
One Post Office Square
450 Lexington Avenue
Suite 1450
New York, NY 10017

Henry A. Plain, Jr. (4).................................................... 241,072 2.2%

James W. Vetter (5)........................................................ 225,302 2.0%

Vaughn D. Bryson (6)....................................................... 75,965 *
800 Pembroke Court
Vero Beach, FL 32963

Serge Lashutka (7) ........................................................ 19,395 *
Unocal Corporation
2141 Rosecrans Avenue, Suite 4000
El Segundo, CA 90245

Michael L. Eagle (8)....................................................... 17,395 *
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285

Mark A. Wan (9)............................................................ 5,318 *
Three Arch Partners
2800 Sand Hill Road, Suite 270
Menlo Park, CA 94025

Ronald W. Songer (10)...................................................... 97,901 *

Coy F. Blevins (11)........................................................ 56,912 *

John G. McCutcheon (12).................................................... 45,093 *

Kenneth E. Ludlum (13)..................................................... 77,621 *

All directors and executive officers as a group (Includes 12 persons) (14) 2,560,865 23.1%
- --------------------------
</TABLE>

* Less than 1%.
(1) Except as indicated in the footnotes to this table, the persons or entities
named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.

(2) Percent of the outstanding shares of Common Stock, treating as outstanding
all shares issuable on exercise of options held by the particular
beneficial owner that are included in the first column.

39
<PAGE>

(3) Includes (i) 1,202,143 shares held by the Simpson Family Trust over which
Dr. Simpson and his wife hold voting and dispositive control, (ii) 49,200
shares held by the John David Simpson Trust over which Dr. Simpson and his
wife hold voting and dispositive control and (iii) 356,294 shares held by
Fox Hollow, Ltd. Also includes 41,247 shares issuable upon exercise of
stock options exercisable within 60 days after April 30, 1999.

(4) Includes (i) 95,349 shares held by the Plain Family Trust over which Mr.
Plain and his wife hold voting and dispositive control, (ii) 20,000 shares
held by the Alexandra Marie Plain Trust, (iii) 20,000 shares held by the
Henry Albert Plain III Trust. Also includes 48,580 shares issuable upon
exercise of stock options exercisable within 60 days after April 30, 1999.

(5) Includes 30,310 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(6) Includes 30,000 shares held by the Vaughn D. Bryson Irrevocable Trust. Also
includes of 45,965 shares issuable upon exercise of stock options
exercisable within 60 days after April 30, 1999.

(7) Includes 17,395 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(8) Consists of 17,395 shares issuable upon exercise of stock options
exercisable within 60 days after April 30, 1999.

(9) Includes 4,685 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(10) Includes 31,716 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(11) Includes 28,212 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(12) Includes 39,015 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

(13) Consists of 77,621 shares issuable upon exercise of stock options
exercisable within 60 days after April 30, 1999.

(14) Includes 402,783 shares issuable upon exercise of stock options exercisable
within 60 days after April 30, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the fiscal year ended March 26, 1999, the Company made
payments to the following members of its Board of Directors pursuant to
consulting arrangements between the Company and such directors: John B.
Simpson, Ph.D., M.D., $43,333.33 and James W. Vetter, M.D., $65,000.00.

On August 31, 1998, the Company loaned to Ronald W. Songer, the Vice
President of Product Development, the principal amount of $200,000, with
interest to accrue at a rate of 5.57% per annum. The loan was subsequently
paid in full in February 1999.

In December 1998, the Company entered into a consulting agreement
with Life Science Advisors, LLC ("LSA"). Vaughn D. Bryson, a member of the
Company's Board of Directors, serves as President of LSA. A total of 8,155
stock options have been granted to Mr. Bryson in connection with the
consulting agreement. During the fiscal year 1999, the Company made no
payments to either LSA or Mr. Bryson in connection with the consulting
agreement.

40
<PAGE>

PART IV

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

(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent
Auditors....................................................... F-1
Consolidated Balance Sheets, March 31, 1999 and 1998........... F-2
Consolidated Statements of Operations, Years Ended March 31,
1999, 1998 and 1997............................................ F-3
Consolidated Statements of Cash Flows, Years Ended
March 31, 1999, 1998 and 1997.................................. F-4
Consolidated Statements of Stockholders' Equity, Years Ended
March 31, 1999, 1998 and 1997.................................. F-5
Notes to Consolidated Financial Statements..................... F-6
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts is listed on page F-19
of this Annual Report on 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. INDEX TO EXHIBITS
See Index to Exhibits on page 42.

(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended March 1999.

41
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
INCORPORATING
EXHIBIT REFERENCE
NO. DESCRIPTION IF APPLICABLE
- ------- ----------- -------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation. [A]
3.2 Bylaws of the Registrant, as amended.
3.3 Certificate of Designations of Rights, Preferences and Privileges of Series A Participating [B]
Preferred Stock.
3.4 Preferred Shares Rights Agreement, dated as of January 27, 1997. [B]
4.1 Specimen Common Stock Certificate. [A]
10.1 Form of Indemnification Agreement between the Company and each of its directors and officers. [A]
10.2 1992 Stock Plan and form of Stock Option Agreement thereunder. [A]
10.3 1995 Director Option Plan. [A]
10.4 1995 Employee Stock Purchase Plan and forms of agreements thereunder. [A]
10.9 Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders [A]
of the Registrant's securities.
10.10 Employment Agreement dated May 8, 1996 between the Registrant and Kenneth E. Ludlum. [C]
10.11 Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc. [A]
10.12 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997. [C]
10.13 Promissory Note between the Registrant and Kenneth E. Ludlum and Judy M. Wong dated June 26, 1997. [D]
10.14 1997 Stock plan and Form of Stock Option Agreement. [E]
10.15 1995 Director Option Plan, as amended to date. [I]
10.17 Lease Agreement dated June 24, 1998 between Registrant and Seaport Centre Associates, LLC for [G]
facility located at 300 & 400 Saginaw Drive, Redwood City, California.
10.18 Promissory Note between the Registrant and Ronald W. Songer dated August 31, 1998 [H]
10.19 Standby Letter of Credit dated July 14, 1998. [H]
10.20 Sublease Agreement dated March 18, 1999 between Registrant and Ventis, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney-(see page 44).
27.1 Financial Data Schedule (Edgar version only).
- -------------
</TABLE>

[A] Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-97128) and incorporated herein by reference.
[B] Filed as an Exhibit to the Registrant's Registration Statement of Form 8-A
filed with the Securities and Exchange Commission on January 28, 1997, and
incorporated herein by reference.
[C] Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 28, 1997 and incorporated herein by reference.
[D] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 27, 1997 and incorporated herein by reference.
[E] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 19, 1997 and incorporated herein by reference.
[F] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-K for
the fiscal year ended March 27, 1998 and incorporated herein by reference.
[G] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 26, 1998 and incorporated herein by reference.
[H] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 25, 1998 and incorporated herein by reference.
[I] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 25, 1998 and incorporated herein by reference.

<PAGE>

SIGNATURES

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

PERCLOSE, INC.
By:
----------------------------------------
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 dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Henry A. Plain, Jr. President, Chief Executive Officer and Director June 24, 1999
(Principal Executive Officer)

Kenneth E. Ludlum Vice President, Finance and Administration and Chief Financial Officer June 24, 1999
(Principal Financial and Accounting Officer)

Michael L. Eagle Director June 24, 1999

Vaughn D. Bryson Director June 24, 1999

Serge Lashutka Director June 24, 1999

John B. Simpson, Ph.D., M.D. Director June 24, 1999

James W. Vetter, M.D. Director June 24, 1999

Mark A. Wan Director June 24, 1999
</TABLE>

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Perclose, Inc.

We have audited the accompanying consolidated balance sheets of
Perclose, Inc. as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended March 31, 1999. Our audits also included
financial statements schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 consolidated financial position of
Perclose, Inc. at March 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

San Jose, California
April 28, 1999

F-1
<PAGE>

PERCLOSE, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)

MARCH 31,
--------------------------
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 7,333 $ 13,232
Short-term investments....................................................... 22,864 18,349
Accounts receivable, net of allowance for returns and doubtful
accounts of $301 in 1999 and 1998 .......................................... 7,762 3,455
Inventories.................................................................. 2,549 1,619
Prepaid expenses............................................................. 689 628
------------ ------------
Total current assets...................................................... 41,197 37,283

Equipment and leasehold improvements, net....................................... 5,767 2,277
Officer notes receivable........................................................ 200 600
Other assets.................................................................... 2,426 291
------------ ------------
Total assets.................................................................... $ 49,590 $ 40,451
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,717 $ 782
Accrued compensation......................................................... 1,886 1,202
Accrued warranty............................................................. 45 191
Other accrued expenses....................................................... 995 955
Notes payable................................................................ 32 379
------------ ------------
Total current liabilities................................................. 4,675 3,509

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares: 5,000,000 -- --
Common stock, $0.001 par value
Authorized shares: 30,000,000
Issued and outstanding shares: 11,035,422 in 1999 and 10,731,089 in 1998.. 11 11
Additional paid-in capital................................................... 81,427 79,433
Accumulated other comprehensive income (loss)................................ (31) --
Accumulated deficit.......................................................... (36,219) (41,763)
Deferred compensation........................................................ (273) (739)
------------ ------------
Total stockholders' equity...................................................... 44,915 36,942
------------ ------------
Total liabilities and stockholders' equity...................................... $ 49,590 $ 40,451
============ ============
</TABLE>
See accompanying notes.

F-2
<PAGE>

PERCLOSE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

YEARS ENDED MARCH 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net revenues.......................................................... $ 43,340 $ 10,631 $ 4,456
Cost of goods sold.................................................... 13,979 7,783 4,703
-------------- -------------- --------------
Gross profit (loss)................................................... 29,361 2,848 (247)

Operating expenses:
Research and development........................................... 7,957 5,449 4,745
Selling, general and administrative................................ 17,153 12,530 6,301
-------------- -------------- --------------
Total operating expenses........................................ 25,110 17,979 11,046
-------------- -------------- --------------

Income (loss) from operations......................................... 4,251 (15,131) (11,293)

Other income (expense):
Interest income ................................................... 1,662 1,466 1,747
Interest expense................................................... (17) (186) (118)
Other income (expense)............................................. (60) 55 6
-------------- -------------- --------------
Total other income.............................................. 1,585 1,335 1,635
-------------- -------------- --------------

Income (loss) before income taxes..................................... 5,836 (13,796) (9,658)

Provision for income taxes............................................ 292 -- --
-------------- -------------- --------------

Net income (loss)..................................................... $ 5,544 $(13,796) $(9,658)
============== ============== ==============

Basic earnings (loss) per common share................................ $ 0.51 $ (1.38) $ (1.02)
============== ============== ==============

Diluted earnings (loss) per common share.............................. $ 0.47 $ (1.38) $ (1.02)
============== ============== ==============

Shares used in computing basic earnings (loss) per share.............. 10,829 9,967 9,471
============== ============== ==============

Shares used in computing diluted earnings (loss) per share............ 11,725 9,967 9,471
============== ============== ==============
</TABLE>

See accompanying notes.

F-3
<PAGE>

PERCLOSE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

YEARS ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................................... $ 5,544 $ (13,796) $ (9,658)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 1,519 1,523 668
Deferred compensation amortization................................... 466 324 262
Compensation expense related to consultants' stock options......... 147 -- --
Changes in operating assets and liabilities:
Accounts receivable.................................................. (4,307) (1,925) (606)
Inventories.......................................................... (930) (875) (214)
Prepaid expenses..................................................... (196) (1,078) (5)
Accounts payable..................................................... 935 359 105
Accrued compensation................................................ 684 350 438
Accrued warranty..................................................... (146) (133) 245
Accrued clinical trial costs......................................... -- (310) 310
Other accrued expenses............................................... 40 537 (18)
-------------- --------------- ---------------
Net cash provided by (used in) operating activities................ 3,756 (15,024) (8,473)

INVESTING ACTIVITIES
Purchases of short-term investments..................................... (16,869) (17,864) (22,443)
Proceeds from sales and maturities of short-term investments............ 12,323 24,587 25,551
Purchases of equipment and leasehold improvements....................... (4,604) (1,690) (1,333)
Other assets............................................................ (2,405) 217 109
-------------- --------------- ---------------
Net cash provided by (used in) investing activities................ (11,555) 5,250 1,884

FINANCING ACTIVITIES
Payments under notes payable............................................ (347) (377) (365)
Proceeds from issuance of common stock, net of issuance costs........... 2,704 20,906 227
Repurchase of common stock.............................................. (857) -- --
Repayment of and (issuance of) officer notes receivable................. 400 (200) (400)
-------------- --------------- ---------------
Net cash provided by (used in) financing activities................ 1,900 20,329 (538)
-------------- --------------- ---------------

Net increase (decrease) in cash and cash equivalents.................... (5,899) 10,555 (7,127)

Cash and cash equivalents at beginning of year.......................... 13,232 2,677 9,804
-------------- --------------- ---------------
Cash and cash equivalents at end of year................................ $ 7,333 $ 13,232 $ 2,677
============== =============== ===============

Supplemental disclosures of cash flow information:
Cash paid for interest.................................................. $ 251 $ 32 $ 68
Cash paid for income taxes.............................................. $ 200 $ -- $ --
Non-cash financing activities:
Issuance of common stock for license agreement.......................... $ -- $ 48 $ --
</TABLE>

See accompanying notes.

F-4
<PAGE>

PERCLOSE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------ PAID-IN COMPREHENSIVE ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT COMPENSATION EQUITY
------ ------ ------- ------------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996 ............. 9,502 $ 10 $57,372 $ (128) $(18,309) $ (445) $ 38,500
Net loss ............................. -- -- -- -- (9,658) -- (9,658)
Unrealized gain on short-term ........ -- -- -- 51 -- -- 51
investments --------
Comprehensive income (loss) .......... (9,607)
--------
Issuance of common stock under
employee stock purchase and option
plans, net of repurchases ......... 64 -- 227 -- -- -- 227
Deferred compensation related to
cancellation of stock options ..... -- -- (193) -- -- 193 --
Deferred compensation related to
consultants' stock options ........ -- -- 903 -- -- (903) --
Amortization of deferred compensation
related to stock options .......... -- -- -- -- -- 263 263
---------------------------------------------------------------------------------------
Balance at March 31, 1997 ............ 9,566 10 58,309 (77) (27,967) (892) 29,383
Net loss ............................. -- -- -- (13,796) -- (13,796)
Unrealized gain on short-term ........ -- -- -- 77 -- -- 77
investments --------
Comprehensive income (loss) .......... (13,719)
--------
Issuance of common stock under
employee stock purchase and option
plans ............................. 163 -- 1,489 -- -- -- 1,489
Issuance of common stock in connection
with a public offering, net of
issuance costs of $1,583 .......... 1,000 1 19,416 -- -- -- 19,417
Issuance of common stock for payment
of license ........................ 2 -- 48 -- -- -- 48
Deferred compensation related to
consultants' stock options ........ -- -- 171 -- -- (171) --
Amortization of deferred compensation
related to stock options .......... -- -- -- -- -- 324 324
---------------------------------------------------------------------------------------
Balance at March 31, 1998 ............ 10,731 11 79,433 -- (41,763) (739) 36,942
Net income ........................... -- -- -- -- 5,544 -- 5,544
Unrealized loss on short-term
investments........................ -- -- -- (31) -- (31)
--------
Comprehensive income (loss) .......... 5,513
--------
Issuance of common stock under
employee stock purchase and option
plans ............................. 361 -- 2,704 -- -- -- 2,704
Repurchase of common stock ........... (57) -- (857) -- -- -- (857)
Compensation expense related to
consultants' stock options ........ -- -- 147 -- -- -- 147
Amortization of deferred compensation
related to stock options .......... -- -- -- -- -- 466 466
---------------------------------------------------------------------------------------
Balance at March 31, 1999 ............ 11,035 $ 11 $81,427 $ (31) $(36,219) $ (273) $ 44,915
=======================================================================================
</TABLE>
See accompanying notes.

F-5
<PAGE>

PERCLOSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION.

Perclose, Inc. (the "Company") was incorporated in California in
March 1992 and was reincorporated in Delaware in October 1995. The Company is
a medical device company which designs, manufactures and markets less
invasive vascular surgical devices for closing femoral artery access sites
following angioplasty and angiography procedures. The Company commenced
initial sales of its products to customers in Europe and Canada during the
fourth quarter of fiscal year 1995. Sales in the United States began in the
first quarter of fiscal year 1998.

The Company's first product family, the Prostar-Registered
Trademark- and Techstar-Registered Trademark- products, which are marketed
worldwide, surgically close the arterial access site in the femoral artery
after catheterization procedures such as angioplasty, stenting, atherectomy
and diagnostic angiography. A second group of products, The Heartflo-TM-
System, is under development and is designed to automate the surgical
connection of blood vessels in conventional and minimally invasive coronary
artery bypass surgery.

BASIS OF PRESENTATION

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 the consolidated 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.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
Perclose, Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH
formed in June 1998. All significant intercompany balances and transactions
have been eliminated in consolidation.

CURRENCY TRANSLATION

The financial statements of the Company's non-U.S. subsidiary are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets
and liabilities of this subsidiary are translated at the rates of exchange in
effect at the end of the period. Revenues and expenses are translated using
the average exchange rates in effect during the period. Gains and losses from
currency translation are included in stockholders' equity and were not
material for fiscal year 1999. Foreign currency transaction gains or losses
on customer accounts receivable are recognized in current operations and have
not been significant to the Company's operating results.

F-6
<PAGE>

CASH AND CASH EQUIVALENTS

The Company invests its excess cash in government and corporate
securities. Highly liquid investments with maturities of three months or less
at the date of acquisition are considered by the Company to be cash
equivalents. Investments with maturities beyond three months at the date of
acquisition are considered to be short-term investments.

The Company maintains its cash, cash equivalents and short-term
investments in a range of fixed income securities from various issuers with
original maturities not exceeding twenty four months and a minimum S&P rating
of A. This diversification of risk is consistent with the Company's
investment policy, which is to maintain liquidity and to ensure the safety of
principal.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the balance sheet for cash, 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, 1999 and 1998, 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
accumulated other comprehensive income. 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 other
income and expense. 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, 1999 (in thousands):

GROSS
AMORTIZED UNREALIZED ESTIMATED FAIR
COST LOSSES VALUE
---------------- ---------------- -----------------
<S> <C> <C> <C>
Corporate obligations, principally commercial paper
and corporate notes............................... $ 22,895 $ (31) $ 22,864
Money market accounts................................ 4,431 -- 4,431
---------------- ---------------- -----------------
Total............................................. $ 27,326 $ (31) $ 27,295
================ ================ =================

Amounts included in short-term investments........... $ 22,895 $ (31) $ 22,864
Amounts included in cash and cash equivalents........ 4,431 -- 4,431
---------------- ---------------- -----------------
Total............................................. $ 27,326 $ (31) $ 27,295
================ ================ =================
</TABLE>

F-7
<PAGE>

The following is a summary of available-for-sale securities as of March
31, 1998 (in thousands):

GROSS
UNREALIZED
AMORTIZED GAINS ESTIMATED FAIR
COST (LOSSES) VALUE
---------------- ---------------- -----------------
<S> <C> <C> <C>
Obligations of federal government agencies........... $ 2,442 $ 2 $ 2,444

Corporate obligations, principally commercial paper
and corporate notes............................... 16,905 (2) 16,903
Money market accounts................................ 11,010 11,010
---------------- ---------------- -----------------
Total............................................. $ 30,357 $ -- $ 30,357
================ ================ =================

Amounts included in short-term investments........... $ 18,349 $ -- $ 18,349
Amounts included in cash and cash equivalents........ 12,008 -- 12,008
================ ================ =================
Total............................................. $ 30,357 $ -- $ 30,357
================ ================ =================
</TABLE>

Available-for-sale securities at March 31, by contractual maturity, are
shown below (in thousands):

ESTIMATED FAIR VALUE
1999 1998
------------- ------------
<S> <C> <C>
Due in one year or less........................................................ $13,759 $ 24,134
Due between one and two years.................................................. 13,536 6,223
------------- ------------
Total....................................................................... $27,295 $ 30,357
============= ============
</TABLE>

INVENTORIES

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

1999 1998
-------------- ---------------
<S> <C> <C>
Raw materials............................................................... $ 700 $ 409
Work-in-process............................................................. 967 552
Finished goods.............................................................. 882 658
============== ===============
Total Inventory.......................................................... $ 2,549 $ 1,619
============== ===============
</TABLE>

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost.
Depreciation and amortization 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. Equipment and leasehold improvements
are comprised of the following at March 31 (in thousands):

1999 1998
-------------- --------------
<S> <C> <C>
Equipment..................................................................... $ 5,520 $ 3,924
Furniture and fixtures........................................................ 1,069 626
Leasehold improvements........................................................ 2,636 193
-------------- --------------
9,225 4,743
Less accumulated depreciation and amortization................................ (3,458) (2,466)
-------------- --------------
Equipment and leasehold improvements, net.................................. $ 5,767 $ 2,277
============== ==============
</TABLE>

F-8
<PAGE>

OTHER ASSETS

At March 31, 1999, the Company had approximately $1.5 million of
restricted deposits associated with a lease agreement and related letter of
credit for the Company's facility in Redwood City, California. At March 31,
1998, there was $108,000 of restricted deposits supporting leasehold
improvements related to the Company's former facility in Menlo Park,
California.

REVENUE RECOGNITION

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

ADVERTISING EXPENSES

The Company expenses the costs of advertising as incurred.
Advertising expense was approximately $239,000, $132,000 and $156,000 for the
fiscal years ended March 31, 1999, 1998 and 1997, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs, which include clinical testing and
regulatory costs, are expensed as incurred.

ACCOUNTING FOR INCOME TAXES

The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the liability method is
used in accounting for income taxes.

NET INCOME (LOSS) PER SHARE

The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings (loss) per share ("EPS") computations (in
thousands):

FISCAL YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) for basic and diluted EPS............... $5,544 $(13,796) $ (9,658)
----------- ------------ -----------

Denominator for basic EPS -- Weighted-average shares........ 10,829 9,967 9,471

Effect of dilutive securities -- Stock options............... 896 -- --
----------- ----------- ------------

Denominator for diluted EPS --
Adjusted weighted-average shares outstanding and
assumed conversions....................................... 11,725 9,967 9,471
=========== ============ ===========
</TABLE>

For the fiscal years ended March 31, 1998 and 1997, the effect of
the assumed exercise of stock options was antidilutive, therefore basic and
diluted loss per share as presented on the statements of operations are the
same. For additional disclosures regarding potential dilutive stock options,
see Note 5.

F-9
<PAGE>

COMPREHENSIVE INCOME

The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income" effective for the 1999 fiscal year. SFAS No. 130 establishes rules
for the reporting and display of comprehensive income and its components.
Specifically, SFAS No. 130 requires unrealized gains and losses on the
Company's available-for-sale securities which are currently reported
separately in stockholders' equity, to be included in other comprehensive
income and the disclosure of total comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130. The tax effects for other comprehensive income were immaterial for all
periods presented.

SEGMENT INFORMATION

In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About
Segments of An Enterprise and Related Information." SFAS No. 131 requires the
Company to use the "management approach" and establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its revenues by product, revenues by geographic area and
revenues by major customer. Under SFAS No. 131, the Company operates as one
segment defined as Percutaneous Vascular Surgery ("PVS") products and sells
its products primarily to hospitals and medical device distributors. During
fiscal 1998 the Company received FDA approvals for commercial sale in the
United States for the Prostar and Techstar family of products. The Company
markets its products outside the United States (mainly Europe and Japan)
through its sales organizations and distributors. The Company only reports
profit and loss information on an aggregate basis to chief operating decision
makers of the Company.

Geographic sources of net revenues based on the location of
customers are as follows (in thousands):

FISCAL YEAR ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
United States net revenues....................... $ 38,948 $ 9,035 $ --
Foreign net revenues............................. 4,392 1,596 4,456
================ =============== ===============
Total net revenues............................... $ 43,340 $ 10,631 $ 4,456
================ =============== ===============
</TABLE>

During the fiscal year ended March 31, 1997, sales to major
customers as a percentage of total revenues were 59% to a German distributor,
15% to a Japanese distributor and 15% to a French distributor. In the fiscal
years ended March 31, 1999 and March 31, 1998 no single customer contributed
10% or more of the Company's net revenues.

RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company currently does not make use of derivatives
and management anticipates that the adoption of SFAS No. 133 will not have a
significant effect on earnings or the financial position of the Company.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the
current year presentation.

F-10
<PAGE>

2. COMMITMENTS

In June 1998, the Company entered into a new facility lease
agreement for approximately 80,000 square feet of office, laboratory,
cleanroom and manufacturing space in Redwood City, California. The new lease
expires in 2008. In addition to the base rent, the lease agreement requires
the Company to pay taxes, insurance and maintenance expenses. Occupation of
the new facility commenced in March 1999. In addition, the Company will
continue to incur rent on a portion of its prior facilities through September
1999. Rental expense was approximately $1,000,000, $514,000 and $397,000 in
fiscal years 1999, 1998 and 1997, respectively.

A $1.0 million certificate of deposit for the establishment of a
$1.0 million letter of credit was made in connection with the Company's new
facility lease. The letter of credit designates the landlord as beneficiary
and provides that the landlord may draw down the letter of credit in the
amount equal to any default under the lease. The letter of credit will be
required for a minimum of eighteen months; upon the Company's achievement of
certain financial criteria, the letter of credit and certificate of deposit
will be released. As of March 31, 1999, no amounts have been advanced to the
lessor from the letter of credit.

In March 1999, the Company entered into an agreement to sublease to
a third party approximately 13,000 square feet of space in its new facility.
Rental income under the sublease will total approximately $418,000 for fiscal
year 2000.

The annual minimum rental commitments under all noncancelable
operating lease arrangements, exclusive of sublease income, are as follows at
March 31, 1999 (in thousands):

<TABLE>

<S> <C>
2000......................................................... $ 2,384
2001......................................................... 2,176
2002......................................................... 2,241
2003......................................................... 2,308
2004......................................................... 2,377
Thereafter................................................... 11,145
----------------
Total.................................................... $ 22,631
================
</TABLE>

3. 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. The final maturities under the financing arrangements are $32,000
in the year ended March 31, 2000. The total value of the lease maturities has
been included in current liabilities.

4. STOCKHOLDERS' EQUITY

STOCK REPURCHASE PLAN

In September 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. During the
fiscal year ended March 31, 1999 the Company repurchased 56,800 shares at an
aggregate cost of $857,000 under this repurchase program. All of the
repurchased shares were subsequently canceled and returned to the status of
authorized, unissued shares.

F-11
<PAGE>

PUBLIC OFFERING OF COMMON STOCK

In November 1997, the Company sold a total of 1,000,000 shares of
common stock at $21.00 per share. The net proceeds (after underwriters'
commissions and other expenses associated with the offering) totaled
approximately $19,417,000.

PREFERRED STOCK

The Company is authorized to issue 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. There were no shares of
preferred stock issued or outstanding at March 31, 1999.

COMMON STOCK

Shares of common stock reserved for future issuance under the
Company's stock compensation plans are as follows at March 31, 1999 (in
thousands):

<TABLE>

<S> <C>
Stock option plans:
Options outstanding.......................................................... 1,809
Option shares reserved for future option grants.............................. 543
--------------
Total shares of common stock reserved under stock option plans............... 2,352

Shares of common stock reserved under the employee stock purchase plan....... 77
--------------
Total shares of common stock reserved for future issuance.................... 2,429
==============
</TABLE>

5. STOCK PLANS

STOCK OPTION PLANS

The Company currently has three stock option plans for employees,
directors and others-- the 1992 Stock Plan, the 1995 Director Option Plan and
the 1997 Stock Plan.

Under the Company's 1992 Stock Plan, the Board of Directors may
grant options for the purchase of up to 2,100,000 shares of common stock by
directors, employees and others. Nonqualified stock options are generally
granted with an exercise price equal to the fair market value of the common
stock on the date of grant but may be granted at a lower price as determined
by the plan administrator. 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.

Under the Company's 1995 Director Option Plan (the "1995 Plan")
directors who are not employees of the Company receive options to purchase up
to 15,000 shares of common stock upon joining the Board of Directors.
Subsequent to receiving initial grants under the 1995 Plan, directors are
eligible to receive additional discretionary grants. A total of 400,000
shares may be granted over the term of the plan. 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.

F-12
<PAGE>

The Company's 1997 Stock Plan (the "1997 Plan") was approved by the
stockholders in July 1997 and provides for awards of incentive stock options,
nonqualified stock options and stock rights to employees, directors and
consultants of the Company. The 1992 Plan remains in effect until it expires
on its own terms and the Company will continue to grant options available
thereunder. An aggregate of 500,000 shares of common stock were reserved for
issuance under the 1997 Plan. The 1997 Plan provides for an annual increase
on each anniversary date of the adoption of the plan of 5% of the Company's
outstanding shares or such lesser amount as determined by the Board of
Directors. A total of 1,040,227 shares have been reserved for issuance under
the 1997 Plan. A maximum of 15,000,000 shares may be issued under the 1997
Plan over its ten year term. Nonqualified stock options are generally granted
with an exercise price equal to the fair market value of the common stock on
the date of grant but may be granted at a lower price as determined by the
plan administrator. 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
relationship as a service provider. Stock purchase rights may be issued
alone, in addition to, or in tandem with other awards granted under this plan.

REPRICING

In January 1998, the Company offered employees, excluding executive
officers, the option to exchange options to purchase 376,255 shares of common
stock with an aggregate exercise price of $8,747,000 million for new options
to purchase 376,255 shares with an exercise price of $19.31 per share and an
aggregate exercise price of $7,267,000 million. All of the repriced options
continue to vest under the original terms of the option grant. In exchange
for the offer to reprice stock options, employees agreed to a moratorium on
exercising repriced options until July 1, 1998. To the extent an employee
voluntarily terminated employment with the Company prior to July 1, 1998, all
vested shares at the date of termination relating to repriced stock options
were canceled and forfeited.

In September 1998, the Company offered employees and executive
officers the option to exchange stock options to purchase 1,342,168 shares of
common stock with an aggregate exercise price of $28,643,000 million for new
options to purchase 1,342,168 shares with an exercise price of $11.50 per
share and an aggregate exercise price of $15,435,000 million. All of the
repriced options have vesting provisions consistent with the terms of the
original option grant. In exchange for the offer to reprice stock options,
employees agreed to a moratorium on exercising re-priced options until March
16, 1999. To the extent an employee voluntarily terminated employment with
the Company prior to March 16, 1999, all vested shares at the date of
termination relating to repriced stock options were canceled and forfeited.

F-13
<PAGE>

The following table summarizes all stock option activity for the three years
ended March 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR OF EXERCISE
GRANT SHARES PRICE
------------- ------------ -------------
(000'S) (000'S)
<S> <C> <C> <C>
Balance at April 1, 1996................... 338 842 $ 8.57
Shares authorized....................... 450 -- --
Options granted......................... (681) 681 $21.06
Options exercised....................... 47 (95) $ 0.78
Options canceled........................ 32 (32) $18.38
------------- ------------

Balance at March 31, 1997.................. 186 1,396 $14.83
Shares authorized....................... 700 -- --
Options granted......................... (1,021) 1,021 $20.54
Options exercised....................... -- (139) $ 8.23
Options canceled........................ 493 (493) $22.67
------------- ------------

Balance at March 31,1998................... 358 1,785 $16.45
Shares authorized....................... 540 -- --
Options granted......................... (1,803) 1,803 $15.84
Options exercised....................... -- (331) $ 6.56
Options canceled........................ 1,448 (1,448) $21.08
------------- ------------

Balance at March 31,1999................... 543 1,809 $13.93
============= ============
</TABLE>

The following table summarizes information about stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES 3/31/99 LIFE PRICE 3/31/99 PRICE
- ------ --------------- -------------- ----------------- ------------------ ------------------
(000's) (years) (000's)
<S> <C> <C> <C> <C> <C>
$ 0.10 - $ 6.00........ 136 4.90 $ 1.28 131 $1.08
$11.50 ................ 1,206 8.21 $11.50 434 $11.50
$13.00 -$25.00......... 263 7.72 $17.92 151 $16.91
$26.50 -$43.75......... 199 8.88 $31.26 40 $26.63
$44.66 -$49.62......... 5 9.95 $47.44 -- --
=============== ==================
$0.10 - $49.62......... 1,809 7.97 $13.93 756 $11.58
=============== ==================
</TABLE>

At March 31, 1998 and 1997, 636,514 and 355,581 shares were
exercisable at weighted average exercise prices of $11.02 and $5.87,
respectively.

1995 EMPLOYEE STOCK PURCHASE PLAN

In September 1995, the 1995 Employee Stock Purchase Plan (the
"ESPP") 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. In
accordance with Section 423 of the Internal Revenue Code, this plan permits
eligible employees to authorize payroll deductions of up to 15% of their base
compensation to purchase shares of the Company's common stock at the lower of
85% of the fair market value of the common stock

F-14
<PAGE>

on first day of the offering period or the purchase date. For the years ended
March 31, 1999, 1998 and 1997, 30,753, 23,699 and 16,689 shares,
respectively, were issued under the ESPP.

DEFERRED COMPENSATION

During the fiscal years ended March 31, 1998 and 1997 the Company
recorded deferred compensation with respect to stock options granted to
consultants of $171,000 and $903,000, respectively. Additionally, during
fiscal 1997, the Company repurchased 47,396 shares of common stock resulting
from the exercise of unvested stock options and reduced related unamortized
deferred compensation by $193,000.

Deferred compensation is amortized ratably over the period that the
options vest and is adjusted for options which have been cancelled. Deferred
compensation expense was $466,000, $324,000, and $263,000 for the years ended
March 31, 1999, 1998 and 1997, respectively.

During fiscal year 1999, the Company granted 35,000 options in
connection with consulting agreements. The stock options were valued using
the Black-Scholes option valuation model and the Company recorded $93,000 of
compensation expense for fiscal year 1999. The Company expects to record
compensation expense of $247,000, $247,000 and $165,000 for fiscal years
2000, 2001 and 2002, respectively.

STOCK-BASED COMPENSATION

As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in
accounting for stock-based awards to employees and directors. Under APB No.
25, the Company generally recognizes no compensation expense with respect to
such awards.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after March 31, 1995 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS No. 123. The fair value of the Company's stock-based
awards to employees was estimated using the minimum value model for awards
prior to the Company's initial public offering on November 7, 1995 and the
Black-Scholes model subsequent to the initial public offering. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards
to employees. The fair value of the Company's stock-based awards to employees
was estimated assuming no expected dividends and the following
weighted-average assumptions:

OPTIONS ESPP
------------------------- -------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)..................... 5.00 5.00 5.00 .50 .50 .50
Expected volatility....................... .67 .62 .70 .94 .45 .77
Risk-free interest rate %................. 4.66 5.52 6.49 5.40 5.40 5.47
</TABLE>

For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the purchase period (for stock purchases under the ESPP).
The Company's pro forma information is as follows (in thousands, except for
per share information):

F-15
<PAGE>

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Pro forma net loss............................................ $(3,494) $(17,662) $(11,538)
Pro forma basic and diluted net loss per share................ $ (0.32) $ (1.77) $ (1.22)
</TABLE>

The weighted average fair value of options granted during 1999, 1998
and 1997 was $9.43, $11.96 and $13.50 per share, respectively.

The weighted average fair value of shares issued under the ESPP
during 1999, 1998 and 1997 was $16.74, $8.49 and $10.79 per share,
respectively.

6. INCOME TAXES

The components of the provision for income taxes were as follows (in
thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Federal................................. $ 171 $ -- $ --
State................................... 86 -- --
Foreign................................. 35 -- --
------------ ------------ -------------
Total................................ $ 292 $ -- $ --
============ ============ =============
</TABLE>

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 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rates................. $ 2,043 $ (4,828) $ (3,284)
State taxes..................................................... 56 -- --
Loss for which no tax benefit is currently recognizable......... -- 4,828 3,284
Benefit of net operating losses................................. (1,807) -- --
------------ ------------ -------------
$ 292 $ -- $ --
============ ============ =============
</TABLE>

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 (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 14,000 $ 13,700
Tax credit carryforwards..................... 700 370
Other, net................................... 2,200 2,100
-----------------------------
Total..................................... 16,900 16,170
Valuation allowance.......................... (16,900) (16,170)
-----------------------------
Net....................................... $ -- $ --
============== =============
</TABLE>

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, 1999 and 1998, has been established to reflect these uncertainties.
The change in the valuation allowance was a net increase of $730,000,
$5,280,000 and $3,660,000 for the fiscal years 1999, 1998 and 1997,
respectively.

F-16
<PAGE>

At March 31, 1999 the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $39,000,000 and
$14,000,000, respectively, which will expire from 2000 through 2012, if not
utilized. At March 31, 1999, the Company also had research and development
tax credit carryforwards of approximately $400,000 and $350,000,
respectively, for federal and state tax purposes expiring from 2007 through
2019, if not utilized. As of March 31,1999 the future use of net operating
loss and tax credit carryforwards are not subject to material limitations
resulting from the ownership change limitations provided by the Internal
Revenue Code and similar state provisions.

Included in the valuation allowance is $3,000,000 related to the
exercise of stock options which are not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance related to this amount will be credited directly to equity and not
reflected as an income tax benefit in the statement of operations.

7. EMPLOYEE BENEFIT PLAN

The Company adopted the Perclose 401(k) Retirement Plan to provide
retirement benefits for its employees in December 1994. As allowed under
Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred
salary deductions for eligible employees. Full time employees who are at
least 21 years of age are eligible to participate in the next quarter
enrollment period. Participants may make voluntary contributions to the plan
up to 15% of their compensation, subject to certain Internal Revenue Service
restrictions. The Company does not provide a matching contribution at this
time.

8. CONCENTRATIONS OF CREDIT AND OTHER RISKS

The Company operates in a single industry segment and sells its
products primarily to hospitals and medical device distributors. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. There have been no material losses on customer
receivables.

DEPENDENCE ON PROSTAR AND TECHSTAR PRODUCTS

The Prostar and Techstar products are currently the Company's only
marketed products. There can be no assurance as to when or whether the
Company will receive FDA clearance or approval for sale of other products in
the United States. There can be no assurance that the Company's development
efforts will be successful or that any further products 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.

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.

9. LEGAL PROCEEDINGS

In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation and that competitor's marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company counter-sued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
counter-defendants have engaged in antitrust

F-17
<PAGE>

and unfair competition violations. In March 1999, Tyco sold the marketing
rights to the competitive product to St. Jude Medical, Inc. The case is
presently set for trial in September 1999. The Company believes that the case
is without merit and intends to defend itself and its intellectual property
rights vigorously.

10. RELATED PARTY TRANSACTIONS

In December 1998, the Company entered into a consulting agreement
with Life Science Advisors ("LSA"). A member of the Company's Board of
Directors also serves as the President of LSA. A total of 8,155 stock options
have been granted to the director in connection with the consulting
agreement. For the fiscal year ended March 31, 1999, the Company has made no
payments to either LSA or the director in connection with the consulting
agreement.

F-18
<PAGE>

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
(Year Ended March 31)
1997................................ $ 20,000 $ 761,000 $ 605,000 $ 176,000
1998................................ $ 176,000 $ 683,000 $ 558,000 $ 301,000
1999................................ $ 301,000 $ 29,000 $ 29,000 $ 301,000
</TABLE>

F-19

<PAGE>

EXHIBIT 3.2

BYLAWS

PERCLOSE, INC.
(A DELAWARE CORPORATION)

<PAGE>

BYLAWS OF

PERCLOSE, INC.
(a Delaware corporation)

TABLE OF CONTENTS

Page
<S> <C>
ARTICLE I

CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II

MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. . 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . 4
2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . 4
2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . . .5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING . . . . . . . . . . . . 5
2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . . 6
2.15 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE III

DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . 8

-i-
<PAGE>

TABLE OF CONTENTS

(Continued)

Page
----

3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . 8
3.5 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . 9
3.7 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . .10
3.9 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . .10
3.10 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . .10
3.12 ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.13 NOTICE OF ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . .11
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . .11
3.15 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . .11
3.16 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . .11
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION . . . . . .12

ARTICLE IV

COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . .12
4.2 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . .12
4.3 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . .13

ARTICLE V

OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . .13
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . .14
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . .14
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . .14
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . .14
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . .15
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . . .15

-ii-
<PAGE>

TABLE OF CONTENTS

(Continued)

Page
----
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . . .16
5.12 ADMINISTRATIVE OFFICERS. . . . . . . . . . . . . . . . . . . . . .16
5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . .16

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . .18
6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . .19
6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

ARTICLE VII

RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . .19
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . .20
7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . .20
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . .20
7.5 CERTIFICATION AND INSPECTION OF BYLAWS . . . . . . . . . . . . . .20

ARTICLE VIII

GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE
AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. . . . . . . . . . . . .21
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED . . . . . . . .21
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES . . . . . . . . .21
8.5 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . . .22
8.6 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . .22
8.7 TRANSFER AGENTS AND REGISTRARS . . . . . . . . . . . . . . . . . .23
8.8 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . .23

-iii-
<PAGE>

TABLE OF CONTENTS

(Continued)

Page
----
ARTICLE IX

AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>

-iv-
<PAGE>

BYLAWS

PERCLOSE, INC.
(a Delaware corporation)

ARTICLE I

CORPORATE OFFICES

1.1 REGISTERED OFFICE

The registered office of the corporation shall be fixed in the
certificate of incorporation of the corporation.

1.2 OTHER OFFICES

The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.

ARTICLE II

MEETINGS OF STOCKHOLDERS

2.1 PLACE OF MEETINGS

Meetings of stockholders shall be held at any place within or outside
the State of Delaware designated by the board of directors. In the absence
of any such designation, stockholders' meetings shall be held at the
principal executive office of the corporation.

2.2 ANNUAL MEETING

The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday in May in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected, and any other proper business may be transacted.

<PAGE>

2.3 SPECIAL MEETING

A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or
by one or more stockholders holding shares in the aggregate entitled to cast
not less than ten percent (10%) of the votes at that meeting. No other
person or persons are permitted to call a special meeting.

If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time
of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the board,
the president, or the secretary of the corporation. The officer receiving
the request shall cause notice to be promptly given to the stockholders
entitled to vote, in accordance with the provisions of Sections 2.4 and 2.6
of these bylaws, that a meeting will be held at the time requested by the
person or persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.

2.4 NOTICE OF STOCKHOLDERS' MEETINGS

All notices of meetings of stockholders shall be sent or otherwise given
in accordance with Section 2.6 of these bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a
special meeting, the purpose or purposes for which the meeting is called (no
business other than that specified in the notice may be transacted) or (ii)
in the case of the annual meeting, those matters which the board of
directors, at the time of giving the notice, intends to present for action by
the stockholders (but any proper matter may be presented at the meeting for
such action). The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees who, at the time of the
notice, the board intends to present for election.

2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS

Subject to the rights of holders of any class or series of stock having
a preference over the Common Stock as to dividends or upon liquidation,

(a) nominations for the election of directors, and

(b) business proposed to be brought before any stockholder meeting

-2-
<PAGE>

may be made by the board of directors or proxy committee appointed by the
board of directors or by any stockholder entitled to vote in the election of
directors generally if such nomination or business proposed is otherwise
proper business before such meeting. However, any such stockholder may
nominate one or more persons for election as directors at a meeting or
propose business to be brought before a meeting, or both, only if such
stockholder has given timely notice in proper written form of their intent to
make such nomination or nominations or to propose such business. To be
timely, such stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation not less than one
hundred twenty (120) calendar days in advance of the date specified in the
corporation's proxy statement released to stockholders in connection with the
previous year's annual meeting of stockholders; provided, however, that in
the event that no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than thirty (30) days from the
date contemplated at the time of the previous year's proxy statement, notice
by the stockholder to be timely must be so received a reasonable time before
the solicitation is made. To be in proper form, a stockholder's notice to
the secretary shall set forth:

(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person
or persons to be nominated or of the business to be proposed;

(ii) a representation that the stockholder is a holder of record of stock
of the corporation entitled to vote at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice;

(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;

(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and

(v) if applicable, the consent of each nominee to serve as director of
the corporation if so elected.

The chairman of the meeting shall refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedure.

-3-
<PAGE>

2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges
prepaid and shall be addressed to the stockholder at the address of that
stockholder appearing on the books of the corporation or given by the
stockholder to the corporation for the purpose of notice. Notice shall be
deemed to have been given at the time when delivered personally or deposited
in the mail or sent by telegram or other means of written communication.

An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.

2.7 QUORUM

The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman
of the meeting or (ii) the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting in
accordance with Section 2.7 of these bylaws.

When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the
question is one upon which, by express provision of the laws of the State of
Delaware or of the certificate of incorporation or these bylaws, a different
vote is required, in which case such express provision shall govern and
control the decision of the question.

If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by
a majority of the stockholders initially constituting the quorum.

2.8 ADJOURNED MEETING; NOTICE

When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.

-4-
<PAGE>

2.9 VOTING

The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these
bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners, and to voting trusts and other voting agreements).

Except as may be otherwise provided in the certificate of incorporation
or these bylaws, each stockholder shall be entitled to one vote for each
share of capital stock held by such stockholder and stockholders shall not be
entitled to cumulate their votes in the election of directors or with respect
to any matter submitted to a vote of the stockholders.

Notwithstanding the foregoing, if the stockholders of the corporation
are entitled, pursuant to Sections 2115 and 301.5 of the California
Corporations Code, to cumulate their votes in the election of directors, each
such stockholder shall be entitled to cumulate votes (i.e., cast for any
candidate a number of votes greater than the number of votes that such
stockholder normally is entitled to cast) only if the candidates' names have
been properly placed in nomination (in accordance with these bylaws) prior to
commencement of the voting, and the stockholder requesting cumulative voting
has given notice prior to commencement of the voting of the stockholder's
intention to cumulate votes. If cumulative voting is properly requested, each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes that (absent this provision as to cumulative voting) he or
she would be entitled to cast for the election of directors with respect to
his or her shares of stock multiplied by the number of directors to be
elected by him, and he or she may cast all of such votes for a single
director or may distribute them among the number to be voted for, or for any
two or more of them, as he or she may see fit.

2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Unless otherwise provided in the Certificate of Incorporation, any
action required or permitted to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote, if a consent or consents in writing setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Such consents shall be delivered to the corporation by
delivery to it registered office in the state of Delaware, its principal
place of business, or an officer or agent of the corporation having custody
of the book in which proceedings of meetings of stockholders are recorded.
Delivery made to a corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested.

2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING

-5-
<PAGE>

For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a
record date, which shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors and which shall
not be more than sixty (60) days nor less than ten (10) days before the date
of any such meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote, notwithstanding any
transfer of any shares on the books of the corporation after the record date.

If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.

A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting unless the board of directors fixes a new record date for the
adjourned meeting, but the board of directors shall fix a new record date if
the meeting is adjourned for more than thirty (30) days from the date set for
the original meeting.

The record date for any other purpose shall be as provided in Section
8.1 of these bylaws.

2.12 PROXIES

Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the
secretary of the corporation, but no such proxy shall be voted or acted upon
after three (3) years from its date, unless the proxy provides for a longer
period. A proxy shall be deemed signed if the stockholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic
transmission, telefacsimile or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of
Section 212(e) of the General Corporation Law of Delaware.

2.13 ORGANIZATION

The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one
of the corporation's vice presidents, shall call the meeting of the
stockholders to order, and shall act as chairman of the meeting. In the
absence of the president, the chairman of the board, and all of the vice
presidents, the stockholders shall appoint a chairman for such meeting. The
chairman of any meeting of stockholders shall determine the order of business
and the procedures at the meeting, including such matters as the regulation
of the manner of voting and the conduct of business. The secretary of the
corporation shall act as secretary of all meetings of the stockholders, but
in the absence of the secretary at any meeting of the stockholders, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.

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2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE

The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

2.15 WAIVER OF NOTICE

Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any
written waiver of notice unless so required by the certificate of
incorporation or these bylaws.

ARTICLE III

DIRECTORS

3.1 POWERS

Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction
of the board of directors.

3.2 NUMBER OF DIRECTORS

The board of directors shall consist of seven (7) members. The number
of directors may be changed by an amendment to this bylaw, duly adopted by
the board of directors or by the stockholders, or by a duly adopted amendment
to the certificate of incorporation. Upon the closing

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of the first sale of the corporation's common stock pursuant to a firmly
underwritten registered public offering (the "IPO"), the directors shall be
divided into three classes, with the term of office of the first class, which
class shall initially consist of two directors, to expire at the first annual
meeting of stockholders held after the IPO; the term of office of the second
class, which class shall initially consist of two directors, to expire at the
second annual meeting of stockholders held after the IPO; the term of office
of the third class, which class shall initially consist of three directors,
to expire at the third annual meeting of stockholders held after the IPO; and
thereafter for each such term to expire at each third succeeding annual
meeting of stockholders held after such election.

3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS

Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office as provided in
Section 3.2 of these bylaws. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of the
term for which elected and until a successor has been elected and qualified.

3.4 RESIGNATION AND VACANCIES

Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.

Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote
of the stockholders or by court order may be filled only by the affirmative
vote of a majority of the shares represented and voting at a duly held
meeting at which a quorum is present (which shares voting affirmatively also
constitute a majority of the required quorum). Each director so elected
shall hold office for a term expiring at the next annual meeting of the
stockholders at which the term of office of the class to which such director
has been elected expires.

Unless otherwise provided in the certificate of incorporation or these
bylaws:

(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by
a sole remaining director.

(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the

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directors elected by such class or classes or series thereof then in office,
or by a sole remaining director so elected.

If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders
in accordance with the provisions of the certificate of incorporation or
these bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation
Law of Delaware.

If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten (10) percent of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office as aforesaid, which election shall be governed by the
provisions of Section 211 of the General Corporation Law of Delaware as far
as applicable.

3.5 REMOVAL OF DIRECTORS

Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors; provided,
however, that, if and so long as stockholders of the corporation are entitled
to cumulative voting, if less than the entire board is to be removed, no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire board of directors.

3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE

Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the board may be held at any place within
or outside the State of Delaware that has been designated in the notice of
the meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.

Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.

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3.7 FIRST MEETINGS

The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting. In the event of the failure of the stockholders to fix
the time or place of such first meeting of the newly elected board of
directors, or in the event such meeting is not held at the time and place so
fixed by the stockholders, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special
meetings of the board of directors, or as shall be specified in a written
waiver signed by all of the directors.

3.8 REGULAR MEETINGS

Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting
shall be held at the same time and place on the next succeeding full business
day.

3.9 SPECIAL MEETINGS; NOTICE

Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least
four (4) days before the time of the holding of the meeting. If the notice
is delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to
the director or to a person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to the
director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of
the corporation.

3.10 QUORUM

A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.12 of these bylaws. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors, subject to
the provisions of the certificate of incorporation and applicable law.

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A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the quorum for that meeting.

3.11 WAIVER OF NOTICE

Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends
the meeting other than for the express purposed of objecting at the beginning
of the meeting to the transaction of any business because the meeting is not
lawfully called or convened. All such waivers shall be filed with the
corporate records or made part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
board of directors.

3.12 ADJOURNMENT

A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.

3.13 NOTICE OF ADJOURNMENT

Notice of the time and place of holding an adjourned meeting of the
board need not be given unless the meeting is adjourned for more than
twenty-four (24) hours. If the meeting is adjourned for more than
twenty-four (24) hours, then notice of the time and place of the adjourned
meeting shall be given before the adjourned meeting takes place, in the
manner specified in Section 3.9 of these bylaws, to the directors who were
not present at the time of the adjournment.

3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action
by written consent shall have the same force and effect as a unanimous vote
of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board of directors.

3.15 FEES AND COMPENSATION OF DIRECTORS

Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall
not be construed to preclude any director from serving the

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corporation in any other capacity as an officer, agent, employee or otherwise
and receiving compensation for those services.

3.16 APPROVAL OF LOANS TO OFFICERS

The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of
its subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with
or without interest and may be unsecured, or secured in such manner as the
board of directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing contained in this section shall
be deemed to deny, limit or restrict the powers of guaranty or warranty of
the corporation at common law or under any statute.

3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION

In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise
all of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.

ARTICLE IV

COMMITTEES

4.1 COMMITTEES OF DIRECTORS

The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting
of the committee. The appointment of members or alternate members of a
committee requires the vote of a majority of the authorized number of
directors. Any committee, to the extent provided in the resolution of the
board, shall have and may exercise all the powers and authority of the board,
but no such committee shall have the power or authority to (i) amend the
certificate of incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the

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issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement
of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property
and assets, (iv) recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution or (v) amend the bylaws of the
corporation; and, unless the board resolution establishing the committee, the
bylaws or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.

4.2 MEETINGS AND ACTION OF COMMITTEES

Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment),
Section 3.13 (notice of adjournment) and Section 3.14 (board action by
written consent without meeting), with such changes in the context of those
bylaws as are necessary to substitute the committee and its members for the
board of directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special meetings
of committees may also be called by resolution of the board of directors, and
that notice of special meetings of committees shall also be given to all
alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.

4.3 COMMITTEE MINUTES

Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.

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ARTICLE V

OFFICERS

5.1 OFFICERS

The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at
the discretion of the board of directors, a chairman of the board, one or
more vice presidents (however denominated), one or more assistant
secretaries, a treasurer and one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3
of these bylaws. Any number of offices may be held by the same person.

In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the
corporation in accordance with the provisions of Section 5.12 of these bylaws.

5.2 ELECTION OF OFFICERS

The Corporate Officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Section 5.3 or Section 5.5
of these bylaws, shall be chosen by the board of directors, subject to the
rights, if any, of an officer under any contract of employment, and shall
hold their respective offices for such terms as the board of directors may
from time to time determine.

5.3 SUBORDINATE OFFICERS

The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.

The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12
of these bylaws.

5.4 REMOVAL AND RESIGNATION OF OFFICERS

Subject to the rights, if any, of a Corporate Officer under any contract
of employment, any Corporate Officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the
board or, except in case of a Corporate Officer chosen by the board

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of directors, by any Corporate Officer upon whom such power of removal may be
conferred by the board of directors.

Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the
receipt of that notice or at any later time specified in that notice; and,
unless otherwise specified in that notice, the acceptance of the resignation
shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the corporation under any contract to
which the Corporate Officer is a party.

Any Administrative Officer designated and appointed by the president may
be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.

5.5 VACANCIES IN OFFICES

A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in these bylaws for regular appointments to that office.

5.6 CHAIRMAN OF THE BOARD

The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such
other powers and perform such other duties as may from time to time be
assigned to him by the board of directors or as may be prescribed by these
bylaws. If there is no president, then the chairman of the board shall also
be the chief executive officer of the corporation and shall have the powers
and duties prescribed in Section 5.7 of these bylaws.

5.7 PRESIDENT

Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation.
He or she shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board, at all meetings of the
board of directors. He or she shall have the general powers and duties of
management usually vested in the office of president of a corporation, and
shall have such other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.

5.8 VICE PRESIDENTS

In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their rank as
fixed by the board of directors or, if not ranked, a vice president
designated by the board of directors, shall perform all the duties of the
president and when

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so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed
for them respectively by the board of directors, these bylaws, the president
or the chairman of the board.

5.9 SECRETARY

The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of
directors, committees of directors and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names of those present at
directors' meetings or committee meetings, the number of shares present or
represented at stockholders' meetings and the proceedings thereof.

The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares and
the number and date of cancellation of every certificate surrendered for
cancellation.

The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law
or by these bylaws. He or she shall keep the seal of the corporation, if one
be adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these
bylaws.

5.10 CHIEF FINANCIAL OFFICER

The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related
to his position as a director.

The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as
may be designated by the board of directors. He or she shall disburse the
funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account
of all of his or her transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or
these bylaws.

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5.11 ASSISTANT SECRETARY

The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or
if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of
the secretary and shall perform such other duties and have such other powers
as the board of directors may from time to time prescribe.

5.12 ADMINISTRATIVE OFFICERS

In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be
such Administrative Officers of the corporation as may be designated and
appointed from time to time by the president of the corporation.
Administrative Officers shall perform such duties and have such powers as
from time to time may be determined by the president or the board of
directors in order to assist the Corporate Officers in the furtherance of
their duties. In the performance of such duties and the exercise of such
powers, however, such Administrative Officers shall have limited authority to
act on behalf of the corporation as the board of directors shall establish,
including but not limited to limitations on the dollar amount and on the
scope of agreements or commitments that may be made by such Administrative
Officers on behalf of the corporation, which limitations may not be exceeded
by such individuals or altered by the president without further approval by
the board of directors.

5.13 AUTHORITY AND DUTIES OF OFFICERS

In addition to the foregoing powers, authority and duties, all officers
of the corporation shall respectively have such authority and powers and
perform such duties in the management of the business of the corporation as
may be designated from time to time by the board of directors.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS

6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS

The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware as the same now exists or may
hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually
and reasonably incurred in connection with any threatened, pending or
completed action, suit, or proceeding in which such person was or is a party
or is threatened to be made a party by reason

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of the fact that such person is or was a director or officer of the
corporation. For purposes of this Section 6.1, a "director" or "officer" of
the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was a director or
officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.

The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.

The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to
indemnification hereunder in defending any action, suit or proceeding
referred to in this Section 6.1 in advance of its final disposition;
provided, however, that payment of expenses incurred by a director or officer
of the corporation in advance of the final disposition of such action, suit
or proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should ultimately be
determined that the director of officer is not entitled to be indemnified
under this Section 6.1 or otherwise.

The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the corporation's Certificate of
Incorporation, these bylaws, agreement, vote of the stockholders or
disinterested directors or otherwise.

Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.

6.2 INDEMNIFICATION OF OTHERS

The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action,
suit, or proceeding, in which such person was or is a party or is threatened
to be made a party by reason of the fact that such person is or was an
employee or agent of the corporation. For purposes of this Section 6.2, an
"employee" or "agent" of the corporation (other than a director or officer)
shall mean any person (i) who is or was an employee or agent of the
corporation, (ii) who is or was serving at the request of the corporation as
an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was

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an employee or agent of a corporation which was a predecessor corporation of
the corporation or of another enterprise at the request of such predecessor
corporation.

6.3 INSURANCE

The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liability under the
provisions of the General Corporation Law of Delaware.

ARTICLE VII

RECORDS AND REPORTS

7.1 MAINTENANCE AND INSPECTION OF RECORDS

The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record
of its stockholders listing their names and addresses and the number and
class of shares held by each stockholder, a copy of these bylaws as amended
to date, accounting books and other records of its business and properties.

Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other
books and records and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent is the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing that authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand
under oath shall be directed to the corporation at its registered office in
Delaware or at its principal place of business.

7.2 INSPECTION BY DIRECTORS

Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books
and records for a purpose reasonably related to his or her position as a
director.

-19-
<PAGE>

7.3 ANNUAL STATEMENT TO STOCKHOLDERS

The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.

7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS

The chairman of the board, if any, the president, any vice president,
the chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise
on behalf of this corporation all rights incident to any and all shares of
the stock of any other corporation or corporations standing in the name of
this corporation. The authority herein granted may be exercised either by
such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.

7.5 CERTIFICATION AND INSPECTION OF BYLAWS

The original or a copy of these bylaws, as amended or otherwise altered
to date, certified by the secretary, shall be kept at the corporation's
principal executive office and shall be open to inspection by the
stockholders of the corporation, at all reasonable times during office hours.

ARTICLE VIII

GENERAL MATTERS

8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING

For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which
shall not precede the date upon which the resolution fixing the record date
is adopted and which shall not be more than sixty (60) days before any such
action. In that case, only stockholders of record at the close of business
on the date so fixed are entitled to receive the dividend, distribution or
allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation
after the record date so fixed, except as otherwise provided by law.

If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close
of business on the day on which the board of directors adopts the applicable
resolution.

-20-
<PAGE>

8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS

From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders
for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.

8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED

The board of directors, except as otherwise provided in these bylaws,
may authorize and empower any officer or officers, or agent or agents, to
enter into any contract or execute any instrument in the name of and on
behalf of the corporation; such power and authority may be general or
confined to specific instances. Unless so authorized or ratified by the
board of directors or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the corporation
by any contract or engagement or to pledge its credit or to render it liable
for any purpose or for any amount.

8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES

The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not
apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock represented by
certificates and, upon request, every holder of uncertificated shares, shall
be entitled to have a certificate signed by, or in the name of the
corporation by, the chairman or vice-chairman of the board of directors, or
the president or vice-president, and by the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all
of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be
issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.

Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of
shares for which it is issued; a summary statement or reference to the
powers, designations, preferences or other special rights of such stock and
the qualifications, limitations or restrictions of such preferences and/or
rights, if any; a statement or summary of liens, if any; a conspicuous notice
of restrictions upon transfer or registration of transfer, if any; a
statement as to any applicable voting trust agreement; if the shares be
assessable, or, if assessments are collectible by personal action, a plain
statement of such facts.

-21-
<PAGE>

Upon surrender to the secretary or transfer agent of the corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, or upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated. Upon the declaration of any dividend on fully paid shares,
the corporation shall declare a dividend upon partly paid shares of the same
class, but only upon the basis of the percentage of the consideration
actually paid thereon.

8.5 SPECIAL DESIGNATION ON CERTIFICATES

If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations
or restrictions of such preferences and/or rights shall be set forth in full
or summarized on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock; provided, however,
that, except as otherwise provided in Section 202 of the General Corporation
Law of Delaware, in lieu of the foregoing requirements there may be set forth
on the face or back of the certificate that the corporation shall issue to
represent such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests the powers, the
designations, the preferences and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.

8.6 LOST CERTIFICATES

Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the corporation and cancelled at the same time. The board
of directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the issuance
of the replacement certificate.

-22-
<PAGE>

8.7 TRANSFER AGENTS AND REGISTRARS

The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who shall
be appointed at such times and places as the requirements of the corporation
may necessitate and the board of directors may designate.

8.8 CONSTRUCTION; DEFINITIONS

Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person"
includes both an entity and a natural person.

ARTICLE IX

AMENDMENTS

The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote or by the board of directors
of the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.

Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any
bylaw is repealed, the fact of repeal with the date of the meeting at which
the repeal was enacted or the filing of the operative written consent(s)
shall be stated in said book.

-23-
<PAGE>

CERTIFICATE OF ADOPTION OF BYLAWS

PERCLOSE, INC.

ADOPTION BY INCORPORATOR

The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Perclose, Inc. hereby adopts the foregoing bylaws,
comprising twenty-two (22) pages, as the Bylaws of the corporation.

Effective as of September 1, 1995.

/s/ Christopher J. Ozburn
------------------------------------------
Christopher J. Ozburn
Incorporator

CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR

The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Perclose, Inc. and that the foregoing Bylaws,
comprising twenty-two (22) pages, were adopted as the Bylaws of the
corporation effective as of September 1, 1995, by the person appointed in the
Certificate of Incorporation to act as the Incorporator of the corporation.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 11th day of September 1995.

/s/ J. Casey McGlynn
------------------------------------------
J. Casey McGlynn
Secretary

-24-
<PAGE>

CERTIFICATE OF AMENDMENT

OF BYLAWS OF

PERCLOSE, INC.

The undersigned, being the Secretary of Perclose, Inc., hereby certifies
that Article II, Section 2.3 of the Bylaws of this corporation were amended,
effective January 14, 1997, by the Board of Directors of the corporation to
provide as follows:

(1) SECTION 2.3 is hereby amended in its entirety to read as follows:

"2.3 SPECIAL MEETING

A special meeting of the stockholders may be called at any time by
the board of directors, or by the chairman of the board, or by the president.
No other person or persons are permitted to call a special meeting.

If a special meeting is called by any person or persons other than
the board of directors, then the request shall be in writing, specifying the
time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the board,
the president, or the secretary of the corporation. The officer receiving
the request shall cause notice to be promptly given to the stockholders
entitled to vote, in accordance with the provisions of Sections 2.4 and 2.6
of these bylaws, that a meeting will be held at the time requested by the
person or persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held."

Dated: January 14, 1997

/s/ J. Casey McGlynn
-----------------------------------
J. Casey McGlynn,
Secretary

<PAGE>

EXHIBIT 10.20

SUBLEASE AGREEMENT

1. PARTIES. This Sublease, dated March 18, 1999, is made between
Perclose, Inc. ("Sublessor"), and Ventis, Inc. ("Sublessee").

2. MASTER LEASE. Sublessor is the lessee under a written lease
dated April 16, 1998, wherein Seaport Centre Associates, LLC ("Lessor")
leased to Perclose ("Sublessor") the real property located in the City of
Redwood City, County of San Mateo, State of California, described as two
buildings, a 60,841 square foot building at 400 Saginaw and a 19,483 square
foot building at 300 Saginaw ("Master Premises"). Said lease is herein
collectively referred to as the "Master Lease" and is attached hereto as
Exhibit "A."

3. PREMISES. Sublessor hereby subleases to Sublessee on the
terms and conditions set forth in this Sublease the portion of the Master
Premises ("Premises") identified in Exhibit "B" attached hereto and
comprising of approximately 12,908 square foot portion of 300 Saginaw,
Redwood City, California.

4. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to
Sublessee that Sublessor's knowledge the Master Lease has not been amended or
modified, that Sublessor is not now, and as of the commencement of the Term
hereof will not be, in default or breach of any of the provisions of the
Master Lease, and that Sublessor has no knowledge of any claim by Lessor that
Sublessor is in default or breach of any of the provisions of the Master
Lease.

5. TERM. The Term of this Sublease shall commence on April 1,
1999 ("Commencement Date"), or when Lessor consents to this Sublease (if such
consent is required under the Master Lease), whichever shall last occur, and
end on March 30, 2000 ("Termination Date"), unless otherwise sooner
terminated in accordance with the provisions of this Sublease. In the event
the Term commences on a date other than the Commencement Date, Sublessor and
Sublessee shall execute a memorandum setting forth the actual date of
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor shall not
be subject to any liability for such failure, the Termination Date shall not
be extended by the delay, and the validity of this Sublease shall not be
impaired, but rent shall abate until delivery of Possession. Notwithstanding
the foregoing, if Sublessor has not delivered Possession to Sublessee within
thirty (30) days after the Commencement Date, then at any time thereafter and
before delivery of Possession, Sublessee may give written notice to Sublessor
of Sublessee's intention of cancellation of this Sublease. If Sublessor fails
to deliver Possession to Sublessee on or before such effective date, this
Sublease shall be cancelled, in which case all consideration previously paid
by Sublessee to Sublessor on account of this Sublease shall be returned to
Sublessee, this Sublease shall be of no further force or effect, and
Sublessor shall have no further liability to Sublessee. If Sublessor permits
Sublessee to take Possession prior to the commencement of the Term, it shall
not advance the Termination Date and shall be subject to the provisions of
this Sublease.

6. RENT.

6.1 Sublessee shall pay to Sublessor as minimum rent, without deduction,
setoff, notice, or demand, at 400 Saginaw, Redwood City, California or at
such other place as Sublessor shall designate from time to time by notice to
Sublessee, the sum of Two Dollars and 70/100 ($2.70) per square foot per
month, in advance on the first day of each month of the Term. Sublessor and
Sublessee agree that the Rent referenced in the previous sentence is a Full
Service Rental Rate. This rate shall include the following: Base Rent,
Additional Rent as indicated in Paragraph 3.2 of the Master Lease, Utilities
for the Premises, and Janitorial Service not less than every other business
day for the Premises. Sublessee shall pay to Sublessor upon execution of this
Sublease the sum of $27,000 as rent for the first month. If the Term begins
or ends on a day other than the first or last day of a month, the rent for
the partial months shall be prorated on a per diem basis.

7. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution of this Sublease an amount equal to three (3) months rent $81,000
as security for Sublessee's faithful performance of Sublessee's obligations
hereunder ("Security Deposit"). If Sublessee so chooses, it shall have the
right to issue and deliver a Letter of Credit to Sublessor pursuant to the
terms of Paragraph 36 of the Master Lease, except that "$81,000" shall be
substituted for "$1,000,000, "Sublessee" shall be substituted for "Tenant",
"Sublessor" shall be substituted for "Landlord", and Paragraphs 36. (b) and
36. (c) shall be deleted. Said Letter would replace the aforementioned
Security

-1-
<PAGE>

Deposit, and would be subject to all the terms and conditions referenced in
this paragraph." If Sublessee fails to pay rent or other charges when due
under this Sublease, or fails to perform any of its other obligations
hereunder, Sublessor may use or apply all or any portion of the Security
Deposit for the payment of any rent or other amount then due hereunder and
unpaid, for the payment of any other sum for which Sublessor may become
obligated by reason of Sublessee's default or breach, or for any loss or
damage sustained by Sublessor as a result of Sublessee's default or breach.
If Sublessor so uses any portion of the Security Deposit, Sublessee shall,
within ten (10) days after written demand by Sublessor, restore the Security
Deposit to the full amount originally deposited, and Sublessee's failure to
do so shall constitute a default under this Sublease. Sublessor shall not be
required to keep the Security Deposit separate from its general accounts, and
shall have no obligation or liability for payment of interest on the Security
Deposit. In the event Sublessor assigns its interest in this Sublease,
Sublessor shall deliver to its assignee so much of the Security Deposit as is
then held by Sublessor. Within ten (10) days after the Term has expired, or
Sublessee has vacated the Premises, or any final adjustment pursuant to
Subsection 6.2 hereof has been made, whichever shall last occur, and provided
Sublessee is not then in default of any of its obligations hereunder, the
Security Deposit, or so much thereof as had not theretofore been applied by
Sublessor, shall be returned to Sublessee or to the last assignee, if any, of
Sublessee's interest hereunder.

8. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign this
Sublease or further sublet all or part of the Premises without the prior
written consent of Sublessor (and the consent of Lessor, if such is required
under the terms of the Master Lease).

9. OTHER PROVISIONS OF SUBLEASE. All applicable terms and
conditions of the Master Lease are incorporated into and made a part of this
Sublease as if Sublessor were the lessor thereunder, Sublessee the lessee
thereunder, and the Premises the Master Premises, EXCEPT for dollar amounts
affecting prorata shares of the following: (1) premises, (2) term, (3) rent,
(4) security deposit, (5) tenant improvements and alterations. Sublessee
assumes and agrees to perform the lessee's obligations under the Master Lease
during the Term to the extent that such obligations are applicable to the
Premises, except that the obligation to pay rent to Lessor under the Master
Lease shall be considered performed by Sublessee to the extent and in the
amount rent is paid to Sublessor in accordance with Section 6 of this
Sublease. Sublessee shall not commit or suffer any act or omission that will
violate any of the provisions of the Master Lease. Sublessor shall exercise
due diligence in attempting to cause Lessor to perform its obligations under
the Master Lease for the benefit of Sublessee. If the Master Lease
terminates, this Sublease shall terminate and the parties shall be relieved
of any further liability or obligation under this Sublease, provided however,
that if the Master Lease terminates as a result of a default or breach by
Sublessor or Sublessee under this Sublease and/or the Master Lease, then the
defaulting party shall be liable to the non-defaulting party for the damage
suffered as a result of such termination. Notwithstanding the foregoing, if
the Master Lease gives Sublessor any right to terminate the Master Lease in
the event of the partial or total damage, destruction, or condemnation of the
Master Premises or the building or project of which the Master Premises are a
part, the exercise of such right by Sublessor shall not constitute a default
or breach hereunder.

10. OPTION TO RENEW: Provided Sublessee is not in default of any
provision of the Sublease Agreement, Sublessee shall have an option to extend
the Sublease Term for three (3) consecutive terms of three (3) months each
("Extended Terms") following the expiration of the initial Sublease Term. The
first two (2) options shall be exercised at Sublessee's sole discretion. The
third option shall be exercised upon mutual agreement by Sublessor and
Sublessee. Such option shall be exercised by Sublessee giving written notice
to Sublessor not less than 120 days prior to the end of the initial Sublease
Term or the applicable Extended Term. All terms and conditions of the
original Sublease Agreement shall prevail during the Extended Term. If
Sublessee is in default on the date the Extended Term is to commence, the
Extended Term shall not commence and the Sublease shall expire at the end of
the initial Sublease Term. The rent for this Extended Term shall be at the
same rate as in the initial Sublease Term.

11. ATTORNEYS' FEES. If Sublessor, Sublessee, or Broker shall
commence an action against the other arising out of or in connection with
this Sublease, the prevailing party shall be entitled to recover its costs of
suit and reasonable attorney's fees.

12 NOTICES.

To Sublessor: Perclose, Inc.
400 Saginaw Drive
Redwood City, CA 94063
Attention: Chief Financial Officer

-2-
<PAGE>

To Sublessee: Ventis, Inc.
300 Saginaw Drive
Redwood City, CA 94063
Attention: President/Warren Weiss

13. CONSENT BY LESSOR. THIS SUBLEASE SHALL BE OF NO FORCE OR
EFFECT UNLESS CONSENTED TO BY LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF.

14. COMPLIANCE. The parties hereto agree to comply with all
applicable federal, state and local laws, regulations, codes, ordinances and
administrative orders having jurisdiction over the parties, property or the
subject matter of this Agreement, including, but not limited to, the 1964
Civil Rights Act and all amendments thereto, the Foreign Investment in Real
Property Tax Act, the Comprehensive Environmental Response Compensation and
Liability Act, and The Americans With Disabilities Act.

15. BROKERS. Sublessee and Sublessor acknowledge that the BT
Commercial is acting as Sublessor's representative in this transaction, and
Trammell Crow Company is acting as Sublessee's representative. Trammell Crow
Company shall be paid a Commission equal to 2 1/2 % of the total NNN rent
payable throughout the term of the Sublease. The monthly rent shall be
calculated by multiplying the $1.95 NNN lease rate by the 12,908 Rentable
Square Feet in the Premises. BT Commercial shall be paid a Commission per a
separate agreement with Sublessor.

16. MISCELLANEOUS
15.1 Signage. Sublessee shall then have the right to install a sign, at
Sublessee's sole cost and expense, on the monument.
15.2 Tenant Improvements. Sublessor shall carpet the two large tiled rooms
as indicted in Exhibit "A" of our proposal, remove the racks hanging from the
ceiling in the large tiled room, and add a ceiling in the one large room, and
demise the space in a manner agreeable to both Sublessee and Sublessor.
Also, Sublessor shall cooperate fully with Sublessee on any other reasonable
alterations that Sublessee shall require in the space.

Sublessor: PERCLOSE, INC. Sublessee: VENTIS, INC.
----------------------- ---------------------------
Signature: Signature:
----------------------- ---------------------------
Title: PRESIDENT & CEO Title:
--------------------------- -------------------------------
By: HANK PLAIN By:
--------------------------- ----------------------------------
Date: Date:
---------------------------- --------------------------------

-3-
<PAGE>

LESSOR'S CONSENT TO SUBLEASE

The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning further assignment or subletting. Lessor certifies that, as of
the date of Lessor's execution hereof, Sublessor is not in default or breach
of any of the provisions of the Master Lease, and that the Master Lease has
not been amended or modified except as expressly set forth in the foregoing
Sublease.

Lessor:
----------------------------

By:
--------------------------------

Title:
-----------------------------

By:
--------------------------------

Title:
-----------------------------

Date:
------------------------------

- --------------------------------------------------------------------------------
CONSULT YOUR ADVISERS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by any party as to the
legal sufficiency or tax consequences of this document or the transaction to
which it relates. These are questions for your attorney.

In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
- --------------------------------------------------------------------------------

-4-

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-56, 333-17977, 333-45291, and 333-59933) pertaining to the
1992 Stock Plan, 1995 Employee Stock Purchase Plan, 1995 Director Option Plan,
and the 1997 Stock Plan of Perclose, Inc., of our report dated April 28, 1999,
with respect to the financial statements and schedule of Perclose, Inc. included
in the Annual Report (Form 10-K) for the year ended March 31, 1999.

/s/ ERNST & YOUNG

San Jose, California
June 22, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-26-1999
<PERIOD-START> MAR-27-1998
<PERIOD-END> MAR-26-1999
<CASH> 7,333
<SECURITIES> 22,864
<RECEIVABLES> 7,990
<ALLOWANCES> 301
<INVENTORY> 2,549
<CURRENT-ASSETS> 41,197
<PP&E> 9,225
<DEPRECIATION> 3,458
<TOTAL-ASSETS> 49,590
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<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 44,904
<TOTAL-LIABILITY-AND-EQUITY> 49,590
<SALES> 43,340
<TOTAL-REVENUES> 43,340
<CGS> 13,979
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<OTHER-EXPENSES> 142
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</TABLE>