10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended June 30, 2009
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-52082

CARDIOVASCULAR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	41-1698056
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
651 Campus Drive St. Paul, Minnesota (Address of principal executive offices)	55112-3495 (Zip Code)

Registrant’s telephone number, including area code:

(651) 259-1600

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, One-tenth of One Cent ($0.001) Par Value Per Share	NASDAQ Global Market

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

None.

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

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.  þ

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

(Do not check if a smaller reporting company)

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

As of December 31, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $9,236,344 based on the closing sale price as reported on the NASDAQ Global Market.

The number of shares of the registrant’s common stock outstanding as of September 24, 2009 was 14,598,226.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant’s 2009 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this report.

Table of Contents

			Page No.
PART I				1
	Item 1.	Business		1
	Item 1A.	Risk Factors		19
	Item 1B.	Unresolved Staff Comments		36
	Item 2.	Properties		36
	Item 3.	Legal Proceedings		36
	Item 4.	Submission of Matters to a Vote of Security Holders		38
PART II				40
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		40
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		55
	Item 8.	Financial Statements and Supplementary Data		56
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		57
	Item 9A(T).	Controls and Procedures		57
	Item 9B.	Other Information		59
PART III				60
	Item 10.	Directors, Executive Officers and Corporate Governance		60
	Item 11.	Executive Compensation		60
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		60
	Item 14.	Principal Accounting Fees and Services		60
PART IV				60
	Item 15.	Exhibits, Financial Statement Schedules		60
EX-10.34
EX-10.35
EX-10.36
EX-10.37
EX-14.1
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act on our web site, http://www.csi360.com, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. We are not including the information on our web site as a part of, or incorporating it by reference into, our Form 10-K.

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PART I

Item 1.   Business.

Special Note Regarding Forward Looking Statements

This report contains plans, intentions, objectives, estimates and expectations that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements, and other statements that are other than statements of historical fact. Our actual results could differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks and uncertainties are described more fully by us in Part I, Item 1A and Part II, Item 7 of this report and in our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Corporate Information

We were incorporated as Replidyne, Inc. in Delaware in 2000. On February 25, 2009, Replidyne, Inc. completed its business combination with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008, by and among Replidyne, Responder Merger Sub, Inc., a wholly-owned subsidiary of Replidyne (“Merger Sub”), and CSI-MN (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into CSI-MN, with CSI-MN continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Replidyne. At the effective time of the merger, Replidyne changed its name to Cardiovascular Systems, Inc. (“CSI”) and CSI-MN changed its name to CSI Minnesota, Inc. As of immediately following the effective time of the merger, former CSI-MN stockholders owned approximately 80.2% of the outstanding common stock of the combined company, and Replidyne stockholders owned approximately 19.8% of the outstanding common stock of the combined company. Following the merger of Merger Sub with CSI-MN, CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation. These transactions are referred to herein as the “merger.” Unless the context otherwise requires, all references herein to the “Company,” “CSI,” “we,” “us” and “our” refer to CSI-MN prior to the completion of the merger and to CSI following the completion of the merger and the name change, and all references to “Replidyne” refer to Replidyne prior to the completion of the merger and the name change.

Replidyne was a biopharmaceutical company focused on discovering, developing, in-licensing and commercializing anti-infective products.

CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997, we engaged in research and development on several different product concepts that were later abandoned. Since 1997, we have devoted substantially all of our resources to the development of the Diamondback 360° and our Viper line of ancillary products.

Our principal executive office is located at 651 Campus Drive, St. Paul, Minnesota 55112. Our telephone number is (651) 259-2800, and our website is www.csi360.com. The information contained in or connected to our website is not incorporated by reference into, and should not be considered part of, this Annual Report on Form 10-K.

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We have received federal registration of certain marks including “Diamondback 360°” and “CSI.” We have applied for federal registration of certain marks, including “ViperWire”, “ViperWire Advance”, “ViperSheath”, “ViperSlide”, “ViperTrack”, and “ViperCaddy.” All other trademarks, trade names and service marks appearing in this Form 10-K are the property of their respective owners.

Business Overview

We are a medical device company focused on developing and commercializing minimally invasive treatment solutions for vascular disease. Interventional endovascular treatment of peripheral artery disease, or PAD, was our initial area of focus. PAD is caused by the accumulation of plaque in peripheral arteries, most commonly occurring in the pelvis and legs, and affects approximately eight to 12 million people in the United States, as cited by the authors of the PARTNERS study published in the Journal of the American Medical Association in 2001. However, as reported in an article published in Podiatry Today in 2006, only approximately 2.5 million of those eight to 12 million people are treated. PAD is a progressive disease, and, if left untreated, can lead to limb amputation or death.

Our primary product, the Diamondback 360^® PAD System, is a catheter-based platform capable of treating a broad range of plaque types in leg arteries both above and below the knee and addresses many of the limitations associated with existing treatment alternatives. In August 2007, the U.S. Food and Drug Administration, or FDA, granted us 510(k) clearance for use of the Diamondback 360° as a therapy for treatment of patients with PAD. We commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007 and began a full commercial launch during the quarter ended March 31, 2008. As of June 30, 2009, we were selling the Diamondback 360° in 556 accounts that had completed an estimated 15,000 procedures.

The Diamondback 360°’s single-use catheter incorporates a flexible drive shaft with an offset crown coated with diamond grit. With the aid of fluoroscopy, the physician positions the crown at a plaque-containing lesion in the peripheral artery and removes the plaque by causing the crown to orbit against it. This mechanism of action creates a smooth lumen, or channel, in the vessel. The Diamondback 360° is designed to differentiate between plaque and compliant arterial tissue, a concept that we refer to as “differential sanding.” Normal arteries are compliant; they have the ability to expand and contract as needed to supply blood flow to the legs and feet. Arteries burdened with fibrotic (moderate) and/or calcified (hardened) plaque due to PAD lose their compliance which makes other therapies such as angioplasty, stenting, surgical bypass and directional atherectomy problematic. The Diamondback 360° sands plaque into small particles and restores both blood flow and vessel compliance. The particles created by the Diamondback 360° are generally smaller than red blood cells and are carried away by the bloodstream. The small size of the particles avoids the need for plaque collection reservoirs. The Diamondback 360° can treat the diseased arteries with less than three minutes of sanding time, potentially reducing the overall procedure time.

We have conducted three clinical trials involving 207 patients to demonstrate the safety and efficacy of the Diamondback 360° in treating PAD. In particular, our pivotal OASIS clinical trial was a prospective 20-center United States study that involved 124 patients with 201 lesions and successfully met FDA targets. The OASIS Study demonstrated a low 2.4% incidence of target lesion revascularization at six months. In addition, the Diamondback 360° achieved a 100% limb salvage rate at six months in a group of patients with mostly below-the-knee disease. We were the first company to conduct a prospective multi-center clinical trial with a prior investigational device exemption, or IDE, in support of a 510(k) clearance for this device category. We continue to support device performance through a rigorous clinical program and have initiated two post-market, randomized feasibility studies to further differentiate the outcomes of the Diamondback 360° from those of conventional balloon angioplasty. In addition, we believe that the Diamondback 360° provides a platform that can be leveraged across multiple market segments. We are seeking premarket approval, or PMA, to use the Diamondback 360° to treat patients with coronary artery disease and have submitted an IDE to the FDA.

In addition to the Diamondback 360°, we are expanding our product portfolio through internal product development and establishment of business relationships. We now offer multiple accessory devices designed to complement the use of the Diamondback 360°, and we have entered into distribution agreements with Invatec, Inc. and Asahi-Intecc, Ltd.

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Market Overview

PAD is a circulatory problem in which plaque deposits build up on the walls of arteries, reducing blood flow to the limbs. The most common early symptoms of PAD are pain, cramping or fatigue in the leg or hip muscles while walking. Symptoms may progress to include numbness, tingling or weakness in the leg and, in severe cases, burning or aching pain in the leg, foot or toes while resting. As PAD progresses, additional signs and symptoms occur, including cooling or color changes in the skin of the legs or feet, and sores on the legs or feet that do not heal. If untreated, PAD may lead to critical limb ischemia, a condition in which the amount of oxygenated blood being delivered to the limb is insufficient to keep the tissue alive. Critical limb ischemia often leads to large non-healing ulcers, infections, gangrene and, eventually, limb amputation or death.

PAD affects approximately eight to 12 million people in the United States, as cited by the authors of the PARTNERS study published in the Journal of the American Medical Association in 2001. According to 2007 statistics from the American Heart Association, PAD becomes more common with age and affects approximately 12% to 20% of the population over 65 years old. An aging population, coupled with increasing incidence of diabetes and obesity, is likely to increase the prevalence of PAD. In many older PAD patients, particularly those with diabetes, PAD is characterized by fibrotic (moderate) or calcified (hardened) plaque deposits that have not been successfully treated with existing non-invasive treatment techniques. PAD may involve arteries either above or below the knee. Arteries above the knee are generally long, straight and relatively wide, while arteries below the knee are shorter and branch into arteries that are progressively smaller in diameter.

Despite the severity of PAD, it remains relatively underdiagnosed. According to an article published in Podiatry Today in 2006, only approximately 2.5 million of the eight to 12 million people in the United States with PAD are diagnosed. Although we believe the rate of diagnosis of PAD is increasing, underdiagnosis continues due to patients failing to display symptoms or physicians misinterpreting symptoms as normal aging. Recent emphasis on PAD education from medical associations, insurance companies and other groups, coupled with publications in medical journals, is increasing physician and patient awareness of PAD risk factors, symptoms and treatment options. The PARTNERS study advocated increased PAD screening by primary care physicians.

Physicians treat a significant portion of the 2.5 million people in the United States who are diagnosed with PAD using medical management, which includes lifestyle changes, such as diet and exercise and drug treatment. For instance, within a reference group of over 1,000 patients from the PARTNERS study, 54% of the patients with a prior diagnosis of PAD were receiving antiplatelet medication treatment. While medications, diet and exercise may improve blood flow, they do not treat the underlying obstruction and many patients have difficulty maintaining lifestyle changes. Additionally, many prescribed medications are contraindicated, or inadvisable, for patients with heart disease, which often exists in PAD patients. As a result of these challenges, many medically managed patients develop more severe symptoms that require procedural intervention.

Our Solution

The Diamondback 360° represents a new approach to the treatment of PAD that provides physicians and patients with a procedure that addresses many of the limitations of traditional treatment alternatives. The Diamondback 360°’s single-use catheter incorporates a flexible drive shaft with an offset crown coated with diamond grit. Physicians position the crown at the site of an arterial plaque lesion and remove the plaque by causing the crown to orbit against it, creating a smooth lumen, or channel, in the vessel. The Diamondback 360° is a device designed to differentiate between plaque and compliant arterial tissue, a concept that we refer to as “differential sanding.”

Normal arteries are compliant; they have the ability to expand and contract as needed to supply blood flow to the legs and feet. Arteries burdened with fibrotic (moderate) and/or calcified (hardened) plaque due to PAD lose their compliance which makes other therapies such as angioplasty, stenting, surgical bypass and atherectomy problematic. The Diamondback 360° sands plaque into small particles and restores both blood flow and vessel compliance. The particles created by the Diamondback 360° are generally smaller than red blood cells and are carried away by the bloodstream. The small size of the particles avoids the need for plaque collection reservoirs. The Diamondback 360° can treat the diseased arteries with less than three minutes of sanding time, potentially reducing the overall procedure time.

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We believe that the Diamondback 360° offers the following key benefits:

Strong Safety Profile

•  Differential Sanding Reduces Risk of Adverse Events.  The Diamondback 360° is designed to differentiate between plaque and compliant arterial tissue. The diamond grit coated offset crown engages and removes plaque from the artery wall with minimal likelihood of penetrating or damaging the fragile, internal elastic lamina layer of the arterial wall because compliant tissue flexes away from the crown. Furthermore, the Diamondback 360° rarely penetrates even the middle inside layer of the artery and the two elastic layers that border it. The Diamondback 360°’s perforation rate was 2.4% during our pivotal OASIS trial. Analysis by an independent pathology laboratory of more than 434 consecutive cross sections of porcine arteries treated with the Diamondback 360° revealed there was minimal to no damage, on average, to the medial layer, which is typically associated with restenosis. In addition, the safety profile of the Diamondback 360° was found to be non-inferior to that of angioplasty, which is often considered the safest of interventional methods. This was demonstrated in our OASIS trial, which had a low 4.8% rate of device-related serious adverse events, or SAEs.

•  Reduces the Risk of Distal Embolization.  The Diamondback 360° sands plaque away from artery walls in a manner that produces particles of such a small size — generally smaller than red blood cells — that they are carried away by the bloodstream. The small size of the particles avoids the need for plaque collection reservoirs on the catheter and reduces the need for ancillary distal protection devices, commonly used with directional cutting atherectomy, and also significantly reduces the risk that larger pieces of removed plaque will block blood flow downstream.

•  Allows Continuous Blood Flow During Procedure.  The Diamondback 360° allows for continuous blood flow during the procedure, except when used in chronic total occlusions. Other devices may restrict blood flow due to the size of the catheter required or the use of distal protection devices, which could result in complications such as excessive heat and tissue damage.

Proven Efficacy

•  Efficacy Demonstrated in a 124-Patient Clinical Trial.  Our pivotal OASIS clinical trial was a prospective 20-center study that involved 124 patients with 201 lesions and performance targets were established cooperatively with the FDA before the trial began. Despite 55% of the lesions consisting of calcified plaque and 48% of the lesions having a length greater than three centimeters, the performance of the device in the OASIS trial successfully met the FDA’s study endpoints.

•  Treats Difficult, Fibrotic and Calcified Lesions.  The Diamondback 360° enables physicians to remove plaque from long, fibrotic, calcified or bifurcated lesions in peripheral arteries both above and below the knee. Other PAD devices have demonstrated limited effectiveness in treating these challenging lesions.

•  Orbital Motion Improves Device-to-Lumen Ratio.  The orbiting action of the Diamondback 360° can create a lumen of approximately 2.0 times the diameter of the crown. The variable device-to-lumen ratio allows the continuous removal of plaque as the opening of the lumen increases during the operation of the device. Non-orbiting rotational atherectomy catheters remove plaque by abrading the lesion with a spinning, abrasive burr, which acts in a manner similar to a drill and only creates a lumen the same size or slightly smaller than the size of the burr.

•  Differential Sanding Creates Smooth Lumens.  The differential sanding of the Diamondback 360° creates a smooth surface inside the lumen. We believe that the smooth lumen created by the Diamondback 360° increases the velocity of blood flow and decreases the resistance to blood flow which may decrease potential for restenosis, or renarrowing of the arteries.

Ease of Use

•  Utilizes Familiar Techniques.  Physicians using the Diamondback 360° employ techniques similar to those used in angioplasty, which are familiar to interventional cardiologists, vascular surgeons and interventional

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radiologists who are trained in endovascular techniques. The Diamondback 360°’s simple user interface requires minimal additional training. The system’s ability to differentiate between diseased and compliant tissue reduces the risk of complications associated with user error and potentially broadens the user population.

•  Single Insertion to Complete Treatment.  The Diamondback 360°’s orbital technology and differential sanding process in most cases allows for a single insertion to treat lesions. Because the particles of plaque sanded away are of such small sizes, the Diamondback 360° does not require a collection reservoir that needs to be repeatedly emptied or cleaned during the procedure. Rather, the Diamondback 360° allows for multiple passes of the device over the lesion until plaque is removed and a smooth lumen is created.

•  Limited Use of Fluoroscopy.  The relative simplicity of our process and predictable crown location allows physicians to significantly reduce fluoroscopy use, thus limiting radiation exposure.

Cost and Time Efficient Procedure

•  Short Procedure Time.  The Diamondback 360° has a short procedure time typically ranging from two to six minutes.

•  Single Crown Can Create Various Lumen Sizes Limiting Hospital Inventory Costs.  The Diamondback 360°’s orbital mechanism of action allows a single-sized device to create various diameter lumens inside the artery. Adjusting the rotational speed of the crown changes the orbit to create the desired lumen diameter, thereby potentially avoiding the need to use multiple catheters of different sizes to treat multiple lesions. The Diamondback 360° can create a lumen that is 100% larger than the actual diameter of the device, for a device-to-lumen ratio of approximately 1.0 to 2.0.

•  Single Insertion Reduces Procedural Time.  Since the physician does not need to insert and remove multiple catheters or clean a plaque collection reservoir to complete the procedure, there is a potential for decreased procedure time.

Our Strategy

Our goal is to be the leading provider of minimally invasive solutions for the treatment of vascular disease. The key elements of our strategy include:

•  Drive Adoption Through Our Direct Sales Organization and Key Physician Leaders.  We expect to continue to drive adoption of the Diamondback 360° through our direct sales force, which targets interventional cardiologists, vascular surgeons and interventional radiologists. We commenced a limited commercial introduction in September 2007 and broadened its commercialization efforts to a full commercial launch in the quarter ended March 31, 2008. As of June 30, 2009, we had a 124 person direct sales force driving product adoption in 556 hospitals in the United States. Over 15,000 Diamondback 360° procedures were completed as of June 30, 2009. As a key element of our strategy, we focus on educating and training physicians on the Diamondback 360° through our direct sales force and during seminars where physician industry leaders discuss case studies and treatment techniques using the Diamondback 360°.

•  Collect Additional Clinical Evidence on Benefits of the Diamondback 360°.  We are focused on using clinical evidence to demonstrate the advantages of our system and drive physician acceptance. We have conducted three clinical trials to demonstrate the safety and efficacy of the Diamondback 360° in treating PAD, involving 207 patients, including our pivotal OASIS trial. In addition, we have initiated two clinically rigorous, randomized post-market feasibility trials to further differentiate the performance of the Diamondback 360° from conventional balloon angioplasty. In both of these studies, the CALCIUM 360° and COMPLIANCE 360°, acute procedural success and device safety will be verified by an independent core lab, and the long-term durability of the procedure will be evaluated.

•  Expand Product Portfolio within the Market for Treatment of Peripheral Arteries.  In addition to the Diamondback 360°, we are expanding our product portfolio. We now offer multiple accessory devices

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designed to complement the use of the Diamondback 360°. Within the past 12 months, we have launched the following products:

•  ViperSlide^tm Lubricant — an exclusive lubricant designed to optimize the smooth operation of the Diamondback 360°

•  ViperSheath^tm Introducer Sheath — 5-7 French kink-resistant and crush-resistant vascular access tools offered in 45 cm and 85 cm lengths

•  ViperTrack^tm Radiopaque Tape — a radiopaque tape to assist in measuring lesion lengths and marking lesion locations

•  ViperCaddy^tm Guide Wire Management — a secure guide wire holder that is easy to use and provides a steady grip on the multiple guide wires used during an interventional procedure.

We are continuing to actively pursue internal product development to further expand our portfolio of PAD treatment solutions.

•  Leverage Technology Platform into Coronary Market.  Based on the excellent clinical performance of the Diamondback 360^o in treating lower extremity PAD, we intend to leverage the device’s capabilities to expand into the interventional coronary market. A coronary application would address a large market opportunity, further leveraging our core technology and expanding its market potential. In 2008, we completed the ORBIT I trial, a 50-patient study in India which investigated the safety of the Diamondback 360^o device in treating calcified coronary artery lesions. Results successfully met both safety and efficacy endpoints. An IDE application was recently submitted to the FDA for ORBIT II, a pivotal trial in the United States to evaluate the safety and effectiveness of the Diamondback 360^o in treating severely calcified coronary lesions.

•  Pursue Strategic Acquisitions and Partnerships.  We have recently entered into agreements with both Invatec, Inc. and Asahi-Intecc, Ltd. In April 2009, we signed a sales agency agreement with Invatec, Inc. to distribute the Invatec balloon catheter line, including the SubMarine Plus^tm PTA Balloon Catheter, the Admiral Xtreme^tm PTA Balloon Catheter and the Amphirion Deep^tm PTA Balloon Catheter. These balloons are typically used at low pressure, if needed, following the restoration of vessel compliance with the Diamondback 360°. In August 2009, we signed an exclusive distribution agreement with Asahi-Intecc, Ltd. to market its peripheral guide wire line in the United States. We offer two Asahi 0.18 wire platforms: the Astato 30 and Treasure 12. The Astato 30 is a high-penetration guide wire specially designed to break through fibrous caps and calcium deposits, and treat long, complex lesions. The Treasure 12 has a one-piece core to provide control, torque performance and tactile feedback to the physician.

In addition to adding to our product portfolio through internal development efforts, we intend to continue to explore the acquisition of other product lines, technologies or companies that may leverage our sales force or complement our strategic objectives. We plan to continue to evaluate distribution agreements, licensing transactions and other strategic partnerships.

Our Product

Components of the Diamondback 360°

The Diamondback 360° consists of a single-use, low-profile catheter that travels over our proprietary ViperWire^tm Guide Wire. The system is used in conjunction with a reusable external control unit.

Catheter.  The catheter consists of:

•  a control handle, which allows precise movement of the crown and predictable crown location;

•  a flexible drive shaft with a diamond grit coated offset crown, which tracks and orbits over the guidewire; and

•  a sheath, which covers the drive shaft and permits delivery of saline or medications to the treatment area.

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The crown is available in two configurations — classic and solid. The classic crown addresses treatment needs in arteries typically below the knee and in more tortuous anatomy, while the solid crown addresses treatment needs in larger arteries typically above the knee. The crown is available in multiple sizes, including 1.25, 1.50, 1.75, 2.00 and 2.25 millimeter diameters. The catheter length is 135 centimeters which addresses procedural approach and target lesion locations both above and below the knee.

ViperWire Guidewire.  The ViperWire, which is located within the catheter, maintains device position in the vessel and is the rail on which the catheter operates. The ViperWire is available in two levels of firmness.

Control Unit.  The control unit incorporates a touch-screen interface on an easily maneuverable, lightweight pole. Using an external air supply, the control unit regulates air pressure to drive the turbine located in the catheter handle to speeds ranging up to 200,000 revolutions per minute. Saline, delivered by a pumping mechanism on the control unit, bathes the device shaft and crown. The constant flow of saline reduces the risk of heat generation.

Technology Overview

The two technologies used in the Diamondback 360° are plaque modification through differential sanding and plaque removal.

Plaque Modification through Differential Sanding.  The Diamondback 360°’s design allows the device to differentiate between compliant and diseased arterial tissue. This property is common with sanding material such as the diamond grit used in the Diamondback 360°. The diamond preferentially engages and sands harder material. The Diamondback 360° also treats soft plaque, which is less compliant than a normal vessel wall. Arterial lesions tend to be harder and stiffer than compliant, undiseased tissue, and they often are fibrotic or calcified. The Diamondback 360° sands the lesion but does not damage more compliant parts of the artery. The mechanism is a function of the centrifugal force generated by the Diamondback 360° as it rotates. As the crown moves outward, the centrifugal force is offset by the counterforce exerted by the arterial wall. If the tissue is compliant, it flexes away, rather than generating an opposing force that would allow the Diamondback 360° to engage and sand the wall. Diseased tissue provides resistance and is able to generate an opposing force that allows the Diamondback 360° to engage and sand the plaque. The sanded plaque is broken down into particles generally smaller than circulating red blood cells that are washed away downstream with the patient’s natural blood flow. Of 36 consecutive experiments that we performed in carbon blocks, animal and cadaver models:

•  93.1% of particles were smaller than a red blood cell, with a 99% confidence interval; and

•  99.3% of particles were smaller than the lumen of the capillaries (which provide the connection between the arterial and venous system), with a 99% confidence interval.

The small particle size minimizes the risk of vascular bed overload, or a saturation of the peripheral vessels with large particles, which may cause slow or reduced blood flow to the foot. We believe that the small size of the particles also allows them to be managed by the body’s natural cleansing of the blood, whereby various types of white blood cells eliminate worn-out cells and other debris in the bloodstream.

Plaque Removal.  The system operates on the principles of centrifugal force. As the speed of the crown’s rotation increases, it creates centrifugal force, which increases the crown’s orbit and presses the diamond grit coated offset crown against the lesion or plaque, removing a small amount of plaque with each orbit. The characteristics of the orbit and the resulting lumen size can be adjusted by modifying three variables:

•  Speed.  An increase in speed creates a larger lumen. Our current system allows the user to choose between three rotational speeds. The fastest speed can result in a device-to-lumen ratio of 1.0 to 2.0, for a lumen that is approximately 100% larger than the actual diameter of the device.

•  Crown Characteristics.  The crown can be designed with various weights (as determined by different materials and density) and coated with diamond grit of various width, height and configurations. Our current system offers the choice between a hollow, lightweight crown and a solid, heavier crown, which could potentially increase the device-to-lumen ratio. We are developing a crown utilizing an alternative material that potentially will enhance the device’s orbit and more effectively modify and remove plaque from the arterial wall.

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•  Drive Shaft Characteristics.  The drive shaft can be designed with various shapes and degrees of rigidity. We are developing a new drive shaft that may enhance the ability to advance the device more smoothly and effectively through tortuous anatomy and challenging lesion morphologies and potentially enhance the device’s performance.

We view the Diamondback 360° as a platform that can be used to develop additional products by adjusting one or more of the speed, crown and shaft variables.

Applications

The Diamondback 360° can be used to treat plaque in multiple anatomic locations.

Below-the-Knee Peripheral Artery Disease.  Arteries below the knee have small diameters and may be diffusely diseased, calcified or both, limiting the effectiveness of traditional devices. The Diamondback 360° is effective in both diffuse and calcified vessels as demonstrated in the OASIS trial, where 94.5% of lesions treated were below the knee.

Above-the-Knee Peripheral Artery Disease.  Plaque in arteries above the knee may also be diffuse, fibrotic and calcific; however, these arteries are longer, straighter and wider than below-the-knee vessels. While effective in difficult-to-treat below-the-knee vessels, and indicated for vessels up to four millimeters in diameter, our product is also being used to treat lesions above the knee. The Millennium Research Group estimates that there will be approximately 258,600 procedures to treat above-the-knee PAD in 2010 and that there will be approximately 71,220 procedures to treat below-the-knee PAD in 2010.

Coronary Artery Disease.  Given the many similarities between peripheral and coronary artery disease, we have developed a modified version of the Diamondback 360° to treat coronary arteries. We have conducted numerous bench studies, four pre-clinical animal studies, and our ORBIT I 50-patient human clinical study to evaluate the Diamondback 360° in coronary artery disease. In the bench studies, we evaluated the system for conformity to specifications and patient safety, and, under conditions of expected clinical use, no safety issues were observed. In three of the animal studies, the system was used to treat a large number of stented and non-stented arterial lesions. The system was able to safely debulk lesions without evidence or observations of significant distal embolization, and the treated vessels in the animal studies showed only minimal to no damage. The fourth animal study evaluated the safety of the system for the treatment of coronary stenosis. There were no device-related adverse events associated with system treatment during this study, with some evidence of injury observed in 17% of the tissue sections analyzed, although 75% of these injuries were minimal or mild. A coronary application would require us to conduct a clinical trial and receive PMA from the FDA. We participated in three pre-IDE meetings with the FDA and completed the human feasibility portion of a coronary trial in the summer of 2008 in India, enrolling 50 patients. The FDA has agreed to accept the data from the India trial to support an IDE submission and we have submitted the IDE based on the results of this trial.

Clinical Trials and Studies for Our Products

We have conducted three clinical trials to demonstrate the safety and efficacy of the Diamondback 360° in treating PAD, enrolling a total of 207 patients in our PAD I and PAD II pilot trials and our pivotal OASIS trial. We have recently completed a retrospective study evaluating the long-term results of 64 patients from the OASIS Trial in order to determine durability of procedure results. In addition, we have also initiated two post-market, randomized feasibility studies to further differentiate the performance of the Diamondback 360° from conventional balloon angioplasty.

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The common metrics used to evaluate the efficacy of plaque removal devices for PAD include:

Metric	Description
Absolute Plaque Reduction	Absolute plaque reduction is the difference between the pre-treatment percent stenosis, or the narrowing of the vessel, and the post-treatment percent stenosis as measured angiographically.
Target Lesion Revascularization	Target lesion revascularization rate, or TLR rate, is the percentage of patients at follow-up who have another peripheral intervention precipitated by their worsening symptoms, such as an angioplasty, stenting or surgery to reopen the treated lesion site.
Ankle Brachial Index	The Ankle Brachial Index, or ABI, is a measurement that is useful to evaluate the adequacy of circulation in the legs and improvement or worsening of leg circulation over time. The ABI is a ratio between the blood pressure in a patient’s ankle and a patient’s arm, with a ratio above 0.9 being normal.

The common metrics used to evaluate the safety of atherectomy devices for PAD include:

Metric	Description
Serious Adverse Events	Serious adverse events, or SAEs, include any experience that is fatal or life-threatening, is permanently disabling, requires or prolongs hospitalization, or requires intervention to prevent permanent impairment or damage. SAEs may or may not be related to the device.
Perforations	Perforations occur when the artery is punctured during atherectomy treatment. Perforations may be nonserious or an SAE depending on the treatment required to repair the perforation.

Inclusion criteria for trials often limit size of lesion and severity of disease, as measured by the Rutherford Class, which utilizes a scale of I to VI, with I being mild and VI being most severe, and the Ankle Brachial Index.

PAD I Feasibility Trial

Our first trial was a two-site, 17-patient feasibility clinical trial in Europe, which we refer to as PAD I, that began in March 2005. Patients enrolled in the trial had lesions that were less than 10 cm in length in arteries between 1.5 mm and 6.0 mm in diameter, with Rutherford Class scores of IV or lower. Patients were evaluated at the time of the procedure and at 30 days following treatment. The purpose of PAD I was to obtain the first human clinical experience and evaluate the safety of the Diamondback 360°. This was determined by estimating the cumulative incidence of patients experiencing one or more SAEs within 30 days post-treatment.

The results of PAD I were presented at the Transcatheter Therapeutics conference, or TCT, in 2005 and published in American Journal of Cardiology. Results confirmed that the Diamondback 360° was safe and established that the Diamondback 360° could be used to treat vessels in the range of 1.5 mm to 4.0 mm, which are found primarily below the knee. Also, PAD I showed that removal of plaque, could be accomplished and the resulting device-to-lumen ratio was approximately 1.0 to 2.0. The SAE rate in PAD I was 6% (one of 17 patients).

PAD II Feasibility Trial

After being granted the CE Mark in May 2005, we began a 66-patient European clinical trial at seven sites, which we refer to as PAD II, in August 2005. All patients had stenosis in vessels below the femoral artery of between

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1.5 mm and 4.0 mm in diameter, with at least 50% blockage. The primary objectives of this study were to evaluate the acute (30 days or less) risk of experiencing an SAE post procedure and provide evidence of device effectiveness. Effectiveness was confirmed angiographically and based on the percentage of absolute plaque reduction.

The PAD II results demonstrated safe and effective debulking in vessels with diameters ranging from 1.5 mm to 4.0 mm with a mean absolute plaque reduction of 55%. The SAE rate in PAD II was 9% (six of 66 patients), which did not differ significantly from existing non-invasive treatment options.

OASIS Pivotal Trial

We received an IDE to begin our pivotal United States trial, OASIS, in September 2005. OASIS was a 124-patient, 20-center, prospective trial that began enrollment in January 2006.

Patients included in the trial had:

•  an ABI of less than 0.9;

•  a Rutherford Class score of V or lower; and

•  treated arteries of between 1.5 mm and 4.0 mm or less in diameter via angiogram measurement, with a well-defined lesion of at least 50% diameter stenosis and lesions of no greater than 10.0 cm in length.

The primary efficacy study endpoint was absolute plaque reduction of the target lesions from baseline to immediately post procedure. The primary safety endpoint was the cumulative incidence of SAEs at 30 days.

In the OASIS trial, 94.5% of lesions treated were below the knee, an area where lesions have traditionally gone untreated until they require bypass surgery or amputation. Of the lesions treated in OASIS, 55% were comprised of calcified plaque which presents a challenge to proper expansion and apposition of balloons and stents, and 48% were diffuse, or greater then 3 cm in length, which typically requires multiple balloon expansions or stent placements. Competing plaque removal devices are often ineffective with these difficult to treat lesions.

The average time of treatment in the OASIS trial was three minutes per lesion, which compares favorably to the treatment time required by other plaque removal devices. We believe physicians using other plaque removal devices require approximately ten to 20 minutes of treatment time to achieve desired results, although treatment times may vary depending upon the nature of the procedure, the condition of the patient and other factors. The following table is a summary of the OASIS trial results:

Item	FDA Target	OASIS Result
Absolute Plaque Reduction	55%	59.4%
SAEs at 30 days	8% mean, with an upper bound of 16%	4.8% mean, device-related; 9.7% mean, overall
TLR	20% or less	2.4%
Perforations	N/A	1 serious perforation
ABI at baseline	N/A	0.68 ± 0.2*
ABI at 30 days	N/A	0.9 ± 0.18*
ABI at 6 months	N/A	0.83 ± 0.23*

* Mean ± Standard Deviation

We submitted our OASIS data and received 510(k) clearance from the FDA for use of the Diamondback 360°, including the initial version of the control unit, with a hollow crown as a therapy for patients with PAD in August 2007. The FDA’s labeling requirements reflected the inclusion criteria for the OASIS trial listed above. We received 510(k) clearances in October 2007 for the updated control unit used with the Diamondback 360° and in November 2007 for the Diamondback 360° with a solid crown. In May 2005, we received the CE mark, allowing for the commercial use of the Diamondback 360° within the European Union; however, our current plans are to focus sales in the United States.

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OASIS Long-Term Study

A retrospective study evaluating the long-term results of 64 patients from the pivotal OASIS trial has been completed. Outcomes were analyzed out to a mean of 29 months and include limb salvage rate, target lesion revascularization rate (TLR) and ankle-brachial index (ABI). TLR, or reintervention in the originally treated lesion, was 13.6%. A 100% limb salvage rate was maintained. ABI scores, a measure of blood flow to the ankle, remained significantly improved. This 29 month data of OASIS patients adds to our confidence in the safety and efficacy of the Diamondback 360°.

Post-Market Feasibility Studies

In June 2009, the first patient was enrolled in the COMPLIANCE 360° clinical trial, the first of two PAD post-market studies scheduled to begin in calendar 2009. This prospective, randomized, multi-center study will evaluate the clinical benefit of modifying plaque to change large vessel compliance above the knee with the Diamondback 360^o. The study compares the performance of the Diamondback 360^o, plus low-pressure balloon inflation, if desired, with that of high-pressure balloon inflation alone. The study calls for enrolling 50 patients at five U.S. medical centers.

Hospital internal review board (IRB) submissions are in progress for the CALCIUM 360^o study, a prospective, randomized, multi-center study, which will compare the effectiveness of the Diamondback 360^o to balloon dilation in treating heavily calcified lesions below the knee. Calcified plaque exists in about 75 percent of lesions below the knee. This study will also enroll 50 patients at five U.S. medical centers.

Sales and Marketing

We market and sell the Diamondback 360° through a direct sales force in the United States. As of June 30, 2009, we had a 124-person direct sales force, including a Vice President of Sales, five clinical specialists, eight associate sales managers, 93 district sales managers, 11 regional sales managers, two sales directors, a director of customer operations, and three customer service specialists. Upon receiving 510(k) clearance from the FDA on August 30, 2007, we began limited commercialization of the Diamondback 360° in September 2007. We commenced our full commercial launch in the quarter ended March 31, 2008. As of June 30, 2009, we were selling the Diamondback 360° in 556 accounts in the United States that had completed an estimated 15,000 procedures.

While we sell directly to hospitals, we have targeted sales and marketing efforts to interventional cardiologists, vascular surgeons and interventional radiologists with experience using similar catheter-based procedures, such as angioplasty, stenting, and cutting or laser atherectomy. Physician referral programs and peer-to-peer education are other key elements of our sales strategy. Patient referrals come from general practitioners, podiatrists, nephrologists and endocrinologists.

We target our marketing efforts to practitioners through physician education, medical conferences, seminars, peer reviewed journals and marketing materials. Our sales and marketing program focuses on:

•  educating physicians regarding the proper use and application of the Diamondback 360°;

•  developing relationships with key opinion leaders; and

•  facilitating regional referral marketing programs.

We are not marketing our products internationally and do not expect to do so in the near future; however, we will continue to evaluate international opportunities.

Research and Development

As of June 30, 2009, we had 29 employees in our research and development department, comprised primarily of scientists, engineers and physicians, all of whom report to our Executive Vice President. Our research and development efforts are focused in the development of products to penetrate our three key target markets:

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below-the-knee, above-the-knee and coronary vessels. Research and development expenses for fiscal 2009, fiscal 2008 and fiscal 2007 were $14.7 million, $16.1 million and $8.4 million, respectively.

Manufacturing

We use internally-manufactured and externally-sourced components to manufacture the Diamondback 360°. Most of the externally-sourced components are available from multiple suppliers; however, a few key components, including the diamond grit coated crown, are single sourced. We assemble the shaft, crown and handle components on-site, and test, pack, seal and label the finished assembly before sending the packaged product to a contract sterilization facility. The sterilization facility sends samples to an independent laboratory to test for sterility. Upon return from the sterilizer, product is held in inventory prior to shipping to our customers.

The current floor plan at our manufacturing facility allows for finished goods of approximately 8,000 units of the Diamondback 360° and for approximately 50 control units. The manufacturing areas, including the shaft manufacturing and the controlled-environment assembly areas, are equipped to accommodate approximately 30,000 units per shift annually.

We are registered with the FDA as a medical device manufacturer. We have opted to maintain quality assurance and quality management certifications to enable us to market our products in the member states of the European Union, the European Free Trade Association and countries that have entered into Mutual Recognition Agreements with the European Union. We are ISO 13485:2003 certified, and our renewal is due by December 2009. During the time of commercialization, we have had two minor instances of recall, involving one single lot of Diamondback 360° devices (eight units), and two boxes of ViperWires (ten wires), related to “Use By” date labeling issues. While these recalls were reported to the FDA, according to regulations, they did not provide a risk to patient safety.

Third-Party Reimbursement and Pricing

Third-party payors, including private insurers, and government insurance programs, such as Medicare and Medicaid, pay for a significant portion of patient care provided in the United States. The single largest payor in the United States is the Medicare program, a federal governmental health insurance program administered by the Centers for Medicare and Medicaid Services, or CMS. Medicare covers certain medical care expenses for eligible elderly and disabled individuals, including a large percentage of the population with PAD who could be treated with the Diamondback 360°. In addition, private insurers often follow the coverage and reimbursement policies of Medicare. Consequently, Medicare’s coverage and reimbursement policies are important to our operations.

CMS has established Medicare reimbursement codes describing atherectomy products and procedures using atherectomy products, and many private insurers follow these policies. We believe that physicians and hospitals that treat PAD with the Diamondback 360° will generally be eligible to receive reimbursement from Medicare and private insurers for the cost of the single-use catheter and the physician’s services.

The continued availability of insurance coverage and reimbursement for newly approved medical devices is uncertain. The commercial success of our products in both domestic and international markets will be dependent on whether third-party coverage and reimbursement is available for patients that use our products. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, they may not continue to provide adequate payment for our products. To position our device for acceptance by third-party payors, we may have to agree to a lower net sales price than we might otherwise charge. The continuing efforts of governmental and commercial third-party payors to contain or reduce the costs of healthcare may limit our revenue.

In some foreign markets, pricing and profitability of medical devices are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar controls. Also, the trends toward managed healthcare in the United States and proposed legislation intended to reduce the cost of government insurance programs could significantly influence the purchase of healthcare services and products and may result in lower prices for our products or the exclusion of our products from reimbursement programs.

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Competition

The medical device industry is highly competitive, subject to rapid change and significantly affected by new product introductions and other activities of industry participants. The Diamondback 360° competes with a variety of other products or devices for the treatment of vascular disease, including stents, balloon angioplasty catheters and atherectomy catheters, as well as products used in vascular surgery. Large competitors in the stent and balloon angioplasty market segments include Abbott Laboratories, Boston Scientific, Cook, Johnson & Johnson and Medtronic. We also compete against manufacturers of atherectomy catheters including, among others, ev3, Spectranetics, Boston Scientific and Pathway Medical Technologies, as well as other manufacturers that may enter the market due to the increasing demand for treatment of vascular disease. Several other companies provide products used by surgeons in peripheral bypass procedures. Other competitors include pharmaceutical companies that manufacture drugs for the treatment of mild to moderate PAD and companies that provide products used by surgeons in peripheral bypass procedures. We are not aware of any competing catheter systems either currently on the market or in development that also use an orbital motion to create lumens larger than the catheter itself.

Because of the size of the peripheral and coronary market opportunities, competitors and potential competitors have historically dedicated significant resources to aggressively promote their products. We believe that the Diamondback 360° competes primarily on the basis of:

•  safety and efficacy;

•  predictable clinical performance;

•  ease of use;

•  price;

•  physician relationships;

•  customer service and support; and

•  adequate third-party reimbursement.

Patents and Intellectual Property

We rely on a combination of patent, copyright and other intellectual property laws, trade secrets, nondisclosure agreements and other measures to protect our proprietary rights. As of August 31, 2009, we held 22 issued U.S. patents and have 23 U.S. patent applications pending, as well as 48 issued or granted foreign patents and 24 foreign patent applications, each of which corresponds to aspects of our U.S. patents and applications. Our issued U.S. patents expire between 2010 and 2027, and our most important patent, U.S. Patent No. 6,494,890, is due to expire in 2017. Our issued patents and patent applications relate primarily to the design and operation of certain interventional atherectomy devices, including the Diamondback 360°. These patents and applications include claims covering key aspects of certain rotational atherectomy devices including the design, manufacture and therapeutic use of certain atherectomy abrasive heads, drive shafts, control systems, handles and couplings. As we continue to research and develop our atherectomy technology, we intend to file additional U.S. and foreign patent applications related to the design, manufacture and therapeutic uses of atherectomy devices. In addition, we hold eight registered U.S. trademarks and have eight U.S., three Canadian and three European trademark applications pending.

We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information and other intellectual property by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from bringing the proprietary rights of third parties to us. We also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.

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Government Regulation of Medical Devices

Governmental authorities in the United States at the federal, state and local levels and in other countries extensively regulate, among other things, the development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import of medical devices such as the Diamondback 360°.

Failure to obtain approval to market our products under development and to meet the ongoing requirements of these regulatory authorities could prevent us from marketing and continuing to market our products.

United States

The Federal Food, Drug, and Cosmetic Act, or FDCA, and the FDA’s implementing regulations govern medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post-market surveillance. Medical devices and their manufacturers are also subject to inspection by the FDA. The FDCA, supplemented by other federal and state laws, also provides civil and criminal penalties for violations of its provisions. We manufacture and market medical devices that are regulated by the FDA, comparable state agencies and regulatory bodies in other countries.

Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require marketing authorization from the FDA prior to distribution. The two primary types of FDA marketing authorization are premarket notification (also called 510(k) clearance) and premarket approval (also called PMA approval). The type of marketing authorization applicable to a device — 510(k) clearance or PMA approval — is generally linked to classification of the device. The FDA classifies medical devices into one of three classes (Class I, II or III) based on the degree of risk FDA determines to be associated with a device and the extent of control deemed necessary to ensure the device’s safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, premarket notification, and adherence to the FDA’s current good manufacturing practice requirements, as reflected in its Quality System Regulation, or QSR. Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or postmarket surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls, and include life-sustaining, life-supporting or implantable devices, and devices not “substantially equivalent” to a device that is already legally marketed.

Most Class I devices and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from FDA. Class I and Class II devices that have not been so exempted are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require PMA approval prior to commercial marketing. The PMA approval process is generally more stringent, time-consuming and expensive than the 510(k) clearance process.

510(k) Clearance.  To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is “substantially equivalent” to a predicate device legally marketed in the United States. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process can exceed 90 days and may extend to a year or more.

After a device has received 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, such as a significant change in the design, materials, method of manufacture or intended use, will require a new 510(k) clearance or PMA approval (if the device as modified is not substantially equivalent to a legally marketed predicate device). The determination as to whether new authorization is needed is initially left to the manufacturer; however, the FDA may review this determination to evaluate the

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regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

We received 510(k) clearance for use of the Diamondback 360° as a therapy in patients with PAD in the United States on August 22, 2007. We received additional 510(k) clearances for the control unit used with the Diamondback 360° on October 25, 2007 and for the solid crown version of the Diamondback 360° on November 9, 2007.

Premarket Approval.  A PMA application requires the payment of significant user fees and must be supported by valid scientific evidence, which typically requires extensive data, including technical, preclinical, clinical and manufacturing data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device. A PMA application must also include a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the FDA’s Quality System Regulations, or QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures.

FDA review of a PMA application is required by statute to take no longer than 180 days, although the process typically takes significantly longer, and may require several years to complete. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

•  the systems may not be safe or effective to the FDA’s satisfaction;

•  the data from preclinical studies and clinical trials may be insufficient to support approval;

•  the manufacturing process or facilities used may not meet applicable requirements; and

•  changes in FDA approval policies or adoption of new regulations may require additional data.

If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the PMA. Even if a PMA application is approved, the FDA may approve the device with an indication that is narrower or more limited than originally sought. The agency can also impose restrictions on the sale, distribution or use of the device as a condition of approval, or impose post approval requirements such as continuing evaluation and periodic reporting on the safety, efficacy and reliability of the device for its intended use.

New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device that is approved through the PMA process. PMA approval supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.

We are currently seeking PMA to use the Diamondback 360° as a therapy in treating patients with coronary artery disease and have submitted an IDE to the FDA.

Clinical Trials.  Clinical trials are almost always required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an IDE to the FDA.

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The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non- significant risk device and eligible for more abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites.

FDA approval of an IDE allows clinical testing to go forward but does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria. With certain exceptions, changes made to an investigational plan after an IDE is approved must be submitted in an IDE supplement and approved by FDA (and by governing institutional review boards when appropriate) prior to implementation.

All clinical trials must be conducted in accordance with regulations and requirements collectively known as good clinical practice. Good clinical practices include the FDA’s IDE regulations, which describe the conduct of clinical trials with medical devices, including the recordkeeping, reporting and monitoring responsibilities of sponsors and investigators, and labeling of investigation devices. They also prohibit promotion, test marketing or commercialization of an investigational device and any representation that such a device is safe or effective for the purposes being investigated. Good clinical practices also include the FDA’s regulations for institutional review board approval and for protection of human subjects (such as informed consent), as well as disclosure of financial interests by clinical investigators.

Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. The commencement or completion of any clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application or clearance of a premarket notification for numerous reasons, including, but not limited to, the following:

•  the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial (or a change to a previously approved protocol or trial that requires approval), or place a clinical trial on hold;

•  patients do not enroll in clinical trials or follow up at the rate expected;

•  patients do not comply with trial protocols or experience greater than expected adverse side effects;

•  institutional review boards and third-party clinical investigators may delay or reject the trial protocol or changes to the trial protocol;

•  third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, investigator agreements, good clinical practices or other FDA requirements;

•  third-party organizations do not perform data collection and analysis in a timely or accurate manner;

•  regulatory inspections of the clinical trials or manufacturing facilities, which may, among other things, require corrective action or suspension or termination of the clinical trials;

•  changes in governmental regulations or administrative actions;

•  the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and

•  the FDA concludes that the trial design is inadequate to demonstrate safety and efficacy.

Continuing Regulation.  After a device is approved and placed in commercial distribution, numerous regulatory requirements continue to apply. These include:

•  establishment registration and device listing upon the commencement of manufacturing;

•  the QSR, which requires manufacturers, including third-party manufacturers, to follow design, testing, control, documentation and other quality assurance procedures during medical device design and manufacturing processes;

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•  labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;

•  medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if malfunctions were to recur;

•  corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections; and

•  product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA caused by the device that may present a risk to health.

In addition, the FDA may require a company to conduct postmarket surveillance studies or order it to establish and maintain a system for tracking its products through the chain of distribution to the patient level.

Failure to comply with applicable regulatory requirements, including those applicable to the conduct of clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:

•  warning letters or untitled letters;

•  fines, injunctions and civil penalties;

•  product recall or seizure;

•  unanticipated expenditures;

•  delays in clearing or approving or refusal to clear or approve products;

•  withdrawal or suspension of FDA approval;

•  orders for physician notification or device repair, replacement or refund;

•  operating restrictions, partial suspension or total shutdown of production or clinical trials; and

•  criminal prosecution.

We and our contract manufacturers, specification developers and suppliers are also required to manufacture our products in compliance with current Good Manufacturing Practice, or GMP, requirements set forth in the QSR.

The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing and record keeping. The FDA enforces the QSR through periodic announced and unannounced inspections that may include the manufacturing facilities of subcontractors. If the FDA believes that we or any of our contract manufacturers or regulated suppliers is not in compliance with these requirements, it can shut down our manufacturing operations, require recall of our products, refuse to clear or approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our business.

Fraud and Abuse

Our operations will be directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the FDCA, federal Anti-Kickback Statute and False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, these laws require us to screen individuals and other companies, suppliers and vendors in order to ensure that they are not “debarred” by the federal government and therefore prohibited from doing business in the healthcare industry.

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The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false claim to, or the knowing use of false statements to obtain payment from, the federal government. Various states have also enacted laws modeled after the federal False Claims Act.

In addition to the laws described above, the Health Insurance Portability and Accountability Act of 1996 created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

Voluntary industry codes, federal guidance documents and a variety of state laws address the tracking and reporting of marketing practices relative to gifts given and other expenditures made to doctors and other healthcare professionals. In addition to impacting our marketing and educational programs, internal business processes will be affected by the numerous legal requirements and regulatory guidance at the state, federal and industry levels.

International Regulation

International sales of medical devices are subject to foreign government regulations, which may vary substantially from country to country. The time required to obtain approval in a foreign country may be longer or shorter than that required for FDA approval and the requirements may differ. For example, the primary regulatory environment in Europe with respect to medical devices is that of the European Union, which includes most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout European Union, although actual implementation of the these directives may vary on a country-by-country basis. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of submission of a design dossier, self-assessment by the manufacturer, a third-party assessment and, review of the design dossier by a “Notified Body.” This third-party assessment generally consists of an audit of the manufacturer’s quality system and manufacturing site, as well as review of the technical documentation used to support application of the CE mark to one’s product and possibly specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. We obtained CE marking approval for sale of the Diamondback 360° in May 2005.

Environmental Regulation

Our operations are subject to regulatory requirements relating to the environment, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of hazardous substances. We are currently classified and licensed as a Very Small Quantity Hazardous Waste Generator within Ramsey County, Minnesota.

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Employees

As of June 30, 2009, we had 239 employees, including 49 employees in manufacturing, 124 employees in sales, 12 employees in marketing, four employees in clinicals, 20 employees in general and administrative, and 30 employees in research and development, all of which are full-time employees. None of our employees are represented by a labor union or parties to a collective bargaining agreement, and we believe that our employee relations are good.

Item 1A.   Risk Factors.

Risks Relating to Our Business and Operations

We have a history of net losses and anticipate that we will continue to incur losses.

We are not profitable and have incurred net losses in each fiscal year since our formation in 1989. In particular, we had net losses of $31.9 million in fiscal 2009, $39.2 million in fiscal 2008, and $15.6 million in fiscal 2007. As of June 30, 2009, we had an accumulated deficit of approximately $127.4 million. We commenced commercial sales of the Diamondback 360° PAD System in September 2007, and our short commercialization experience makes it difficult for us to predict future performance. We also expect to incur significant additional expenses for sales and marketing and manufacturing as we continue to commercialize the Diamondback 360° and additional expenses as we seek to develop and commercialize future versions of the Diamondback 360° and other products. Additionally, we expect that our general and administrative expenses will increase as our business grows and we incur the legal and regulatory costs associated with being a public company. As a result, we expect our operating losses to continue but generally decline as we continue our commercialization activities, develop additional product enhancements, increase manufacturing capacity, and make further regulatory submissions.

We have a limited history selling the Diamondback 360°, which is currently our primary product, and our inability to market this product successfully would have a material adverse effect on our business and financial condition.

Although we also sell a variety of ancillary products, the Diamondback 360° is our primary product and we are largely dependent on it. The Diamondback 360° received 510(k) clearance from the FDA in the United States for use as a therapy in patients with PAD in August 2007. We initiated a limited commercial introduction of the Diamondback 360° in the United States in September 2007 and we therefore have limited experience in the commercial manufacture and marketing of this product. Our ability to generate revenue will depend upon our ability to further successfully commercialize the Diamondback 360° and to develop, manufacture and receive required regulatory clearances and approvals and patient reimbursement for treatment with future versions of the Diamondback 360°. As we continue to commercialize the Diamondback 360°, we will need to expand our sales force to reach our target market. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch. Thus, we may not be able to expand our sales and marketing capabilities on a timely basis or at all. If we are unable to adequately increase these capabilities, we will need to contract with third parties to market and sell the Diamondback 360° and any other products that we may develop. To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services on our behalf, our product revenues could be lower than if we marketed and sold our products on a direct basis. Furthermore, any revenues resulting from co-promotion or other marketing and sales arrangements with other companies will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. Some of these companies may have current products or products under development that compete with ours, and they may have an incentive not to devote sufficient efforts to marketing our products. If we fail to successfully develop, commercialize and market the Diamondback 360° or any future versions of this product that we develop, our business will be materially adversely affected.

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The Diamondback 360° and future products may never achieve broad market acceptance.

The Diamondback 360° and future products we may develop may never gain broad market acceptance among physicians, patients and the medical community. The degree of market acceptance of any of our products will depend on a number of factors, including:

•  the actual and perceived effectiveness and reliability of our products;

•  the prevalence and severity of any adverse patient events involving our products, including infection, perforation or dissection of the artery wall, internal bleeding, limb loss and death;

•  the results of any long-term clinical trials relating to use of our products;

•  the availability, relative cost and perceived advantages and disadvantages of alternative technologies or treatment methods for conditions treated by our systems;

•  the degree to which treatments using our products are approved for reimbursement by public and private insurers;

•  the strength of our marketing and distribution infrastructure; and

•  the level of education and awareness among physicians and hospitals concerning our products.

Failure of the Diamondback 360° to significantly penetrate current or new markets would negatively impact our business, financial condition and results of operations.

If longer-term or more extensive clinical trials performed by us or others indicate that procedures using the Diamondback 360° or any future products are not safe, effective and long lasting, physicians may choose not to use our products. Furthermore, unsatisfactory patient outcomes or injuries could cause negative publicity for our products. Physicians may be slow to adopt our products if they perceive liability risks arising from the use of these products. It is also possible that as our products become more widely used, latent defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If the Diamondback 360° and our future products do not achieve an adequate level of acceptance by physicians, patients and the medical community, our overall business and profitability would be harmed.

Our future growth depends on physician adoption of the Diamondback 360°, which requires physicians to change their screening and referral practices.

We believe that we must educate physicians to change their screening and referral practices. For example, although there is a significant correlation between PAD and coronary artery disease, many physicians do not routinely screen for PAD while screening for coronary artery disease. We target our sales efforts to interventional cardiologists, vascular surgeons and interventional radiologists because they are often the primary care physicians diagnosing and treating both coronary artery disease and PAD. However, the initial point of contact for many patients may be general practitioners, podiatrists, nephrologists and endocrinologists, each of whom commonly treats patients experiencing complications resulting from PAD. If we do not educate referring physicians about PAD in general and the existence of the Diamondback 360° in particular, they may not refer patients to interventional cardiologists, vascular surgeons or interventional radiologists for the procedure using the Diamondback 360°, and those patients may instead be surgically treated or treated with an alternative interventional procedure. If we are not successful in educating physicians about screening for PAD or referral opportunities, our ability to increase our revenue may be impaired.

Our customers may not be able to achieve adequate reimbursement for using the Diamondback 360°, which could affect the acceptance of our product and cause our business to suffer.

The availability of insurance coverage and reimbursement for newly approved medical devices and procedures is uncertain. The commercial success of our products is substantially dependent on whether third-party insurance coverage and reimbursement for the use of such products and related services are available. We expect the Diamondback 360° to generally be purchased by hospitals and other providers who will then seek reimbursement from various public and private third-party payors, such as Medicare, Medicaid and private insurers, for the services

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provided to patients. We can give no assurance that these third-party payors will provide adequate reimbursement for use of the Diamondback 360° to permit hospitals and doctors to consider the product cost-effective for patients requiring PAD treatment, or that current reimbursement levels for the Diamondback 360° will continue. In addition, the overall amount of reimbursement available for PAD treatment could decrease in the future. Failure by hospitals and other users of our product to obtain sufficient reimbursement could cause our business to suffer.

Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement, and, as a result, they may not cover or provide adequate payment for use of the Diamondback 360°. In order to position the Diamondback 360° for acceptance by third-party payors, we may have to agree to lower prices than we might otherwise charge. The continuing efforts of governmental and commercial third-party payors to contain or reduce the costs of healthcare may limit our revenue.

We expect that there will continue to be federal and state proposals for governmental controls over healthcare in the United States. Governmental and private sector payors have instituted initiatives to limit the growth of healthcare costs using, for example, price regulation or controls and competitive pricing programs. Some third-party payors also require demonstrated superiority, on the basis of randomized clinical trials, or pre-approval of coverage, for new or innovative devices or procedures before they will reimburse healthcare providers who use such devices or procedures. Also, the trend toward managed healthcare in the United States and proposed legislation intended to reduce the cost of government insurance programs could significantly influence the purchase of healthcare services and products and may result in necessary price reductions for our products or the exclusion of our products from reimbursement programs. It is uncertain whether the Diamondback 360° or any future products we may develop will be viewed as sufficiently cost-effective to warrant adequate coverage and reimbursement levels.

If third-party coverage and reimbursement for the Diamondback 360° is limited or not available, the acceptance of the Diamondback 360° and, consequently, our business will be substantially harmed.

Healthcare reform legislation could adversely affect our revenue and financial condition.

In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs. Recently, President Obama and members of Congress have proposed significant reforms to the U.S. healthcare system. Both the U.S. Senate and House of Representatives have conducted hearings about U.S. healthcare reform. The Obama administration’s fiscal year 2010 budget included proposals to limit Medicare payments and increase taxes. In addition, members of Congress have proposed a single-payer healthcare system, a government health insurance option to compete with private plans and other expanded public healthcare measures. The ultimate content or timing of any future healthcare reform legislation, and its impact on us, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our financial condition and results of operations.

We have limited data and experience regarding the safety and efficacy of the Diamondback 360°. Any long-term data that is generated may not be positive or consistent with our limited short-term data, which would affect market acceptance of this product.

Our success depends on the acceptance of the Diamondback 360° by the medical community as safe and effective. Because our technology is relatively new in the treatment of PAD, we have performed clinical trials only with limited patient populations. The long-term effects of using the Diamondback 360° in a large number of patients are not known and the results of short-term clinical use of the Diamondback 360° do not necessarily predict long-term clinical benefit or reveal long-term adverse effects. For example, we do not have sufficient experience with the Diamondback 360° to evaluate its relative effectiveness in different plaque morphologies, including hard, calcified lesions and soft, non-calcified lesions. If the results obtained from any future clinical trials or clinical or

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commercial experience indicate that the Diamondback 360° is not as safe or effective as other treatment options or as current short-term data would suggest, adoption of this product may suffer and our business would be harmed.

Even if we believe that the data collected from clinical trials or clinical experience indicate positive results, each physician’s actual experience with our device will vary. Clinical trials conducted with the Diamondback 360° have involved procedures performed by physicians who are very technically proficient. Consequently, both short and long-term results reported in these studies may be significantly more favorable than typical results achieved by physicians, which could negatively impact market acceptance of the Diamondback 360°.

We face significant competition and may be unable to sell the Diamondback 360° at profitable levels.

We compete against very large and well-known stent and balloon angioplasty device manufacturers, including Abbott Laboratories, Boston Scientific, Cook, Johnson & Johnson and Medtronic. We may have difficulty competing effectively with these competitors because of their well-established positions in the marketplace, significant financial and human capital resources, established reputations and worldwide distribution channels. We also compete against manufacturers of atherectomy catheters including, among others, ev3, Spectranetics, Boston Scientific and Pathway Medical Technologies, as well as other manufacturers that may enter the market due to the increasing demand for treatment of vascular disease. Several other companies provide products used by surgeons in peripheral bypass procedures. Other competitors include pharmaceutical companies that manufacture drugs for the treatment of mild to moderate PAD and companies that provide products used by surgeons in peripheral bypass procedures.

Our competitors may:

•  develop and patent processes or products earlier than we will;

•  obtain regulatory clearances or approvals for competing medical device products more rapidly than we will;

•  market their products more effectively than we will; or

•  develop more effective or less expensive products or technologies that render our technology or products obsolete or non-competitive.

We have encountered and expect to continue to encounter potential customers who, due to existing relationships with our competitors, are committed to or prefer the products offered by these competitors. If we are unable to compete successfully, our revenue will suffer. Increased competition might lead to price reductions and other concessions that might adversely affect our operating results. Competitive pressures may decrease the demand for our products and could adversely affect our financial results.

Our ability to compete depends on our ability to innovate successfully. If our competitors demonstrate the increased safety or efficacy of their products as compared to ours, our revenue may decline.

The market for medical devices is highly competitive, dynamic and marked by rapid and substantial technological development and product innovations. Our ability to compete depends on our ability to innovate successfully, and there are few barriers that would prevent new entrants or existing competitors from developing products that compete directly with our products. Demand for the Diamondback 360° could be diminished by equivalent or superior products and technologies offered by competitors. Our competitors may produce more advanced products than ours or demonstrate superior safety and efficacy of their products. If we are unable to innovate successfully, the Diamondback 360° could become obsolete and our revenue would decline as our customers purchase competitor products.

We have limited commercial manufacturing experience and could experience difficulty in producing the Diamondback 360° or will need to depend on third parties to manufacture the product.

We have limited experience in commercially manufacturing the Diamondback 360° and have no experience manufacturing this product in the volume that we anticipate will be required if we achieve planned levels of commercial sales. As a result, we may not be able to develop and implement efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture the Diamondback 360° or future products in

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significant volumes, while meeting the legal, regulatory, quality, price, durability, engineering, design and production standards required to market our products successfully. If we fail to develop and implement these manufacturing capabilities and processes, we may be unable to profitably commercialize the Diamondback 360° and any future products we may develop because the per unit cost of our products is highly dependent upon production volumes and the level of automation in our manufacturing processes. There are technical challenges to increasing manufacturing capacity, including equipment design and automation capabilities, material procurement, problems with production yields and quality control and assurance. Increasing our manufacturing capacity will require that we invest substantial additional funds and hire and retain additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase in manufacturing capacity in a timely manner or at all. If we are unable to manufacture a sufficient supply of our products, maintain control over expenses or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand and our business will suffer.

The forecasts of demand we use to determine order quantities and lead times for components purchased from outside suppliers may be incorrect. Lead times for components may vary significantly depending on the type of component, the size of the order, time required to fabricate and test the components, specific supplier requirements and current market demand for the components and subassemblies. Failure to obtain required components or subassemblies when needed and at a reasonable cost would adversely affect our business.

In addition, we may in the future need to depend upon third parties to manufacture the Diamondback 360° and future products. We also cannot assure you that any third-party contract manufacturers will have the ability to produce the quantities of our products needed for development or commercial sales or will be willing to do so at prices that allow the products to compete successfully in the market. Additionally, we can give no assurance that even if we do contract with third-party manufacturers for production that these manufacturers will not experience manufacturing difficulties or experience quality or regulatory issues. Any difficulties in locating and hiring third-party manufacturers, or in the ability of third-party manufacturers to supply quantities of our products at the times and in the quantities we need, could have a material adverse effect on our business.

We depend upon third-party suppliers, including single source suppliers to us and our customers, making us vulnerable to supply problems and price fluctuations.

We rely on third-party suppliers to provide us with certain components of our products and to provide key components or supplies to our customers for use with our products. We rely on single source suppliers for the components of the Diamondback 360°. We purchase components from these suppliers on a purchase order basis and carry only limited levels of inventory for these components. If we underestimate our requirements, we may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and loss of revenue. We depend on these suppliers to provide us and our customers with materials in a timely manner that meet ours and their quality, quantity and cost requirements. These suppliers may encounter problems during manufacturing for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems, and environmental factors, any of which could delay or impede their ability to meet our demand and our customers’ demand. Our reliance on these outside suppliers also subjects us to other risks that could harm our business, including:

•  interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;

•  delays in product shipments resulting from defects, reliability issues or changes in components from suppliers;

•  price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;

•  our suppliers may make errors in manufacturing components, which could negatively affect the efficacy or safety of our products or cause delays in shipment of our products;

•  our suppliers may discontinue production of components, which could significantly delay our production and sales and impair operating margins;

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•  we and our customers may not be able to obtain adequate supplies in a timely manner or on commercially acceptable terms;

•  we and our customers may have difficulty locating and qualifying alternative suppliers for ours and their sole-source supplies;

•  switching components may require product redesign and new regulatory submissions, either of which could significantly delay production and sales;

•  we may experience production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

•  our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver components to us or our customers in a timely manner; and

•  our suppliers may encounter financial hardships unrelated to us or our customers’ demand for components or other products, which could inhibit their ability to fulfill orders and meet requirements.

Other than existing, unfulfilled purchase obligations, our suppliers have no contractual obligations to supply us with, and we are not contractually obligated to purchase from them, any of our supplies. Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our products would limit our ability to manufacture our products and could have a material adverse effect on our business, financial condition and results of operations. We have no reason to believe that any of our current suppliers could not be replaced if they were unable to deliver components to us in a timely manner or at an acceptable price and level of quality. However, if we lost one of these suppliers and were unable to obtain an alternate source on a timely basis or on terms acceptable to us, our production schedules could be delayed, our margins could be negatively impacted, and we could fail to meet our customers’ demand. Our customers rely upon our ability to meet committed delivery dates and any disruption in the supply of key components would adversely affect our ability to meet these dates and could result in legal action by our customers, cause us to lose customers or harm our ability to attract new customers, any of which could decrease our revenue and negatively impact our growth. In addition, to the extent that our suppliers use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable materials or components from alternative sources.

Manufacturing operations are often faced with a supplier’s decision to discontinue manufacturing a component, which may force us or our customers to make last time purchases, qualify a substitute part, or make a design change which may divert engineering time away from the development of new products.

We will need to increase the size of our organization and we may experience difficulties managing growth. If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be adversely affected.

The growth we may experience in the future will provide challenges to our organization, requiring us to rapidly expand our sales and marketing personnel and manufacturing operations. Our sales and marketing force has increased from six employees on January 1, 2007 to 136 employees on June 30, 2009, and we expect to continue to grow our sales and marketing force. We also expect to significantly expand our manufacturing operations to meet anticipated growth in demand for our products. Rapid expansion in personnel means that less experienced people may be producing and selling our product, which could result in unanticipated costs and disruptions to our operations. If we cannot scale and manage our business appropriately, our anticipated growth may be impaired and our financial results will suffer.

We anticipate future losses and may require additional financing, and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs or commercialization efforts.

We anticipate future losses and therefore may be dependent on additional financing to execute our business plan. Although we expect to achieve our first profitable quarter during fiscal year 2011, our plans for expansion may

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still require additional financing. In particular, we may require additional capital in order to continue to conduct the research and development and obtain regulatory clearances and approvals necessary to bring any future products to market and to establish effective marketing and sales capabilities for existing and future products. Our operating plan may change, and we may need additional funds sooner than anticipated to meet our operational needs and capital requirements for product development, clinical trials and commercialization. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may terminate or delay the development of one or more of our products, or delay establishment of sales and marketing capabilities or other activities necessary to commercialize our products.

Our future capital requirements will depend on many factors, including:

•  the costs of expanding our sales and marketing infrastructure and our manufacturing operations;

•  the degree of success we experience in commercializing the Diamondback 360°;

•  the number and types of future products we develop and commercialize;

•  the costs, timing and outcomes of regulatory reviews associated with our future product candidates;

•  the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and

•  the extent and scope of our general and administrative expenses.

Raising additional capital through debt financing may restrict our operations.

To the extent that we raise additional capital through debt financing, the terms may include provisions that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could adversely affect our ability to achieve our product development and commercialization goals and have a material adverse effect on our business, financial condition and results of operations.

We do not intend to market the Diamondback 360° internationally in the near future, which will limit our potential revenue from this product.

As a part of our product development and regulatory strategy, we do not intend to market the Diamondback 360° internationally in the near future in order to focus our resources and efforts on the U.S. market, as international efforts would require substantial additional sales and marketing, regulatory and personnel expenses. Our decision to market this product only in the United States will limit our ability to reach all of our potential markets and will limit our potential sources of revenue. In addition, our competitors will have an opportunity to further penetrate and achieve market share abroad until such time, if ever, that we market the Diamondback 360° or other products internationally.

We are dependent on our senior management team and scientific personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success.

We are highly dependent on our senior management, especially David L. Martin, our President and Chief Executive Officer. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including scientists, clinicians, engineers and other highly skilled personnel and to integrate current and additional personnel in all departments. Competition for senior management personnel, as well as scientists, clinical and regulatory specialists, engineers and sales personnel, is intense and we may not be able to retain our personnel. The loss of members of our senior management, scientists, clinical and regulatory specialists, engineers and sales personnel could prevent us from achieving our objectives of continuing to grow the company. The loss of a member of our senior management or professional staff would require the remaining senior executive officers to divert immediate and substantial attention to seeking a replacement. In particular, we expect to substantially increase the size of our sales force, which will require management’s attention. In that regard, ev3 Inc., ev3 Endovascular, Inc., and FoxHollow Technologies, Inc. have brought an action against us that, if successful,

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could limit our ability to retain the services of certain sales personnel that were formerly employed by those companies and make it more difficult to recruit and hire such sales and other personnel in the future. We do not carry key person life insurance on any of our employees.

We may incur significant costs due to the application of Section 409A of the Internal Revenue Code.

The estimated fair value of the common stock underlying our stock options was originally estimated in good faith by our board of directors based upon the best information available regarding the company on the dates of grant, including financing activity, development of our business, the FDA process and launch of our product, the initial public offering process and our financial results. During the fiscal years ended June 30, 2007 and June 30, 2008, we did not obtain valuations from an independent valuation firm contemporaneously with each option grant date. As further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgments and Estimates,” we hired an independent valuation firm to determine the estimated fair value of our common stock for financial reporting purposes as of various dates, including June 29, 2007, September 30, 2007, December 31, 2007, March 31, 2008 and June 30, 2008. Our board considered these estimates when estimating the fair market value of our common stock on each option grant date that followed the board’s receipt of an estimate from the valuation firm, but certain grants were later deemed to have been made at less than fair market value when such valuation estimates were retrospectively applied. With respect to options granted from June 12, 2007 through February 14, 2008, the estimated fair value of the common stock determined by the independent valuation firm was higher than the exercise price of stock options we had previously granted at or near such dates by a weighted average per share amount of approximately $0.79.

If the Internal Revenue Service were to determine that the fair market value of our common stock was higher than the exercise price of any of our stock options as of the grant date of such options, either in accordance with our financial reporting valuations or under a different methodology, then we and our optionholders may experience adverse tax consequences under Section 409A of the Internal Revenue Code and related provisions, including the imposition of future tax liabilities and penalties based on the spread between the fair market value and the exercise price at the time of option vesting and on future increases (if any) in the value of our stock or the company after the vesting date. These liabilities may be significant. The imposition of such liabilities may affect a significant portion of our employees and could adversely affect employee morale and our business operations.

We may be subject to damages or other remedies as a result of pending litigation.

On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and FoxHollow Technologies, Inc. filed a complaint against us and certain of our employees alleging, among other things, misappropriation and use of their confidential information by us and certain of our employees who were formerly employees of FoxHollow. The complaint also alleges that certain of our employees violated their employment agreements with FoxHollow requiring them to refrain from soliciting FoxHollow employees. There can be no assurance as to the outcome of this litigation. We are defending this litigation vigorously. If we are not successful in defending it, we could be required to pay substantial damages and be subject to equitable relief that could include a requirement that we terminate the employment of certain employees, including certain key sales personnel who were formerly employed by FoxHollow. In any event, the defense of this litigation, regardless of the outcome, could result in substantial legal costs and diversion of our management’s time and efforts from the operation of our business. If the plaintiffs in this litigation are successful, it could have a material adverse effect on our business, operations and financial condition.

Risks Related to Government Regulation

Our ability to market the Diamondback 360° in the United States is limited to use as a therapy in patients with PAD, and if we want to expand our marketing claims, we will need to file for additional FDA clearances or approvals and conduct further clinical trials, which would be expensive and time-consuming and may not be successful.

The Diamondback 360° received FDA 510(k) clearance in the United States for use as a therapy in patients with PAD. This general clearance restricts our ability to market or advertise the Diamondback 360° beyond this use and could affect our growth. While off-label uses of medical devices are common and the FDA does not regulate

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physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications regarding such off-label use. We will not actively promote or advertise the Diamondback 360° for off-label uses. In addition, we cannot make comparative claims regarding the use of the Diamondback 360° against any alternative treatments without conducting head-to-head comparative clinical trials, which would be expensive and time consuming. If our promotional activities fail to comply with the FDA’s regulations or guidelines, we may be subject to FDA warnings or enforcement action.

If we determine to market the Diamondback 360° in the United States for other uses, for instance, use in the coronary arteries, we would need to conduct further clinical trials and obtain premarket approval from the FDA. In 2008, we completed the ORBIT I trial, a 50-patient study in India which investigated the safety of the Diamondback 360^o in treating calcified coronary artery lesions, and results successfully met both safety and efficacy endpoints. An investigational device exemption, or IDE application was recently submitted to the FDA for ORBIT II, a pivotal trial in the United States to evaluate the safety and effectiveness of the Diamondback 360^o in treating severely calcified coronary lesions. Clinical trials are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. Before we may begin clinical trials, we must submit and obtain approval for an IDE, that describes, among other things, the manufacture of, and controls for, the device and a complete investigational plan. Clinical trials generally involve a substantial number of patients in a multi-year study. We may encounter problems with our clinical trials, and any of those problems could cause us or the FDA to suspend those trials, or delay the analysis of the data derived from them.

A number of events or factors, including any of the following, could delay the completion of our clinical trials in the future and negatively impact our ability to obtain FDA clearance or approval for, and to introduce, a particular future product:

•  failure to obtain approval from the FDA or any foreign regulatory authority to commence an investigational study;

•  conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials;

•  delays in obtaining or maintaining required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials;

•  insufficient supply of our future product candidates or other materials necessary to conduct our clinical trials;

•  difficulties in enrolling patients in our clinical trials;

•  negative or inconclusive results from clinical trials, results that are inconsistent with earlier results, or the likelihood that the part of the human anatomy involved is more prone to serious adverse events, necessitating additional clinical trials;

•  serious or unexpected side effects experienced by patients who use our future product candidates; or

•  failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations in a timely manner.

Our clinical trials may not begin as planned, may need to be redesigned, and may not be completed on schedule, if at all. Delays in our clinical trials may result in increased development costs for our future product candidates, which could cause our stock price to decline and limit our ability to obtain additional financing. In addition, if one or more of our clinical trials is delayed, competitors may be able to bring products to market before we do, and the commercial viability of our future product candidates could be significantly reduced.

Even if we believe that a clinical trial demonstrates promising safety and efficacy data, such results may not be sufficient to obtain FDA clearance or approval. Without conducting and successfully completing further clinical trials, our ability to market the Diamondback 360° will be limited and our revenue expectations may not be realized.

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We may become subject to regulatory actions if we are found to have promoted the Diamondback 360° for unapproved uses.

If the FDA determines that our promotional materials, training or other activities constitute promotion of our product for an unapproved use, it could request that we cease use of or modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of an untitled or warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional, training or other materials to constitute promotion of our product for an unapproved or uncleared use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

The Diamondback 360° may in the future be subject to product recalls that could harm our reputation.

The FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design or labeling defects. During the time of commercialization, we have had two minor instances of recall, involving one single lot of Diamondback 360° devices (eight units), and two boxes of ViperWires (ten wires), related to “Use By” date labeling issues. Any additional recalls of our product would divert managerial and financial resources, harm our reputation with customers and have an adverse effect on our financial condition and results of operations.

If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems, our products could be subject to restrictions or withdrawal from the market.

The Diamondback 360° and related manufacturing processes, clinical data, adverse events, recalls or corrections and promotional activities, are subject to extensive regulation by the FDA and other regulatory bodies. In particular, we and our component suppliers are required to comply with the FDA’s Quality System Regulation, or QSR, and other regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain marketing clearance or approval. The FDA enforces the QSR through announced and unannounced inspections. We and certain of our third-party manufacturers have not yet been inspected by the FDA. Failure by us or one of our component suppliers to comply with the QSR requirements or other statutes and regulations administered by the FDA and other regulatory bodies, or failure to adequately respond to any observations, could result in, among other things:

•  warning or other letters from the FDA;

•  fines, injunctions and civil penalties;

•  product recall or seizure;

•  unanticipated expenditures;

•  delays in clearing or approving or refusal to clear or approve products;

•  withdrawal or suspension of approval or clearance by the FDA or other regulatory bodies;

•  orders for physician notification or device repair, replacement or refund;

•  operating restrictions, partial suspension or total shutdown of production or clinical trials; and

•  criminal prosecution.

If any of these actions were to occur, it would harm our reputation and cause our product sales to suffer.

Furthermore, any modification to a device that has received FDA clearance or approval that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, design or manufacture, requires a new clearance or approval from the FDA. If the FDA disagrees with any determination by us that new

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clearance or approval is not required, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval. In addition, we could be subject to significant regulatory fines or penalties.

Regulatory clearance or approval of a product may also require costly post-marketing testing or surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as the QSR, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

The use, misuse or off-label use of the Diamondback 360° may increase the risk of injury, which could result in product liability claims and damage to our business.

The use, misuse or off-label use of the Diamondback 360° may result in injuries that lead to product liability suits, which could be costly to our business. The Diamondback 360° is not FDA-cleared or approved for treatment of the carotid arteries, the coronary arteries, within bypass grafts or stents, of thrombus or where the lesion cannot be crossed with a guidewire or a significant dissection is present at the lesion site. We cannot prevent a physician from using the Diamondback 360° for off-label applications. The application of the Diamondback 360° to coronary or carotid arteries, as opposed to peripheral arteries, is more likely to result in complications that have serious consequences, including heart attacks or strokes which could result, in certain circumstances, in death.

We will face risks related to product liability claims, which could exceed the limits of available insurance coverage.

If the Diamondback 360° is defectively designed, manufactured or labeled, contains defective components or is misused, we may become subject to costly litigation by our customers or their patients. The medical device industry is subject to substantial litigation, and we face an inherent risk of exposure to product liability claims in the event that the use of our product results or is alleged to have resulted in adverse effects to a patient. In most jurisdictions, producers of medical products are strictly liable for personal injuries caused by medical devices. We may be subject in the future to claims for personal injuries arising out of the use of our products. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. A product liability claim against us, even if ultimately unsuccessful, could have a material adverse effect on our financial condition, results of operations and reputation. While we have product liability insurance coverage for our products and intend to maintain such insurance coverage in the future, there can be no assurance that we will be adequately protected from the claims that will be brought against us.

Compliance with environmental laws and regulations could be expensive. Failure to comply with environmental laws and regulations could subject us to significant liability.

Our operations are subject to regulatory requirements relating to the environment, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of hazardous substances. Although we are currently classified as a Very Small Quantity Hazardous Waste Generator within Ramsey County, Minnesota, we cannot ensure that we will maintain our licensed status as such, nor can we ensure that we will not incur material costs or liability in connection with our operations, or that our past or future operations will not result in claims or injury by employees or the public. Environmental laws and regulations could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations.

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We and our distributors must comply with various federal and state anti-kickback, self-referral, false claims and similar laws, any breach of which could cause a material adverse effect on our business, financial condition and results of operations.

Our relationships with physicians, hospitals and the marketers of our products are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws.

Healthcare fraud and abuse laws are complex, and even minor, inadvertent violations can give rise to claims that the relevant law has been violated. If our operations are found to be in violation of these laws, we, as well as our employees, may be subject to penalties, including monetary fines, civil and criminal penalties, exclusion from federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE (the healthcare system administered by or on behalf of the U.S. Department of Defense for uniformed services beneficiaries, including active duty and their dependents, retirees and their dependents), and forfeiture of amounts collected in violation of such prohibitions. Individual employees may need to defend such suits on behalf of us or themselves, which could lead to significant disruption in our present and future operations. Certain states in which we intend to market our products have similar fraud and abuse laws, imposing substantial penalties for violations. Any government investigation or a finding of a violation of these laws would likely have a material adverse effect on our business, financial condition and results of operations.

Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid or other government-sponsored healthcare programs. In addition, the cost of non-compliance with these laws could be substantial, since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for non-compliance.

We have entered into consulting agreements with physicians, including some who may make referrals to us or order our product. One of these physicians was one of 20 principal investigators in our OASIS clinical trial at the same time he was acting as a paid consultant for us. In addition, some of these physicians own our stock, which they purchased in arm’s-length transactions on terms identical to those offered to non-physicians, or received stock options from us as consideration for consulting services performed by them. We believe that these consulting agreements and equity investments by physicians are common practice in our industry, and while these transactions were structured with the intention of complying with all applicable laws, including the federal ban on physician self-referrals, commonly known as the “Stark Law,” state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties, or prohibit us from accepting referrals from these physicians. Because our strategy relies on the involvement of physicians who consult with us on the design of our product, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with our physician advisors who refer or order our product to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of our clinical advisors.

The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.

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We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Global Market, have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and made some activities more time consuming and costly. While we have developed and instituted a corporate compliance program based on what we believe are the current appropriate best practices and continue to update the program in response to newly implemented or changing regulatory requirements, we cannot ensure that it is or will be in compliance with all potentially applicable regulations.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and, at certain times, our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, when required, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.

These obligations divert management’s time and attention away from our business. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable. If we fail to staff our accounting and finance function adequately or maintain internal controls adequate to meet the demands that are placed upon us a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately or in a timely manner, and our business and stock price may suffer. The costs of being a public company, as well as diversion of management’s time and attention, may have a material adverse effect on our business, financial condition and results of operations.

Additionally, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, board committees or as executive officers.

Risks Relating to Our Intellectual Property

Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.

Our success and ability to compete depends, in part, upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patents, copyrights and trademarks, as well as trade secrets and nondisclosure agreements, to protect our intellectual property. As of August 31, 2009, we had a portfolio of 22 issued U.S. patents and 48 issued or granted non-U.S. patents covering aspects of our core technology, which expire between 2010 and 2027. However, our issued patents and related intellectual property may not be adequate to protect us or permit us to gain or maintain a competitive advantage. The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in litigation or proceedings before the U.S. Patent and Trademark Office, or the USPTO. In addition, our pending patent applications include claims to numerous important aspects of our products under development that are not currently protected by any of our issued patents. We cannot assure you that any of our pending patent applications

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will result in the issuance of patents to us. The USPTO may deny or require significant narrowing of claims in our pending patent applications. Even if any patents are issued as a result of pending patent applications, they may not provide us with significant commercial protection or be issued in a form that is advantageous to us. Proceedings before the USPTO could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. Further, if any patents we obtain or license are deemed invalid and unenforceable, or have their scope narrowed, it could impact our ability to commercialize or license our technology.

Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. For instance, the U.S. Supreme Court has recently modified some tests used by the USPTO in granting patents during the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, the USPTO has adopted new rules of practice (the application of which has been enjoined as a result of litigation) that limit the number of claims that may be filed in a patent application and the number of continuation or continuation-in-part applications that may be filed. These new rules may result in patent applicants being unable to secure all of the rights that they would otherwise have been entitled to in the absence of the new rules and, therefore, may negatively affect our ability to obtain comprehensive patent coverage. The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, if at all.

To protect our proprietary rights, we may, in the future, need to assert claims of infringement against third parties to protect our intellectual property. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our financial condition, reputation and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, invalid or unenforceable, and could order us to pay third-party attorneys’ fees. Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. In addition, we may not have sufficient resources to litigate, enforce or defend our intellectual property rights. Additionally, third parties may be able to design around our patents.

We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. In this regard, we seek to protect our proprietary information and other intellectual property by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from bringing the proprietary rights of third parties to us. We also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials. However, trade secrets are difficult to protect. We cannot provide any assurance that employees and third parties will abide by the confidentiality or assignment terms of these agreements, or that we will be effective securing necessary assignments from these third parties. Despite measures taken to protect our intellectual property, unauthorized parties might copy aspects of our products or obtain and use information that we regard as proprietary. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Finally, others may independently discover trade secrets and proprietary information, and this would prevent us from asserting any such trade secret rights against these parties.

Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.

Claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from commercializing products, require us to obtain licenses from third parties or require us to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.

The medical technology industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. The likelihood that patent infringement or misappropriation claims

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may be brought against us increases as we achieve more visibility in the marketplace and introduce products to market. All issued patents are entitled to a presumption of validity under the laws of the United States. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our products are covered by U.S. or foreign patents held by them. We are aware of numerous patents issued to third parties that relate to the manufacture and use of medical devices for interventional cardiology. The owners of each of these patents could assert that the manufacture, use or sale of our products infringes one or more claims of their patents. Because patent applications may take years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that we infringe. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings can be substantial, and it is possible that such efforts would be unsuccessful if unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. There could also be existing patents of which we are unaware that one or more aspects of its technology may inadvertently infringe. In some cases, litigation may be threatened or brought by a patent-holding company or other adverse patent owner who has no relevant product revenues and against whom our patents may provide little or no deterrence.

Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. 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. If the relevant patents were upheld in litigation as valid and enforceable and we were found to infringe, we could be prohibited from commercializing any infringing products unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign any infringing products to avoid infringement. Further, any redesign may not receive FDA clearance or approval or may not receive such clearance or approval in a timely manner. Any such license could impair operating margins on future product revenue. A court could also order us to pay compensatory damages for such infringement, and potentially treble damages, plus prejudgment interest and third-party attorneys’ fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing infringing products, or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a significant adverse impact on our business.

Risks Relating to Ownership of Our Common Stock

Until recently there has not been a public market for our common stock and our stock price is expected to be volatile and you may not be able to resell your shares.

The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, medical device, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

•  our ability to develop, obtain regulatory clearances or approvals for and market new and enhanced products on a timely basis;

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•  changes in governmental regulations or in the status of our regulatory approvals, clearances or future applications;

•  our announcements or our competitors’ announcements regarding new products, product enhancements, significant contracts, number of hospitals and physicians using our products, acquisitions or strategic investments;

•  announcements of technological or medical innovations for the treatment of vascular disease;

•  delays or other problems with the manufacturing of the Diamondback 360°;

•  volume and timing of orders for the Diamondback 360° and any future products, if and when commercialized;

•  changes in the availability of third-party reimbursement in the United States and other countries;

•  quarterly variations in our or our competitors’ results of operations;

•  changes in earnings estimates or recommendations by securities analysts who cover our common stock;

•  failure to meet estimates or recommendations by securities analysts who cover our stock;

•  changes in healthcare policy;

•  product liability claims or other litigation;

•  product recalls;

•  accusations that we have violated a law or regulation;

•  sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

•  disputes or other developments with respect to intellectual property rights;

•  changes in accounting principles; and

•  general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

In addition, if securities class action litigation is initiated against us, we would incur substantial costs and our management’s attention would be diverted from operations. All of these factors could cause the price of our stock to decline, and you may lose some or all of your investment.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against such company. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

We do not expect to pay cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment in the company.

We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate that we will pay cash dividends in the future. As a result, appreciation of the price of our common stock is the only potential source of return to stockholders. Investors seeking cash dividends should not invest in our common stock.

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If equity research analysts do not publish research or reports about our business or if they issue unfavorable research or downgrade the company’s common stock, the price of our common stock could decline.

Investors may look to reports of equity research analysts for additional information regarding our industry and operations. Therefore, any trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. Equity research analysts may elect not to provide research coverage of our common stock, which may adversely affect the market price of our common stock. If equity research analysts do provide research coverage of our common stock, the price of our common stock could decline if one or more of these analysts downgrade the common stock or if they issue other unfavorable commentary about us or our business. If one or more of these analysts ceases coverage of the company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Provisions in our restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions include:

•  authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

•  limiting the removal of directors by the stockholders;

•  prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

•  eliminating the ability of stockholders to call a special meeting of stockholders; and

•  establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by such corporation’s board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to the combined company’s stockholders.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

Sales of a substantial number of shares of the combined company’s common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of the common stock.

To the extent we raise additional capital by issuing equity securities, including in a debt financing where we issue convertible notes or notes with warrants, our stockholders may experience substantial dilution. We may sell common stock in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock in more than one transaction, existing stockholders may be materially diluted. In addition, new investors could gain rights superior to existing stockholders, such as liquidation and other preferences. We have stock options and warrants outstanding to purchase shares of our capital stock. Our stockholders will incur dilution upon exercise of any outstanding stock options or warrants.

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Item 1B.   Unresolved Staff Comments.

Not applicable.

Item 2.   Properties.

Our principal executive offices are located in a 47,000 square foot facility located in St. Paul, Minnesota. We have leased this facility through November 2012 with an option to renew through November 2017. This facility accommodates our research and development, sales, marketing, manufacturing, finance and administrative activities.

In September 2009, we entered into an agreement to lease a 46,000 square foot production facility in Pearland, Texas beginning April 1, 2010. We have leased this facility through March 2020. This facility will primarily accommodate additional manufacturing activities.

We believe that our current premises, combined with the Pearland, Texas production facility, are substantially adequate for our current and anticipated future needs for the foreseeable future.

Item 3.   Legal Proceedings.

On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and FoxHollow Technologies, Inc., together referred to as the Plaintiffs, filed a complaint in the Ramsey County District Court for the State of Minnesota against us and Sean Collins and Aaron Lew, who are former employees of FoxHollow currently employed by us, as well as against unknown former employees of Plaintiffs currently employed by us, referred to in the complaint as John Does 1-10. On July 2, 2008, Plaintiffs served and filed with the court a second amended complaint. In this amended pleading, Plaintiffs asserted claims against us as well as ten of our employees, all of whom were formerly employed by one or more of the Plaintiffs. The second amended complaint also continues to refer to “John Doe 1-10” defendants, who are not identified by name.

The second amended complaint alleges the following:

•  That certain of our employees (i) violated provisions in their employment agreements with their former employer FoxHollow, barring them from misusing FoxHollow confidential information and from soliciting or encouraging employees of FoxHollow to join us, and (ii) breached a duty of loyalty owed to FoxHollow.

•  That we and certain of our employees misappropriated trade secrets of one or more of the Plaintiffs.

•  That all defendants engaged in unfair competition and conspired to gain an unfair competitive and economic advantage for us to the detriment of the Plaintiffs.

•  That (i) we tortiously interfered with the contracts between FoxHollow and certain of our employees by allegedly procuring breaches of the non-solicitation — encouragement provision in those agreements, and (ii) one of our employees tortiously interfered with the contracts between certain of our employees and FoxHollow by allegedly procuring breaches of the confidential information provision in those agreements.

In the second amended complaint, the Plaintiffs seek, among other forms of relief, an award of damages in an amount greater than $50,000, a variety of forms of injunctive relief, exemplary damages under the Minnesota Trade Secrets Act, and recovery of their attorney fees and litigation costs. Although we have requested the information, the Plaintiffs have not yet disclosed what specific amount of damages they claim.

On December 28, 2007, the Plaintiffs filed with the court a motion for a temporary restraining order, which the court granted in part and denied in part in an order dated January 10, 2008. With regard to former employees of ev3 or FoxHollow who are now employed with us, the court

•  enjoined those employees from disclosing trade secrets of ev3 or FoxHollow;

•  directed that any of such employees who signed a FoxHollow employment agreement must not disclose the identity of FoxHollow Key Opinion Leaders or Thought Leaders or use this information to aid us;

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•  ordered that these persons must not maintain, use or disclose any confidential information about the FoxHollow Key Opinion Leaders or Thought Leaders that was received while they were employed with FoxHollow, and that if such information had already been disclosed or used, they were required to advise the recipients of such information in writing that this information is confidential and may not be used by them or disclosed to anyone;

•  ordered that if any of these employees contact any physician who is a FoxHollow Key Opinion Leader or Thought Leader, he/she must be able to trace, document and account, with specificity, how he/she was able to identify such prospect through information, records or documents obtained outside his/her employment with Plaintiffs; and

•  directed that those employees who are subject to a FoxHollow employee nonsolicitation agreement must not, for one year after leaving FoxHollow, be involved in soliciting or recruiting any current employee of the Plaintiffs to leave that employment or to accept employment with us.

In the memorandum accompanying the January 10, 2008 order, the court noted that Mr. Collins admitted he took certain FoxHollow sales information just prior to the conclusion of his employment with FoxHollow, and noted that Mr. Collins had indicated a willingness to return that information to FoxHollow. Mr. Collins has returned the information.

We believe the January 10, 2008 court order and the continuing confidentiality obligations of our officers and employees who were subject to employment agreements with FoxHollow will have no material impact on our sales efforts and the efforts of our management. In accordance with the court’s order, we have undertaken an effort to document and account, with specificity, how our employees identified our existing physician customers through information, records or documents that did not originate with FoxHollow, and we have implemented procedures to document how we identify new physician customers. We believe all of our existing physician customers were identified through appropriate sources, such as publicly-available information, employees’ preexisting physician relationships and referrals from existing physician customers. In addition, we do not believe the court order imposes any materially adverse restriction on identifying and contacting new physician prospects since these physicians are typically well-known in their industry and are easily identified through appropriate sources. Accordingly, we do not anticipate that the court order will materially impact our sales efforts.

In July 2008, all defendants in the case filed motions with the district court asking the court to dismiss all claims on the grounds that the claims should be decided exclusively in arbitration in accordance with provisions found in the employment agreements between FoxHollow and eight of the 10 individual defendants. In October 2008, the district court granted this motion with respect to the eight individual defendants who had arbitration provisions in their FoxHollow employment agreements and stayed proceedings in the action against these parties pending the outcome of any subsequent arbitration proceedings. At the same time, the court denied the motions to compel arbitration brought by us and by the two other individual defendants. In late October 2008, both we and the two individual defendants filed appeals from the district court’s order denying the motions to compel arbitration. In January 2009, the district court stayed all proceedings in the action pending resolution of the appeals. During the oral argument before the Court of Appeals that occurred in May 2009, counsel for the Plaintiffs informed the court that the Plaintiffs do not intend to commence arbitration proceedings against the eight co-Defendants who prevailed in the district court on motions to compel arbitration. On August 11, 2009, the Court of Appeals issued a decision affirming the district court’s order denying the motions by us and the two individual defendants to compel arbitration. In late August 2009, both we and the two individual defendants filed petitions with the Minnesota Supreme Court, asking that court to review the August 11, 2009, decision by the Minnesota Court of Appeals. We anticipate learning by the end of October 2009 whether the Supreme Court will accept review.

The Diamondback 360° is, at least in some applications, considered to be a direct competitor with one of Plaintiffs’ products. Our current Chief Executive Officer, Vice President of Business Operations and Vice President of Business Development were formerly employed by FoxHollow. These officers remain subject to confidentiality provisions in their employment agreements with FoxHollow, but the employee nonsolicitation provisions in their agreements with FoxHollow have expired. As of August 31, 2009, 35 of the 126 members of our sales department, or 27.8%, were formerly employed by one or more of the Plaintiffs.

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We are defending this litigation vigorously. However, if we are not successful in this litigation, we could be required to pay substantial damages and could be subject to equitable relief that could include a requirement that we terminate or otherwise alter the terms or conditions of employment of certain employees, including certain key sales personnel who were formerly employed by FoxHollow. In any event, the defense of this litigation, regardless of the outcome, could result in substantial legal costs and diversion of our management’s time and efforts from the operation of our business.

Item 4.   Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Registrant.

The information required by Item 10 relating to directors, our code of ethics, procedures for stockholder recommendations of director nominees, the audit committee and compliance with Section 16 of the Exchange Act is incorporated herein by reference to the sections entitled “Election of Directors”, “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which appear in our definitive proxy statement for our 2009 Annual Meeting.

The names, ages and positions of our executive officers are as follows:

Name	Age		Position
David L. Martin		45	President and Chief Executive Officer
Laurence L. Betterley		55	Chief Financial Officer
James E. Flaherty		55	Chief Administrative Officer and Secretary
Brian Doughty		46	Vice President of Commercial Operations
Scott Kraus		39	Vice President of Sales
Paul Koehn		46	Vice President of Manufacturing
Robert J. Thatcher		55	Executive Vice President
Paul Tyska		51	Vice President of Business Development

David L. Martin, President and Chief Executive Officer.  Mr. Martin has been our President and Chief Executive Officer since February 2007, and a director since August 2006. Mr. Martin also served as our Interim Chief Financial Officer from January 2008 to April 2008. Prior to joining us, Mr. Martin was Chief Operating Officer of FoxHollow Technologies, Inc. from January 2004 to February 2006, Executive Vice President of Sales and Marketing of FoxHollow Technologies, Inc. from January 2003 to January 2004, Vice President of Global Sales and International Operations at CardioVention Inc. from October 2001 to May 2002, Vice President of Global Sales for RITA Medical Systems, Inc. from March 2000 to October 2001 and Director of U.S. Sales, Cardiac Surgery for Guidant Corporation from September 1999 to March 2000. Mr. Martin has also held sales and sales management positions for The Procter & Gamble Company and Boston Scientific Corporation.

Laurence L. Betterley, Chief Financial Officer.  Mr. Betterley joined us in April 2008 as our Chief Financial Officer. Previously, Mr. Betterley was Chief Financial Officer at Cima NanoTech, Inc. from May 2007 to April 2008, Senior Vice President and Chief Financial Officer of PLATO Learning, Inc. from June 2004 to January 2007, Senior Vice President and Chief Financial Officer of Diametrics Medical, Inc. from 1996 to 2003, and Chief Financial Officer of Cray Research Inc. from 1994 to 1996.

James E. Flaherty, Chief Administrative Officer and Secretary.  Mr. Flaherty has been our Chief Administrative Officer since January 14, 2008. Mr. Flaherty was our Chief Financial Officer from March 2003 to January 14, 2008. As Chief Administrative Officer, Mr. Flaherty reports directly to our Chief Executive Officer and has responsibility for information technology, facilities, legal matters, financial analysis of business development opportunities and business operations. Prior to joining us, Mr. Flaherty served as an independent financial consultant from 2001 to 2003 and Chief Financial Officer of Zomax Incorporated from 1997 to 2001 and Racotek, Inc. from 1990 to 1996. On June 9, 2005, the Securities and Exchange Commission filed a civil injunctive action charging Zomax Incorporated with violations of federal securities law by filing a materially misstated Form 10-Q

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for the period ended June 30, 2000. The SEC further charged that in a conference call with analysts, certain of Zomax’s executive officers, including Mr. Flaherty, misrepresented or omitted to state material facts regarding Zomax’s prospects of meeting quarterly revenue and earnings targets, in violation of federal securities law. Without admitting or denying the SEC’s charges, Mr. Flaherty consented to the entry of a court order enjoining him from any violation of certain provisions of federal securities law. In addition, Mr. Flaherty agreed to disgorge $16,770 plus prejudgment interest and pay a $75,000 civil penalty.

Brian Doughty, Vice President of Commercial Operations.  Mr. Doughty joined us in December 2006 as Director of Marketing, was named Vice President of Marketing in August 2007 and became Vice President of Commercial Operations in April 2009. Prior to joining us, Mr. Doughty was Director of Marketing at EKOS Corporation from February 2005 to December 2006, National Sales Initiatives Manager of FoxHollow Technologies, Inc. from September 2004 to February 2005, National Sales Operations Director at Medtronic from August 2000 to September 2004, and Sales Team Leader for Johnson and Johnson from December 1998 to August 2000. Mr. Doughty has also held sales and sales management positions for Ameritech Information Systems.

Scott Kraus, Vice President of Sales.  Mr. Kraus has been with us since September 2006, acting as a senior sales director, until becoming Vice President of Sales in April 2009. Previously, Mr. Kraus was at Boston Scientific Corporation where he served as an Account Manager/Regional Sales Manager from April 2006 to September 2006. He held the same position with Guidant Corporation from December 2000 to April 2006, before Boston Scientific’s acquisition of Guidant in April 2006. Earlier, he gained sales experience at C.R. Bard, Bristol-Myers Squibb and Surgical Specialties Corporation.

Paul Koehn, Vice President of Manufacturing.  Mr. Koehn joined us in March 2007 as Director of Manufacturing and was promoted to Vice President of Manufacturing in October 2007. Previously, Mr. Koehn was Vice President of Operations for Sewall Gear Manufacturing from 2000 to March 2007 and before joining Sewall Gear, Mr. Koehn held various quality and manufacturing management roles with Dana Corporation.

Robert J. Thatcher, Executive Vice President.  Mr. Thatcher joined us as Senior Vice President of Sales and Marketing in October 2005 and became Vice President of Operations in September 2006. Mr. Thatcher became Executive Vice President in August 2007. Previously, Mr. Thatcher was Senior Vice President of TriVirix Inc. from October 2003 to October 2005. Mr. Thatcher has more than 29 years of medical device experience in both large and start-up companies. Mr. Thatcher has held various sales management, marketing management and general management positions at Medtronic, Inc., Schneider USA, Inc. (a former division of Pfizer Inc.), Boston Scientific Corporation and several startup companies.

Paul Tyska, Vice President of Business Development.  Mr. Tyska joined us in August 2006 as Vice President of Business Development. Previously, Mr. Tyska was employed at FoxHollow Technologies, Inc. since July 2003 where he most recently served as National Sales Director from February 2006 to August 2006. Mr. Tyska has held various positions with Guidant Corporation, CardioThoracic Systems, Inc., W. L. Gore & Associates and ATI Medical Inc.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock and Dividend Policy

Prior to the closing of the merger on February 25, 2009, the stock of Replidyne was traded on the Nasdaq Global Market under the symbol “RDYN.” On February 26, 2009, the stock of CSI began trading on the Nasdaq Global Market under the symbol “CSII.” The following table sets forth the high and low sales prices for our common stock (based upon intra-day trading) as reported by the Nasdaq Global Market, as adjusted to reflect a 1-for-10 reverse stock split that occurred on February 25, 2009:

	Common Stock
	High		Low
Fiscal Year Ended June 30, 2009
First quarter	$	14.30	$	11.60
Second quarter		12.70		2.80
Third quarter (through February 25, 2009)		10.30		6.60
Third quarter (from February 26, 2009 through March 31, 2009)		10.15		4.78
Fourth quarter		7.97		5.60
Fiscal Year Ended June 30, 2008
First quarter	$	75.00	$	52.30
Second quarter		66.60		30.50
Third quarter		31.00		12.90
Fourth quarter		19.00		12.50

The number of record holders of our common stock on September 23, 2009 was approximately 527. No cash dividends have been previously paid on our common stock and none are anticipated during fiscal year 2010. We are restricted from paying dividends under our Loan and Security Agreement with Silicon Valley Bank.

Recent Sales of Unregistered Securities

Between February 26, 2009 and June 30, 2009, we issued and sold 12,615 unregistered shares of our common stock pursuant to warrant exercises with exercise price of $1.55 per share. The shares were sold in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act. No underwriters were involved in the transactions or received any commissions or other compensation. Proceeds of the sales were used to fund our working capital requirements.

Issuer Purchases of Equity Securities

None.

Securities Authorized For Issuance Under Equity Compensation Plans

For information on our equity compensation plans, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements about our business and operations, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties.

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Our actual results may differ materially from those we currently anticipate as a result of many important factors, including the factors we describe under “Risk Factors” and elsewhere in this Form 10-K.

OVERVIEW

We are a medical device company focused on developing and commercializing interventional treatment systems for vascular disease. Our initial product, the Diamondback 360°, is a minimally invasive catheter system for the treatment of peripheral arterial disease, or PAD.

We were incorporated as Replidyne, Inc. in Delaware in 2000. On February 25, 2009, Replidyne, Inc. completed its business combination with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008. Pursuant to the Merger Agreement, CSI-MN continued after the merger as the surviving corporation and a wholly owned subsidiary of Replidyne. Replidyne changed its name to Cardiovascular Systems, Inc. (“CSI”) and CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation. These transactions are referred to herein as the “merger.” Unless the context otherwise requires, all references herein to the “Company,” “CSI,” “we,” “us” and “our” refer to CSI-MN prior to the completion of the merger and to CSI following the completion of the merger and the name change, and all references to “Replidyne” refer to Replidyne prior to the completion of the merger and the name change.

At the closing of the merger, Replidyne’s net assets, as calculated pursuant to the terms of the Merger Agreement, were approximately $36.6 million. As of immediately following the effective time of the merger, former CSI-MN stockholders owned approximately 80.2% of the outstanding common stock of the combined company, and Replidyne stockholders owned approximately 19.8% of the outstanding common stock of the combined company.

Our common stock was accepted for listing on the Nasdaq Global Market under the symbol “CSII” and trading commenced on February 26, 2009.

Replidyne was a biopharmaceutical company focused on discovering, developing, in-licensing and commercializing anti-infective products.

CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997, we engaged in research and development on several different product concepts that were later abandoned. Since 1997, we have devoted substantially all of our resources to the development of the Diamondback 360°.

From 2003 to 2005, we conducted numerous bench and animal tests in preparation for application submissions to the FDA. We initially focused our testing on providing a solution for coronary in-stent restenosis but later changed the focus to PAD. In 2006, we obtained an investigational device exemption from the FDA to conduct our pivotal OASIS clinical trial, which was completed in January 2007. The OASIS clinical trial was a prospective 20-center study that involved 124 patients with 201 lesions.

In August 2007, the FDA granted us 510(k) clearance for the use of the Diamondback 360° as a therapy in patients with PAD. We commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007. This limited commercial introduction intentionally limited the size of our sales force and the number of customers each member of the sales force served in order to focus on obtaining quality and timely product feedback on initial product usages.

We market the Diamondback 360° in the United States through a direct sales force and commenced a full commercial launch in the quarter ended March 31, 2008. We expend significant capital on our sales and marketing efforts to expand our customer base and utilization per customer. We manufacture the Diamondback 360° internally at our facilities.

As of June 30, 2009, we had an accumulated deficit of $127.4 million. We expect our losses to continue but generally decline as we continue our commercialization activities, develop additional product enhancements, increase our manufacturing capacity, and make further regulatory submissions. To date, we have financed our operations primarily through the private placement of equity securities and completion of the merger.

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FINANCIAL OVERVIEW

Revenues.  We derive substantially all of our revenues from the sale of the Diamondback 360° and other ancillary products. The Diamondback 360° system consists of a disposable, single-use, low-profile catheter that travels over our proprietary ViperWire guidewire and an external control unit that powers the system. Our ancillary products include the ViperSlide^tm Lubricant, the ViperSheath^tm Introducer Sheath, ViperTrack^tm Radiopaque Tape, and ViperCaddy^tm Guide Wire Management.

Cost of Goods Sold.  We assemble the single-use catheter with components purchased from third-party suppliers, as well as with components manufactured in-house. The control unit and guidewires are purchased from third-party suppliers. Our cost of goods sold consists primarily of raw materials, direct labor, and manufacturing overhead.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses include compensation for executive, sales, marketing, finance, information technology, human resources and administrative personnel, including stock-based compensation. Other significant expenses include travel and marketing costs, professional fees, and patent expenses.

Research and Development.  Research and development expenses include costs associated with the design, development, testing, enhancement and regulatory approval of our products. Research and development expenses include employee compensation including stock-based compensation, supplies and materials, consulting expenses, travel and facilities overhead. We also incur significant expenses to operate clinical trials, including trial design, third-party fees, clinical site reimbursement, data management and travel expenses. All research and development expenses are expensed as incurred.

Interest Income.  Interest income is attributed to both interest earned on deposits in investments that consist of money market funds and auction rate securities and the initial fair value and changes in fair value of the auction rate securities put option discussed below.

Interest Expense.  Interest expense results from outstanding debt balances, the issuance of convertible promissory notes, and debt discount amortization.

Decretion (Accretion) of Redeemable Convertible Preferred Stock Warrants.  Decretion (accretion) of redeemable convertible preferred stock warrants reflects the change in the current estimated fair market value of the preferred stock warrants on a quarterly basis, as determined by management and the board of directors. Decretion (accretion) is recorded as a decrease (increase) to redeemable convertible preferred stock warrants in the consolidated balance sheet and a decrease (increase) to net loss in the consolidated statement of operations. Concurrent with the merger, all preferred stock warrants were converted into warrants to purchase common stock and, accordingly, we stopped recording decretion (accretion) as of the merger date.

Gain (Impairment) on Investments.  Gain (impairment) on investments reflects the change in the fair value of investments as determined with the assistance of ValueKnowledge LLC, an independent third party valuation firm.

Decretion (Accretion) of Redeemable Convertible Preferred Stock.  Decretion (accretion) of redeemable convertible preferred stock reflects the change in the current estimated fair market value of the preferred stock on a quarterly basis, as determined by management and the board of directors. Decretion (accretion) is recorded as a decrease (increase) to redeemable convertible preferred stock in the consolidated balance sheet and a decrease (increase) to the loss attributable to common stockholders in the consolidated statement of operations. The redeemable convertible preferred stock was converted into common stock immediately prior to the effective time of the merger with Replidyne. As such, the preferred stockholders forfeited their liquidation preferences and we stopped recording decretion (accretion) as of the merger date.

Net Operating Loss Carryforwards.  We have established valuation allowances to fully offset our deferred tax assets due to the uncertainty about our ability to generate the future taxable income necessary to realize these deferred assets, particularly in light of our historical losses. The future use of net operating loss carryforwards is dependent on us attaining profitable operations and will be limited in any one year under Internal Revenue Code Section 382 due to significant ownership changes (as defined in Section 382) resulting from our equity financings.

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At June 30, 2009, we had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $110.2 million, which will expire at various dates through fiscal 2029.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect amounts reported in those statements. Our estimates, assumptions and judgments, including those related to revenue recognition, allowance for doubtful accounts, excess and obsolete inventory, investments, stock-based compensation, preferred stock and preferred stock warrants are updated as appropriate at least quarterly. We use authoritative pronouncements, our technical accounting knowledge, cumulative business experience, judgment and other factors in the selection and application of our accounting policies. While we believe that the estimates, assumptions and judgments that we use in preparing our consolidated financial statements are appropriate, these estimates, assumptions and judgments are subject to factors and uncertainties regarding their outcome. Therefore, actual results may materially differ from these estimates.

Some of our significant accounting policies require us to make subjective or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (1) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (2) different estimates that reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of our financial condition, results of operations, or cash flows. We believe that the following are our critical accounting policies and estimates:

Revenue Recognition.  We sell the majority of our products via direct shipment to hospitals or clinics. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. These criteria are met at the time of delivery when the risk of loss and title passes to the customer. We record estimated sales returns, discounts and rebates as a reduction of net sales in the same period revenue is recognized.

We also consider Emerging Issues Task Force Bulletin (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, in revenue recognition. This standard addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. In these cases, we recognize revenue from each element of the arrangement as long as separate values for each element can be determined, we have completed our obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

Costs related to products delivered are recognized in the period revenue is recognized. Cost of goods sold consists primarily of raw materials, direct labor, and manufacturing overhead.

Allowance for Doubtful Accounts.  We maintain allowances for doubtful accounts. This allowance is an estimate and is regularly evaluated for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Provisions for the allowance for doubtful accounts attributed to bad debt are recorded in general and administrative expenses.

Excess and Obsolete Inventory.  We have inventories that are principally comprised of capitalized direct labor and manufacturing overhead, raw materials and components, and finished goods. Due to the technological nature of our products, there is a risk of obsolescence to changes in our technology and the market, which is impacted by technological developments and events. Accordingly, we write down our inventories as we become aware of any situation where the carrying amount exceeds the estimated realizable value based on assumptions about future demands and market conditions. The evaluation includes analyses of inventory levels, expected product lives, product at risk of expiration, sales levels by product and projections of future sales demand.

Investments.  Our investments include AAA rated auction rate securities (ARS) issued primarily by state agencies and backed by student loans substantially guaranteed by the Federal Family Education Loan Program

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(FFELP). In February 2008, we were informed that there was insufficient demand for auction rate securities, resulting in failed auctions for $23.0 million of our auction rate securities held at June 30, 2009 and 2008. Currently, these affected securities are not liquid and will not become liquid until a future auction for these investments are successful, they are redeemed by the issuer, or they mature. As a result, at June 30, 2009 and 2008, we have classified the fair value of the auction rate securities as a long-term asset. We have collected all interest due on our auction rate securities and have no reason to believe that we will not collect all interest due in the future.

On November 7, 2008, we accepted an offer from UBS AG (“UBS”), providing rights related to our ARS (the “Rights”). The Rights permit us to require UBS to purchase our ARS at par value, which is defined for this purpose as the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our ARS under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. So long as we hold ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails. Prior to accepting the UBS offer, we recorded ARS as investments available-for-sale. We recorded unrealized gains and losses on available-for-sale securities in accumulated other comprehensive income in the stockholders’ equity (deficiency) section of the balance sheet. Realized gains and losses were accounted for on the specific identification method. After accepting the UBS offer, we recorded the ARS as trading investments and realized gains and losses are included in earnings.

The Rights represent a firm agreement in accordance with SFAS 133, which defines a firm agreement as an agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction, and b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the Rights results in a put option and should be recognized as a free standing asset separate from the ARS. At June 30, 2009, we recorded $2.8 million as the fair value of the put option asset with a corresponding credit to interest income. We considered the expected time until the Rights are exercised, carrying costs of the Rights, and the expected credit risk attributes of the Rights and UBS in their valuation of the put option. The put option does not meet the definition of a derivative instrument under SFAS 133. Therefore, we have elected to measure the put option at fair value under SFAS 159, which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the ARS. As a result, unrealized gains and losses will be included in earnings in future periods.

We determined the fair value of our auction rate securities and quantified the other-than-temporary impairment loss and the unrealized loss with the assistance of ValueKnowledge LLC, an independent third party valuation firm, which utilized various valuation methods and considered, among other factors, estimates of present value of the auction rate securities based upon expected cash flows, the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value, the likelihood of a return of liquidity to the market for these securities and the potential to sell the securities in secondary markets. Based on these factors, we recorded impairment of investments for the years ended June 30, 2009 and 2008 of $1.7 million and $1.3 million, respectively.

Stock-Based Compensation.  We account for stock-based compensation expense in accordance with SFAS No. 123(R), Share-Based Payment, as interpreted by SAB No. 107 to account for stock-based compensation expense associated with the issuance or amendment of stock options and restricted stock awards. SFAS No. 123(R) requires us to recognize stock-based compensation expense in an amount equal to the fair value of share-based payments computed at the date of grant. The fair value of all stock option and restricted awards are expensed in the consolidated statements of operations over the related vesting period. We calculate the fair value on the date of grant using a Black-Scholes model.

To determine the inputs for the Black-Scholes option pricing model, we are required to develop several assumptions, which are highly subjective. These assumptions include:

•  our common stock’s volatility;

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•  the length of our options’ lives, which is based on future exercises and cancellations;

•  the number of shares of common stock pursuant to which options which will ultimately be forfeited;

•  the risk-free rate of return; and

•  future dividends.

Prior to the consummation of the merger, we used comparable public company data to determine volatility for option grants. Since we have a limited history of stock purchase and sale activity, expected volatility is based on historical data from several public companies similar to us in size and nature of operations. We will continue to use comparable public company data to determine expected volatility for option grants until our historical volatility is relevant to measure. We use a weighted average calculation to estimate the time our options will be outstanding. We estimated the number of options that are expected to be forfeited based on our historical experience. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. We use our judgment and expectations in setting future dividend rates, which is currently expected to be zero.

All options we have granted become exercisable over periods established at the date of grant. The option exercise price is generally not less than the estimated fair market value of our common stock at the date of grant, as determined by management and board of directors.

The absence of an active market for our common stock prior to the merger required our management and board of directors to estimate the fair value of our common stock for purposes of granting options and for determining stock-based compensation expense. In response to these requirements, prior to the merger our management and board of directors estimated the fair market value of common stock at each date at which options are granted based upon stock valuations and other qualitative factors. Our management and board of directors conducted stock valuations using two different valuation methods: the option pricing method and the probability weighted expected return method. Both of these valuation methods took into consideration the following factors: financing activity, rights and preferences of our preferred stock, growth of the executive management team, clinical trial activity, the FDA process, the status of our commercial launch, our mergers and acquisitions and public offering processes, revenues, the valuations of comparable public companies, our cash and working capital amounts, and additional objective and subjective factors relating to our business. Our management and board of directors set the exercise prices for option grants based upon their best estimate of the fair market value of the common stock at the time they made such grants, taking into account all information available at those times. In some cases, management and the board of directors made retrospective assessments of the valuation of the common stock at later dates and determined that the fair market value of the common stock at the times the grants were made was different than the exercise prices established for those grants. In cases in which the fair market was higher than the exercise price, we recognized stock-based compensation expense for the excess of the fair market value of the common stock over the exercise price.

Following the merger, our stock valuations are based upon the market price for our common stock.

Preferred Stock.  We record the current estimated fair value of our convertible preferred stock on a quarterly basis based on the fair market value of that stock as determined by our management and board of directors. The determination of fair market value included factors such as recent financing activity, preferred stock rights and preferences, clinical trials, revenues, and regulatory approval process. In accordance with Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks” and EITF Abstracts, Topic D-98, Classification and Measurement of Redeemable Securities, we record changes in the current fair value of our redeemable convertible preferred stock in the consolidated statements of changes in stockholders’ equity (deficiency) and comprehensive (loss) income and consolidated statements of operations as accretion of redeemable convertible preferred stock. Concurrent with the merger, all preferred stock was converted to common stock and, accordingly, was reclassified to stockholders’ equity (deficiency).

Preferred Stock Warrants.  Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and its related interpretations. Under SFAS No. 150, the freestanding warrant that is related to our redeemable convertible preferred stock was classified as a liability on the balance sheet

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as of June 30, 2008. The warrant was subject to remeasurement at each balance sheet date and any change in fair value was recognized as a component of other income (expense). Fair value was measured using the Black-Scholes option pricing model. Concurrent with the merger, all preferred stock warrants were converted into warrants to purchase common stock and, accordingly, the liability was reclassified to stockholders’ equity (deficiency).

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (in thousands), and, for certain line items, the changes between the specified periods expressed as percent increases or decreases:

	Year Ended June 30,									Year Ended June 30,
							Percent									Percent
	2009			2008			Change			2008			2007			Change
Revenues	$	56,461		$	22,177			154.6	%	$	22,177		$	—
Cost of goods sold		16,194			8,927			81.4			8,927			—
Gross profit		40,267			13,250			203.9			13,250			—
Expenses:
Selling, general and administrative		59,822			35,326			69.3			35,326			6,691			428.0
Research and development		14,678			16,068			(8.7	)		16,068			8,446			90.2
Total expenses		74,500			51,394			45.0			51,394			15,137			239.6
Loss from operations		(34,233	)		(38,144	)		(10.3	)		(38,144	)		(15,137	)		152.0
Other income (expense):
Interest expense		(2,350	)		(7	)		33,471.4			(7	)		(13	)		(46.2	)
Interest income		3,380			1,167			189.6			1,167			881			32.5
Decretion (accretion) of redeemable convertible preferred stock warrants		2,991			(916	)		426.5			(916	)		(1,327	)		(31.0	)
Impairment on investments		(1,683	)		(1,267	)		32.8			(1,267	)		—
Total other income (expense)		2,338			(1,023	)		328.5			(1,023	)		(459	)		122.9
Net loss		(31,895	)		(39,167	)		(18.6	)		(39,167	)		(15,596	)		151.1
Decretion (accretion) of redeemable convertible preferred stock		22,781			(19,422	)		217.3			(19,422	)		(16,835	)		15.4
Net loss available to common stockholders	$	(9,114	)	$	(58,589	)		(84.4	)%	$	(58,589	)	$	(32,431	)		80.7	%

Comparison of Fiscal Year Ended June 30, 2009 with Fiscal Year Ended June 30, 2008

Revenues.  Revenues increased by $34.3 million, or 154.6%, from $22.2 million for the year ended June 30, 2008 to $56.5 million for the year ended June 30, 2009. This increase was primarily attributable to increased sales of the Diamondback 360° during the year ended June 30, 2009 compared to three quarters in the year ended June 30, 2008. As of June 30, 2009, we had a 124-person direct sales organization that was selling the Diamondback 360° in 556 accounts. As of June 30, 2008, we had an 87-person direct sales organization that was selling the Diamondback 360° in 186 accounts. We expect our revenue to continue increasing as we continue to increase the number of physicians using the devices and the usage rate per physician in the U.S. PAD market and also introduce new and improved products.

Cost of Goods Sold.  Cost of goods sold increased by $7.3 million, or 81.4%, from $8.9 million for the year ended June 30, 2008 to $16.2 million for the year ended June 30, 2009. These amounts represent the cost of materials, labor and overhead for single-use catheters, guidewires, control units, and other ancillary products. The increase in gross margin from the year ended June 30, 2008 to June 30, 2009 is primarily due to increased volume,

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manufacturing efficiencies, and product cost reductions. Cost of goods sold for the years ended June 30, 2009 and 2008 includes $475,000 and $232,000, respectively, for stock-based compensation. We expect that cost of goods sold as a percentage of revenues will decline in the future as sales volumes increase, although quarterly fluctuations could occur based on timing of new product introductions, sales mix, unanticipated warranty claims, or other unanticipated circumstances.

Selling, General and Administrative Expenses.  Our selling, general and administrative expenses increased by $24.5 million, from $35.3 million for the year ended June 30, 2008 to $59.8 million for the year ended June 30, 2009. The primary reasons for the increase included the building of our sales and marketing team, contributing $22.2 million; increased consulting and professional services, including $1.7 million in previously capitalized initial public offering costs, contributing $2.4 million; and payroll related expenses related to building our administrative team, contributing $1.0 million. Selling, general, and administrative expenses for the years ended June 30, 2009 and 2008 includes $5.7 million and $6.9 million, respectively, for stock-based compensation. We expect our selling, general and administrative expenses to increase in the future due primarily to the costs associated with expanding our sales and marketing organization to further commercialize our products.

Research and Development Expenses.  Research and development expenses decreased by $1.4 million, or 8.7%, from $16.1 million for the year ended June 30, 2008 to $14.7 million for the year ended June 30, 2009. Research and development expenses relate to specific projects to improve our product or expand into new markets, such as the development of a new control unit, shaft designs, crown designs, and PAD and coronary clinical trials. The reduction in expense related to costs of a coronary clinical trial occurring during the year ended June 30, 2008, along with fewer PAD development projects in 2009. Research and development for the years ended June 30, 2009 and 2008 includes $612,000 and $297,000, respectively, for stock-based compensation. As we continue to expand our product portfolio within the market for the treatment of peripheral arteries and leverage our core technology into the coronary market, we expect to incur research and development expenses at a similar rate as for the year ended June 30, 2009, although fluctuations could occur based on the number of projects and studies and the timing of expenditures.

Interest Expense.  Interest expense increased by $2.3 million, from $7,000 for the year ended June 30, 2008 to $2.4 million for the year ended June 30, 2009. Interest expense for the year ended June 30, 2009 consisted of the amortization of debt discount of $1.2 million and interest on outstanding debt facilities of $1.1 million.

Interest Income.  Interest income increased by $2.2 million, from $1.2 million for the year ended June 30, 2008 to $3.4 million for the year ended June 30, 2009. The increase was primarily due to the impact of recording the put option asset of $2.8 million related to our auction rate securities. This was offset by lower average cash and cash equivalent balances along with reduced yields. Average cash and cash equivalent balances were $16.5 million and $20.4 million for the years ended June 30, 2009 and 2008, respectively.

Decretion (Accretion) of Redeemable Convertible Preferred Stock Warrants.  Decretion of redeemable convertible preferred stock warrants for the year ended June 30, 2009 was $3.0 million. Accretion of redeemable convertible preferred stock warrants for the year ended June 30, 2008 was $916,000. Decretion (accretion) of redeemable convertible preferred stock warrants reflects the change in estimated fair value of preferred stock warrants at the balance sheet dates. Due to the merger, decretion recognized during the year ended June 30, 2009 reflects a change in the estimated fair value of preferred stock warrants between July 1, 2008, and February 25, 2009 (date of merger) at which time the preferred stock warrants converted to common stock warrants. Due to the conversion there will be no further decretion (accretion) recorded for these warrants in the future.

Impairment on Investments.  Impairment on investments was $1.7 million and $1.3 million for the years ended June 30, 2009 and 2008, respectively. Impairment on investments was due to a decrease in the fair value of investments in both periods.

Decretion (Accretion) of Redeemable Convertible Preferred Stock.  Decretion of redeemable convertible preferred stock for the year ended June 30, 2009 was $22.8 million. Accretion of redeemable convertible preferred stock for the year ended June 30, 2008 was $19.4 million. Decretion (accretion) of redeemable convertible preferred stock reflects the change in estimated fair value of preferred stock at the balance sheet dates. Due to the merger, decretion recognized during the year ended June 30, 2009 reflects a change in the estimated fair value of preferred

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stock between July 1, 2008, and February 25, 2009 (date of merger) at which time the preferred stock converted to common stock. Due to the conversion there will be no further decretion (accretion) recorded for these shares in the future.

Comparison of Fiscal Year Ended June 30, 2008 with Fiscal Year Ended June 30, 2007

Revenues.  We generated revenues of $22.2 million during the year ended June 30, 2008 attributable to sales of the Diamondback 360° to customers following FDA clearance in August 2007. We commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007, followed by a full commercial launch in the quarter ended March 31, 2008. Since September 2007, we expanded our sales and marketing efforts and shipped more than 6,800 single-use catheters through June 30, 2008.

We applied EITF No. 00-21, Revenue Arrangements with Multiple Deliverables, the primary impact of which was to treat the Diamondback 360° as a single unit of accounting for initial customer orders. As such, revenues were deferred until the title and risk of loss of each Diamondback 360° component, consisting of catheters, guidewires, and a control unit, were transferred to the customer based on the shipping terms. Many initial shipments to customers also included a loaner control unit, which we provided, until the new control unit received clearance from the FDA and was subsequently available for sale.

Cost of Goods Sold.  For the year ended June 30, 2008, cost of goods sold was $8.9 million. This amount represents the cost of materials, labor and overhead for single-use catheters, guidewires and control units shipped subsequent to obtaining FDA clearance for the Diamondback 360° in August 2007. Cost of goods sold for the year ended June 30, 2008 includes $232,000 for stock-based compensation. For the year ended June 30, 2007, there was no cost of goods sold due to revenues not occurring until the year ended June 30, 2008.

Selling, General and Administrative Expenses.  Our selling, general and administrative expenses increased by $28.6 million, from $6.7 million for the year ended June 30, 2007 to $35.3 million for the year ended June 30, 2008. The primary reasons for the increase included the building of our sales and marketing team, contributing $18.6 million, and increased consulting and professional services, contributing $2.1 million. Selling, general and administrative for the years ended June 30, 2008 and 2007 includes $6.9 million and $327,000, respectively, for stock-based compensation.

Research and Development Expenses.  Our research and development expenses increased by $7.7 million, from $8.4 million for the year ended June 30, 2007 to $16.1 million for the year ended June 30, 2008. Research and development spending increased as we initiated projects to improve our product, such as the development of a new control unit, shaft designs, crown designs, and began human feasibility trials in the coronary market. Research and development for the years ended June 30, 2008 and 2007 includes $297,000 and $63,000, respectively, for stock-based compensation.

Interest Expense.  Interest expense decreased by $6,000, from $13,000 for the year ended June 30, 2007 to $7,000 for the year ended June 30, 2008. The decrease was due to the redemption of convertible promissory notes in the year ended June 30, 2007.

Interest Income.  Interest income increased by $286,000, from $881,000 for the year ended June 30, 2007 to $1.2 million for the year ended June 30, 2008. The increase was primarily due to higher average cash and cash equivalent balances. Average cash and cash equivalent balances were $20.4 million and $18.5 million for the years ended June 30, 2008 and 2007, respectively.

Decretion (Accretion) of Redeemable Convertible Preferred Stock Warrants.  Accretion of redeemable convertible preferred stock warrants for the years ended June 30, 2008 and 2007 was $916,000 and $1.3 million, respectively. Decretion (accretion) of redeemable convertible preferred stock warrants reflects the change in estimated fair value of preferred stock warrants at the balance sheet dates.

Impairment on Investments.  Impairment on investments was $1.3 million for the year ended June 30, 2008. This impairment was due to a decrease in the fair value of investments.

Accretion of Redeemable Convertible Preferred Stock.  Accretion of redeemable convertible preferred stock was $19.4 million and $16.8 million for the years ended June 30, 2008 and 2007, respectively. Accretion of

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redeemable convertible preferred stock reflects the change in estimated fair value of preferred stock at the balance sheet dates.

LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $33.4 million and $7.6 million at June 30, 2009 and 2008, respectively. During the year ended June 30, 2009, net cash used in operations amounted to $29.3 million. As of June 30, 2009, we had an accumulated deficit of $127.4 million. We have historically funded our operating losses primarily from the issuance of common and preferred stock, convertible promissory notes, and debt. We have incurred negative cash flows and net losses since inception.

On February 25, 2009, we completed the merger, in accordance with the terms of the Merger Agreement. At closing, Replidyne’s net assets, as calculated pursuant to the terms of the Merger Agreement, were approximately $36.6 million.

In February 2008, we were notified that recent conditions in the global credit markets have caused insufficient demand for auction rate securities, resulting in failed auctions for $23.0 million of our auction rate securities held at June 30, 2009 and 2008. These securities are currently not liquid, as we have an inability to sell the securities due to continued failed auctions. On March 28, 2008, we obtained a margin loan from UBS Financial Services, Inc., the entity through which we originally purchased our auction rate securities, for up to $12.0 million, which was secured by the $23.0 million par value of our auction rate securities. The outstanding balance on this loan at June 30, 2008 was $11.9 million. On August 21, 2008, we replaced this loan with a margin loan from UBS Bank USA, which increased maximum borrowings available to $23.0 million, which may be adjusted from time to time by UBS Bank in its sole discretion. The margin loan bears interest at variable rates that equal the lesser of (i) 30 day LIBOR plus 1.25% or (ii) the applicable reset rate, maximum auction rate or similar rate as specified in the prospectus or other documentation governing the pledged taxable student loan auction rate securities; however, interest expense charged on the loan will not exceed interest income earned on the auction rate securities. The loan is due on demand and UBS Bank will require us to repay it in full from the proceeds received from a public equity offering where net proceeds exceed $50.0 million. In addition, if at any time any of our auction rate securities may be sold, exchanged, redeemed, transferred or otherwise conveyed for no less than their par value by UBS, then we must immediately effect such a transfer and the proceeds must be used to pay down outstanding borrowings under this loan. The margin requirements are determined by UBS Bank and are subject to change. From August 21, 2008, the date this loan was initially funded, through June 30, 2009, the margin requirements included maximum borrowings, including interest, of $23.0 million. If these margin requirements are not maintained, UBS Bank may require us to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. We have maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at June 30, 2009 was $22.9 million.

On September 12, 2008, we entered into a loan and security agreement with Silicon Valley Bank with maximum available borrowings of $13.5 million, which agreement was amended on February 25, 2009 and April 30, 2009. The agreement includes a $3.0 million term loan, a $10.0 million accounts receivable line of credit, and a $5.5 million term loan that reduces availability of borrowings on the accounts receivable line of credit. The terms of each of these loans are as follows:

•  The $3.0 million term loan has a fixed interest rate of 10.5% and a final payment amount equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with repayment terms that include interest only payments during the first six months followed by 30 equal principal and interest payments. This term loan also includes an acceleration provision that requires us to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. As part of the term loan agreement, we granted Silicon Valley Bank a warrant to purchase 8,493 shares of Series B redeemable convertible preferred stock at an exercise price of $14.16 per share. This warrant was assigned a value of $75,000 for accounting purposes, is immediately exercisable, and expires ten years after issuance. The balance outstanding on the term loan at June 30, 2009 was $2.6 million.

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•  The accounts receivable line of credit has a two year maturity and a floating interest rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on 80% of eligible domestic receivables, which is defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and government receivables. Accounts receivable receipts are deposited into a lockbox account in the name of Silicon Valley Bank. The accounts receivable line of credit is subject to non-use fees, annual fees, cancellation fees, and maintaining a minimum liquidity ratio. There was no balance outstanding on the line of credit at June 30, 2009. On April 30, 2009, the accounts receivable line of credit was amended to allow for an increase in borrowings from $5.0 million to $10.0 million. All other terms and conditions of the original line of credit agreement remain in place. The $5.5 million term loan reduces available borrowings under the line of credit agreement.

•  The $5.5 million term loan was originally two guaranteed term loans each with a one year maturity. Each of the guaranteed term loans had a floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0%. Interest on borrowings were due monthly and the principal balance was due at maturity. One of our directors and stockholders and two entities who held preferred shares and were also affiliated with two of our directors agreed to act as guarantors of these term loans. In consideration for guarantees, we issued the guarantors warrants to purchase an aggregate of 296,539 shares of our common stock at an exercise price of $9.28 per share.

On April 30, 2009, the guaranteed term loans were refinanced into a $5.5 million term loan that has a fixed interest rate of 9.0% and a final payment amount equal to 1.0% of the loan amount due at maturity. As a result of the refinancing, the guarantees on the original term loans have been released. This term loan has a 30 month maturity, with repayment terms that include equal monthly payments of principal and interest beginning June 1, 2009. This term loan also includes an acceleration provision that requires us to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 3.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. The term loan reduces available borrowings under the amended accounts receivable line of credit agreement. The balance outstanding on the guaranteed term loans at June 30, 2009 was $5.3 million (excluding debt discount of $0.7 million).

The guaranteed term loans and common stock warrants were allocated using the relative fair value method. Under this method, we estimated the fair value of the term loans without the guarantees and calculated the fair value of the common stock warrants using the Black-Scholes method. The relative fair value of the loans and warrants were applied to the loan proceeds of $5.5 million resulting in an assigned value of $3.7 million for the loans and $1.8 million for the warrants. The assigned value of the warrants of $1.8 million is treated as a debt discount. The balance of the debt discount at June 30, 2009 is $0.7 million and is being amortized over the remaining term of the $5.5 million term loan.

Borrowings from Silicon Valley Bank are secured by all of our assets, other than our auction rate securities and intellectual property, and, until April 30, 2009, the investor guarantees. The borrowings are subject to prepayment penalties and financial covenants, and our achievement of minimum monthly net revenue goals. The agreement also includes subjective acceleration clauses which permit Silicon Valley Bank to accelerate the due date under certain circumstances, including, but not limited to, material adverse effects on our financial status or otherwise. Any non-compliance by us under the terms of our debt arrangements could result in an event of default under the Silicon Valley Bank loan, which, if not cured, could result in the acceleration of this debt. We were in compliance with all financial covenants at June 30, 2009.

The reported changes in cash and cash equivalents and investments for the year ended June 30, 2009 and 2008 are summarized below.

Cash and Cash Equivalents.  Cash and cash equivalents was $33.4 million and $7.6 million at June 30, 2009 and 2008, respectively. This increase is primarily attributable to net assets acquired in the merger with Replidyne.

Investments.  Investments were $20.0 million and $21.7 million at June 30, 2009 and 2008, respectively.

Our investments include AAA rated auction rate securities issued primarily by state agencies and backed by student loans substantially guaranteed by the Federal Family Education Loan Program, or FFELP. The federal

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government insures loans in the FFELP so that lenders are reimbursed at least 97% of the loan’s outstanding principal and accrued interest if a borrower defaults. Approximately 99.2% of the par value of our auction rate securities is supported by student loan assets that are guaranteed by the federal government under the FFELP.

In February 2008, we were informed that there was insufficient demand for auction rate securities, resulting in failed auctions for $23.0 million of our auction rate securities held at June 30, 2009 and 2008. Currently, these affected securities are not liquid and will not become liquid until a future auction for these investments is successful, they are redeemed by the issuer, they mature, or they are repurchased by UBS. As a result, we have determined the fair value of our auction rate securities at June 30, 2009 to be $20.0 million and have classified them as a long-term asset. We determined the fair value of our auction rate securities with the assistance of ValueKnowledge LLC, an independent third party valuation firm, which utilized various valuation methods and considered, among other factors, estimates of present value of the auction rate securities based upon expected cash flows, the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value, the likelihood of a return of liquidity to the market for these securities and the potential to sell the securities in secondary markets.

On November 7, 2008, we accepted an offer from UBS AG (“UBS”), providing rights related to our auction rate securities (the “Rights”). The Rights permit us to require UBS to purchase our auction rate securities at par value, which is defined for this purpose as the liquidation preference of the auction rate securities plus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our auction rate securities at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our auction rates securities under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our auction rate securities. At June 30, 2009, we have determined the fair value of our auction rate security rights to be $2.8 million and have classified them as a long-term asset. So long as we hold auction rate securities, they will continue to accrue interest as determined by the auction process or the terms of the auction rate securities if the auction process fails.

Operating Activities.  Net cash used in operating activities was $29.7 million and $31.9 million for the years ended June 30, 2009 and 2008, respectively. For the years ended June 30, 2009 and 2008, we had a net loss of $31.9 million and $39.2 million, respectively. Changes in working capital accounts also contributed to the net cash used in the years ended June 30, 2009 and 2008. Significant changes in working capital during these periods included:

•  cash used in accounts receivable of $3.7 million and $5.1 million during the years ended June 30, 2009 and 2008, respectively;

•  cash used in (provided by) inventory of $(407,000) and $2.7 million during the years ended June 30, 2009 and 2008, respectively;

•  cash used in (provided by) prepaid expenses and other current assets of $(2.4) million and $1.3 million during the years ended June 30, 2009 and 2008, respectively;

•  cash used in (provided by) accounts payable of $1.1 million and $(3.6) million during the years ended June 30, 2009 and 2008, respectively; and

•  cash used in accrued expenses and other liabilities of $267,000 and $2.8 million during the years ended June 30, 2009 and 2008, respectively.

Investing Activities.  Net cash provided by (used in) investing activities was $36.0 million and $(12.4) million for the years ended June 30, 2009 and 2008, respectively. For the year ended June 30, 2009, cash acquired in the merger with Replidyne, net of transaction costs paid, was $37.0 million. For the year ended June 30, 2008, we purchased investments in the amount of $31.3 million. For the years ended June 30, 2009 and 2008, we sold investments in the amount of $50,000 and $20.0 million, respectively. The balance of cash provided by (used in) investing activities primarily related to the purchase of property and equipment. Purchases of property and equipment used cash of $957,000 and $721,000 for the years ended June 30, 2009 and 2008, respectively.

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Financing Activities.  Net cash provided by financing activities was $19.5 million and $44.0 million in the years ended June 30, 2009 and 2008, respectively. Cash provided by financing activities during these periods included:

•  proceeds from long-term debt of $19.8 million and $16.4 million during the years ended June 30, 2009 and 2008, respectively;

•  exercise of stock options and warrants of $525,000 and $1.9 million during the years ended June 30, 2009 and 2008, respectively; and

•  net proceeds from the issuance of convertible preferred stock of $30.3 million in the year ended June 30, 2008.

Cash used in financing activities in these periods included:

•  payment of long-term debt of $945,000 and $4.5 million during the years ended June 30, 2009 and 2008, respectively.

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, the continuing acceptance of our products in the marketplace, competing technologies and market and regulatory developments. As of June 30, 2009, we believe our current cash and cash equivalents and available debt will be sufficient to fund working capital requirements, capital expenditures and operations for the foreseeable future. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future.

Contractual Cash Obligations.  Our contractual obligations and commercial commitments as of June 30, 2009 are summarized below:

	Payments Due by Period
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
	(In thousands)
Operating leases(1)	$	1,642	$	478	$	962	$	202	$	—
Purchase commitments(2)		5,424		5,424		—		—		—
Debt maturities(3)		30,202		25,823		4,379		—		—
Total	$	37,234	$	31,707	$	5,325	$	202	$	—

(1)	The amounts reflected in the table above for operating leases represent future minimum payments under a non-cancellable operating lease for our office and production facility along with equipment.
(2)	This amount reflects open purchase orders.
(3)	The amounts reflected in the table above represents debt maturities under various debt agreements.

INFLATION

We do not believe that inflation has had a material impact on our business and operating results during the periods presented.

OFF-BALANCE SHEET ARRANGEMENTS

Since inception, we have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

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RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Accounting Standards Codification^tm (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. We do not expect the adoption of this standard will have a material impact on our consolidated financial position or results of operations.

In April 2009, the FASB issued FSP SFAS, No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS Statement No. 107, Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. This FSP is effective for interim periods ending after June 15, 2009. We do not expect the adoption of this standard will have a material impact on our consolidated financial position or results of operations.

In June 2008, the FASB issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-05 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, “Accounting For Derivative Instruments and Hedging Activities” and/or EITF 00-19, “Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF 07-05 is effective for year-ends beginning after December 15, 2008. We are currently evaluating the impact that the adoption of this standard will have on our financial position and consolidated results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop these assumptions. On February 12, 2008, the FASB issued FASB Staff Position, or FSP, FAS 157-2, Effective Date of FASB Statement No. 157, or FSP FAS 157-2. FSP FAS 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The portion of SFAS No. 157 that has been deferred by FSP FAS 157-2 will be effective beginning in the first quarter of fiscal year 2010. We are currently evaluating the impact of this statement. SFAS No. 157 was adopted for financial assets and liabilities on July 1, 2008 and did not have a material impact on our financial position or consolidated results of operations during the year ended June 30, 2009.

In October 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which we adopted for financial assets and liabilities on July 1, 2008, in situations where the market is not active. We have considered the guidance provided by FSP SFAS No. 157-3 in our determination of estimated fair values as of June 30, 2009.

In June 2008, the FASB issued Staff Position EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-06-1”). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, “Earnings per Share”. FSP EITF 03-06-1 is effective on July 1, 2009 and requires all prior-period earnings per share data to be adjusted retrospectively. We do

53

not expect the adoption of this standard will have a material impact on our consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. The revised standards continue the movement toward the greater use of fair values in financial reporting. SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods including the accounting for contingent consideration. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008 with SFAS 141(R) to be applied prospectively while SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. We are currently evaluating the impact of these statements, but expect that the adoption of SFAS No. 141(R) will have a material impact on how we will identify, negotiate, and value any future acquisitions and a material impact on how an acquisition will affect our consolidated financial statements, and that SFAS No. 160 will not have a material impact on our financial position or consolidated results of operations.

In April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP SFAS No. 141(R)-1 amends and clarifies the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R). FSP SFAS No. 141(R)-1 is effective beginning fiscal year 2010 and must be applied to assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after April 25, 2009. The adoption of FSP SFAS No. 141(R)-1 will not be material to the consolidated financial statements.

PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Such “forward-looking” information is included in this Form 10-K and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company). Forward-looking statements include all statements based on future expectations. This Form 10-K contains forward-looking statements that involve risks and uncertainties, including our expectation that our losses will continue; our plans to continue to expand our sales and marketing efforts, conduct research and development and increase our manufacturing capacity to support anticipated future growth; the expected benefits of the Rights from UBS and our expectation that we will sell our auction rate securities under the Rights; our expectation of increased revenue, selling, general and administrative expenses and research and development expenses; our expectation that cost of goods sold as a percentage of revenues will decline in the future; the sufficiency of our current and anticipated financial resources; and our belief that our current cash and cash equivalents and available debt will be sufficient to fund working capital requirements, capital expenditures and operations for the foreseeable future. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on their interpretation of currently available information.

These statements involve known and unknown risks, uncertainties and other factors that may cause our results or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. These factors include regulatory developments in the U.S. and foreign countries; the experience of physicians regarding the effectiveness and reliability of the Diamondback 360^o; competition from other devices; unanticipated developments affecting our estimates regarding expenses, future revenues and capital requirements; fluctuations in results and expenses based on new product introductions, sales mix, unanticipated warranty claims, and the timing of project expenditures; our

54

inability to expand our sales and marketing organization and research and development efforts; the sufficiency of UBS’s financial resources to purchase our auction rate securities; the market for auction rate securities; our ability to obtain and maintain intellectual property protection for product candidates; our actual financial resources; general economic conditions; and those matters identified and discussed in Item 1A of this Form 10-K under “Risk Factors.”

You should read these risk factors and the other cautionary statements made in this Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. We cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this Form 10-K completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or availability. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and investments in a variety of marketable securities, including money market funds, U.S. government securities, and certain bank obligations. Our cash and cash equivalents as of June 30, 2009 include liquid money market accounts. Due to the short-term nature of these investments, we believe that there is no material exposure to interest rate risk.

In February 2008, we were informed that there was insufficient demand for auction rate securities (ARS), resulting in failed auctions for $23.0 million of our ARS held at June 30, 2009 and June 30, 2008. Currently, these affected securities are not liquid and will not become liquid until a future auction for these investments is successful, they are redeemed by the issuer, or they mature. For discussion of the related risks, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

55

Item 8.   Financial Statements and Supplementary Data.

Index to Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets		F-2
Consolidated Statements of Operations		F-3
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and Comprehensive (Loss) Income		F-4
Consolidated Statements Cash Flows		F-5
Notes to Consolidated Financial Statements		F-6

56

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Cardiovascular Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and comprehensive (loss) income and cash flows present fairly, in all material respects, the financial position of Cardiovascular Systems, Inc. (the “Company”) at June 30, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

September 28, 2009

F-1

Cardiovascular Systems, Inc.

Consolidated Balance Sheets

	June 30,			June 30,
	2009			2008
	(Dollars in thousands, except per share and share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	33,411		$	7,595
Accounts receivable, net		8,474			4,897
Inventories		3,369			3,776
Prepaid expenses and other current assets		798			1,936
Total current assets		46,052			18,204
Auction rate securities put option		2,800			—
Investments, trading		20,000			—
Investments, available-for-sale		—			21,733
Property and equipment, net		1,719			1,041
Patents, net		1,363			980
Other assets		436			—
Total assets	$	72,370		$	41,958
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities
Current maturities of long-term debt	$	25,823		$	11,888
Accounts payable		4,751			5,851
Accrued expenses		5,600			3,583
Total current liabilities		36,174			21,322
Long-term liabilities
Long-term debt, net of current maturities		4,379			—
Redeemable convertible preferred stock warrants		—			3,986
Lease obligation and other liabilities		1,485			100
Total long-term liabilities		5,864			4,086
Total liabilities		42,038			25,408
Commitments and contingencies
Series A redeemable convertible preferred stock, no par value; authorized 3,511,269 shares, issued and outstanding 3,081,375 at June 30, 2008; aggregate liquidation value $31,230 at June 30, 2008		—			51,213
Series A-1 redeemable convertible preferred stock, no par value; authorized 1,461,220 shares at June 30, 2008; issued and outstanding 1,461,220 at June 30, 2008; aggregate liquidation value $19,862 at June 30, 2008		—			23,657
Series B redeemable convertible preferred stock, no par value; authorized 1,412,908 shares, issued and outstanding 1,412,591 at June 30, 2008; aggregate liquidation value $20,871 at June 30, 2008		—			23,372
Stockholders’ equity (deficiency)
Common stock, $0.001 par value at June 30, 2009 and no par value at June 30, 2008; authorized 100,000,000 common shares at June 30, 2009 and 45,290,000 common shares and 3,235,000 undesignated shares at June 30, 2008, respectively; issued and outstanding 14,113,904 at June 30, 2009 and 4,900,984 at June 30, 2008, respectively		14			35,933
Additional paid in capital		146,455			—
Common stock warrants		11,282			680
Accumulated deficit		(127,419	)		(118,305	)
Total stockholders’ equity (deficiency)		30,332			(81,692	)
Total liabilities and stockholders’ equity (deficiency)	$	72,370		$	41,958

The accompanying notes are an integral part of these consolidated financial statements.

F-2

Cardiovascular Systems, Inc.

Consolidated Statements of Operations

	Year Ended June 30,
	2009			2008			2007
	(Dollars in thousands, except per share and
	share amounts)
Revenues	$	56,461		$	22,177		$	—
Cost of goods sold		16,194			8,927			—
Gross profit		40,267			13,250			—
Expenses
Selling, general and administrative		59,822			35,326			6,691
Research and development		14,678			16,068			8,446
Total expenses		74,500			51,394			15,137
Loss from operations		(34,233	)		(38,144	)		(15,137	)
Other income (expense)
Interest expense		(2,350	)		(7	)		(13	)
Interest income		3,380			1,167			881
Decretion (accretion) of redeemable convertible preferred stock warrants		2,991			(916	)		(1,327	)
Impairment on investments		(1,683	)		(1,267	)		—
Total other income (expense)		2,338			(1,023	)		(459	)
Net loss		(31,895	)		(39,167	)		(15,596	)
Decretion (accretion) of redeemable convertible preferred stock		22,781			(19,422	)		(16,835	)
Net loss available to common stockholders	$	(9,114	)	$	(58,589	)	$	(32,431	)
Loss per common share
Basic and diluted	$	(1.13	)	$	(13.25	)	$	(8.06	)
Weighted average common shares used in computation
Basic and diluted		8,068,689			4,422,326			4,020,989

The accompanying notes are an integral part of these consolidated financial statements.

F-3

Cardiovascular Systems, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and

Comprehensive (Loss) Income

															Accumulated
															Other
	Common Stock					Additional						Accumulated			Comprehensive						Comprehensive
	Shares		Amount			Paid In Capital			Warrants			Deficit			(Loss) Income			Total			(Loss) Income
	(Dollars in thousands, except per share and share amounts)
Balances at June 30, 2006		4,010,799	$	25,578		$	—		$	1,280		$	(27,285	)	$	—		$	(427	)	$	(4,895	)
Exercise of stock options and warrants at $1.55 per share		44,158		86						(17	)								69
Value assigned to warrants issued in connection with Series A redeemable convertible preferred stock										103									103
Accretion of redeemable convertible preferred stock													(16,835	)					(16,835	)
Stock-based compensation related to stock options				390															390
Unrealized loss on investments																(7	)		(7	)	$	(7	)
Net Loss													(15,596	)					(15,596	)		(15,596	)
Balances at June 30, 2007		4,054,957	$	26,054		$	—		$	1,366		$	(59,716	)	$	(7	)	$	(32,303	)	$	(15,603	)
Issuance/forfeiture of restricted stock awards, net		525,473		1,152															1,152
Stock-based compensation related to stock options				6,229															6,229
Exercise of stock options and warrants at $1.55 - $12.37 per share		320,554		2,382						(570	)								1,812
Expiration of warrants				116						(116	)								—
Accretion of redeemable convertible preferred stock													(19,422	)					(19,422	)
Unrealized gain on investments																7			7		$	7
Net loss													(39,167	)					(39,167	)		(39,167	)
Balances at June 30, 2008		4,900,984	$	35,933		$	—		$	680		$	(118,305	)	$	—		$	(81,692	)	$	(39,160	)
Issuance/forfeiture of restricted stock awards, net		425,359		2,464			2,003												4,467
Stock-based compensation related to stock options				756			1,548												2,304
Exercise of stock options and warrants at $1.55-$8.83 per share		100,333		640			307			(422	)								525
Issuance of common stock warrants							(8,217	)		10,031									1,814
Conversion of preferred warrants to common warrants										1,069									1,069
Expiration of warrants				76						(76	)								—
Decretion of redeemable convertible preferred stock													22,781						22,781
Conversion of preferred stock to common stock		5,954,389		6			75,456												75,462
Merger with Replidyne, net of merger costs		2,732,839		3			35,494												35,497
To adjust common stock to par value				(39,864	)		39,864												—
Net loss													(31,895	)					(31,895	)		(31,895	)
Balances at June 30, 2009		14,113,904	$	14		$	146,455		$	11,282		$	(127,419	)	$	—		$	30,332		$	(31,895	)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

Cardiovascular Systems, Inc.

Consolidated Statements of Cash Flows

	Year Ended June 30,
	2009			2008			2007
	(Dollars in thousands, except per share and share amounts)
Cash flows from operating activities
Net loss	$	(31,895	)	$	(39,167	)	$	(15,596	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization of property and equipment		417			264			153
Provision for doubtful accounts		95			164			—
Amortization of patents		53			29			45
(Decretion) accretion of redeemable convertible preferred stock warrants		(2,991	)		916			1,327
Amortization of debt discount		1,228			—			—
Stock-based compensation		6,771			7,381			390
Amortization of discount on investments		—			(52	)		(293	)
Impairment on investments		1,683			1,267			—
Gain on auction rate securities put option		(2,800	)		—			—
Changes in assets and liabilities, net of merger
Accounts receivable		(3,672	)		(5,061	)		—
Inventories		407			(2,726	)		(322	)
Prepaid expenses and other assets		2,362			(1,323	)		(113	)
Accounts payable		(1,100	)		3,631			1,709
Accrued expenses and other liabilities		(268	)		2,809			424
Net cash used in operations		(29,710	)		(31,868	)		(12,276	)
Cash flows from investing activities
Expenditures for property and equipment		(957	)		(720	)		(465	)
Purchases of investments		—			(31,314	)		(23,169	)
Sales of investments		50			19,988			11,840
Costs incurred in connection with patents		(436	)		(397	)		(58	)
Cash acquired in Replidyne merger, net of transaction costs paid		37,369			—			—
Net cash provided by (used in) investing activities		36,026			(12,443	)		(11,852	)
Cash flows from financing activities
Proceeds from sale of redeemable convertible preferred stock		—			30,296			30,294
Payment of offering costs		—			(51	)		(1,776	)
Issuance of common stock warrants		—			—			103
Issuance of convertible preferred stock warrants		75			—			1,767
Exercise of stock options and warrants		525			1,865			94
Proceeds from long-term debt		19,845			16,398			—
Payments on long-term debt		(945	)		(4,510	)		—
Net cash provided by financing activities		19,500			43,998			30,482
Net change in cash and cash equivalents		25,816			(313	)		6,354
Cash and cash equivalents
Beginning of period		7,595			7,908			1,554
End of period	$	33,411		$	7,595		$	7,908
Noncash investing and financing activities
Decretion (accretion) of redeemable convertible preferred stock	$	(22,781	)	$	19,422		$	16,835
Conversion of Series A warrants to common warrants		1,069			—			—
Issuance of common stock warrants		1,814			—			—
Issuance of common stock warrants in connection with merger		8,217			—			—
Conversion of redeemable convertible preferred stock to common stock		75,456			—			—
Expiration of common warrants		76			—			—
Adjustment of common stock to par value		39,864			—			—
Capitalized financing costs included in accounts payable		—			311			—
Capitalized financing costs included in accrued expenses		—			47			—
Net unrealized gain (loss) on investments		—			7			(7	)
Conversion of convertible promissory notes and accrued interest into Series A redeemable convertible preferred stock		—			—			(3,145	)
Supplemental cash flow information
Interest paid	$	1,051		$	7		$	13

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share and share amounts)

1.   Summary of Significant Accounting Policies

Company Description

Cardiovascular Systems, Inc. was incorporated as Replidyne, Inc. in Delaware in 2000. On February 25, 2009, Replidyne, Inc. completed its reverse merger with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”) incorporated in 1989, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008. Pursuant to the Merger Agreement, CSI-MN continued after the merger as the surviving corporation and a wholly owned subsidiary of Replidyne. Replidyne changed its name to Cardiovascular Systems, Inc. (“CSI”) and CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation. These transactions are referred to herein as the “merger.”

Unless the context otherwise requires, all references herein to the “Company,” “CSI,” “we,” “us” and “our” refer to CSI-MN prior to the completion of the merger and to CSI following the completion of the merger and the name change, and all references to “Replidyne” refer to Replidyne prior to the completion of the merger and the name change. CSI is considered the accounting acquirer in the merger and financial results presented for all periods reflect historical CSI results.

The Company develops, manufactures and markets devices for the treatment of vascular diseases. The Company has completed a pivotal clinical trial in the United States to demonstrate the safety and efficacy of the Company’s Diamondback 360° PAS System in treating peripheral arterial disease. On August 30, 2007, the U.S. Food and Drug Administration, or FDA, granted the Company 510(k) clearance to market the Diamondback 360° for the treatment of peripheral arterial disease. The Company commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007. During the quarter ended March 31, 2008, the Company began its full commercial launch of the Diamondback 360°. Prior to the merger, Replidyne was a biopharmaceutical company focused on discovering, developing, in-licensing and commercializing anti-infective products.

For the fiscal year ended June 30, 2007, the Company was considered a “development stage enterprise” as prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises. During that time, the Company’s major emphasis was on planning, research and development, recruitment and development of a management and technical staff, and raising capital. The Company no longer considers itself a development stage enterprise as these development stage activities were completed prior to the first quarter of fiscal 2008. The Company’s management team, organizational structure and distribution channel are in place. The Company’s primary focus is on the sale and commercialization of its current product to end user customers.

Principles of Consolidation

The consolidated balance sheets, statements of operations, changes in stockholders’ equity (deficiency) and comprehensive (loss) income, and cash flows include the accounts of the Company and its wholly owned inactive Netherlands subsidiary, SCS B.V., after elimination of all significant intercompany transactions and accounts. SCS B.V. was formed for the purpose of conducting human trials and the development of production facilities. Operations of the subsidiary ceased in fiscal 2002; accordingly, there are no assets or liabilities included in the consolidated financial statements related to SCS B.V.

Cash and Cash Equivalents

The Company considers all money market funds and other investments purchased with an original maturity of three months or less to be cash and cash equivalents.

F-6

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Customer credit terms are established prior to shipment with the general standard being net 30 days. Collateral or any other security to support payment of these receivables generally is not required. The Company maintains allowances for doubtful accounts. This allowance is an estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Provisions for the allowance for doubtful accounts attributed to bad debt are recorded in general and administrative expenses. The following table shows allowance for doubtful accounts activity for the fiscal years ended June 30, 2009 and 2008:

	Amount
Balance at June 30, 2007	$	—
Provision for doubtful accounts		164
Balance at June 30, 2008		164
Provision for doubtful accounts		95
Write-offs		(6	)
Balance at June 30, 2009	$	253

Inventories

Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out (“FIFO”) method of valuation. The establishment of inventory allowances for excess and obsolete inventories is based on estimated exposure on specific inventory items.

Investments

The Company’s investments include AAA rated auction rate securities (ARS) issued primarily by state agencies and backed by student loans substantially guaranteed by the Federal Family Education Loan Program (FFELP). In February 2008, the Company was informed that there was insufficient demand for auction rate securities, resulting in failed auctions for $23,000 of the Company’s auction rate securities held at June 30, 2009 and 2008. Currently, these affected securities are not liquid and will not become liquid until a future auction for these investments are successful, they are redeemed by the issuer, or they mature. As a result, at June 30, 2009 and 2008, the Company has classified the fair value of the auction rate securities as a long-term asset. The Company has collected all interest due on its auction rate securities and has no reason to believe that it will not collect all interest due in the future.

On November 7, 2008, the Company accepted an offer from UBS AG (“UBS”), providing rights related to the Company’s ARS (the “Rights”). The Rights permit the Company to require UBS to purchase the Company’s ARS at par value, which is defined for this purpose as the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell the Company’s ARS at any time until July 2, 2012, so long as the Company receives payment at par value upon any sale or disposition. The Company expects to sell its ARS under the Rights. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy the Company’s ARS. So long as the Company holds ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails. Prior to accepting the UBS offer, the Company recorded ARS as investments available-for-sale. The Company recorded unrealized gains and losses on available-for-sale securities in accumulated other comprehensive income in the stockholders’ equity (deficiency) section of the balance sheet. Realized gains and losses were accounted for on the specific identification

F-7

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

method. After accepting the UBS offer, the Company recorded ARS as trading investments and unrealized gains and losses are included in earnings.

The Rights represent a firm agreement in accordance with SFAS 133, which defines a firm agreement as an agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction, and b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the Rights results in a put option and should be recognized as a free standing asset separate from the ARS. At June 30, 2009, the Company recorded $2,800 as the fair value of the put option asset with a corresponding credit to interest income. The Company considered the expected time until the Rights are exercised, carrying costs of the Rights, and the expected credit risk attributes of the Rights and UBS in their valuation of the put option. The put option does not meet the definition of a derivative instrument under SFAS 133. Therefore, the Company has elected to measure the put option at fair value under SFAS 159, which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the ARS. As a result, unrealized gains and losses will be included in earnings in future periods.

The Company determined the fair value of its auction rate securities and quantified the other-than-temporary impairment loss and the unrealized loss with the assistance of ValueKnowledge LLC, an independent third party valuation firm, which utilized various valuation methods and considered, among other factors, estimates of present value of the auction rate securities based upon expected cash flows, the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value, the likelihood of a return of liquidity to the market for these securities and the potential to sell the securities in secondary markets. Based on these factors, the Company recorded impairment of investments for the years ended June 30, 2009 and 2008 of $1,683 and $1,267, respectively.

The amortized cost and fair value of available-for-sale investments as of June 30, 2008 was $21,733. All ARS at June 30, 2008 had original maturities greater than ten years.

Property and Equipment

Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of five years for production equipment and furniture and fixtures; three years for computer equipment and software; and the shorter of their estimated useful lives or the lease term for leasehold improvements. Expenditures for maintenance and repairs and minor renewals and betterments which do not extend or improve the life of the respective assets are expensed as incurred. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gains or losses included in the consolidated statement of operations.

Patents

The capitalized costs incurred to obtain patents are amortized using the straight-line method over their remaining estimated lives, not exceeding 20 years. The recoverability of capitalized patent costs is dependent upon the Company’s ability to derive revenue-producing products from such patents or the ultimate sale or licensing of such patent rights. Patents that are abandoned are written off at the time of abandonment.

Operating Lease

The Company leases office space under an operating lease. The lease arrangement contains a rent escalation clause for which the lease expense is recognized on a straight-line basis over the terms of the lease. Rent expense

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that is recognized but not yet paid is included in lease obligation and other liabilities on the consolidated balance sheets.

Long-Lived Assets

The Company regularly evaluates the carrying value of long-lived assets for events or changes in circumstances that indicate that the carrying amount may not be recoverable or that the remaining estimated useful life should be changed. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its fair value.

Revenue Recognition

The Company sells the majority of its products via direct shipment to hospitals or clinics. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. These criteria are met at the time of delivery when the risk of loss and title passes to the customer. The Company records estimated sales returns, discounts and rebates as a reduction of net sales in the same period revenue is recognized.

The Company also considers Emerging Issues Task Force Bulletin (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, in revenue recognition. This standard addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. In these cases, the Company recognizes revenue from each element of the arrangement as long as separate values for each element can be determined, the Company has completed its obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

Costs related to products delivered are recognized in the period revenue is recognized. Cost of goods sold consists primarily of raw materials, direct labor, and manufacturing overhead.

Warranty Costs

The Company provides its customers with the right to receive a replacement if a product is determined to be defective at the time of shipment. Warranty reserve provisions are estimated based on Company experience, volume, and expected warranty claims. Warranty reserve, provisions and claims for the fiscal years ended June 30, 2009 and 2008 were as follows:

	Amount
Balance at June 30, 2007	$	—
Provision		137
Claims		(125	)
Balance at June 30, 2008		12
Provision		559
Claims		(506	)
Balance at June 30, 2009	$	65

Income Taxes

Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax rates applicable to the

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Developing a provision for income taxes, including the effective tax rate and the analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets. The Company’s judgment and tax strategies are subject to audit by various taxing authorities.

Research and Development Expenses

Research and development expenses include costs associated with the design, development, testing, enhancement and regulatory approval of the Company’s products. Research and development expenses include employee compensation, including stock-based compensation, supplies and materials, consulting expenses, travel and facilities overhead. The Company also incurs significant expenses to operate clinical trials, including trial design, third-party fees, clinical site reimbursement, data management and travel expenses. Research and development expenses are expensed as incurred.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. The Company maintains its cash and investment balances primarily with two financial institutions. At times, these balances exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in cash and cash equivalents.

Fair Value of Financial Instruments

Effective July 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which provides a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which provides a one-year deferral on the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to financial assets and financial liabilities only.

SFAS 157 classifies these inputs into the following hierarchy:

Level 1 Inputs — quoted prices in active markets for identical assets and liabilities

Level 2 Inputs — observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 Inputs — unobservable inputs

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the fair value of the Company’s auction rate securities that were measured on a recurring basis as of June 30, 2009. Assets are measured on a recurring basis if they are remeasured at least annually:

	Level 3
							Auction Rate
	Available-for-			Trading			Securities Put
	Sale Securities			Securities			Option
Balance at June 30, 2008	$	21,733		$	—		$	—
Transfer to trading securities		(21,733	)		21,733			—
Gain on auction rate securities put option		—			—			2,800
Sales of investments		—			(50	)		—
Impairment on investments		—			(1,683	)		—
Balance at June 30, 2009	$	—		$	20,000		$	2,800

As of June 30, 2009, the Company believes that the carrying amounts of its other financial instruments, including accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term maturities of these instruments. The carrying amount of long-term debt approximates fair value based on interest rates currently available for debt with similar terms and maturities.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

Stock-Based Compensation

Effective July 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) SFAS No. 123(R), Share-Based Payment, as interpreted by SAB No. 107 to account for stock-based compensation expense associated with the issuance or amendment of stock options and restricted stock awards. SFAS No. 123(R) requires the Company to recognize stock-based compensation expense in an amount equal to the fair value of share-based payments computed at the date of grant. The fair value of all stock option and restricted stock awards are expensed in the consolidated statements of operations over the related vesting period. The Company calculates the fair value on the date of grant using a Black-Scholes model.

Preferred Stock

The Company recorded the estimated fair value of its redeemable convertible preferred stock based on the fair market value of that stock as determined by management and the Board of Directors. In accordance with Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks,” and EITF Abstracts, Topic D-98, Classification and Measurement of Redeemable Securities, the Company recorded changes in the fair value of its redeemable convertible preferred stock in the consolidated statements of changes in stockholders’ equity (deficiency) and comprehensive (loss) income and consolidated statements of operations as decretion (accretion) of redeemable convertible preferred stock. The Company adjusted redeemable convertible preferred stock for changes in fair value until the date of merger at which time all redeemable convertible preferred stock was converted into common stock and, accordingly, was reclassified to stockholders’ equity (deficiency).

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Preferred Stock Warrants

Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and its related interpretations. Under SFAS No. 150, the freestanding warrant that is related to the Company’s redeemable convertible preferred stock is classified as a liability on the consolidated balance sheets as of June 30, 2008. The warrant was subject to remeasurement at each balance sheet date and any change in fair value was recognized as a component of interest (expense) income. Fair value on the grant date was measured using the Black-Scholes option pricing model and similar underlying assumptions consistent with the issuance of stock option awards. The Company adjusted the liability for changes in fair value until the date of merger at which time all preferred stock warrants were converted into warrants to purchase common stock and, accordingly, the liability was reclassified to equity.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Accounting Standards Codification^tm (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial position or results of operations.

In April 2009, the FASB issued FSP SFAS, No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS Statement No. 107, Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. This FSP is effective for interim periods ending after June 15, 2009. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial position or results of operations.

In June 2008, the FASB issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-05 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, “Accounting For Derivative Instruments and Hedging Activities” and/or EITF 00-19, “Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF 07-05 is effective for year-ends beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of this standard will have on its financial condition and consolidated results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop these assumptions. On February 12, 2008, the FASB issued FASB Staff Position, or FSP, FAS 157-2, Effective Date of FASB Statement No. 157, or FSP FAS 157-2. FSP FAS 157-2 defers the implementation of SFAS No. 157 for

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

certain nonfinancial assets and nonfinancial liabilities. The portion of SFAS No. 157 that has been deferred by FSP FAS 157-2 will be effective for the Company beginning in the first quarter of fiscal year 2010. The Company is currently evaluating the impact of this statement. SFAS No. 157 was adopted for financial assets and liabilities on July 1, 2008 and did not have a material impact on the Company’s financial position or consolidated results of operations during the year ended June 30, 2009.

In October 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the Company adopted for financial assets and liabilities on July 1, 2008, in situations where the market is not active. The Company has considered the guidance provided by FSP SFAS No. 157-3 in its determination of estimated fair values as of June 30, 2009.

In June 2008, the FASB issued Staff Position EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-06-1”). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, “Earnings per Share”. FSP EITF 03-06-1 is effective for the Company on July 1, 2009 and requires all prior-period earnings per share data to be adjusted retrospectively. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. The revised standards continue the movement toward the greater use of fair values in financial reporting. SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods including the accounting for contingent consideration. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008 with SFAS 141(R) to be applied prospectively while SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. The Company is currently evaluating the impact of these statements, but expects that the adoption of SFAS No. 141(R) will have a material impact on how the Company will identify, negotiate, and value any future acquisitions and a material impact on how an acquisition will affect its consolidated financial statements, and that SFAS No. 160 will not have a material impact on its financial position or consolidated results of operations.

In April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP SFAS No. 141(R)-1 amends and clarifies the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R). FSP SFAS No. 141(R)-1 is effective for the Company beginning fiscal year 2010 and must be applied to assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after April 25, 2009. The adoption of FSP SFAS No. 141(R)-1 will not be material to the consolidated financial statements.

2.   Merger with Replidyne

On February 25, 2009, the Company completed its reverse merger with Replidyne, Inc. Immediately prior to the merger each share of CSI-MN’s Series A, A-1, and B convertible preferred stock automatically converted into approximately one share of CSI-MN’s common stock.

At closing, Replidyne’s net assets, as calculated pursuant to the terms of the Merger Agreement, were $36,607. Based on the amount of net assets, each outstanding share of CSI-MN’s common stock, including each share

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

issuable upon conversion of CSI-MN Series A, Series A-1 and Series B convertible preferred stock as described above, was converted at the effective time of the merger into the right to receive 0.647 shares of Company common stock, taking into account a 1-for-10 reverse stock split approved by Replidyne’s stockholders and board of directors on February 24, 2009. All share and per share amounts reflect the effect of the conversion factor for all periods presented. Immediately following the effective time of the merger, former CSI-MN stockholders owned approximately 80.2% of the outstanding common stock of the Company, and Replidyne stockholders owned approximately 19.8% of the outstanding common stock of the Company. Options exercisable for a total of 5,681,974 shares of CSI-MN common stock (equivalent to a total of 3,676,208 shares of Company common stock) and warrants exercisable for a total of 4,836,051 shares of CSI-MN common stock (equivalent to a total of 3,128,740 shares of Company common stock) were assumed by the Company in connection with the merger.

Immediately prior to the merger, warrants to purchase shares of CSI-MN Series A and Series B convertible preferred stock were converted into warrants to purchase shares of CSI-MN common stock at the same ratios as the preferred stock converted into common stock. Each option and warrant to purchase CSI-MN common stock outstanding at the effective time of the merger was assumed by the Company at the effective time of the merger. Each such option or warrant became an option or warrant, as applicable, to acquire that number of shares of Company common stock equal to the product obtained by multiplying the number of shares of CSI-MN common stock subject to such option or warrant by 0.647, rounded down to the nearest whole share of Company common stock. Following the merger, each such option or warrant has a purchase price per share of Company common stock equal to the quotient obtained by dividing the per share purchase price of CSI-MN common stock subject to such option or warrant by 0.647, rounded up to the nearest whole cent.

The Company’s common stock was accepted for listing on the Nasdaq Global Market under the symbol “CSII” and trading commenced on February 26, 2009.

The Company believes that Replidyne did not meet the definition of a business in accordance with the Statements of Financial Accounting Standards No. 141, Business Combinations, and Emerging Issues Task Force (EITF) No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business, because as of the date of merger Replidyne had reduced its employee headcount to three employees that were not engaged in development or commercialization efforts and did not transition to the combined company, and had discontinued and engaged in a process to sell or otherwise dispose of its research and development programs. As such, at the time the transaction was consummated, Replidyne’s sole business activity was liquidation through the merger. Under EITF No. 98-3, the total estimated purchase price is allocated to the assets acquired and liabilities assumed in connection with the transaction, based on their estimated fair values. As a result, the cost of the merger has been measured at the estimated fair value of the net assets acquired, and no goodwill has been recognized. While the accounting treatment of the transaction is an acquisition of assets and assumption of certain liabilities by the Company, the manner in which such transaction was consummated is a merger whereby former CSI-MN stockholders control the combined entity. Accordingly, consistent with guidance relating to such transactions, CSI-MN (the legal acquiree, but the accounting acquirer) is considered to be the continuing reporting entity that acquires the registrant, Replidyne (the legal acquirer, but the accounting acquiree), and therefore the transaction is considered to be a reverse merger. The merger qualified as a tax-free reorganization under provisions of Section 368(a) of the Internal Revenue Code. CSI-MN directors constitute a majority of the combined company’s board of directors and CSI-MN executive officers constitute all members of executive management of the combined company.

The financial statements of the combined entity reflect the historical results of CSI-MN before the merger and do not include the historical financial results of Replidyne before the completion of the merger. The combined entity has changed its year-end to June 30 to correspond to the historical results of CSI-MN. Stockholders’ equity and earnings per share of the combined entity and, except as noted, all other share references have been retroactively restated to reflect the number of shares of common stock received by CSI-MN security holders in the merger, after

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

giving effect to the difference between the par values of the capital stock of CSI-MN and Replidyne, with the offset to additional paid-in capital.

A summary of the estimated fair value of the net assets acquired and merger costs incurred in the merger are as follows:

Description	Amount
Cash and cash equivalents	$	38,479
Prepaid expenses and other current assets		1,135
Property and equipment		138
Other assets		525
Liabilities		(3,670	)
Net assets acquired	$	36,607

The Company incurred merger related costs of $1,110 that were recorded in additional paid in capital as part of the transaction.

The Company has recorded a current and long-term asset totaling $651 at June 30, 2009 related to a deposit for a portion of the vacated Replidyne office and production facility that has been subleased to two tenants. The tenants have prepaid the entire sublease amount and this prepayment has been netted against the lease liability that is included in accrued expenses and lease obligation and other liabilities on the balance sheet. The deposit is being held at an escrow agent and returned in monthly payments until lease expiration in September 2011. The Company has recorded the unreturned portion of the deposit at June 30, 2009, resulting in $281 in prepaid expenses and other current assets and $370 in other assets on the balance sheet.

The Company has recorded a current and long-term liability totaling $2,389 at June 30, 2009 related to Replidyne’s lease on the vacated office and production facility. The lease currently requires monthly base rent payments of $50 plus common area maintenance and operating expenses. Monthly base rent escalates over the remaining lease term to a maximum of $59 at lease expiration in September 2011. The Company has recorded the estimated net present value of the base rent, common area maintenance and operating expenses offset by estimated rental income at June 30, 2009, resulting in $998 in accrued expenses and $1,391 in lease obligation and other liabilities on the balance sheet.

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.   Selected Consolidated Financial Statement Information

	June 30,
	2009			2008
Accounts Receivable
Accounts receivable	$	8,727		$	5,061
Less: Allowance for doubtful accounts		(253	)		(164	)
	$	8,474		$	4,897
Inventories
Raw materials	$	1,536		$	2,338
Work in process		348			117
Finished goods		1,485			1,321
	$	3,369		$	3,776
Property and equipment
Equipment	$	2,313		$	1,360
Furniture		168			169
Leasehold improvements		109			90
		2,590			1,619
Less: Accumulated depreciation and amortization		(871	)		(578	)
	$	1,719		$	1,041
Patents
Patents	$	1,715		$	1,279
Less: Accumulated amortization		(352	)		(299	)
	$	1,363		$	980

As of June 30, 2009, future estimated amortization of patents and patent licenses will be:

2010	$	46
2011		45
2012		45
2013		45
2014		45
Thereafter		1,137
	$	1,363

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

This future amortization expense is an estimate. Actual amounts may vary from these estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization or other events.

	June 30,
	2009		2008
Accrued expenses
Salaries and bonus	$	1,453	$	1,229
Commissions		1,441		1,493
Accrued vacation		1,198		554
Merger related lease obligation		998		—
Other		510		307
	$	5,600	$	3,583

4.   Debt

Loan and Security Agreement with Silicon Valley Bank

On September 12, 2008, the Company entered into a loan and security agreement with Silicon Valley Bank with maximum available borrowings of $13,500, which agreement was amended on February 25, 2009 and April 30, 2009. The agreement includes a $3,000 term loan, a $10,000 accounts receivable line of credit, and a $5,500 term loan that reduces the availability of funds on the accounts receivable line of credit. The terms of each of these loans are as follows:

•  The $3,000 term loan has a fixed interest rate of 10.5% and a final payment amount equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with repayment terms that include interest only payments during the first six months followed by 30 equal principal and interest payments. This term loan also includes an acceleration provision that requires the Company to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. As part of the term loan agreement, the Company granted Silicon Valley Bank a warrant to purchase 8,493 shares of Series B redeemable convertible preferred stock at an exercise price of $14.16 per share. This warrant was assigned a value of $75 for accounting purposes, is immediately exercisable, and expires ten years after issuance. The balance outstanding on the term loan at June 30, 2009 was $2,642.

•  The accounts receivable line of credit as amended has a two year maturity and a floating interest rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on 80% of eligible domestic receivables, which is defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and government receivables. The Company’s accounts receivable receipts are deposited into a lockbox account in the name of Silicon Valley Bank. The accounts receivable line of credit is subject to non-use fees, annual fees, cancellation fees, and maintaining a minimum liquidity ratio. There was no balance outstanding on the line of credit at June 30, 2009. On April 30, 2009, the accounts receivable line of credit was amended to allow for an increase in borrowings from $5,000 to $10,000. All other terms and conditions of the original line of credit agreement remain in place. The $5,500 term loan reduces available borrowings under the line of credit agreement.

•  The term loan was originally two guaranteed term loans each with a one year maturity. Each of the guaranteed term loans had a floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0%. Interest on borrowings was due monthly and the principal balance was due at maturity. One of the Company’s directors and stockholders and two entities who held the Company’s preferred shares and were also affiliated with two of the Company’s directors agreed to act as guarantors of these term loans. In

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consideration for guarantees, the Company issued the guarantors warrants to purchase an aggregate of 296,539 shares of the Company’s common stock at an exercise price of $9.28 per share.

On April 30, 2009, the guaranteed term loans were refinanced into a $5,500 term loan that has a fixed interest rate of 9.0% and a final payment amount equal to 1.0% of the loan amount due at maturity. As a result of the refinancing, the guarantees on the original term loans have been released. This term loan has a 30 month maturity, with repayment terms that include equal monthly payments of principal and interest beginning June 1, 2009. This term loan also includes an acceleration provision that requires the Company to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 3.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. The term loan reduces available borrowings under the amended accounts receivable line of credit agreement. The balance outstanding on the term loan at June 30, 2009 was $5,328.

The guaranteed term loans and common stock warrants were allocated using the relative fair value method. Under this method, the Company estimated the fair value of the term loans without the guarantees and calculated the fair value of the common stock warrants using the Black-Scholes method. The relative fair value of the loans and warrants were applied to the loan proceeds of $5,500, resulting in an assigned value of $3,686 for the loans and $1,814 for the warrants. The assigned value of the warrants of $1,814 is treated as a debt discount. The balance of the debt discount at June 30, 2009 is $661 and is being amortized over the remaining term of the $5,500 term loan.

Borrowings from Silicon Valley Bank are collateralized by all of the Company’s assets, other than the Company’s ARS and intellectual property, and, until April 30, 2009, the investor guarantees. The borrowings are subject to prepayment penalties and financial covenants, including the Company’s achievement of minimum monthly net revenue goals. The agreement also includes subjective acceleration clauses which permit Silicon Valley Bank to accelerate the due date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise. Any non-compliance by the Company under the terms of the Company’s debt arrangements could result in an event of default under the Silicon Valley Bank loan, which, if not cured, could result in the acceleration of this debt. The Company was in compliance with all monthly financial covenants through August 31, 2009.

Loan Payable

On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc. for up to $12,000, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was collateralized by the $23,000 par value of the Company’s auction rate securities. The maximum borrowing amount may have been adjusted from time to time by UBS Financial Services in its sole discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services and were subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceed $12,000 or 75% of UBS Financial Services’ estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements.

On August 21, 2008, the Company replaced this loan with a margin loan from UBS Bank USA, which increased maximum borrowings available to $23,000, which may be adjusted from time to time by UBS Bank in its sole discretion. The margin loan bears interest at variable rates that equal the lesser of (i) 30 day LIBOR plus 1.25% or (ii) the applicable reset rate, maximum auction rate or similar rate as specified in the prospectus or other documentation governing the pledged taxable student loan auction rate securities; however, interest expense charged on the loan will not exceed interest income earned on the auction rate securities. The loan is due on demand and UBS Bank will require the Company to repay it in full from the proceeds received from a public equity offering

F-18

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

where net proceeds exceed $50,000. In addition, if at any time any of the Company’s auction rate securities may be sold, exchanged, redeemed, transferred or otherwise conveyed for no less than their par value by UBS, then the Company must immediately effect such a transfer and the proceeds must be used to pay down outstanding borrowings under this loan. The margin requirements are determined by UBS Bank and are subject to change. As of June 30, 2009, the margin requirements include maximum borrowings, including interest, of $22,950. If these margin requirements are not maintained, UBS Bank may require the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. The Company has maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at June 30, 2009 was $22,893 and is included in maturities during the year ending June 30, 2010.

As of June 30, 2009, debt maturities (including debt discount) were as follows:

2010	$	25,823
2011		3,252
2012		1,127
Total	$	30,202
Less: Current Maturities		(25,823	)
Long-term debt	$	4,379

5.   Common Stock Warrants

Immediately prior to consummation of the merger, the Company issued warrants to preferred stockholders to purchase an aggregate of 2,264,264 shares of Company common stock at an exercise price at $8.83 per share. The warrants were assigned a value of $8,217 for accounting purposes and were recorded as additional paid in capital as part of the merger. The warrants are immediately exercisable and expire five years after issuance.

In connection with the merger, 439,317 fully exercisable preferred stock warrants were converted into common stock warrants. The exercise prices on these warrants range from $8.83 - $14.16 and expire at various dates through September 2018.

During the year ended June 30, 2009, the Company issued the former guarantors of the Silicon Valley Bank guaranteed term loans warrants to purchase an aggregate of 296,539 shares of the Company’s common stock at an exercise price of $9.28 per share. The warrants were assigned a value of $1,810 for accounting purposes, are immediately exercisable, and expire five years after issuance.

F-19

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes common stock warrant activity:

	Warrants			Price Range
	Outstanding			per Share
Warrants outstanding at June 30, 2006		169,978		$1.55-12.37
Warrants issued		88,864		$8.83
Warrants exercised		(2,102	)	$1.55
Warrants outstanding at June 30, 2007		256,740		$1.55-12.37
Warrants exercised		(76,312	)	$1.55-12.37
Warrants expired		(22,387	)	$7.73
Warrants outstanding at June 30, 2008		158,041		$1.55-12.37
Warrants issued		2,560,803		$8.83-9.28
Warrants converted		439,317		$8.83-14.16
Warrants exercised		(33,431	)	$1.55-7.73
Warrants expired		(8,605	)	$7.73
Warrants outstanding at June 30, 2009		3,116,125		$1.55-$14.16

The following assumptions were utilized in determining the fair value of warrants issued under the Black-Scholes model:

	Year Ended
	June 30,
	2009
Weighted average fair value of warrants granted	$4.06
Risk-free interest rates	2.5%-3.0%
Expected life	5 years
Expected volatility	46.7%-55.5%
Expected dividends	None

6.   Stock Options and Restricted Stock Awards

The Company has a 2007 Equity Incentive Plan (the “2007 Plan”), which was assumed from CSI-MN, under which options to purchase common stock and restricted stock awards have been granted to employees, directors and consultants at exercise prices determined by the board of directors; and also in connection with the merger the Company assumed options and restricted stock awards granted by CSI-MN under its 1991 Stock Option Plan (the “1991 Plan”) and 2003 Stock Option Plan (the “2003 Plan”) (the 2007 Plan, the 1991 Plan and the 2003 Plan collectively, the “Plans”). The 1991 Plan and 2003 Plan permitted the granting of incentive stock options and nonqualified options. A total of 485,250 shares of common stock were originally reserved for issuance under the 1991 Plan, but with the execution of the 2003 Plan no additional options were granted under it. A total of 2,458,600 shares of common stock were originally reserved for issuance under the 2003 Plan but with the approval of the 2007 Plan no additional options will be granted under it. The 2007 Plan originally allowed for the granting of up to 1,941,000 shares of common stock as approved by the board of directors in the form of nonqualified or incentive stock options, restricted stock awards, restricted stock unit awards, performance share awards, performance unit awards or stock appreciation rights to officers, directors, consultants and employees of the Company. The Plan was amended in February 2009 to increase the number of authorized shares to 2,509,969. The amended 2007 Plan also includes a renewal provision whereby the number of shares shall automatically be increased on the first day of each fiscal year beginning July 1, 2008, and ending July 1, 2017, by the lesser of (i) 970,500 shares, (ii) 5% of the outstanding common shares on such date, or (iii) a lesser amount determined by the board of directors.

F-20

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On July 1, 2009 the number of shares available for grant was increased by 705,695 under the 2007 plan’s renewal provision.

All options granted under the Plans become exercisable over periods established at the date of grant. The option exercise price is generally not less than the estimated fair market value of the Company’s common stock at the date of grant, as determined by the Company’s management and board of directors. In addition, the Company has granted nonqualified stock options to employees, directors and consultants outside of the Plans.

In estimating the value of the Company’s common stock prior to the merger for purposes of granting options and determining stock-based compensation expense, the Company’s management and board of directors conducted stock valuations using two different valuation methods: the option pricing method and the probability weighted expected return method. Both of these valuation methods took into consideration the following factors: financing activity, rights and preferences of the Company’s preferred stock, growth of the executive management team, clinical trial activity, the FDA process, the status of the Company’s commercial launch, the Company’s mergers and acquisitions and public offering processes, revenues, the valuations of comparable public companies, the Company’s cash and working capital amounts, and additional objective and subjective factors relating to the Company’s business. The Company’s management and board of directors set the exercise prices for option grants based upon their best estimate of the fair market value of the common stock at the time they made such grants, taking into account all information available at those times. In some cases, management and the board of directors made retrospective assessments of the valuation of the common stock at later dates and determined that the fair market value of the common stock at the times the grants were made was different than the exercise prices established for those grants. In cases in which the fair market was higher than the exercise price, the Company recognized stock-based compensation expense for the excess of the fair market value of the common stock over the exercise price.

Following the merger, the Company’s stock valuations are based upon the market price for the common stock.

Stock option activity is as follows:

				Weighted
	Number of			Average
	Options(a)			Exercise Price
Options outstanding at June 30, 2006		1,180,004		$	6.08
Options granted		1,696,984		$	8.72
Options exercised		(42,055	)	$	1.55
Options forfeited or expired		(61,367	)	$	1.61
Options outstanding at June 30, 2007		2,773,566		$	7.67
Options granted		1,871,089		$	11.14
Options exercised		(244,242	)	$	5.07
Options forfeited or expired		(597,289	)	$	3.56
Options outstanding at June 30, 2008		3,803,124		$	10.19
Options granted		99,314		$	9.13
Options exercised		(59,524	)	$	8.12
Options forfeited or expired		(205,032	)	$	9.32
Options outstanding at June 30, 2009		3,637,882		$	10.24

(a) Includes the effect of options granted, exercised, forfeited or expired from the 1991 Plan, 2003 Plan, 2007 Plan, and options granted outside the stock option plans described above.

F-21

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options outstanding and exercisable at June 30, 2009 were as follows:

	Options Outstanding						Options Exercisable
			Remaining						Remaining
			Weighted		Weighted				Weighted		Weighted
	Number of		Average		Average		Number of		Average		Average
	Outstanding		Contractual		Exercise		Exercisable		Contractual		Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Life (Years)		Price
$7.90		600,885		8.10	$	7.90		295,971		8.09	$	7.90
$8.75		92,844		9.68	$	8.75		—		—	$	8.75
$8.83		1,276,093		4.00	$	8.83		946,523		4.00	$	8.83
$9.28		78,931		0.79	$	9.28		78,931		0.79	$	9.28
$11.38		85,143		8.38	$	11.38		85,143		8.38	$	11.38
$12.15		1,184,807		8.49	$	12.15		683,382		8.51	$	12.15
$12.37		176,307		1.56	$	12.37		176,307		1.56	$	12.37
$13.98		111,421		8.63	$	13.98		111,421		8.63	$	13.98
$18.55		31,451		6.75	$	18.55		31,451		6.75	$	18.55
		3,637,882		6.36	$	10.24		2,409,129		5.90	$	10.39

Options issued to employees and directors that are vested or expected to vest at June 30, 2009, were as follows:

			Remaining
			Weighted		Weighted
			Average		Average		Aggregate
	Number of		Contractual		Exercise		Intrinsic
	Shares		Life (Years)		Price		Value
Options vested or expected to vest		3,295,921		6.36	$	10.24	$	—

An additional requirement of SFAS No. 123(R) is that estimated pre-vesting forfeitures be considered in determining stock-based compensation expense. As of June 30, 2009, 2008, and 2007, the Company estimated its forfeiture rate at 9.4%, 5.0%, and 5.0%, respectively. As of June 30, 2009, 2008, and 2007, the total compensation cost for non-vested awards not yet recognized in the consolidated statements of operations was $5,820, $6,316, and $2,367, respectively, net of the effect of estimated forfeitures. These amounts are expected to be recognized over a weighted-average period of 1.50, 2.17, and 2.72 years, respectively.

Options typically vest over three years. An employee’s unvested options are forfeited when employment is terminated; vested options must be exercised at or within 90 days of termination to avoid forfeiture. The Company determines the fair value of options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ vesting periods. The following assumptions were used in determining the fair value of stock options granted under the Black-Scholes model:

	Year Ended June 30,
	2009	2008	2007
Weighted average fair value of options granted	$4.66	$5.78	$1.66
Risk-free interest rates	2.82%	2.45%-4.63%	4.56%-5.18%
Expected life	6 years	3.5-6 years	3.5-6 years
Expected volatility	55.5%	43.1%-46.4%	43.8%-45.1%
Expected dividends	None	None	None

The risk-free interest rate for periods within the five and ten year contractual life of the options is based on the U.S. Treasury yield curve in effect at the grant date and the expected option life of 3.5 to 6 years. Expected volatility is based on the historical volatility of the stock of companies within the Company’s peer group.

F-22

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award. The aggregate intrinsic value for outstanding options at June 30, 2009, 2008 and 2007 was $0, $21,441, and $5,181, respectively. The aggregate intrinsic value for exercisable options at June 30, 2009, 2008 and 2007 was $0, $9,692, and $4,417, respectively. The total aggregate intrinsic value of options exercised during the years ended June 30, 2009 and 2008 was $387 and $1,435, respectively. Shares supporting option exercises are sourced from new share issuances.

On December 12, 2007, the Company granted 501,425 performance based incentive stock options to certain executives. The options originally were to become exercisable in full on the third anniversary of the date of grant provided that the Company had completed its initial public offering of common stock or a change of control transaction before December 31, 2008 and would terminate on the tenth anniversary of the date of the grant. For this purpose, “change of control transaction” was defined as an acquisition of the Company through the sale of substantially all of the Company’s assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization or similar transaction. On December 12, 2008, the Company amended the vesting terms of these options to delete the aforementioned vesting terms and to provide instead that the exercisability of the options was to be conditioned upon the closing of the merger and that the options would vest to the extent of 50% of the total shares subject to the first anniversary of the merger and for the remaining 50% on the second anniversary of the merger. The Company has calculated compensation expense of $4,716 related to the stock options that is expected to be recognized over the vesting period. The Company began recording stock-based compensation expense related to the performance based incentive stock options effective at the closing of the merger, the time at which it became probable that the options would vest.

The Company also maintains its 2006 Equity Incentive Plan (the “2006 Plan”), relating to Replidyne activity prior to the merger in February 2009. A total of 794,641 shares were originally reserved under the 2006 Plan but effective with the merger no additional options will be granted under it. Options granted under the 2006 Plan were either incentive or nonqualified stock options. Incentive stock options were only granted to Replidyne employees. Nonqualified stock options were granted by Replidyne to its employees, directors, and nonemployee consultants. Generally, options granted under the 2006 Plan expired ten years from the date of grant and vested over four years. Vested options granted to employees terminate 90 days after termination.

Stock option activity since the date of merger is as follows:

				Weighted
	Number of			Average
	Options			Exercise Price
Options outstanding at February 25, 2009		239,716		$	31.11
Options granted		—		$	—
Options exercised		(7,379	)	$	6.13
Options forfeited or expired		(162,337	)	$	37.83
Options outstanding at June 30, 2009		70,000		$	18.15

	Options Outstanding						Options Exercisable
			Remaining						Remaining
			Weighted		Weighted				Weighted		Weighted
	Number of		Average		Average		Number of		Average		Average
	Outstanding		Contractual		Exercise		Exercisable		Contractual		Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Life (Years)		Price
$14.00		4,000		3.51	$	14.00		4,000		3.51	$	14.00
$16.40		6,000		3.51	$	16.40		6,000		3.51	$	16.40
$18.60		60,000		2.66	$	18.60		60,000		2.66	$	18.60
		70,000		2.78	$	18.15		70,000		2.78	$	18.15

F-23

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award. There was no aggregate intrinsic value for outstanding options or exercisable options under the former Replidyne plan at June 30, 2009. The total aggregate intrinsic value of options exercised during the years ended June 30, 2009 was $6.

As of June 30, 2009, the Company had granted 1,075,605 restricted stock awards. The fair value of each restricted stock award was equal to the fair market value of the Company’s common stock at the date of grant. Vesting of restricted stock awards range from one to three years. The estimated fair value of restricted stock awards, including the effect of estimated forfeitures, is recognized on a straight-line basis over the restricted stock’s vesting period. Restricted stock award activity is as follows:

				Weighted
	Number of			Average Fair
	Shares			Value
Restricted stock awards outstanding at June 30, 2007		—		$	—
Restricted stock awards granted		543,481		$	14.67
Restricted stock awards forfeited		(18,008	)	$	14.36
Restricted stock awards outstanding at June 30, 2008		525,473		$	14.68
Restricted stock awards granted		532,124		$	9.08
Restricted stock awards forfeited		(106,765	)	$	14.06
Restricted stock awards vested		(206,455	)	$	14.52
Restricted stock awards outstanding at June 30, 2009		744,377		$	10.81

During the year ended June 30, 2009, the Company granted restricted stock units to members of the Board of Directors. Restricted stock units represent the right to receive payment from the Company equal in value to the market price per share of Company stock on date of payment. Restricted stock unit payments would occur on the six month anniversary after a Director terminates from the Board. A total of 42,238 restricted stock units were granted at the applicable market price of $8.75. The aggregate restricted stock unit liability of $323,086 has been included in accrued expenses in the balance sheet at June 30, 2009.

The following amounts were recognized as stock-based compensation expense in the consolidated statements of operations for the year ended June 30, 2009:

					Employee
	Stock		Restricted		Stock
	Options		Stock Awards		Purchase Plan		Total
Cost of goods sold	$	199	$	274	$	2	$	475
Selling, general and administrative		1,786		3,862		36		5,684
Research and development		276		331		5		612
Total	$	2,261	$	4,467	$	43	$	6,771

The following amounts were recognized as stock-based compensation expense in the consolidated statements of operations for the year ended June 30, 2008:

	Stock		Restricted
	Options		Stock Awards		Total
Cost of goods sold	$	91	$	141	$	232
Selling, general and administrative		5,957		895		6,852
Research and development		181		116		297
Total	$	6,229	$	1,152	$	7,381

F-24

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following amounts were recognized as stock-based compensation expense in the consolidated statements of operations for the year ended June 30, 2007:

	Stock
	Options
Selling, general and administrative	$	327
Research and development		63
Total	$	390

The following summarizes shares available for grant under the Company’s various equity incentive plans:

	Shares Available
	for Grant(a)
Shares available for grant at June 30, 2006		404,213
Shares reserved		1,617,500
Shares granted		(1,696,984	)
Shares forfeited, expired or cancelled		51,663
Shares outstanding at June 30, 2007		376,392
Shares reserved		1,941,000
Shares granted(b)		(2,369,280	)
Shares forfeited, expired or cancelled		70,953
Shares available for grant at June 30, 2008		19,065
Shares reserved		575,444
Shares granted		(631,438	)
Shares forfeited, expired or cancelled		121,767
Shares available for grant at June 30, 2009		84,838

(a)	Excludes the effect of shares granted, exercised, forfeited or expired related to activity from shares granted outside the stock option plans described above. Excludes share forfeitures from grants not under the 2007 plan.
(b)	Excludes a grant of 45,290 shares outside of plans

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan (ESPP). The plan provides eligible employees the opportunity to acquire common stock in accordance with Section 423 of the Internal Revenue Code of 1986. Stock can be purchased each six-month period per year (twice per year), however the initial period is from June 1, 2009 through December 31, 2009. The purchase price is equal to 85% of the lower of the price at the beginning or the end of the respective period. Shares reserved under the plan at June 30, 2009 totaled 192,087. The ESPP allows for an annual increase in reserved shares on July 1 equal to the lesser of (i) one percent of the outstanding common shares outstanding, or (ii) 180,000 shares, provided that the Board of Directors may designate a smaller amount of shares to be reserved. On July 1, 2009, 141,139 shares were added to plan.

F-25

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.   Income Taxes

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

	June 30,
	2009			2008
Deferred tax assets
Stock-based compensation	$	3,398		$	2,053
Accrued expenses		508			154
Inventories		488			358
Debt warrant amortization		466			—
Other		188			575
Research and development credit carryforwards		2,974			2,192
Net operating loss carryforwards		33,124			24,041
Total deferred tax assets		41,146			29,373
Deferred tax liabilities
Accelerated depreciation and amortization		(29	)		(20	)
Total deferred tax liabilities		(29	)		(20	)
Valuation allowance		(41,117	)		(29,353	)
Net deferred tax assets	$	—		$	—

The Company has established valuation allowances to fully offset its deferred tax assets due to the uncertainty about the Company’s ability to generate the future taxable income necessary to realize these deferred assets, particularly in light of the Company’s historical losses. The future use of net operating loss carryforwards is dependent on the Company attaining profitable operations, and will be limited in any one year under Internal Revenue Code Section 382 (“IRC Section 382”) due to significant ownership changes, as defined under the Code Section, as a result of the Company’s equity financings. A summary of the valuation allowances are as follows:

	Amount
Balance at June 30, 2007	$	16,889
Additions		12,464
Balance at June 30, 2008		29,353
Additions		11,764
Balance at June 30, 2009	$	41,117

At June 30, 2009, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $108,166 which will expire at various dates through fiscal 2029.

The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on July 1, 2007. Under FIN 48, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. The Company did not record any adjustment to the liability for unrecognized income tax benefits or accumulated deficit for the cumulative effect of the adoption of FIN 48.

F-26

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In addition, the amount of unrecognized tax benefits as of June 30, 2009 and 2008 was zero. There have been no material changes in unrecognized tax benefits since July 1, 2007, and the Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income tax expense for all periods presented. The Company did not have an accrual for the payment of interest and penalties related to unrecognized tax benefits as of June 30, 2009 or 2008.

The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is potentially subject to income tax examinations by tax authorities for the tax years ended June 30, 2009, 2008 and 2007. The Company is not currently under examination by any taxing jurisdiction.

8.   Commitment and Contingencies

Operating Lease

The Company leases manufacturing and office space and equipment under various lease agreements which expire at various dates through November 2012. Rental expenses were $658, $572 and $341 for the years ended June 30, 2009, 2008 and 2007, respectively.

Future minimum lease payments under the agreements as of June 30, 2009 are as follows:

2010	$	478
2011		482
2012		480
2013		202
	$	1,642

9.   Employee Benefits

The Company offers a 401(k) plan to its employees. Eligible employees may authorize up to $16 of their annual compensation as a contribution to the plan, subject to Internal Revenue Service limitations. The plan also allows eligible employees over 50 years old to contribute an additional $6 subject to Internal Revenue Service limitations. All employees must be at least 21 years of age to participate in the plan. The Company did not provide any employer matching contributions for the years ended June 30, 2009, 2008 and 2007.

10.   Redeemable Convertible Preferred Stock and Convertible Preferred Stock Warrants

The Company issued 3,081,375 shares of Series A redeemable convertible preferred stock during fiscal 2007, no par value, for total proceeds of $27,000. In addition, Series A convertible preferred stock warrants were issued to purchase 436,710 shares of Series A redeemable convertible preferred stock in connection with the sale of the Series A redeemable convertible preferred stock. The Series A convertible preferred stock warrants have a purchase price of $8.83 per share with a five-year term and were assigned an initial value of $1,767 for accounting purposes using the Black-Scholes model. The change in value of the Series A convertible preferred stock warrants due to decretion (accretion) as a result of remeasurement was $2,991, ($916), and ($1,327) for the years ended June 30, 2009, 2008 and 2007, respectively, and is included in the consolidated statements of operations.

As of June 30, 2007, the Company had sold 652,377 shares of Series A-1 redeemable convertible preferred stock, no par value, for total proceeds of $8,271, net of offering costs of $34. During the period from July 2007 to September 2007, the Company sold an additional 808,843 shares of Series A-1 redeemable convertible preferred stock for total proceeds of $10,282, net of offering costs of $14.

F-27

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On December 17, 2007, the Company completed the sale of 1,412,591 shares of Series B redeemable convertible preferred stock for total proceeds of $19,963, net of offering costs of $37.

In connection with the closing of the merger at February 25, 2009, and preparation of the Company’s financial statements as of June 30, 2008, the Company’s management and Board of Directors established what it believed to be a fair market value of the Company’s Series A, Series A-1, and Series B redeemable convertible preferred stock. This determination was based on concurrent significant stock transactions with third parties and a variety of factors, including the Company’s business milestones achieved and future financial projections, the Company’s position in the industry relative to its competitors, external factors impacting the value of the Company in its marketplace, the stock volatility of comparable companies in its industry, general economic trends and the application of various valuation methodologies.

Changes in the current market value of the Series A, Series A-1, and Series B redeemable convertible preferred stock were recorded as decretion (accretion) of redeemable convertible preferred stock and as accumulated deficit in the consolidated statements of changes in stockholders’ equity (deficiency) and in the consolidated statements of operations as decretion (accretion) of redeemable convertible preferred stock.

Immediately prior to the merger with Replidyne, each share of CSI-MN’s Series A, A-1, and B convertible preferred stock automatically converted into approximately one share of CSI-MN’s common stock pursuant to an agreement with the preferred stockholders. In addition, immediately prior to the merger, warrants to purchase shares of CSI-MN Series A and B convertible preferred stock were converted into warrants to purchase CSI-MN common stock outstanding at the effective time of the merger.

Subsequent to the merger with Replidyne, the Company has 5,000,000 preferred shares authorized. There are no preferred shares issued or outstanding at June 30, 2009.

11.   Legal Matters

ev3 Legal Proceedings

The Company is party to a legal proceeding with ev3 Inc., ev3 Endovascular, Inc. and FoxHollow Technologies, Inc., together referred to as the Plaintiffs, which filed a complaint on December 28, 2007 in the Ramsey County District Court for the State of Minnesota against the Company and former employees of FoxHollow currently employed by the Company, which complaint was subsequently amended.

The complaint, as amended, alleges the following:

•  That certain of the Company’s employees (i) violated provisions in their employment agreements with their former employer FoxHollow, barring them from misusing FoxHollow confidential information and from soliciting or encouraging employees of FoxHollow to join the Company, and (ii) breached a duty of loyalty owed to FoxHollow.

•  That the Company and certain of its employees misappropriated trade secrets of one or more of the Plaintiffs.

•  That all defendants engaged in unfair competition and conspired to gain an unfair competitive and economic advantage for the Company to the detriment of the Plaintiffs.

•  That (i) the Company tortiously interfered with the contracts between FoxHollow and certain of the Company’s employees by allegedly procuring breaches of the non-solicitation — encouragement provision in those agreements, and (ii) one of the Company’s employees tortiously interfered with the contracts between certain of the Company’s employees and FoxHollow by allegedly procuring breaches of the confidential information provision in those agreements.

The Plaintiffs seek, among other forms of relief, an award of damages in an amount greater than $50, a variety of forms of injunctive relief, exemplary damages under the Minnesota Trade Secrets Act, and recovery of their

F-28

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

attorney fees and litigation costs. Although the Company has requested the information, the Plaintiffs have not yet disclosed what specific amount of damages they claim.

The Company is defending this litigation vigorously, and believes that the outcome of this litigation will not have a materially adverse effect on the Company’s business, operations, cash flows or financial condition. The Company has not recognized any expense related to the settlement of this matter as an adverse outcome of this action is not probable. If the Company is not successful in this litigation, it could be required to pay substantial damages and could be subject to equitable relief that could include a requirement that the Company terminate or otherwise alter the terms or conditions of employment of certain employees, including certain key sales personnel who were formerly employed by FoxHollow. In any event, the defense of this litigation, regardless of the outcome, could result in substantial legal costs and diversion of management’s time and efforts from the operation of business.

12.   Earnings Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted earnings per common share computations:

	Year Ended June 30,
	2009			2008			2007
Numerator
Net loss available in basic calculation	$	31,895		$	39,167		$	15,596
Accretion (decretion) of redeemable convertible preferred stock(a)		(22,781	)		19,422			16,835
Loss available to common stockholders	$	9,114		$	58,589		$	32,431
Denominator
Weighted average common shares — basic		8,068,689			4,422,326			4,020,988
Effect of dilutive stock options and warrants(b)(c)		—			—			—
Weighted average common shares outstanding — diluted		8,068,689			4,422,326			4,020,988
Loss per common share — basic and diluted	$	(1.13	)	$	(13.25	)	$	(8.06	)

(a)	The calculation for accretion of redeemable convertible preferred stock marks the redeemable convertible preferred stock to fair value, which equals or exceeds the amount of any undeclared dividends on the redeemable convertible preferred stock.
(b)	At June 30, 2009, 2008 and 2007, 3,116,125, 464,170 and 691,175 warrants, respectively, were outstanding. The effect of the shares that would be issued upon exercise of these warrants has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
(c)	At June 30, 2009, 2008 and 2007, 3,707,882, 3,803,124 and 2,773,566 stock options, respectively, were outstanding. The effect of the shares that would be issued upon exercise of these options has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.

13.   Initial Public Offering Costs

The Company withdrew the registration statement for its initial public offering in conjunction with the announcement of the execution of the Merger Agreement in November 2008. Therefore, previously capitalized offering costs of approximately $1,700 were included in selling, general and administrative during the year ended June 30, 2009.

F-29

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.   Subsequent Event

In September 2009, the Company entered into a corporate job creation agreement and lease agreement with the Pearland Economic Development Corporation of Pearland, Texas (PEDC).

The corporate job creation agreement provides the Company various cash incentives for attaining and maintaining specified employment levels in Pearland, Texas. These incentives are provided by the PEDC and Texas Enterprise Fund and total $6,000 if all specified employment levels are attained and maintained. The incentives are subject to partial or full repayment over a five year period if the Company becomes in default of the agreement, which is the reduction in the Company’s work force, after the first year of operation, resulting in the Company having fewer than 25 employees at the facility for more than 120 consecutive days.

The agreement includes the Company leasing a production facility from the PEDC. The lease commences on April 1, 2010 and is for a ten year period. The lease requires annual base rent of $416 in years one through five and $460 in years 6-10. The lease also requires the Company to provide for adequate liability insurance and real estate taxes related to the facility.

The Company has performed an evaluation of subsequent events through September 28, 2009, which is the date the financial statements were issued.

F-30

Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T).   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, are responsible for establishing and maintaining our disclosure controls and procedures. The Certifying Officers have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2009. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the Certifying Officers have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, also referred to herein as ICFR, as defined in Rule 13a-15 and 15d-15 under the Exchange Act. Our internal control over financial reporting has been designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;

•  Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation.

This annual report on Form 10-K does not include a report of management’s assessment regarding ICFR, or an attestation report of the Company’s independent registered public accounting firm regarding ICFR, based upon guidance from the Securities and Exchange Commission and for the reasons explained below.

On February 25, 2009, Replidyne, Inc. completed its reverse merger with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008, by and among Replidyne, Responder Merger Sub, Inc., a wholly-owned subsidiary of Replidyne (“Merger Sub”), and CSI-MN (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into CSI-MN, with CSI-MN continuing after the merger as the surviving

57

corporation and a wholly owned subsidiary of Replidyne. At the effective time of the merger, Replidyne changed its name to Cardiovascular Systems, Inc. (“CSI”) and CSI-MN changed its name to CSI Minnesota, Inc. Following the merger of Merger Sub with CSI-MN, CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation. These transactions are referred to herein as the “merger.” The following were certain material effects of the merger:

•  Immediately following the merger, our executive management team was composed entirely of CSI-MN’s executive management team prior to the merger and did not include any of Replidyne’s executive officers or other employees.

•  The merger did not affect the operation of CSI-MN’s business, other than by providing additional funds, and we do not utilize any aspects of Replidyne’s former business.

•  We assumed CSI-MN’s fiscal year, which ends on June 30 of each year, while Replidyne’s fiscal year ended on December 31 of each year.

•  The merger has been treated as an acquisition of the net assets of Replidyne by CSI-MN in accordance with U.S. generally accepted accounting principles and the merger was accounted for as a reverse merger and a recapitalization. CSI-MN is considered to have acquired Replidyne in the merger.

•  Our financial statements after the merger reflect the historical results of CSI-MN before the merger and do not include the historical financial results of Replidyne before the completion of the merger.

•  The merger resulted in a complete change of our ICFR environment from that of Replidyne to that of CSI-MN.

We believe that it was impracticable for our management to complete an assessment of ICFR with respect to CSI-MN’s systems and business between the closing date of the merger and the end of our fiscal year on June 30, for the following reasons:

•  Prior to consummation of the merger, CSI-MN management has not previously conducted an ICFR assessment under the Securities and Exchange Commission’s standards, nor had CSI-MN undergone an ICFR audit in accordance with Section 404 of the Sarbanes-Oxley Act and the Securities and Exchange Commission’s rules. In the absence of the merger, CSI-MN would not have been required to include a management’s assessment of ICFR until its second annual report. Consistent with Securities and Exchange Commission guidance regarding the transition period granted for newly public companies, it would be an additional burden for our management to perform an assessment of ICFR as part of the process to prepare its first annual report.

•  The merger closed on February 25, 2009 and our fiscal year ended June 30, 2009, which would have provided management with approximately four months to perform the ICFR assessment. Management would have been required to divert substantial resources to conduct an ICFR assessment for this Form 10-K, which it had not planned to devote until the fiscal year ending June 30, 2010, and it is doubtful that management would have been able to sufficiently complete the assessment in such period.

•  The management of the Company completely changed from the management of Replidyne to the management of CSI-MN.

•  CSI had over 230 employees at the time of the merger, in comparison to Replidyne’s three employees at the time. As a result, business- and personnel-related activities and processes substantially increased compared to Replidyne’s operations given the size of CSI-MN’s business and number of employees. Thus, the overall amount of work to perform an ICFR assessment would likely have been substantial and time-consuming, as compared to an ICFR assessment of Replidyne, the sole business activity of which as of the closing of the merger was liquidation through the merger.

•  Replidyne’s financial accounting systems were phased out and removed from use shortly after the closing of the merger, and we exclusively use CSI-MN’s financial accounting systems.

•  CSI-MN’s business was significant relative to Replidyne’s business at the time of the merger. Replidyne had no revenue and its operating expenses were directed primarily to research and development, which efforts

58

Replidyne ceased entirely by August 2008, while CSI-MN had revenues from the sale of the Diamondback 360° and related costs of good sold and substantially more operating expenses expended for selling and marketing efforts. In addition, Replidyne’s assets consisted primarily of cash and cash equivalents and short term investments, while CSI-MN had accounts receivable and inventories, representing its ongoing business.

We also believe that including a management’s report on ICFR relating to Replidyne’s business and systems in this Form 10-K would not be meaningful and would potentially be misleading. Replidyne did not have any revenue or significant operations for the period beginning July 1, 2008 through the closing of the merger, and there have been no continuing operations of Replidyne after the closing of the merger. Furthermore, on February 24, 2009, Replidyne filed a Form 10-K for the fiscal year ended December 31, 2008, which included Replidyne management’s assessment of Replidyne’s ICFR for that period. The only operations of Replidyne between January 1, 2009 and the closing of the merger were to take actions necessary to consummate the merger and file its Form 10-K. Accordingly, at the time of filing of its Form 10-K, Replidyne provided an ICFR assessment for its last complete fiscal year, and there were no meaningful operations or financial activity during the approximately two-month period before the closing of the merger that would be relevant to our stockholders. Furthermore, our current management would be required to perform the assessment of Replidyne’s ICFR for that period, and those individuals would not be in a position to do so without substantial efforts. Finally, as our financial statements do not include the historical financial results of Replidyne before completion of the merger, an assessment of Replidyne’s ICFR by our management in this Form 10-K would not only have little meaning to a stockholder, but it would also be potentially misleading because it would not relate in any way to our business or financial statements for the fiscal year ended June 30, 2009.

We are in the process of preparing to issue a report of management’s assessment regarding ICFR in our next Form 10-K. We have taken steps internally toward formalizing and improving our ICFR, and we have engaged an outside consulting firm to assist with formalizing our control documentation and administering test plans relating to our ICFR. We expect that interim testing will occur before the end of calendar 2009, with continued testing late in fiscal 2010, and that we will be in a position to issue the required report in the Form 10-K for the fiscal year ending June 30, 2010.

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding ICFR pursuant to temporary rules of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

As noted above, on February 25, 2009, we completed the transactions contemplated by the Merger Agreement. As of the closing of the merger, the Company’s accounting and financial personnel, processes and systems were replaced by those of CSI-MN that existed before the merger, and the Company’s system of internal controls was replaced by CSI-MN’s pre-merger system of internal controls. There were no changes in the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) of the Company during the three months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information.

None.

59

PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

Other than the information included in this Form 10-K under the heading “Executive Officers of the Registrant,” which is set forth at the end of Part  I, the information required by Item 10 is incorporated by reference to the sections labeled “Election of Directors,” “Information Regarding the Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” all of which appear in our definitive proxy statement for our 2009 Annual Meeting.

Item 11.   Executive Compensation.

The information required by Item 11 is incorporated herein by reference to the sections entitled “Executive Compensation,” “Director Compensation,” and “Compensation Committee,” all of which appear in our definitive proxy statement for our 2009 Annual Meeting.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 is incorporated herein by reference to the sections entitled “Principal Stockholders” and “Equity Compensation Plan Information,” which appear in our definitive proxy statement for our 2009 Annual Meeting.

Item 13.   Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 is incorporated herein by reference to the sections entitled “Information Regarding the Board of Directors and Corporate Governance — Independence of the Board of Directors” and “Transactions With Related Persons,” which appear in our definitive proxy statement for our 2009 Annual Meeting.

Item 14.   Principal Accounting Fees and Services.

The information required by Item 14 is incorporated herein by reference to the section entitled “Principal Accountant Fees and Services,” which appears in our definitive proxy statement for our 2009 Annual Meeting.

PART IV

Item 15.   Exhibits, Financial Statement Schedules.

(a) Documents filed as part of this report.

(1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:

•  Report of Independent Public Registered Accounting Firm

•  Consolidated Balance Sheets as of June 30, 2009 and 2008

•  Consolidated Statements of Operations for the years ended June 30, 2009, 2008 and 2007

•  Consolidated Statements of Stockholders’ Equity (Deficiency) and Comprehensive (Loss) Income for the years ended June 30, 2009, 2008 and 2007

•  Consolidated Statements of Cash Flows for the years ended June 30, 2009, 2008 and 2007

•  Notes to Consolidated Financial Statements

(2) Financial Statement Schedules.

•  All financial statement schedules have been omitted, because they are not applicable, are not required, or the information is included in the Financial Statements or Notes thereto

(3) Exhibits. See “Exhibit Index to Form 10-K” immediately following the signature page of this Form 10-K

60

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.

CARDIOVASCULAR SYSTEMS, INC.

By:  /s/  David L. Martin

David L. Martin

President and Chief Executive Officer

Date: September 28, 2009

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.

Each person whose signature appears below constitutes and appoints David L. Martin and Laurence L. Betterley as the undersigned’s true and lawful attorneys-in fact and agents, each acting alone, with full power of substitution and resubstitution, for the undersigned and in the undersigned’s name, place and stead, in any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granted unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Signature	Title	Date
/s/  David L. Martin David L. Martin	President, Chief Executive Officer and Director (principal executive officer)	September 28, 2009
/s/  Laurence L. Betterley Laurence L. Betterley	Chief Financial Officer (principal financial and accounting officer)	September 28, 2009
/s/  Edward Brown Edward Brown	Director	September 28, 2009
/s/  Brent G. Blackey Brent G. Blackey	Director	September 28, 2009
John H. Friedman	Director
/s/  Geoffrey O. Hartzler Geoffrey O. Hartzler	Director	September 28, 2009
Roger J. Howe	Director

61

Signature	Title	Date
Augustine Lawlor	Director
/s/  Glen D. Nelson Glen D. Nelson	Director	September 28, 2009
/s/  Gary M. Petrucci Gary M. Petrucci	Director	September 28, 2009

62

EXHIBIT INDEX

CARDIOVASCULAR SYSTEMS, INC.

FORM 10-K

Exhibit
No.			Description
	3	.1	Restated Certificate of Incorporation, as amended.(7)
	3	.2	Amended and Restated Bylaws.(2)
	4	.1	Specimen Common Stock Certificate.(2)
	4	.2	Form of Cardiovascular Systems, Inc. common stock warrant issued to former preferred stockholders.(2)
	4	.3	Registration Rights Agreement by and among Cardiovascular Systems, Inc. and certain of its stockholders, dated as of March 16, 2009.(1)
	4	.4	Termination of Fourth Amended and Restated Stockholders Agreement by and among Cardiovascular Systems, Inc. and certain of its stockholders, dated as of March 16, 2009.(1)
	10	.1	Client’s Agreement, dated March 24, 2008, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and UBS Financial Services Inc.(3)
	10	.2	Borrower Agreement and Credit Line Agreement, dated July 24, 2008, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and UBS Bank USA.(3)
	10	.3	Loan and Security Agreement, dated September 12, 2008, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Silicon Valley Bank.(4)
	10	.4	Assumption Agreement and First Amendment to Loan and Security Agreement, dated as of February 25, 2009, by and between Silicon Valley Bank, Cardiovascular Systems, Inc. and CSI Minnesota, Inc.(7)
	10	.5	Second Amendment to Loan and Security Agreement between Silicon Valley Bank and Cardiovascular Systems, Inc., dated April 30, 2009.(9)
	10	.6	Amended and Restated Warrant to Purchase Stock, dated February 25, 2009, issued by Cardiovascular Systems, Inc. to Silicon Valley Bank.(7)
	10	.7	Form of Warrant to Guarantors, dated September 12, 2008.(4)
	10	.8	Lease, dated September 26, 2005, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Industrial Equities Group LLC.(3)
	10	.9	First Amendment to the Lease, dated February 20, 2007, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Industrial Equities Group LLC.(3)
	10	.10	Second Amendment to the Lease, dated March 9, 2007, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Industrial Equities Group LLC.(3)
	10	.11	Third Amendment to the Lease, dated September 26, 2007, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Industrial Equities Group LLC.(3)
	10	.12	Lease Agreement, dated October 25, 2005, by and between the Registrant and Triumph 1450 LLC.(8)
	10	.13	Assumption of Lease, dated March 23, 2009 by Cardiovascular Systems, Inc.(7)
	10	.14†	Employment Agreement, dated December 19, 2006, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and David L. Martin.(3)
	10	.15†	Employment Agreement, dated April 14, 2008, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Laurence L. Betterley.(3)
	10	.16†	Form of Standard Employment Agreement.(3)
	10	.17†	Summary of Fiscal Year 2009 Executive Officer Base Salaries.(7)
	10	.18†	Summary of Fiscal Year 2009 Executive Officer Annual Cash Incentive Compensation.(7)
	10	.19†	Form of Director and Officer Indemnification Agreement.(7)
	10	.20†	Cardiovascular Systems, Inc. Amended and Restated 2007 Equity Incentive Plan.(5)
	10	.21†	Form of Incentive Stock Option Agreement under the Amended and Restated 2007 Equity Incentive Plan.(7)

63

Exhibit
No.			Description
	10	.22†	Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.23†	Form of Restricted Stock Agreement under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.24†	Form of Restricted Stock Unit Agreement under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.25†	Form of Performance Share Award under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.26†	Form of Performance Unit Award under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.27†	Form of Stock Appreciation Rights Agreement under the Amended and Restated 2007 Equity Incentive Plan.(7)
	10	.28†	2003 Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota corporation.(3)
	10	.29†	Form of Incentive Stock Option Agreement under the 2003 Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota corporation.(3)
	10	.30†	Form of Nonqualified Stock Option Agreement under the 2003 Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota corporation.(3)
	10	.31†	1991 Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota corporation.(3)
	10	.32†	Form of Non-Qualified Stock Option Agreement outside the 1991 Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota corporation.(3)
	10	.33†	Cardiovascular Systems, Inc. Amended and Restated 2006 Employee Stock Purchase Plan.(6)
	10	.34†*	Director Compensation Arrangements.
	10	.35*	Corporate Job Creation Agreement between Pearland Economic Development Corporation and Cardiovascular Systems, Inc., dated June 17, 2009.
	10	.36*	Build-To-Suit Lease Agreement between Pearland Economic Development Corporation and Cardiovascular Systems, Inc., dated September 9, 2009.
	10	.37*	Letter Agreement between Silicon Valley Bank and Cardiovascular Systems, Inc., dated September 9, 2009.
	14	.1*	Code of Ethics.
	23	.1*	Consent of PricewaterhouseCoopers LLP.
	23	.2*	Consent of ValueKnowledge LLC.
	24	.1*	Power of Attorney (included on the signature page).
	31	.1*	Certification of principal executive officer required by Rule 13a-14(a).
	31	.2*	Certification of principal financial officer required by Rule 13a-14(a).
	32	.1*	Section 1350 Certification.

*	Filed herewith.
†	Compensatory plan or agreement.
(1)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current Report on Form 8-K filed on March 18, 2009.
(2)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current Report on Form 8-K filed on March 3, 2009.
(3)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from CSI Minnesota, Inc.’s Registration Statement on Form S-1, File No. 333-148798.
(4)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from CSI Minnesota, Inc.’s Registration Statement on Form 10, File No. 000-53478.

64

(5)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-8, File No. 333-158755.
(6)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-8, File No. 333-158987.
(7)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
(8)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, File No. 333-133021.
(9)	Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current Report on Form 8-K filed on May 4, 2009.

65

EX-10.34

Exhibit 10.34

DIRECTOR COMPENSATION ARRANGEMENTS

     For the twelve month period ending June 30, 2010, each non-employee director of Cardiovascular Systems, Inc. will receive the following compensation:

• $40,000 for service as a board member;

• $20,000 for service as a chairman of a board committee;

• $10,000 for service as a member of a board committee;

• $1,200 per board or committee meeting attended in the event more than 12 of each such meeting are held during the period; and

• a restricted stock unit award with a value of $100,000, to be granted following completion of the audit of the Company’s financial statements for the fiscal year ending June 30, 2010, and payable in cash beginning six months after the termination of the director’s board membership.

     In addition, the Chairman of the Board will receive an annual retainer of $40,000, which may, at the election of the Chairman, be paid in shares of common stock based on the fair market value of the Company’s common stock on the date of payment.

EX-10.35

Exhibit 10.35

CORPORATE JOB CREATION AGREEMENT

     This Corporate Job Creation Agreement (“Agreement”) is entered into as of June ___, 2009, by and between the Pearland Economic Development Corporation of Pearland, Texas (the “PEDC”), and Cardiovascular Systems Inc., having its principal place of business at 650 Campus Drive, St Paul Minnesota (the “Company”), for the establishment of a manufacturing and distribution facility in Pearland, Texas (hereinafter collectively referred to as the “Parties”).

PART I:     DEFINITIONS

“All Documents” means this Agreement; the Texas Enterprise Fund contract between the Company and the State of Texas Governors Office; the Skills Development Fund contract between the Company and the State of Texas Workforce Commission; and the Building Lease (as defined below).

“Building Lease” means the Ground and Building Lease with the PEDC, as Landlord, and the Company, as Tenant, for the Facility (as defined below).

“Commencement Date” means shall have the same date as defined in the Building Lease.

“Comprehensive Benefits” means a healthcare benefit plan including those benefits generally described in Exhibit A and where the Company agrees to offer to pay at least 50% of the cost for each employee who chooses to participate in the Company sponsored plan

“Contract to Hire” means those individuals working on a contract basis for the Company and the Company has the option to hire those individuals as full time employees after a specified period of time usually three to six months, but a maximum of twelve months

“Corporate Personnel” means employees other than Direct Labor and includes executive, administrative, sales and marketing, engineering, quality managers, customer service, IT, and clerical personnel.

“Default means the planned reduction in the Company’s work force, after the First Year of Operation, resulting in the Company having fewer than twenty-five FTEs at the Facility for more than 120 consecutive days.

“Direct Incentives” has the meaning specified in Section 4.03.

“Direct Labor” means employees holding jobs requiring some manual labor and moderate technical knowledge and involving the direct handling of products manufactured or assembled by the Company, either during or after the manufacturing or assembly process. Theses employees would include, but not be limited to, assemblers, team leads, QC techs, QA techs, shipping / receiving specialists, material handling / inspection specialists, etc.

Page 1 of 10

“Facility” means the building in Pearland, Texas to be constructed by the PEDC and leased to the Company pursuant to the Building Lease.

“Full Time Equivalent Employee” or “FTE” means one person working a total of 30 hours or more per week for 26 weeks or more per year. FTE’s may be employees of the Company or those working in the “Contract to Hire” evaluation phase of employment.

“Job” means employment for one FTE.

“First Year of Operation” means the period of time beginning 90 days after the Commencement Date, as defined in the Building Lease, and ending 365 days later.

“Second Year of Operation” means the period of time beginning one year after the beginning of the First Year of Operation and ending two years after the beginning of the First Year of Operation.

“Third Year of Operation” means the period of time beginning two years after the beginning of the First Year of Operation and ending three years after the beginning of the First Year of Operation.

“Fourth Year of Operation” means the period of time beginning three years after the beginning of the First Year of Operation and ending four years after the beginning of the First Year of Operation.

“Fifth Year of Operation” means the period of time beginning four years after the beginning of the First Year of Operation and ending five years after the beginning of the First Year of Operation.

PART II:     PROJECT DESCRIPTION

Subject to the satisfaction of the contingencies set forth herein and performance of the PEDC’s obligations hereunder and under the Building Lease, the Company shall locate a manufacturing and distribution facility in Pearland, Texas. The Company intends to create a minimum 250 jobs by the end of the Fifth Year of Operation in the Pearland Facility. All employees will receive Comprehensive Benefits. In support of the Facility, the Company shall hire at least 90% of its Direct Labor and at least 70% of its new Corporate Personnel from the Houston/Sugarland/Baytown Metropolitan Statistical Area (“HMSA”), unless qualified personnel cannot be found within the HMSA. Attached hereto as Exhibit B is the definition of the area served by HMSA.

PART III:     CONSTRUCTION AND LEASE OF FACILITY

The PEDC shall finance and complete the construction of the Facility, in accordance with the Building Lease within the committed time frame.

Page 2 of 10

PART IV:     TERMS AND CONDITIONS OF JOB CREATION

§4.01     The Texas Enterprise Fund

This project is induced by the Texas Enterprise Fund program (TEF) and Skills Development Fund. The Company has applied for the TEF. The terms and conditions of this agreement are subject to the successful approval of the TEF award in the amount of $1.5 million. The PEDC has committed, by resolution, to guarantee this award amount and shall make payment to the Company for the difference between $1.5 million and the actual award from the State of Texas. This amount is expected to be an amount of $750,000. The payment of the difference from $1.5 million and the actual award from the State of Texas will be made in three (3) equal installments. The first installment payment will be due to the Company on the earlier of (i) the date the Company takes occupancy of the Facility or (ii) the date the Facility is “Substantially Complete”, as such term is defined in the Building Lease. The remaining two installment payments will be paid to the Company on the first and second anniversaries of the date that the first installment payment was due to the Company. The PEDC shall provide its full financial support for the local government portion of the Job Creation Agreement.

§4.02     Employment-Related Performance Guarantees

(a)     Comprehensive Benefits.     The Company shall offer Comprehensive Benefits to each of the Company’s employees and shall provide such Comprehensive Benefits to every employee who elects to receive them from the Company.

(b) Employment Levels.     The Company intends to hire and retain at least 250 FTE’s at the Pearland facility within five (5) years. It is anticipated that new hires of FTEs per year will be as follows:

a.	Year 1          30
b.	Year 2          50
c.	Year 3          60
d.	Year 4          40
e.	Year 5          70

(c) Determination of Number of Employees.     For purposes of this Agreement, the number of employees shall be reported quarterly in accordance with the requirements of the Texas Enterprise Fund. Texas Enterprise Fund Program. The Company shall provide to the PEDC annual reports in the form attached hereto as Exhibit C and allow the PEDC reasonable access to information supporting such reports, for audit purposes. The Company shall not be required to provide copies of information that is confidential to the Company or its employees.

§4.03     Direct Incentives.

Within five days after the execution of this Job Creation Agreement, and the Building Lease, the PEDC will pay to the Company $3,500,000.00. Upon the hiring of the 75th FTE, the PEDC will

Page 3 of 10

pay to the Company $1,200,000.00. Upon the hiring of the 125th FTE, the PEDC will pay to the Company $800,000.00. The Company will use these funds for equipment, furnishings, construction, and various operating capacities to support the Pearland facility. The payments described above are referred to in this Agreement as the “Direct Incentives” or “Cash Incentive Funds.”

§4.04     Default.

(a) Prior to or At 24 Months.     If, prior to or within twenty-four 24 months from the Effective Date of this Agreement, the Company is in Default of this Agreement and as a result of such default PEDC terminates this Agreement, the Company shall refund to PEDC all Cash Incentive Funds received.

(b) After 24 Months.     If, after 24 months from the Effective Date of this Agreement, the Company is in Default of this Agreement, and as a result of such Default PEDC terminates this Agreement, the Company shall repay PEDC Cash Incentive Funds as follows:

(i)     If the Default occurs between 24 months and 36 months from the Effective Date, the Company shall repay sixty Percent (60%) of all Cash Incentive Funds received;

(ii)     If the Default occurs between 36 months and 48 months from the Effective Date, the Company shall repay forty Percent (40%) of all Cash Incentive Funds received;

(iii)     If the Default occurs between 48 months and 60 months from the Effective Date, the Company shall repay twenty Percent (20%) of all Cash Incentive Funds received;

(iv)     If the Default occurs at any time after 60 months from the Effective Date, the Company shall repay 0 Percent (0%) of all Cash Incentive Funds received;

(c) Repayment.     If a Default occurs, the Company will have ninety (90) days from receipt of written notification from PEDC of the Default to cure the Default before any repayment is due. If the Company does not cure the Default, any repayment of Cash Incentive Funds shall be paid by the Company to PEDC not later than ninety (90) days after receipt of such written notice of the Default.

(d) Interest.     Any repayment of Cash Incentive Funds shall be subject to an interest rate of 0%.

(e) Default.     If a Default occurs after the Fifth Year of Operation, the Company shall not be required to reimburse any of the Direct Incentives. A natural or man-made disaster that causes a work stoppage does not constitute Default under this Agreement.

(f) Grant of Security Interest.     To secure the Company’s payment of the Repayment Obligation if and as required by subsections 4.04(a) and (b), the Company hereby grants to the PEDC a security interest in the following assets of the Company, whether now owned or existing or hereafter acquired or arising, wherever located, and all proceeds and

Page 4 of 10

products thereof (collectively, the “Collateral”): all equipment and furniture within the Facility. The amount secured by the security interest is limited to the maximum amount of the Repayment Obligation applicable under subsections 4.04(a) and (b), as adjusted. In the event of any sale or liquidation of the Collateral, the proceeds shall be applied first to the payment of the Repayment Obligation, and any surplus remaining after the payment of the Repayment Obligation shall be paid to the Company. The security interest of the PEDC granted hereby is now, and shall always remain, subject and subordinate to all security interests held from time to time by Silicon Valley Bank and any other banks or lending institutions related to, or affiliated with, Silicon Valley Bank or its successors and assigns (the “Bank”).

(g) Perfection of Security Interest.     The Company authorizes the PEDC to file financing statements, including amendments or continuations thereof, describing the Collateral, or describing as the collateral covered thereby “all of the Company’s equipment and furniture” or words to that effect, notwithstanding that such wording may be broader in scope than the Collateral described in this Agreement, in all jurisdictions where the PEDC shall determine, and from time to time at the request of PEDC the Company will execute such other documents as the PEDC may reasonably request to establish and maintain a valid perfected security interest in the Collateral to enable the PEDC to enforce its rights and remedies hereunder with respect to the Collateral, subject to any requirements imposed by the Bank to effectuate the subordination described in subsection 4.04(f).

(h) Termination of Security Interest.     The security interest granted under this Agreement shall terminate at the end of the Fifth Year of Operation or upon the retention of 250 FTEs at the Pearland location for 12 consecutive months. Upon termination of the security interest, the PEDC shall file termination statements to terminate all financing statements filed with respect to the Collateral and shall execute and deliver or file such other releases, satisfactions, and other documents as the Company may reasonably request to confirm the termination of the security interest.

PART V:     OTHER CONSIDERATIONS AND CONDITIONS

§5.01     Documentation Costs.

None of the costs, including attorney’s fees for document preparation or review, will be the responsibility of the Company, except those incurred by the Company for its own counsel and internal corporate review.

§5.02     Severability

If any provision of this Agreement or its application to any person or circumstance is held invalid by any court of competent jurisdiction, such invalidity will not affect any other provisions of this Agreement.

Page 5 of 10

§5.03     Counterparts

This Agreement may be signed in any number of counterparts, each of which will be an original, but all of which taken together will constitute one agreement.

§5.04     Governing Law and Venue

This Agreement shall be governed by, construed according to the laws and regulations of, and subject to the jurisdiction of the State of Texas.

§5.05     No Legal Actions

Other than disclosed in public filings, the Company warrants there are no legal actions, suits, or other proceedings, pending or threatened, before any court or administrative agency, which, if determined adversely to the Company, would have a material adverse effect on the financial condition of the Company.

§5.06     Authorization of Representative Signing for the Benefited Business

The Company, by and through an officer or other representative accepting this Agreement by signing below on the Company’s behalf, has entered into this Agreement with the full knowledge and authorization of the Company under proper procedures prescribed by the articles of incorporation, bylaws, and other documents applicable to the corporate governance of the company.

§5.07     Conditions

The Company’s obligation to perform hereunder is conditioned upon execution by the PEDC and the Company of the Building Lease, satisfaction of the contingencies under the Building Lease and the PEDC’s performance of its obligations thereunder.

ACCEPTANCE PROVISIONS

The parties acknowledge they have read and understand this Agreement and agree to its provisions. The Effective Date will be the date on which the last party hereto signs as shown on the dates below.

Pearland Economic Development Corporation Cardiovascular Systems, Inc.

By: /s/ Fred Welch Fred Welch	By: /s/ Robert Thatcher, EVP Robert Thatcher, EVP
6/17/09	6/16/09
(Date)	(Date)

Page 6 of 10

ATTEST:

BY:________________________________________________

Page 7 of 10

EXHIBIT A
To
CORPORATE JOB CREATION AGREEMENT

COMPREHENSIVE BENEFITS

Page 8 of 10

EXHIBIT B
To
CORPORATE JOB CREATION AGREEMENT

There are 10 counties in the Houston-Sugar Land-Baytown metropolitan statistical area (MSA) defined by the U.S. Census.

• Harris County

• Fort Bend County

• Montgomery County

• Brazoria County

• Galveston County

• Liberty County

• Waller County

• Chambers County

• Austin County San Jacinto County

Page 9 of 10

EXHIBIT C
To
CORPORATE JOB CREATION AGREEMENT

FORM OF ANNUAL REPORTS

Page 10 of 10

EX-10.36

Exhibit 10.36

Execution Copy

BUILD-TO-SUIT LEASE AGREEMENT

BY AND BETWEEN

PEARLAND ECONOMIC DEVELOPMENT CORPORATION
(“LANDLORD”)

AND

CARDIOVASCULAR SYSTEMS, INC.
(“TENANT”)

TABLE OF CONTENTS

	Page
SEC. 1 LEASED PREMISES		1
SEC. 2 TERM		1
SEC. 3 USE		2
SEC. 4 SECURITY DEPOSIT:		2
SEC. 5 BASE RENT:		2
SEC. 6 ADDITIONAL RENT:		3
SEC. 7 TAXES:		4
SEC. 8 MAINTENANCE AND REPAIRS; UTILITIES:		6
SEC. 9 QUIET ENJOYMENT; RIGHTS RESERVED:		7
SEC. 10 ALTERATIONS:		8
SEC. 11 FURNITURE, FIXTURES AND PERSONAL PROPERTY:		9
SEC. 12 SUBLETTING AND ASSIGNMENT:		10
SEC. 13 FIRE AND CASUALTY:		11
SEC. 14 CONDEMNATION:		12
SEC. 15 DEFAULT BY TENANT:		13
SEC. 16 REMEDIES OF LANDLORD:		13
SEC. 17 WAIVER OF LANDLORD’S LIEN:		15
SEC. 18 NON-WAIVER:		15
SEC. 19 COMPLIANCE WITH LAWS:		15
SEC. 20 ASSIGNMENT BY LANDLORD; LIMITATION OF LANDLORD’S LIABILITY:		15
SEC. 21 SEVERABILITY:		15
SEC. 22 SIGNS:		16
SEC. 23 SUCCESSORS AND ASSIGNS:		16
SEC. 24 SUBORDINATION; NONDISTURBANCE:		16
SEC. 25 RESERVED:		17
SEC. 26 HOLDING OVER:		17
SEC. 27 INDEPENDENT OBLIGATION TO PAY RENT:		17
SEC. 28 RELEASE AND WAIVER: INDEMNITY:		18
SEC. 29 INSURANCE:		18
SEC. 30 ENTIRE AGREEMENT:		19
SEC. 31 NOTICES:		19
SEC. 32 MEMORANDUM OF COMMENCEMENT DATE:		19
SEC. 33 INSPECTION:		19
SEC. 34 BROKERS:		19
SEC. 35 ESTOPPEL CERTIFICATES:		19
SEC. 36 ANTI-TERRORISM LAWS:		20
SEC. 37 BANKRUPTCY:		20
SEC. 38 RESERVED:		21
SEC. 39 HAZARDOUS SUBSTANCES:		21
SEC. 40 NO MONEY DAMAGES FOR FAILURE TO CONSENT; WAIVER OF CERTAIN DAMAGES:		22
SEC. 41 ACKNOWLEDGMENT OF NON-APPLICABILITY OF DTPA:		22
SEC. 42 ATTORNEYS’ FEES:		22
SEC. 43 AUTHORITY OF TENANT:		22
SEC. 44 INABILITY TO PERFORM:		22
SEC. 45 JOINT AND SEVERAL TENANCY:		23
SEC. 46 EXECUTION OF THIS LEASE AGREEMENT:		23
SEC. 47 WAIVER OF TRIAL BY JURY; COUNTERCLAIM:		23
SEC. 48 CALCULATION OF TIME PERIODS:		23
SEC. 49 RENEWAL OPTIONS:		23
SEC. 50 PREVAILING MARKET RENTAL RATE DETERMINATION:		24
SEC. 51 PURCHASE OPTION:		25
SEC. 52 FIRST EXPANSION OPTION:		26

-i-

	Page
SEC. 53 SECOND EXPANSION OPTION:		27
SEC. 54 TENANT’S RIGHT OF FIRST REFUSAL:		28
SEC. 55 TENANT’S SELF-HELP REMEDY:		29
SEC. 56 CONSTRUCTION OF IMPROVEMENTS:		31
SEC. 57 PERMITTED ENCUMBRANCES:		32
SEC. 58 RELATIONSHIP OF THE PARTIES; NO PARTNERSHIP		32
SEC. 59 EXHIBITS:		32

EXHIBITS:

EXHIBIT A — DEPICTION OF THE LAND
EXHIBIT B — ACCEPTANCE OF PREMISES MEMORANDUM
EXHIBIT C — TENANT’S ESTOPPEL CERTIFICATE
EXHIBIT D — IMPROVEMENTS
EXHIBIT E — INSURANCE REQUIREMENTS
EXHIBIT F — AMENDMENT TO LEASE AGREEMENT
EXHIBIT G — ARBITRATION PROCEDURES
EXHIBIT H — INTENTIONALLY DELETED
EXHIBIT I — DEPICTION OF FIRST EXPANSION OPTION LAND AND SECOND EXPANSION OPTION LAND
EXHIBIT J — BUILDING PLANS AND CONSTRUCTION DRAWINGS
EXHIBIT K—PERMITTED ENCUMBRANCES

-ii-

BUILD-TO-SUIT LEASE AGREEMENT

     This Build-To-Suit Lease Agreement (this “Lease Agreement”) is made and entered into as of the Effective Date (as defined on the signature page attached hereto) by and between the Pearland Economic Development Corporation, a corporation operating under Chapter 505 of the Texas Local Government Code, hereinafter referred to as “Landlord”, and Cardiovascular Systems, Inc., a Delaware corporation, hereinafter referred to as “Tenant”:

WITNESSETH:

SEC. 1 LEASED PREMISES In consideration of the mutual covenants as set forth herein, Landlord and Tenant hereby agree as follows:

     A. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, for the rental and on the terms and conditions hereinafter set forth, the following described property (collectively, the “Leased Premises”): (i) the tract of land in Pearland, Texas (the “Land”), more particularly depicted on Exhibit A attached hereto, together with any and all easements, rights and appurtenances appertaining to same, and (ii) that certain building (the “Building”) to contain approximately forty-six thousand (46,000) square feet and to be constructed by Landlord on the Land in accordance with the terms of this Lease Agreement. For greater certainty, Landlord and Tenant hereby agree that the term “Leased Premises” shall include, but not be limited to, the Improvements (as defined in Exhibit D).

     B. Landlord, at Landlord’s expense, will construct the Improvements in accordance with the terms and provisions of this Lease Agreement and Exhibit D attached hereto.

SEC. 2 TERM

     A. The term of this Lease Agreement (the “Term”) shall commence on the date, subject to the terms of Exhibit D, Section 3 of this Lease Agreement, that is the later of (i) the date of Substantial Completion (as defined in Exhibit D), or (ii) April 1, 2010 or such earlier date as Tenant may designate upon no less than one hundred five (105) days’ written notice to Landlord (such date being herein referred to as the “Commencement Date”), and, unless sooner terminated or renewed and extended in accordance with the terms and conditions set forth herein, shall expire at 11:59 p.m. on the day preceding the tenth (10th) anniversary of the Rent Commencement Date (as defined in Schedule 1) (the “Expiration Date”).

     B. Notwithstanding the terms of this Section 2 or anything to the contrary contained in this Lease Agreement, Landlord shall not be obligated to commence construction of the interior build-out portion of the Improvements (the “Build-out”) until Landlord receives written notice (the “Build-out Notice”) from Tenant to commence construction of the Build-out and that Tenant requests Substantial Completion to occur on a date on or prior to April 1, 2010, which notice shall be delivered during the period between the Effective Date and December 5, 2009. In the event Tenant does not deliver to Landlord the Build-out Notice on or before December 5, 2009, Landlord shall deliver written notice (the “Warning Notice”) to Tenant of such failure. If Tenant does not deliver to Landlord the Build-out Notice within five (5) days after receipt of the Warning Notice, Landlord shall have the right to terminate this Lease Agreement, and as pursuant to terms that expressly survive the expiration or earlier termination of this Lease Agreement, the parties shall have not further rights or obligations hereunder. In the event Landlord terminates this Lease Agreement pursuant to the preceding sentence, Tenant shall, within five (5) business days after the date of such termination pay to Landlord as liquidated damages an amount equal to the sum of $69,000 and all amounts paid to Tenant by Landlord prior to such date pursuant to the terms of that certain Corporate Job Creation Agreement of even date herewith by and between Landlord and Tenant (the “Termination Fee”). Landlord and Tenant agree that because of the difficulty or impossibility of determining Landlord’s actual damages by way of loss of the costs of construction and financing, the costs of anticipated rent from the Leased Premises and the cost of re-bidding the Leased Premises to secure a new tenant, the difficulties of proof of loss and the inconvenience or nonfeasibility of Landlord otherwise having a remedy for such termination, the Termination Fee is a reasonable amount to be paid by Tenant for the failure to satisfy the conditions set forth in this Section 2. Further and without limiting the foregoing, Tenant hereby waives any right that it may have to challenge the amount of the Termination Fee or its appropriateness as an estimate of Landlord’s damages as a result of a termination of

this Lease Agreement. Landlord’s right to receive the Termination Fee shall be Landlord’s sole and exclusive remedy as a result of the termination of this Lease pursuant to this Section 2.B. but shall not limit Landlord’s remedies with respect to the other provisions which expressly survive termination of this Lease Agreement. The terms and provisions of this Section 2.B. shall survive the expiration or earlier termination of this Lease Agreement.

     C. This Lease Agreement shall be effective as of the Effective Date and in the event Tenant or its agents, employees or contractors enters the Leased Premises prior to the Commencement Date in accordance with the terms of Exhibit D, Section 4 of this Lease Agreement, such entry shall be subject to the terms and conditions of this Lease Agreement, except that the Rent (as hereinafter defined) shall not commence to accrue as a result of such entry until the Rent Commencement Date.

SEC. 3 USE: The Leased Premises shall be used and occupied by Tenant (and any of its permitted subtenants and assignees) solely for the engineering, design, storage, warehouse, manufacturing, assembly, distribution and sale of medical devices produced by Tenant or its affiliates and for all related and associated purposes. Tenant shall not use the Leased Premises for any other uses without Landlord’s prior written consent, which consent may be withheld in Landlord’s sole and absolute discretion. Notwithstanding anything contained in this Lease Agreement to the contrary, but subject to Landlord’s representations and warranties set forth in Section 9.C., Tenant will not use, occupy, or permit the use or occupancy of the Leased Premises for any purpose which is, directly or indirectly, forbidden by federal, state or local laws, rules, statutes, regulations, court order or decision, governmental directives, restrictive covenants, ordinances, or governmental or municipal regulations or orders (“Laws”) or which may be dangerous to life, limb or property, or permit the maintenance of any public or private nuisance.

SEC. 4 SECURITY DEPOSIT: $38,333.33 payable on the Effective Date. Upon the occurrence of any Event of Default (as hereinafter defined) by Tenant, Landlord may, from time to time, without prejudice to any other remedy, use the security deposit paid to Landlord by Tenant as herein provided to the extent necessary to make good any arrears of Rent (as hereinafter defined) and any other damage, injury, expense or liability caused to Landlord by such Event of Default. Following any such application of the security deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the security deposit to the amount thereof existing prior to such application. Any remaining balance of the security deposit shall be returned by Landlord to Tenant within sixty (60) days after the termination of this Lease Agreement and after Tenant provides written notice to Landlord of Tenant’s forwarding address; provided, however, Landlord shall have the right to retain and expend such remaining balance (a) to reimburse Landlord for any and all rentals or other sums due hereunder that have not been paid in full by Tenant and/or (b) for cleaning and repairing the Leased Premises if Tenant shall fail to deliver same at the termination of this Lease Agreement in the condition required under this Lease Agreement. Tenant shall not be entitled to any interest on the security deposit. Such security deposit shall not be considered an advance payment of rental or a measure of Landlord’s damages in case of an Event of Default by Tenant. If Landlord assigns its interest in the Leased Premises during the Term hereof, Landlord may assign the security deposit to the assignee, and so long as such assignee assumes all of Landlord’s obligations under this Lease Agreement with respect to the security deposit thereafter Landlord shall have no further liability for the return of such security deposit, and Tenant agrees to look solely to the new Landlord for the return of such security deposit. The provisions of the preceding sentence shall apply to every transfer or assignment made of the security deposit to a new Landlord. Tenant agrees that it will not assign or encumber, or attempt to assign or encumber, the monies deposited hereunder as security, and that Landlord and its successors and assigns shall not be bound by any such actual or attempted assignment or encumbrance. Regardless of any assignment of this Lease Agreement by Tenant, Landlord may return the security deposit to the original Tenant, in the absence of evidence satisfactory to Landlord of an assignment of the right to receive such security deposit or any part of the balance thereof.

SEC. 5 BASE RENT:

     A. Tenant shall pay to Landlord in advance, without demand, deduction or set off, except as provided in Section 55 and Section 14 of this Lease Agreement, a sum (the “Base Rent”) equal to the amounts for the corresponding intervals as indicated on Schedule 1 attached hereto.

     B. Installments of Base Rent shall be due monthly, in advance, on the first day of each calendar month following the Rent Commencement Date. Base Rent for the month in which the Rent Commencement Date

2

occurs shall be due and payable on the Rent Commencement Date and Base Rent for any partial month shall be prorated.

     C. In addition to the foregoing Base Rent and the Additional Rent (as hereinafter defined) to be paid by Tenant pursuant to Section 6 below, Tenant agrees to pay to Landlord as Additional Rent all other sums payable by Tenant to Landlord hereunder, within ten (10) days after Landlord renders a statement therefor to Tenant. All Rent (as hereinafter defined) shall bear interest from five (5) days after the date due until paid at the greater of (i) two percent (2%) above the “prime rate” per annum of the JPMorgan Chase Bank, a New York banking corporation or its successor or such other “money center” as Landlord and Tenant may agree from time to time (“Chase”) in effect on said due date (or if the “prime rate” be discontinued, the base reference rate then being used by Chase to define the rate of interest charged to commercial borrowers) or (ii) twelve percent (12%) per annum; provided, however, in no event shall the rate of interest hereunder exceed the maximum non-usurious rate of interest (hereinafter called the “Maximum Rate”) permitted by applicable Laws. In addition thereto, if Tenant has failed to pay Rent within five (5) days after the date when due, then, Tenant shall pay Landlord a “Late Charge” of one percent (1%) of the overdue amount. Notwithstanding the foregoing, with respect to Tenant’s first late payment of Rent in a consecutive twelve (12) month period, Tenant shall not be required to pay the Late Charge with respect to such late payment. Tenant agrees that the Late Charge is not a penalty, and will compensate Landlord for costs not contemplated under this Lease Agreement that are impracticable or extremely difficult to fix. Landlord’s acceptance of a Late Charge does not waive Tenant’s default.

SEC. 6 ADDITIONAL RENT:

     A. In addition to Base Rent, Tenant shall pay, as Additional Rent, the cost of the Commercial General Liability Insurance that Landlord is required to maintain under Exhibit E of this Lease Agreement relating to the Leased Premises and all charges for any services, goods or materials furnished by Landlord at Tenant’s written request which are not required to be furnished by Landlord under this Lease Agreement (“Additional Rent” and, together with Base Rent, “Rent”). In the event Landlord maintains a blanket policy of Commercial General Liability Insurance, Landlord and Tenant agree that the costs therefor attributable to this Lease Agreement and to be characterized as Additional Rent hereunder shall be determined on a pro rata basis among the matters insured by such blanket policy. Notwithstanding the foregoing, during the periods in which the Pearland Economic Development Corporation is the Landlord hereunder, the term “Additional Rent” shall not include the cost of Landlord’s Commercial General Liability Insurance.

     B. Additional Rent under this Section 6 shall be payable by Tenant to Landlord in monthly installments equal to 1/12th of Landlord’s estimate of the annual Additional Rent. The initial monthly payments are based upon Landlord’s estimate of the Additional Rent for the year in question, and shall be increased or decreased annually to reflect the projected actual Additional Rent for that year. Within one hundred twenty (120) days after each calendar year or as soon thereafter as is reasonably practicable, Landlord shall deliver to Tenant a statement setting forth the actual Additional Rent for such year. If Tenant’s total payments in respect of Additional Rent for any year are less than the actual Additional Rent for that year, Tenant shall pay the difference to Landlord within ten (10) days after Landlord’s request therefor. If such payments made by Tenant are more than such actual Additional Rent for that year, Landlord shall, at Landlord’s option, either (i) credit such excess against Tenant’s next accruing Rent hereunder, or (ii) repay such excess to Tenant within thirty (30) days. There shall be no duplication of costs for reimbursements in calculating Additional Rent, and any excess retained by Landlord at the end of the Term shall be refunded to Tenant within thirty (30) days after the end of the Term. Upon request from Tenant, Landlord shall deliver to Tenant the invoice from Landlord’s insurance carrier documenting the cost of the Commercial General Liability Insurance.

     C. The first monthly installment (subject to proration, if any) of Additional Rent shall be due on the Rent Commencement Date; thereafter, monthly installments of such Additional Rent shall be due monthly, in advance, on the first day of each calendar month following the Rent Commencement Date. In connection with the first monthly installment of Additional Rent, Landlord shall provide to Tenant a written estimate of the Additional Rent that will be owed by Tenant, at least ten (10) days prior to the Rent Commencement Date.

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     D. All payments and reimbursements required to be made by Tenant under this Lease Agreement shall constitute “Rent” (herein so called) and shall be payable without demand, deduction or set off, except as set forth in Section 55 and Section 14 of this Lease Agreement.

     E. Landlord and Tenant hereby each acknowledge and agree that they are knowledgeable and experienced in commercial transactions and further hereby acknowledge and agree that the provisions of this Lease Agreement for determining Additional Rent and other charges are commercially reasonable and valid even though such methods may not state precise mathematical formulae for determining such Additional Rent. ACCORDINGLY, TENANT HEREBY VOLUNTARILY AND KNOWINGLY WAIVES ALL RIGHTS AND BENEFITS TO WHICH TENANT MAY BE ENTITLED UNDER SECTION 93.012 OF THE TEXAS PROPERTY CODE, AS SUCH SECTION NOW EXISTS OR AS SAME MAY BE HEREAFTER AMENDED OR SUCCEEDED. Notwithstanding the foregoing, nothing set forth in this Section 6.E. shall be deemed to waive Tenant’s right to confirm that the Additional Rent charged to Tenant pursuant to the terms of Section 6.A. was calculated in accordance with the terms of Section 6.A.

SEC. 7 TAXES:

     A. Prior to the Rent Commencement Date, Landlord shall pay and discharge of record any delinquent Taxes (as hereinafter defined) owing with respect to periods prior to the Rent Commencement Date. Tenant shall pay, at least thirty (30) days prior to delinquency, all taxes and assessments and other governmental charges (whether federal, state, county or municipal and whether they be by taxing districts or authorities presently taxing the Leased Premises or by others subsequently created or otherwise) and any other taxes and improvement assessments due and payable for the Leased Premises (excluding, however, the costs of any assessments (i) levied of pending as of the Effective Date and (ii) levied after the Effective Date that were factored into the determination of the amount of Base Rent payable under this Lease Agreement, so as to prevent Tenant from paying the costs of such assessments as Base Rent and also paying such costs as Additional Rent), or its operation or the revenues or rents received therefrom (whether directly or indirectly through the use of a franchise, margin or other similar tax and whether or not such taxes allow for the deduction of expenses in calculating the base amount on which the tax is levied) but excluding, however, federal and state taxes on income sales, transfer, estate or other similar tax in lieu of income, transfer or estate taxes (collectively, “Taxes”); provided, however, that if at any time during the Term, new taxes, assessments, levies, impositions or charges are imposed in lieu of amounts previously charged, or the present method of taxation or assessment shall be so changed that the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate and the improvements thereof shall be discontinued and as a substitute therefor, or in lieu of an increase to the tax rate thereof, taxes, assessments, levies, impositions or charges shall be levied, assessed and/or imposed wholly or partially as a capital levy or otherwise on the rents received from the Leased Premises or the rents reserved herein or any part thereof (whether directly or indirectly through the use of a franchise, margin or similar tax and whether or not such taxes allow for the deduction of expenses in calculating the base amount on which the tax is levied), then such substitute or additional taxes, assessments, levies, impositions or charges, to the extent so levied, assessed or imposed, shall be deemed to be included within the term “Taxes” to the extent that such substitute or additional tax would be payable if the Leased Premises were the only property of the Landlord subject to such tax. For greater certainty, Landlord and Tenant agree that the term “Taxes” will include all management district fees assessed against the Leased Premises. Notwithstanding the foregoing or anything to the contrary contained herein, in the event that after the Effective Date (i) new taxes, assessments, levies, impositions or charges are imposed on rents received from the Leased Premises or the rents reserved herein or any part thereof (whether directly or indirectly through the use of a franchise, margin or similar tax) and (ii) the Law levying such new tax, assessment, levy, imposition or charges requires Landlord, as a landlord under a lease agreement, to pay such new tax, assessment, levy, imposition or charge, then the term “Taxes” shall not include such new tax, assessment, levy, imposition or charge, and Landlord shall be responsible therefor.

     B. From and after the Rent Commencement Date through the remainder of the Term, Tenant shall pay, or cause to be paid, all such Taxes directly to the taxing authority or other payee therefor. Such payment shall be completed at least thirty (30) days prior to the date on which Taxes would become delinquent, subject to Section 7D. below. If any Taxes legally may be paid in installments prior to delinquency, whether or not interest shall accrue on the unpaid balance thereof, Tenant shall have the option to pay such Taxes in installments, and Tenant shall be obligated to pay only such installments or portions thereof as shall be properly allocated to periods within

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the Term. Tenant shall furnish to Landlord, promptly upon receipt thereof, copies of all notices of Taxes. At least thirty (30) days prior to the applicable due date for Taxes, Tenant shall deliver to Landlord reasonable evidence of the payment thereof.

     C. Notwithstanding anything to the contrary herein, (a) all Taxes with respect to the fiscal year or tax year in which the Rent Commencement Date occurs shall be apportioned so that Tenant shall pay only the portion of the Taxes that is applicable to the period after the Rent Commencement Date and (b) all Taxes for the fiscal year or tax year in which the Expiration Date occurs shall be apportioned so that Tenant shall pay only the portion of such Taxes that are attributable to the period prior to the Expiration Date.

     D. Tenant’s Right to Contest Taxes.

     (i) Tenant shall have the right in its own name, and at its sole cost and expense, to contest the validity or amount, in whole or in part, of any Taxes, by appropriate proceedings timely instituted in accordance with any protest procedures permitted by applicable Governmental Authority (a “Tax Proceeding”); provided Tenant gives Landlord at least thirty (30) days prior notice of its intention to contest and diligently prosecute such contest by a Tax Proceeding and at all times effectively stays or prevents any non-judicial or judicial sale of any part of the Leased Premises or the leasehold state created by this Lease Agreement or any interest of Landlord in any of the foregoing, by reason of non-payment of any Taxes. Tenant shall diligently pursue all such Tax Proceedings in good faith. Further, Tenant shall, incident to any such Tax Proceeding, provide such bond or other security as may be required by the applicable Governmental Authority. Tenant shall indemnify, defend, and hold Landlord harmless from any and all such Taxes and all claims, costs, fees, and expense related to any such Taxes or Tax Proceeding, including any and all penalties and interest, and Tenant shall promptly pay any valid final adjudication enforcing any Taxes and shall cause any such final adjudication to be timely satisfied prior to any time period within which any non-judicial or judicial sale could occur to collect any such Taxes. As used herein, the term “Governmental Authority” means any federal, state, local or foreign governmental entity, authority or agency, court, tribunal, regulatory commission or other body, whether legislative, judicial or executive (or a combination or permutation thereof), including a local government corporation.

     (ii) Upon the entry of any determination, ruling or judgment in any Tax Proceedings, it shall be the obligation of Tenant to pay the amount of such Tax or part thereof, as is finally determined in such Tax Proceedings, the payment of which may have been deferred during the prosecution thereof, together with any claims, costs, fees, interest, penalties, charges or other liabilities in connection therewith. Nothing herein contained, however, shall be construed so as to allow such Tax to remain unpaid for such length of time as shall permit the Leased Premises or the leasehold estate created by this Lease Agreement, or any part thereof, to be sold or taken by any Governmental Authority for the non-payment of any Tax. Tenant shall promptly furnish Landlord with copies of all notices, filings and pleadings in all such Tax Proceedings. If Landlord chooses to participate in any such Tax Proceedings, then Landlord shall have the right, at its expense, to participate therein.

     (iii) Tenant at its expense may, if it shall so desire, endeavor at any time or times to obtain a reduction in assessed valuation of the Leased Premises for the purpose of reducing Taxes thereon. Tenant shall be authorized to collect any tax refund payable as a result of any proceeding Tenant may institute for any such reduction in assessed value and any such tax refund shall be the property of Tenant (unless the same was paid by Landlord and not reimbursed by Tenant).

     (iv) Tenant is obligated to notify each Governmental Authority imposing Taxes that all certificates, advices, bills or statements regarding Taxes should be sent directly to Tenant. Landlord hereby grants and gives permission to Tenant to render the Leased Premises from time to time during the Term.

     (v) Landlord shall not be required to join in any Tax Proceeding or other action or proceeding referred to in this Section 7D. unless required by Laws in order to make such action or proceeding effective, in which event any such action or proceeding may be taken by Tenant in the name of but without expense to Landlord, and TENANT HEREBY AGREES TO INDEMNIFY, DEFEND AND HOLD LANDLORD HARMLESS FROM ALL COSTS, FEES, EXPENSES, CLAIMS, LOSSES OR

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DAMAGES BY REASON OF, RELATED TO OR IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING. To the extent such cooperation is required by applicable Governmental Authority for such Tax Proceeding, Landlord shall cooperate in any such Tax Proceeding as reasonably requested by Tenant, at Tenant’s sole cost and expense, whether or not Landlord is joined pursuant thereto, and Landlord agrees to take no action that would be materially adverse to Tenant in any such Tax Proceeding where Tenant seeks to reduce its obligation to pay Taxes.

     (vi) The certificate, advice, bill or statement issued or given by any Governmental Authority authorized by applicable Laws to issue the same or to receive payment of a Tax shall be prima facie evidence of the existence, non-payment or amount of such Tax.

     E. Notwithstanding anything to the contrary contained in this Lease and except as provided in Section 7D. above, in the event Tenant fails to pay any Tax payable by Tenant pursuant to the provisions of this Lease at least thirty (30) days before the date the same becomes delinquent and fails to deliver to Landlord reasonable evidence of such payment at least thirty (30) days before the date the same becomes delinquent, Landlord may, after giving Tenant ten (10) days’ notice of its intention to do so, pay or cause to be paid any such Tax which is delinquent and Tenant shall, within thirty (30) days following Landlord’s demand and notice, pay and reimburse Landlord therefor with interest thereon at the rate described in Section 5C from the date of payment by Landlord until repayment in full by Tenant.

SEC. 8 MAINTENANCE AND REPAIRS; UTILITIES:

     A. LANDLORD’S MAINTENANCE AND REPAIRS.

     (i) Landlord, at its sole cost and expense, without any reimbursement from Tenant except as set forth in Section 8.B. or elsewhere in this Lease Agreement, shall maintain the foundation, load bearing walls, roof, exterior surface of the outside walls (except window glass and signage) and other structural members of the Building (the “Structural Components”) in good condition and repair and in compliance with all Laws, unless the damage is due to the negligence of Tenant or its agent.

     (ii) Except as specifically provided in this Section 8A. or elsewhere in this Lease Agreement, Landlord shall not be responsible for maintaining all or any other portion of the Leased Premises.

     B. TENANT’S REPAIR AND MAINTENANCE.

     (i) Tenant, at its own cost and expense, shall (i) maintain all parts of the Leased Premises (other than those for which Landlord is responsible pursuant to the terms and conditions of Section 8A. above) in good condition and repair, and (ii) promptly make all necessary repairs and replacements to the Leased Premises (other than those for which Landlord is responsible pursuant to the terms and conditions of Section 8A. above), including, but not limited to, windows, glass and plate glass, wiring, applicable, corridors, lobbies, elevator foyers, restrooms, parking areas and similar areas of the Leased Premises, Building sprinkler systems, exterior doors, any special office entry, interior walls and finish work, interior doors and floor covering, utility connections, heating and air conditioning systems, light bulbs, fire protection systems serving the Building, plumbing work and fixtures, termite and pest extermination, and any damage due to vandalism or malicious mischief, unless the damage is due to the negligence of the Landlord or its agent.

     (ii) Any and all security of any kind for Tenant, Tenant’s agents, employees or invitees, the Leased Premises, or any personal property thereon (including, without limitation, any personal property of any sublessee) shall be the sole responsibility and obligation of Tenant, and shall be provided by Tenant at Tenant’s sole cost and expense. Tenant acknowledges and agrees that Landlord shall have no obligation or liability whatsoever with respect to same. Landlord shall not be liable for any loss, cost, damage or other liability arising directly or indirectly from security measures or the absence thereof with respect to the Leased Premises unless caused by the negligence or willful misconduct of Landlord. Tenant may, at Tenant’s sole cost and expense, install alarm systems in the Leased Premises provided such installation

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complies with the applicable terms of this Lease Agreement. Removal of such alarm systems shall be Tenant’s sole responsibility and, at Tenant’s sole cost and expense, shall be completed prior to lease termination and all affected areas of the Leased Premises shall be repaired and/or restored in a good and workmanlike manner to the condition that existed prior to such installation unless Landlord agrees that such system may remain.

     (iii) Tenant agrees, at its own cost and expense, to repair or replace any damage or injury done to the Leased Premises, or any part thereof, by Tenant or Tenant’s agents, employees, invitees, or visitors. Tenant further agrees not to commit or allow any waste or damage to be committed on any portion of the Leased Premises, and at the termination of this Lease, by lapse of time or otherwise, Tenant shall deliver up said Premises to Landlord in as good condition as at the Commencement Date, ordinary wear and tear excepted.

     C. It is hereby agreed by Landlord and Tenant that any repairs or replacements that are necessary as a result of any casualty or condemnation, then the sections of this Lease Agreement governing casualty and condemnation shall control the responsibility and obligations of Landlord and Tenant.

     D. Tenant shall maintain the hot water equipment, the heating, air condition, and ventilation equipment and system (the “HVAC System”), the electrical system, the mechanical system and the plumbing system of the Leased Premises in good repair and condition and in accordance with applicable Laws and with such equipment manufacturers’ suggested operation/maintenance service program; such obligation shall include replacement of all equipment necessary to maintain such equipment and systems in good working order. Tenant shall enter into regularly scheduled preventive maintenance/service contracts for such equipment and systems, each in compliance with Landlord’s reasonable specifications and otherwise in form and substance and with a contractor reasonably acceptable to Landlord, and deliver copies thereof to Landlord. Notwithstanding the foregoing, if, throughout the Term, Tenant has maintained the HVAC System in a manner consistent with the manufacturer’s maintenance and repair standards therefor and the HVAC System needs to be replaced during the Term as determined by the contractor performing the preventive maintenance on such system as required herein and as verified by an independent HVAC contractor reasonably acceptable to Landlord and Tenant, then Landlord, at its sole cost and expense, shall purchase and install a replacement HVAC System consistent in capacity and quality to the HVAC System installed by Landlord as of the Commencement Date (the “Replacement HVAC System”). Landlord shall amortize the cost of the Replacement HVAC System over a period directed by Generally Accepted Accounting Principles and Tenant shall reimburse Landlord as Additional Rent for the annual amortization of such cost until the earlier of the (i) expiration of the Term or (ii) expiration of such amortization period for the Replacement HVAC System.

     E. Tenant shall be responsible for all sanitation and pest control relating to the Leased Premises.

     F. Landlord shall be responsible for any sewer availability charges or water availability charges payable for Tenant’s use of the Leased Premises. Tenant shall obtain and pay for all water, gas, electricity, heat, telephone, sewer, and other utilities and services used at the Leased Premises, together with any sales or use taxes, penalties, surcharges, and the like pertaining to the Tenant’s use of the Leased Premises and shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless the Landlord Parties (as defined on Exhibit E) from and against all costs (including attorneys’ fees and costs of suit), losses, liabilities, or causes of action arising out of or relating to the provision of such utilities to the Leased Premises. If Tenant fails to pay any such amounts when due (and such failure continues for ten (10) days after receipt of written notice from Landlord of such failure), Landlord may do so, in which case, Tenant shall reimburse Landlord for all amounts paid by Landlord plus ten percent (10%) of such costs within ten (10) days after Landlord’s request therefor. Landlord will have no responsibility or liability for the interruption or cessation of any utility, service or amenity to the Leased Premises, nor shall any such interruption or cessation entitle Tenant to any abatement of Rent or be deemed to constitute a constructive eviction of Tenant. For greater certainty, Landlord and Tenant agree that nothing in this Section 8.F. shall relieve Landlord of its obligations set forth in Section 8.A. of this Lease Agreement.

SEC. 9 QUIET ENJOYMENT; RIGHTS RESERVED:

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     A. Landlord covenants, warrants and represents to Tenant that Tenant, on paying the said Rent and performing the covenants herein agreed to be by it performed, shall and may peaceably and quietly have, hold and enjoy the Leased Premises for the said Term.

     B. Any diminution or shutting off of light, air or view by any structure which is now or may hereafter be effected on lands adjacent to the Building shall in no way affect this Lease Agreement or impose any liability on Landlord. Noise, dust or vibration or other incidents caused by or arising out of any new construction of improvements on lands adjacent to the Leased Premises, whether or not owned by Landlord, or on the Land shall in no way affect this Lease Agreement or impose any liability on Landlord.

     C. Landlord represents and warrants to Tenant that, as of the Effective Date, (i) the Leased Premises are zoned appropriately for the Permitted Use, (ii) Landlord holds fee simple title to the Land and (iii) Landlord will deliver the Leased Premises to Tenant free and clear of all other tenancies and claims of rights to occupy the Leased Premises.

SEC. 10 ALTERATIONS:

     A. Tenant shall not make or allow to be made (except as otherwise provided in this Lease Agreement) any alterations or physical additions (including fixtures) in or to the Leased Premises, or place safes, vaults or other heavy furniture or equipment within the Leased Premises, without first obtaining the written consent of Landlord. In addition, Tenant shall not be permitted to take x-rays or core drill or penetrate the floor of the Leased Premises without first obtaining the Landlord’s consent. The reasonable cost of any third party consultant or engineer hired by Landlord and approved by Tenant, such approval not to be unreasonably withheld, delayed or conditioned in connection with such work undertaken by Tenant shall be paid for by Tenant as Additional Rent hereunder. Tenant shall submit requests for consent to make alterations or physical additions together with copies of the plans and specifications for such alterations. Subsequent to obtaining Landlord’s consent and prior to commencement of construction of the alterations or physical additions, Tenant shall deliver to Landlord the building permit (if a building permit is required to complete such alterations or additions), a copy of the executed construction contract covering the alterations and physical additions and evidence of contractor’s and subcontractor’s insurance, such insurance being with such companies, for such periods and in such amounts as Landlord may reasonably require, naming the Landlord Parties as additional insureds. Tenant shall pay to Landlord upon demand a review fee in the amount of Landlord’s actual and reasonable costs (provided that prior to incurring such costs, Landlord shall deliver to Tenant a good faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s reimbursement obligation with respect thereto shall not be limited to such estimate) incurred to compensate Landlord for the third party (such third party to be approved by Tenant in advance, such approval not to be unreasonably withheld, conditioned or delayed) cost of review and approval of the plans and specifications and for additional third party (such third party to be approved by Tenant in advance, such approval not to be unreasonably withheld, conditioned or delayed) administrative costs (provided that prior to incurring such costs, Landlord shall deliver to Tenant a good faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s reimbursement obligation with respect thereto shall not be limited to such estimate) incurred in monitoring the construction of the alterations. If available, Tenant shall deliver to Landlord a copy of the “as-built” plans and specifications for all alterations or physical additions so made in or to the Leased Premises, and shall reimburse Landlord for the reasonable third party (such third party to be approved by Tenant in advance, such approval not to be unreasonably withheld, conditioned or delayed) cost (provided that prior to incurring such costs, Landlord shall deliver to Tenant a good faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s reimbursement obligation with respect thereto shall not be limited to such estimate) incurred by Landlord to update its current architectural plans for the Building.

     B. Notwithstanding the foregoing but subject to the other terms and conditions of this Section 9, Tenant may from time to time at its sole cost and expense make such alterations, additions, restorations, changes, replacements or installations (“Alterations”) in, of or to the interior of the Building as Tenant deems necessary or desirable; provided, however, Tenant shall not make or allow to be made any structural alterations to the Building or any other portion of the Leased Premises, without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. For purposes of this Lease Agreement, the term “structural alterations” means alterations that affect the structure or the structural integrity of Building or any portion

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thereof, or alter the exterior appearance of the Building or any other portion of the Leased Premises, or affect the mechanical, electrical or plumbing systems of the Building.

     C. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless the Landlord Parties from and against all costs (including reasonable attorneys’ fees and costs of suit), losses, liabilities, or causes of action arising out of or relating to any alterations, additions or improvements made by Tenant to the Leased Premises, including but not limited to any mechanics’ or materialmen’s liens asserted in connection therewith.

     D. Tenant shall not be deemed to be the agent or representative of Landlord in making any such alterations, physical additions or improvements to the Leased Premises, and shall have no right, power or authority to encumber any interest in the Leased Premises in connection therewith other than Tenant’s leasehold estate under this Lease Agreement. However, should any mechanics’ or other liens be filed against any portion of the Leased Premises or any interest therein (other than Tenant’s leasehold estate hereunder) by reason of Tenant’s acts or omissions or because of a claim against Tenant or its contractors, Tenant shall cause the same to be canceled or discharged of record by bond or otherwise within thirty (30) days after notice by Landlord. If Tenant shall fail to cancel or discharge said lien or liens, within said thirty (30) day period, which failure shall be deemed to be an Event of Default hereunder without the necessity of any further notice or cure period, Landlord may, at its sole option and in addition to any other remedy of Landlord hereunder, cancel or discharge the same and upon Landlord’s demand, Tenant shall promptly reimburse Landlord for all costs incurred in canceling or discharging such lien or liens.

     E.  Tenant shall cause all alterations, physical additions, and improvements (including fixtures), constructed or installed in the Leased Premises by or on behalf of Tenant to comply with all applicable Laws, excluding the Structural Components. Tenant acknowledges and agrees that neither Landlord’s review and approval of Tenant’s plans and specifications nor its observation or supervision of the construction or installation thereof shall constitute any warranty or agreement by Landlord that same comply with Laws or release Tenant from its obligations under this Section 10D. The terms of this Section 10.E. shall not apply to Landlord’s initial construction of the Improvements as set forth in Exhibit D and Sections 52, 53, 54 and 56 of this Lease Agreement.

     F. Tenant shall be wholly responsible for any accommodations or alterations that are required by Laws to be made to the Leased Premises to accommodate disabled employees and customers of Tenant, including, without limitation, compliance with the Americans with Disabilities Act (42 U.S.C. §§ 12101 et seq.) (collectively, the “Accommodation Laws”); provided, however, that Landlord shall be wholly responsible for any accommodations or alterations that are required by Laws to be made to Structural Components.

     G. If (a) because of any act or omission of Landlord or anyone claiming by, through or under Landlord, or (b) by reason of any construction, alteration, repair or restoration of any part of the Leased Premises by Landlord, any mechanics’ or other lien, encumbrance, judgment lien or order for the payment of money or the performance of any act or thing, shall be filed against the Leased Premises or against Tenant (whether or not such lien or order is valid or enforceable as such), Landlord shall, at Landlord’s own cost and expense, cause the same to be canceled and discharged of record within thirty (30) days after Landlord’s receipt of notice thereof. In connection with Landlord’s obligations set forth in Exhibit D and Sections 52, 53, 54 and 56 of this Lease Agreement with respect to initial construction of the Improvements, Landlord to the extent not specifically prohibited by Laws, shall also indemnify and save harmless Tenant from and against any and all costs, expenses, claims, losses or damages, including, but not limited to, reasonable counsel fees charged by counsel of Landlord’s choice, resulting therefrom or by reason thereof.

SEC. 11 FURNITURE, FIXTURES AND PERSONAL PROPERTY: Tenant may remove its trade fixtures, office supplies and movable office furniture and equipment not attached to the Building provided: (a) such removal is made prior to the termination of this Lease Agreement (b) Tenant is not in default of any obligation or covenant under this Lease Agreement at the time of such removal; and (c) Tenant promptly repairs all damage caused by such removal. All other property at the Leased Premises and any alterations or additions to the Leased Premises (including wall-to-wall carpeting, paneling or other wall covering) and any other article attached or affixed to the floor, wall or ceiling of the Leased Premises shall become the property of Landlord and shall remain upon and be surrendered with the Leased Premises as a part thereof at the termination of the Lease Agreement by lapse of time or otherwise, Tenant hereby waiving all rights to any payment or compensation therefor. If, however, Landlord so

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requests in writing within ten (10) business days after receipt of written notice from Tenant of alterations to the Leased Premises that do not require Landlord’s consent (or if written consent is required, then at the time Landlord grants its consent to such alteration), Tenant will, prior to termination of this Lease Agreement, remove any and all alterations, additions, fixtures, equipment and property placed or installed by Tenant in the Leased Premises and will repair any damage caused by such removal. If Tenant does not complete all removals prior to the termination of this Lease Agreement, Landlord may remove such items (or contract for the removal of such items), Tenant shall reimburse Landlord upon demand for the costs incurred by Landlord in connection therewith and Tenant shall be deemed to be holding over pursuant to Section 26 below until such time as such items have been removed from the Leased Premises. This Section 11 shall survive the expiration or termination of this Lease Agreement. For greater certainty, Landlord and Tenant agree that no portion of the Building or the Improvements shall constitute Tenant’s trade fixtures, office supplies or movable office furniture or equipment for purposes of this Section 11.

SEC. 12 SUBLETTING AND ASSIGNMENT:

     A. In the event Tenant should desire to assign this Lease Agreement or sublet the Leased Premises or any part thereof or allow same to be used or occupied by others, Tenant shall give Landlord written notice (which shall specify the duration of said desired sublease or assignment, the date same is to occur, the exact location of the space affected thereby, the proposed rentals on a square foot basis chargeable thereunder and reasonably sufficient information of the proposed sublessee or assignee regarding its intended use, financial condition and business operations) of such desire at least forty-five (45) days in advance of the date on which Tenant desires to make such assignment or sublease or allow such a use or occupancy. Landlord shall then have a period of fifteen (15) days following receipt of such notice within which to notify Tenant in writing that Landlord elects:

(1)	in the event such assignee or sublessee fails to meet the conditions set forth in subparagraph (3) below, to refuse to permit Tenant to assign this Lease Agreement or sublet such space, and in such case this Lease Agreement shall continue in full force and effect in accordance with the terms and conditions hereof; or
(2)	to terminate this Lease Agreement as to the space so affected as of the date so specified by Tenant in which event Tenant shall be relieved of all obligations hereunder as to such space arising from and after such date; or
(3)	to permit Tenant to assign this Lease Agreement or sublet such space for the duration specified in such notice, such approval not to be unreasonably withheld if (a) the nature and character of the proposed assignee or sublessee and the principals thereof, their business and activities and intended use of the Leased Premises are in Landlord’s reasonable judgment consistent with the current standards of the Building (b) the form and substance of the proposed sublease or instrument of assignment are acceptable to Landlord (which acceptance by Landlord shall not be unreasonably withheld) and is expressly subject to all of the terms and provisions of this Lease Agreement and to any matters to which this Lease Agreement is subject, (c) Tenant enters into a written agreement with Landlord whereby it is agreed that any rent realized by Tenant as a result of said sublease or assignment in excess of the Base Rent and Additional Rent payable to Landlord by Tenant under this Lease Agreement and any and all sums and other considerations of whatsoever nature paid to Tenant by the assignee or sublessee for or by reason of such assignment or sublease, including, but not limited to, sums paid for the sale of Tenant’s fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property in excess of the fair market value thereof (that is, after deducting and giving Tenant credit for Tenant’s reasonable costs directly associated therewith, including reasonable brokerage fees and the reasonable cost of remodeling or otherwise improving the Leased Premises for said assignee or sublessee but excluding any free rentals or the like offered to any such sublessee or assignee) shall be payable to Landlord as it accrues as Additional Rent hereunder, (d) the granting of such consent will not constitute a default under any other agreement to which Landlord is a party or by which Landlord is bound and (e) the creditworthiness of the proposed assignee or sublessee and the principals thereof is acceptable to Landlord, in Landlord’s reasonable discretion.

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     B. No assignment or subletting by Tenant shall be effective unless Tenant shall execute, have acknowledged and deliver to Landlord, and cause each sublessee or assignee to execute, have acknowledged and deliver to Landlord, an instrument in form and substance reasonably acceptable to Landlord in which (i) such sublessee or assignee adopts this Lease Agreement and assumes and agrees to perform jointly and severally with Tenant (provided that if the entity succeeding as Tenant hereunder shall have a tangible net worth equal to or greater than the tangible net worth of Cardiovascular Systems, Inc. as of the Effective Date, Cardiovascular Systems, Inc. shall not be required to be jointly and severally liable with respect to the performance of such obligation) all of the obligations of Tenant under this Lease Agreement to the extent accruing after the effective date of the assignment or subletting, as to the space transferred to it, (ii) such sublessee or assignee agrees to use and occupy the transferred space solely for the purpose specified in Section 3 and otherwise in accordance with this Lease Agreement, and (iii) Tenant acknowledges and agrees that, notwithstanding such subletting or assignment, Tenant remains directly and primarily liable for the performance of all the obligations of Tenant hereunder (including, without limitation, the obligation to pay Rent), and Landlord shall be permitted to enforce this Lease Agreement against Tenant or such sublessee or assignee, or both, without prior demand upon or proceeding in any way against any other persons. Tenant shall, upon demand, reimburse Landlord for all reasonable third party (such third party to be approved by Tenant in advance, such approval not to be unreasonably withheld, conditioned or delayed) costs and expenses (provided that prior to incurring such costs and expenses, Landlord shall deliver to Tenant a good faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s reimbursement obligation with respect thereto shall not be limited to such estimate) incurred by Landlord in connection with a request made by Tenant pursuant to this Section 12, including, without limitation, any investigations as to the acceptability of the proposed assignee or sublessee, all legal costs reasonably incurred in connection with the granting of any requested consent and a charge reasonably determined by Landlord to cover in-house time spent in respect of such request.

     C. Any consent by Landlord to a particular assignment or sublease shall not constitute Landlord’s consent to any other or subsequent assignment or sublease, and any proposed sublease or assignment by any assignee or sublessee shall be subject to the provisions of this Section 12 as if it were a proposed sublease or assignment by Tenant. The prohibition against an assignment or sublease described in this Section 12 shall be deemed to include a prohibition against (i) Tenant’s mortgaging or otherwise encumbering its leasehold estate, (ii) an assignment or sublease which may occur by merger or operation of law and (iii) permitting the use or occupancy of the Leased Premises, or any part thereof, by anyone other than Tenant, each of which shall be ineffective and void and shall constitute an Event of Default under this Lease Agreement unless consented to by Landlord in writing in advance. For purposes hereof, the transfer of the ownership or voting rights in a controlling interest of the voting stock of Tenant (if Tenant is a corporation) or the membership interests of Tenant (if Tenant is a limited liability company) or the transfer of a general partnership interest or a majority of the limited partnership interest in Tenant (if Tenant is a partnership), at any time throughout the Term, shall be deemed to be an assignment of this Lease Agreement; provided that the terms of the foregoing clause shall be limited to periods in which the shares of Tenant are not traded on an exchange.

     D. Notwithstanding anything to the contrary set forth herein, Tenant shall have the right to enter into an assignment of this Lease or a sublease of the Leased Premises, without Landlord’s consent, to any subsidiary corporation of Tenant that is owned and controlled by Tenant, any entity succeeding to substantially all of the assets of Tenant as a result of a consolidation or merger, or to an entity to which all or substantially all of the assets of Tenant have been sold; provided, however, that, as conditions to such permitted assignments and subleases, (i) the entity succeeding as Tenant hereunder shall have a tangible net worth equal to or greater than the tangible net worth of Cardiovascular Systems, Inc. as of the date of the transfer and (ii) Cardiovascular Systems, Inc. (to the extent Cardiovascular Systems, Inc. exists as an entity following such a consolidation or merger) shall be jointly and severally liable with such assignee or sublessee for all obligations of Tenant under this Lease Agreement.

SEC. 13 FIRE AND CASUALTY:

     A. In the event of a fire or other casualty in the Leased Premises, Tenant shall immediately give notice thereof to Landlord. In the event such a fire or other casualty occurs during the last five (5) years of the initial ten (10) year Term or during either of the Extended Terms and (i) results in total or substantial damages to or destruction of the Improvements, or (ii) results in the Leased Premises being untenantable in whole or in substantial part and the reasonable estimation of a contractor reasonably approved by Landlord and Tenant as to the amount of time necessary to rebuild or restore such destruction to the Leased Premises exceeds six (6) months from the time

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such work is commenced, then in either event, Tenant shall have a right to terminate this Lease Agreement effective as of the date of casualty or destruction, and upon such termination, all Rent owed up to the time of such destruction or termination shall be paid by Tenant. Subject to reasonable delays for insurance adjustments, Tenant shall give Landlord written notice of its decisions, estimates or elections under this Section 13 within sixty (60) days after any such damage or destruction.

     B. Any net insurance proceeds payable with respect to the casualty shall be paid directly to Tenant and may be used by Tenant only for the repair or reconstruction of the Improvements to a like or better condition than existed prior to such damage or destruction; provided, however, that if an Event of Default has occurred and is continuing at the time of such casualty or at any time thereafter, all such insurance proceeds shall be paid directly to Landlord and disbursed, subject to terms and conditions that Landlord in its sole discretion deems appropriate given the circumstances, to Tenant for the repair or reconstruction of the Improvements. Notwithstanding anything contained in this Section 13, Tenant shall not be required to expend more to reconstruct, restore and repair the Improvements than the amount actually received (plus deductibles) from the proceeds of the property insurance carried by Tenant, so long as (i) Tenant has maintained policies of insurance consistent with the terms and conditions of this Lease and (ii) Tenant delivers to Landlord written notice thereof at least thirty (30) days prior to commencing the reconstruction, restoration and repair of the Improvements. In the event Tenant will not reconstruct, restore and repair the Improvements to its condition prior to the casualty, Landlord shall have the right to terminate this Lease Agreement upon delivery of written notice to Tenant, delivered within thirty (30) days following the date Tenant delivers to Landlord written notice of the amount of available insurance proceeds and the condition to which Tenant desires to reconstruct, restore and repair the Improvements. If such proceeds are more than sufficient to reconstruct, restore and repair the Improvements to its condition prior to the casualty, the surplus shall belong to and be returned to Tenant; provided, however, that if a monetary Event of Default or Event of Default that could be cured with the payment of money exists at such time, Landlord shall direct such surplus to cure such Event(s) of Default and any surplus remaining after the cure thereof shall be delivered to Tenant. Should Landlord or Tenant terminate this Lease Agreement in accordance with the terms of this Section 13.B., the insurance proceeds shall belong to Landlord and Tenant shall have no claim to such proceeds, except proceeds attributable to the trade fixtures, equipment and personal property of Tenant, provided that in no event shall any portion of the Improvements be considered the trade fixtures, equipment and personal property of Tenant for purposes of such an allocation of proceeds. If Tenant desires any other additional repairs or restoration, and if Landlord consents thereto which consent shall not be unreasonably withheld, it shall be done at Tenant’s sole cost and expense subject to all of the applicable provisions of this Lease Agreement.

     C. Tenant shall not have any right under this Lease Agreement, and hereby waives all rights under applicable law, if any, to abate, reduce or offset Rent by reason of any damage or destruction of the Leased Premises by reason of an insured or uninsured casualty.

SEC. 14 CONDEMNATION:

     A. If all of the Leased Premises is taken or condemned, or acquired under threat of condemnation, by or at the direction of any Governmental Authority (a “Taking” or “Taken”, as the context requires) during the last five (5) years of the initial ten (10) year Term or during either of the Extended Terms, or if so much of the Leased Premises is Taken that, in Tenant’s reasonable opinion, the remainder cannot be used for the Permitted Use, or if the awards payable to Landlord as a result of any Taking are, in Tenant’s reasonable opinion, inadequate to restore the remainder to an economically viable building, Tenant may, at its election, exercisable by the giving of written notice to Landlord within sixty (60) days after the date of the Taking, terminate this Lease Agreement as of the date of the Taking or the date Tenant is deprived of possession of the Leased Premises (whichever is later). If this Lease Agreement is not terminated as a result of a Taking, (i) Landlord shall restore the Leased Premises remaining after the Taking to a tenantable condition; provided however that Landlord shall not be required to expend more to reconstruct, restore and repair the Building than the amount of condemnation awards, proceeds, compensation or other payments actually received by Landlord, and (ii) and the Base Rent shall be reduced proportionately to the portion of the Improvements so taken. Unless covered by business interruption policy of insurance required to be carried by Tenant pursuant to the terms of Exhibit E to this Lease Agreement, during the period of restoration, Base Rent shall be abated to the extent the Leased Premises are rendered untenantable. All awards, proceeds, compensation or other payments from or with respect to any Taking of the Leased Premises or any portion thereof shall belong to Landlord, Tenant hereby assigning to Landlord all of its right, title, interest and claim to same.

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Tenant shall have the right to assert a separate claim for and recover from the condemning authority, but not from Landlord, such compensation as may be awarded on account of Tenant’s moving and relocation expenses, and depreciation to and loss of Tenant’s movable personal property, trade fixtures and equipment.

SEC. 15 DEFAULT BY TENANT: The occurrence of any one or more of the following shall constitute an “Event of Default” under this Lease Agreement:

     A. The failure of Tenant to pay any Rent within ten (10) days after receipt of written notice from Landlord of Tenant’s failure to pay such Rent on the due date therefor under this Lease Agreement;

     B. The failure of Tenant to perform, comply with or observe any of the other covenants or conditions contained in this Lease Agreement and the continuance of such failure for the period of time as may be specified elsewhere in this Lease Agreement for such specific covenant or condition, or should no period of time be specified elsewhere in this Lease Agreement with respect to such specific covenant or condition, a period of ten (10) days after written notice to Tenant; or, if such failure cannot reasonably be cured within said ten (10) day period despite Tenant’s diligent good faith efforts, the failure of Tenant to promptly commence its diligent good faith efforts to cure such failure within said ten (10) day period and/or the continuance of such failure for a period of one hundred twenty (120) days notwithstanding Tenant’s efforts to cure;

     C.  Tenant shall fail to execute and acknowledge or otherwise respond in good faith and in writing within ten (10) days after submission to Tenant of a request for confirmation of the subordination of this Lease Agreement pursuant to Section 24 or an estoppel certificate pursuant to Section 35;

     D. The failure of Tenant to occupy the Leased Premises during the entire Term for a period of twelve (12) consecutive months (other than reasonable cessations of operations in connection with fires or other casualties as described in Section 13 or a Taking as described in Section 14), provided that intermittent operations not exceeding six (6) consecutive months in duration shall not serve to interrupt the running of such twelve (12) month period;

     E. The filing of a petition by or against Tenant of Tenant’s obligations under this Lease Agreement (i) naming Tenant or as debtor in any bankruptcy or other insolvency proceeding, (ii) for the appointment of a liquidator or receiver for all or substantially all of Tenant’s property or for Tenant’s interest in this Lease Agreement, or (iii) to reorganize or modify Tenant’s capital structure, to the extent such petition is not removed or rescinded within ninety (90) days after the filing date;

     F. The admission by Tenant in writing of its inability to meet its obligations as they become due or the making by Tenant of an assignment for the benefit of its creditors;

     G. The attempt by Tenant to assign this Lease Agreement or to sublet all or any part of the Leased Premises without the prior written consent of Landlord in accordance with Section 12, to the extent Landlord’s consent was required; or

     H. The failure by Tenant to comply with the insurance requirements set forth in Exhibit E.

SEC. 16 REMEDIES OF LANDLORD: Upon any Event of Default, Landlord may exercise any one or more of the following described remedies, in addition to all other rights and remedies provided under applicable Laws or in equity:

     A. Terminate this Lease Agreement by written notice to Tenant and forthwith repossess the Leased Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (i) the cost of recovering the Leased Premises (including attorneys’ fees and costs of suit), (ii) the cost of removing and storing any personal property, (iii) the unpaid Rent earned at the time of termination, plus interest thereon at the rate described in Section 5C., (iv) the present value (discounted at the rate of eight percent (8%) per annum) of the balance of the Rent for the remainder of the Term less the present value (discounted at the same rate) of the fair market rental value of the Leased Premises for said period, taking into account the period of time the Leased

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Premises will remain vacant until a new tenant is obtained, and the cost to prepare the Leased Premises for occupancy and the other costs (such as leasing commissions, tenant improvement allowances and attorneys’ fees) to be incurred by Landlord in connection therewith, and (v) any other sum of money and damages owed by Tenant to Landlord under this Lease Agreement.

     B. Terminate Tenant’s right of possession (but not this Lease Agreement) and may repossess the Leased Premises by forcible detainer suit or otherwise, without thereby releasing Tenant from any liability hereunder and without demand or notice of any kind to Tenant and without terminating this Lease Agreement. Subject to Section 16E. below, Landlord shall use reasonable efforts under the circumstances to relet the Leased Premises on such terms and conditions as Landlord in its sole discretion may determine (including a term different than the Term, rental concessions, alterations and repair of the Leased Premises). Landlord shall not be liable for, nor shall Tenant’s obligations hereunder be diminished because of, Landlord’s failure or refusal to relet the Leased Premises or collect rent due in respect of such reletting. For the purpose of such reletting Landlord shall have the right to decorate or to make any repairs, changes, alterations or additions in or to the Leased Premises as may be reasonably necessary or desirable. In the event that (i) Landlord shall fail to relet the Leased Premises, or (ii) the Leased Premises are relet and a sufficient sum shall not be realized from such reletting (after first deducting therefrom, for retention by Landlord, the unpaid Rent due hereunder earned but unpaid at the time of reletting plus interest thereon at the rate specified in Section 5C., the cost of recovering possession (including attorneys’ fees and costs of suit), all of the costs and expenses of such decorations, repairs, changes, alterations and additions, the expense of such reletting and the cost of collection of the rent accruing therefrom) to satisfy the Rent, then Tenant shall pay to Landlord as damages a sum equal to the amount of such deficiency. Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section 16 from time to time. No delivery to or recovery by Landlord of any portion due Landlord hereunder shall be any defense in any action to recover any amount not theretofore reduced to judgment in favor of Landlord, nor shall such reletting be construed as an election on the part of Landlord to terminate this Lease Agreement unless a written notice of such intention be given to Tenant by Landlord. Notwithstanding any such termination of Tenant’s right of possession of the Leased Premises, Landlord may at any time thereafter elect to terminate this Lease Agreement. In any proceedings to enforce this Lease Agreement under this Section 16, Landlord shall be presumed to have used its reasonable efforts to relet the Leased Premises, and Tenant shall bear the burden of proof to establish that such reasonable efforts were not used.

     C. Alter any and all locks and other security devices at the Leased Premises, and if it does so Landlord shall not be required to provide a new key or other access right to Tenant unless Tenant has cured all Events of Default; provided, however, that in any such instance, during Landlord’s normal business hours and at the convenience of Landlord, and upon the written request of Tenant accompanied by such written waivers and releases as Landlord may require, Landlord will escort Tenant or its authorized personnel to the Leased Premises to retrieve any personal belongings or other property of Tenant. The provisions of this Section 16.C are intended to override and control any conflicting provisions of the Texas Property Code.

     D. Make any payment or perform any act on Tenant’s part to cure such Event of Default without waiving or releasing Tenant from any obligations. All sums so paid by Landlord and all costs incurred by Landlord in taking such action plus interest thereon at the lesser of ten percent (10%) per annum or the highest rate then allowed under Laws shall be deemed Additional Rent hereunder and shall be paid to Landlord on demand, and Landlord shall have (in addition to all other rights and remedies of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of Rent.

     E. In connection with the exercise by Landlord of its rights and remedies in respect of any Event of Default on the part of Tenant, to the extent (but no further) that Landlord is required by applicable Laws to mitigate damages, or to use efforts to do so, Tenant agrees in favor of Landlord that Landlord shall not be deemed to have failed to mitigate damages, or to have used the efforts required by Laws to do so, because:

(1)	Landlord leases other property owned by Landlord prior to re-letting the Leased Premises;
(2)	Landlord refuses to relet the Leased Premises to any affiliate of Tenant, or any principal of Tenant, or any affiliate of such principal (for purposes of this Lease Agreement,

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	“affiliate” shall mean and refer to any person or entity controlling, under common control with, or controlled by, the party in question);
(3)	Landlord refuses to relet the Leased Premises to any person or entity whose creditworthiness Landlord in good faith deems unacceptable;
(4)	Landlord refuses to relet the Leased Premises to any person or entity because the use proposed to be made of the Leased Premises by such prospective tenant is not of a type and nature reasonably deemed acceptable by Landlord
(5)	Landlord refuses to relet the Leased Premises to any person or entity, or any affiliate of such person or entity, who has been engaged in litigation with, or who has threatened litigation against, Landlord or any of its affiliates, or whom Landlord in good faith deems to be unreasonably or excessively litigious;
(6)	Landlord refuses to relet the Leased Premises because the tenant or the terms and provisions of the proposed lease are not approved by the holders of any liens or security interests in the Leased Premises or any part thereof, or would cause Landlord to breach or be in default of, or to be unable to perform any of its covenants under, any agreements between Landlord and any third party; or
(7)	Landlord refuses to relet the Leased Premises to a person or entity whose character or reputation, or the nature of whose business, Landlord in good faith deems unacceptable;

and it is further agreed that each and all of the grounds for refusal set forth in clauses (1) through (7) above, both inclusive, of this sentence are reasonable grounds for Landlord’s refusal to relet the Leased Premises, or (as to all other provisions of this Lease Agreement) for Landlord’s refusal to issue any approval, or take any other action, of any nature whatsoever under this Lease Agreement.

SEC. 17 WAIVER OF LANDLORD’S LIEN: Landlord hereby expressly, unconditionally and irrevocably waives any and all liens, express or implied, statutory, constitutional or contractual, that would or might otherwise secure the performance by Tenant of its obligations under this Lease Agreement.

SEC. 18 NON-WAIVER: Neither acceptance of Rent by Landlord nor failure by Landlord to exercise available rights and remedies, whether singular or repetitive, shall constitute a waiver of any of Landlord’s rights hereunder. Waiver by Landlord of any right for any Event of Default of Tenant shall not constitute a waiver of any right for either a subsequent Event of Default of the same obligation or any other Event of Default. No act or thing done by Landlord or its agent shall be deemed to be an acceptance or surrender of the Leased Premises and no agreement to accept a surrender of the Leased Premises shall be valid unless it is in writing and signed by a duly authorized officer or agent of Landlord.

SEC. 19 COMPLIANCE WITH LAWS: Tenant shall comply with, and Tenant shall cause its visitors, employees, contractors, agents, invitees and licensees to comply with, all Laws relating to the use, condition or occupancy of the Leased Premises.

SEC. 20 ASSIGNMENT BY LANDLORD; LIMITATION OF LANDLORD’S LIABILITY: Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Leased Premises, and in such event and upon such transfer no further liability or obligation shall thereafter accrue against Landlord hereunder. Furthermore, Tenant specifically agrees to look solely to Landlord’s interest in the Leased Premises, including, without limitation, all rents and insurance proceeds, for the recovery of any judgment from Landlord, it being agreed that the Landlord Parties shall never be personally liable for any such judgment.

SEC. 21 SEVERABILITY: This Lease Agreement shall be construed in accordance with the laws of the State of Texas. If any clause or provision of this Lease Agreement is illegal, invalid or unenforceable, under present or future Laws effective during the Term hereof, then it is the intention of the parties hereto that the remainder of this

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Lease Agreement shall not be affected thereby, and it is also the intention of both parties that in lieu of each clause or provision that is illegal, invalid or unenforceable, there be added as part of this Lease Agreement a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable.

SEC. 22 SIGNS: Other than the signage expressly referred to in the Construction Drawings (as defined in Exhibit D), Tenant shall not place, install or attach any signage, window or door lettering, decals, window or storefront stickers, advertising media of any type, exterior lights, or exterior decorations, balloons, flags, pennants, banners, paintings, or bars on windows, or security installations on or to the Leased Premises or the Building without Landlord’s prior written approval, which shall not be unreasonably withheld. Other than the signage expressly referred to in the Construction Drawings, or otherwise consented to by Landlord, Tenant shall repair, paint, and/or replace any portion of the Leased Premises or the Building damaged or altered as a result of its signage when it is removed (including, without limitation, any discoloration of the Building). Landlord shall not be required to notify Tenant of whether it consents to any sign until it has received detailed, to-scale drawings thereof specifying design, material composition, color scheme, and method of installation, and has had a reasonable opportunity to review them.

SEC. 23 SUCCESSORS AND ASSIGNS: Landlord and Tenant agree that all provisions hereof are to be construed as covenants and agreements as though the words imparting such covenants were used in each separate paragraph hereof, and that, except as restricted by the provisions of Section 12, this Lease Agreement and all the covenants herein contained shall be binding upon the parties hereto, their respective heirs, legal representatives, successors and assigns.

SEC. 24 SUBORDINATION; NONDISTURBANCE:

     A. Tenant covenants and agrees with Landlord that this Lease Agreement is subject and subordinate to any mortgage, deed of trust, ground lease and/or security agreement which may now or hereafter encumber the Leased Premises or any interest of Landlord therein, and to any advances made on the security thereof and to any and all increases, renewals, modifications, consolidations, replacements and extensions thereof. This clause shall be self-operative and no further instrument of subordination need be required by any owner or holder of any such ground lease, mortgage, deed of trust or security agreement. In confirmation of such subordination, however, at Landlord’s request, Tenant shall execute promptly any appropriate certificate or instrument that Landlord may request. In the event of the enforcement by the ground lessor, the trustee, the beneficiary or the secured party under any such ground lease, mortgage, deed of trust or security agreement of the remedies provided for by Laws or by such ground lease, mortgage, deed of trust or security agreement, Tenant, upon request of the ground lessor or any person or party succeeding to the interest of Landlord as a result of such enforcement, will automatically become the Tenant of such ground lessor or successor in interest without any change in the terms or other provisions of this Lease Agreement; provided, however, that the obligations of such ground lessor or successor in interest shall be as set forth in a subordination, nondisturbance and attornment agreement delivered pursuant to Section 24.C or 24.D below and in no event shall such ground lessor or successor in interest be (a) bound by any payment of Rent for more than one month in advance except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease Agreement, unless received by such ground lessor or successor, (b) bound by any amendment or modification of this Lease Agreement made without the written consent of such ground lessor or such successor in interest (c) liable for any previous act or omission of the Landlord unless such ground lessor or successor in interest, after acquiring succeeding to the interest of Landlord under this Lease Agreement, shall fail to cure any default by Landlord within the time periods set forth in this section, (d) subject to any credit, demand, claim, counterclaim, offset or defense which theretofore accrued to Tenant against the Landlord, unless such ground lessor or successor in interest, after acquiring succeeding to the interest of Landlord under this Lease Agreement, shall fail to cure any default by Landlord within the time periods set forth in this section, (e) required to account for any security deposit of Tenant other than any security deposit actually delivered to lender by Landlord and (f) responsible for any monies owing by Landlord to Tenant. Upon request by such ground lessor or successor in interest, whether before or after the enforcement of its remedies, Tenant shall execute and deliver an instrument or instruments confirming and evidencing the attornment herein set forth. Notwithstanding anything contained in this Lease Agreement to the contrary, in the event of any default by Landlord in performing its covenants or obligations hereunder which would give Tenant the right to terminate this Lease Agreement, Tenant shall not exercise such right unless and until (a) Tenant gives written notice of such default (which notice shall specify the exact nature of said

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default and how the same may be cured) to the lessor under any such land or ground lease and the holder(s) of any such mortgage or deed of trust or security agreement who has theretofore notified Tenant in writing of its interest and the address to which notices are to be sent, and (b) said lessor and holder(s) fail to cure or cause to be cured said default within thirty (30) days from the receipt of such notice from Tenant.

     B. Notwithstanding anything to the contrary set forth above, any beneficiary under any deed of trust may at any time subordinate its deed of trust to this Lease Agreement in whole or in part, without any need to obtain Tenant’s consent, by execution of a written document subordinating such deed of trust to the Lease Agreement to the extent set forth in such document and thereupon the Lease Agreement shall be deemed prior to such deed of trust to the extent set forth in such document without regard to their respective dates of execution, delivery and/or recording. In that event, to the extent set forth in such document, such deed of trust shall have the same rights with respect to this Lease Agreement as would have existed if this Lease Agreement had been executed, and a memorandum thereof, recorded prior to the execution, delivery and recording of the deed of trust.

     C. It shall be a condition precedent to Tenant’s obligation to subordinate this Lease Agreement to any current or future lien, encumbrance, easement, deed of trust or ground lease of any ground lessor or mortgagee that such ground lessor or mortgagee enter into a subordination, non-disturbance and attornment agreement in a reasonable and customary form with Tenant which includes and recognizes the terms of this Lease Agreement and provides that: (a) so long as Tenant is not in default after the expiration of any applicable notice and grace period, this Lease Agreement shall not be terminated nor shall the rights or remedies of Tenant hereunder or its use or occupancy of the Leased Premises be disturbed or interfered with or otherwise affected in any manner as a result of any breach of or default under the mortgage; (b) all condemnation awards and proceeds of insurance shall be applied in the manner reasonably acceptable to Tenant and such ground lessor or mortgagee and (c) neither such holder nor any other holder of such mortgage shall name or join Tenant as a party defendant or otherwise in any suit, action or proceeding to enforce, nor will this Lease Agreement be terminated (except as permitted by the provisions of this Lease Agreement) or otherwise affected by foreclosure or enforcement of, any rights given to any holder of said mortgage pursuant to the terms, covenants or conditions contained therein or in any other documents held by any such holder or otherwise given to any holder as a matter of law or equity.

     D. Prior to the Commencement Date, Landlord, Tenant and any existing mortgagee or ground lessor of the Leased Premises shall enter into a reasonable and customary subordination, non-disturbance and attornment agreement consistent with the terms of this Section 24, including, without limitation, provisions for the application of casualty and condemnation awards.

SEC. 25 RESERVED:

SEC. 26 HOLDING OVER: In the event of holding over by Tenant with respect to all or any portion of the Leased Premises after the expiration or termination of the Lease Agreement, such holding over shall constitute a tenancy at sufferance relationship between Landlord and Tenant and all of the terms and provisions of this Lease Agreement shall be applicable during such period, except that as monthly rental, Tenant shall pay to Landlord for each month (or any portion thereof) during the period of such hold over an amount equal to one hundred fifty percent (150%) of the Rent payable by Tenant for the month immediately preceding the holdover period. The rental payable during such hold over period shall be payable to Landlord on demand. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease Agreement except as herein provided. In the event of any unauthorized holding over, Tenant shall also indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless the Landlord Parties against all claims for damages against the Landlord Parties as a result of Tenant’s possession of the Leased Premises, including, without limitation, claims for damages by any other party to which Landlord may have leased, or entered into an agreement to lease, all or any part of the Leased Premises effective upon the termination of this Lease Agreement. IN NO EVENT SHALL THE TENANT PARTIES BE LIABLE FOR, AND LANDLORD HEREBY WAIVES ANY CLAIM FOR, ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING LOSS OF PROFITS OR BUSINESS OPPORTUNITY, ARISING UNDER OR IN CONNECTION WITH THIS SECTION 26.

SEC. 27 INDEPENDENT OBLIGATION TO PAY RENT:

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     A. Subject to the terms and conditions of Sections 54 and 14 of this Lease Agreement, it is the intention of the parties hereto that the obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements, that the Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease Agreement.

     B. Except as otherwise expressly provided herein, Tenant waives the right (a) to quit, terminate or surrender this Lease Agreement or the Leased Premises or any part thereof, or (b) to any abatement, suspension, deferment or reduction of the Rent or any other sums payable under this Lease Agreement.

SEC. 28 RELEASE AND WAIVER: INDEMNITY:

     A. Except to the extent caused by the negligence or willful misconduct of the Landlord Parties, Tenant hereby agrees to indemnify, protect, defend and hold the Landlord Parties harmless from and against any and all liabilities, claims, causes of action, fines, damages, suits and expenses, including attorneys’ fees and necessary litigation expenses (collectively, the “Claims”), arising from use, occupancy or enjoyment by the Tenant Parties and its servants, customers, licensees and invitees of the Leased Premises and its facilities for the conduct of its business or from any activity, work or thing done, permitted, omitted or suffered by the Tenant Parties and its servants, customers, licensees and invitees in or about the Leased Premises, and Tenant further agrees to indemnify, protect, defend and hold the Landlord Parties harmless from and against any and all Claims arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under the terms of this Lease Agreement or arising from any negligence or willful misconduct of the Tenant Parties or any of its servants, customers, licensees and invitees. In case any action or proceeding shall be brought against the Landlord Parties by reason of any such Claim, Tenant, upon notice from Landlord, shall provide a separate defense to same at Tenant’s sole cost and expense by counsel reasonably satisfactory to Landlord. The indemnity obligations of Tenant under this Section 28 shall survive the expiration or earlier termination of this Lease Agreement.

     B. Except to the extent caused by the negligence or willful misconduct of the Tenant Parties, and to the extent not specifically prohibited by Laws, Landlord hereby agrees to indemnify, protect, defend and hold the Tenant Parties harmless from and against any and all Claims arising from any activity, work or thing done, permitted, omitted or suffered by the Landlord Parties and its servants, customers, licenses and invitees in or about the Leased Premises, and Landlord further agrees, to the extent not specifically prohibited by Laws, to indemnify, protect, defend and hold the Tenant Parties harmless from and against any and all Claims arising from any breach or default in the performance of any obligation on Landlord’s part to be performed under the terms of this Lease Agreement or arising from any negligence or willful misconduct of the Landlord Parties or any of its servants, customers, licensees and invitees. In case any action or proceeding shall be brought against the Tenant by reason of any such Claim, Landlord, upon notice from Tenant, shall provide a separate defense to same at Landlord’s sole cost and expense by counsel reasonably satisfactory to Tenant. The indemnity obligations of Landlord under this Section 28 shall survive the expiration or earlier termination of this Lease Agreement.

     C. Except as otherwise set forth herein, Landlord shall not be liable or responsible to Tenant for (a) any loss or damage to any property or person occasioned by theft, criminal act, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority, or any cause beyond Landlord’s control, or (b) any damage or inconvenience which may arise through repair or alteration of any part of the Building made necessary by virtue of any such cause; provided, however Landlord shall use commercially reasonable efforts to minimize such damage or inconvenience to Tenant.

As used herein, the term “Tenant Parties” means (a) Tenant, (b) any lender whose loan is secured by a lien against Tenant’s interest in the Leased Premises or the property of Tenant therein, (c) their respective shareholders, members, partners, affiliates and subsidiaries, successors and assigns, and (d) any directors, officers, employees, agents, or contractors of such persons or entities are named as additional insureds.

SEC. 29 INSURANCE: Landlord and Tenant shall satisfy the insurance requirements as more particularly described on Exhibit E attached hereto and made a part hereof for all purposes. In no event shall Tenant’s liability under this Lease Agreement be limited by the amount of insurance required to be carried under Exhibit E.

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SEC. 30 ENTIRE AGREEMENT: This instrument and any attached addenda or exhibits signed by the parties constitute the entire agreement between Landlord and Tenant; no prior written or prior or contemporaneous oral promises or representations shall be binding. This Lease Agreement shall not be amended, changed or extended except by written instrument signed by both parties hereto. Section captions herein are for Landlord’s and Tenant’s convenience only, and neither limit nor amplify the provisions of this instrument. Tenant agrees, at Landlord’s request, to execute a recordable memorandum of this Lease Agreement.

SEC. 31 NOTICES: Whenever in this Lease Agreement it shall be required or permitted that notice, notification or demand be given or served by either party to this Lease Agreement to or on the other, such notice or demand shall be given or served and shall not be deemed to have been given or served unless in writing and (i) delivered personally, (ii) sent by Certified or Registered Mail, postage prepaid, with a copy also sent by facsimile or (iii) sent by a reputable common carrier guaranteeing next-day delivery, addressed as follows:

To the Landlord:	Pearland Economic Development Corporation
	3519 Liberty Drive
	Pearland, Texas 77581
	Attention: Executive Director
	Telephone: (281) 652-1627
	Facsimile: (281) 412-2659
To the Tenant:	At the address noted for Tenant on the signature page hereof and from and after the Commencement Date, at the address of the Leased Premises.

Such addresses may be changed from time to time by either party by serving written notice as above provided. Any such notice or demand shall be deemed to have been given on the date of receipted delivery, refusal to accept delivery or when delivery is first attempted but cannot be made due to a change of address for which no notice is given, five (5) business days after it shall have been mailed as provided in this Section 31 or if sent by facsimile, upon electronic or telephonic confirmation of receipt from the receiving facsimile machine, whichever is earlier.

SEC. 32 MEMORANDUM OF COMMENCEMENT DATE: Tenant shall, if requested by Landlord, execute and deliver to Landlord within ten (10) days after Landlord’s request an Acceptance of Leased Premises Memorandum of the Leased Premises, the form of which is attached as Exhibit B attached hereto and made a part hereof for all purposes.

SEC. 33 INSPECTION: Landlord and Landlord’s agents and representatives may enter the Leased Premises during normal business hours and upon 24 hours’ notice (except in an emergency, in which case only reasonable notice considering the type of emergency shall be required) to inspect the Leased Premises; to make such repairs as may be required or permitted under this Lease Agreement; to perform, at its election and subject to the terms of this Lease Agreement, any unperformed obligations of Tenant hereunder; and to show the Leased Premises to prospective purchasers, mortgagees, ground lessors, and (during the last 12 months of the Term) tenants. During the last twelve (12) months of the Term, Landlord may erect a sign on the Leased Premises indicating that the Leased Premises are available. In connection with its exercise of such rights, Landlord shall use commercially reasonable efforts to minimize interference with Tenant’s business operation in the Leased Premises, including, but not limited to, evaluating whether to schedule such maintenance and repair work after Tenant’s normal business hours if the performance thereof could be reasonably expected to interrupt Tenant’s manufacturing operations within the Leased Premises.

SEC. 34 BROKERS: Each party warrants to the other party that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease Agreement and that it knows of no real estate broker(s) or agent(s) who is(are) or might be entitled to a commission in connection with this Lease Agreement. To the extent not specifically prohibited by Laws, each party agrees to indemnify, defend (with counsel reasonably acceptable to the other party) and hold harmless the other party from and against any liability from all claims for commissions, finder’s fee or other compensation by brokers or agents acting by or through the indemnifying party and arising from the negotiation of this Lease Agreement.

SEC. 35 ESTOPPEL CERTIFICATES: From time to time after Tenant accepts the Leased Premises, within ten (10) days after request in writing therefor from Landlord, Tenant agrees to execute and deliver to Landlord, or to

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such other addressee or addresses as Landlord may designate (and Landlord and any such addressee may rely thereon), a statement in writing in the form of Exhibit C or in such other form and substance satisfactory to Landlord (herein called “Tenant’s Estoppel Certificate”), certifying to all or any part of the information provided for in Exhibit C as is requested by Landlord and any other information reasonably requested by Landlord.

SEC. 36 ANTI-TERRORISM LAWS: Tenant represents and warrants to and covenants with Landlord that (i) neither Tenant nor any of its owners or affiliates currently are, or shall be at any time during the Term, in violation of any Laws relating to terrorism or money laundering (collectively, the “Anti-Terrorism Laws”), including without limitation Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and regulations of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) related to Specially Designated Nationals and Blocked Persons (SDN’s OFAC Regulations), and/or the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56) (the “USA Patriot Act”); (ii) neither Tenant nor any of its owners, affiliates, investors, officers, directors, employees, vendors, subcontractors or agents is or shall be during the term hereof a “Prohibited Person” which is defined as follows: (1) a person or entity owned or controlled by, affiliated with, or acting for or on behalf of, any person or entity that is identified as a Specially Designated National and Blocked Person on the then-most current list published by OFAC at its official website, http://www.treas.gov/offices/eotffc/ofac/sdn/t11sdn.pdf, or at any replacement website or other replacement official publication of such list, and (2) a person or entity who is identified as or affiliated with a person or entity designated as a terrorist, or associated with terrorism or money laundering pursuant to regulations promulgated in connection with the USA Patriot Act; and (iii) Tenant has taken appropriate steps to understand its legal obligations under the Anti-Terrorism Laws and has implemented appropriate procedures to assure its continued compliance with such laws. Tenant hereby agrees to defend, indemnify, and hold harmless Landlord, its officers, directors, agents and employees, from and against any and all claims, damages, losses, risks, liabilities and expenses (including attorney’s fees and costs) arising from or related to any breach of the foregoing representations, warranties and covenants. At any time and from time-to-time during the Term, Tenant shall deliver to Landlord within ten (10) days after receipt of a written request therefor, a written certification or such other evidence reasonably acceptable to Landlord evidencing and confirming Tenant’s compliance with this Section 51.

SEC. 37 BANKRUPTCY: If a petition is filed by or against Tenant for relief under Title 11 of the United States Code, as amended (the “Bankruptcy Code”), and Tenant (including for purposes of this Section Tenant’s successor in bankruptcy, whether a trustee or Tenant as debtor in possession) assumes and proposes to assign, or proposes to assume and assign, this Lease Agreement pursuant to the provisions of the Bankruptcy Code to any person or entity who has made or accepted a bona fide offer to accept an assignment of this Lease Agreement on terms acceptable to Tenant, then notice of the proposed assignment setting forth (a) the name and address of the proposed assignee, (b) all of the terms and conditions of the offer and proposed assignment, and (c) the adequate assurance to be furnished by the proposed assignee of its future performance under the Lease Agreement, shall be given to Landlord by Tenant no later than twenty (20) days after Tenant has made or received such offer, but in no event later than ten (10) days prior to the date on which Tenant applies to a court of competent jurisdiction for authority and approval to enter into the proposed assignment. Landlord shall have the prior right and option, to be exercised by notice to Tenant given at any time prior to the date on which the court order authorizing such assignment becomes final and non-appealable, to receive an assignment of this Lease Agreement upon the same terms and conditions, and for the same consideration, if any, as the proposed assignee, less any brokerage commissions which may otherwise be payable out of the consideration to be paid by the proposed assignee for the assignment of this Lease Agreement. If this Lease Agreement is assigned pursuant to the provisions of the Bankruptcy Code, Landlord: (i) may require from the assignee a deposit or other security for the performance of its obligations under the Lease Agreement in an amount substantially the same as would have been required by Landlord upon the initial leasing to a tenant similar to the assignee; and (ii) shall receive, as Additional Rent, the sums and economic consideration described in 12A. Any person or entity to which this Lease Agreement is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or documentation, to have assumed all of the Tenant’s obligations arising under this Lease Agreement on and after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assumption. No provision of this Lease Agreement shall be deemed a waiver of Landlord’s rights or remedies under the Bankruptcy Code to oppose any assumption and/or assignment of this Lease Agreement, to require a timely performance of Tenant’s obligations under this Lease Agreement, or to regain possession of the Leased Premises if this Lease Agreement has neither been assumed or rejected within sixty (60) days after the date of the order for relief or within such additional time as a court of competent jurisdiction may have fixed. Notwithstanding anything in this Lease Agreement to the contrary, all

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amounts payable by Tenant to or on behalf of Landlord under this Lease Agreement, whether or not expressly denominated as rent, shall constitute Rent for the purposes of Section 502(b)(6) of the Bankruptcy Code.

SEC. 38 RESERVED:

SEC. 39 HAZARDOUS SUBSTANCES:

     A. Tenant shall not cause or permit any Hazardous Substance (as hereinafter defined) to be used, stored, generated, contained or disposed of on or in the Leased Premises by Tenant, Tenant’s agents, employees, contractors or invitees in violation of Environmental Laws (as hereinafter defined). Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold the Landlord Parties harmless from any and all claims, damages, fines, judgments, penalties, costs, liabilities and losses (including, without limitation, a decrease in value of the Leased Premises, damages caused by loss or restriction of rentable or usable space or any damages caused by adverse impact on marketing of the space and any and all sums paid for settlement of claims, attorneys’ fees, consultant and expert fees) from or in connection with the presence of any Hazardous Substance on or under the Leased Premises (i) attributable to periods from and after the Commencement Date, unless the Hazardous Substance is present solely as a result of the acts of Landlord, its officers, employees or agents or (ii) attributable to periods prior to the Commencement Date if such Hazardous Substance is present solely as a result of the acts of Tenant, its officers, employees or agents. This indemnification includes, without limitation, any and all costs incurred because of any investigation of the Leased Premises or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision. Without limitation of the foregoing, if Tenant causes or permits the presence of any Hazardous Substance on the Leased Premises in Violation of Environmental Laws that results in contamination, Tenant shall promptly, at its sole expense, take any and all necessary actions to address such violation in compliance, and cause the Leased Premises to comply, with Environmental Laws; provided, however, Tenant must obtain Landlord’s prior written approval for any such remedial action which approval shall not be unreasonably withheld. Tenant shall be responsible for the application for and maintenance of all required permits, the submittal of all notices and reports, proper labeling, training and record keeping, and timely and appropriate response to any release or other discharge by Tenant of a Hazardous Substance under Environmental Laws. The indemnity obligations of Tenant under this Section 39 shall survive the expiration or earlier termination of this Lease Agreement.

     B. As used herein, “Hazardous Substance” means any substance (i) that is toxic, ignitable, reactive or corrosive or that is regulated by any local, state or federal Laws, and includes any and all material or substances that are defined as “hazardous waste”, “extremely hazardous waste”, “hazardous substance” or a “hazardous material” pursuant to any such Laws and includes, but is not limited to, asbestos, polychlorobiphenyls and petroleum and any fractions thereof, (ii) any substance which is now or hereafter considered a biological contaminant or which could adversely impact air quality, including mold, fungi and other bacterial agents and (iii) all biohazardous, infectious and medical waste. Notwithstanding anything in this Section 39 to the contrary, “Hazardous Substances” shall not include materials commonly used in the ordinary operations of a comparable building, including, without limitation, the use of an acid wash to sterilize materials, provided that (1) such materials are used and properly stored in the Leased Premises in quantities ordinarily used and stored in comparable office space, (2) such materials are not introduced into the Building’s plumbing systems or are not otherwise released or discharged in the Leased Premises or the Building and (3) such materials are in strict compliance with Laws. As used herein, “Environmental Laws” means all applicable federal, state or local laws, regulations, orders, judgments and decrees regarding health, safety or the environment.

     C. Tenant hereby acknowledges that it has received and reviewed the Phase I Environmental Site Assessment dated August, 2003 prepared by Terra-Mar, Inc. as TMI Project Number HN 03-056 (the “Environmental Report”). Landlord represents and warrant to Tenant that, to Landlord’s knowledge as of the Effective Date, no Hazardous Substances have been used, stored, generated, contained or disposed of on or in the Leased Premises except as set forth in the Environmental Reports. To the extent not specifically prohibited by Laws, Landlord agrees to indemnify, defend and hold Tenant and its officers, employees, and agents harmless from any claim, judgments, damages, penalties, fines, costs, liabilities or losses from or in connection with the presence of any Hazardous Substance on or under the Leased Premises (i) attributable to periods prior to the Commencement Date, unless the Hazardous Substance is present solely as a result of the acts of Tenant, its officers, employees or agents or (ii) attributable to periods from and after the Commencement Date if the Hazardous Substance is present

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solely as a result of the acts of Landlord, its officers, employees or agents. The indemnity obligations of Landlord under this Section 39 shall survive the expiration or earlier termination of this Lease Agreement.

SEC. 40 NO MONEY DAMAGES FOR FAILURE TO CONSENT; WAIVER OF CERTAIN DAMAGES: Wherever in this Lease Agreement Landlord’s consent or approval is required, if Landlord refuses to grant such consent or approval, whether or not Landlord expressly agreed that such consent or approval would not be unreasonably withheld, Tenant shall not make, and Tenant hereby waives, any claim for money damages (including any claim by way of set-off, counterclaim or defense) based upon Tenant’s claim or assertion that Landlord unreasonably withheld or delayed its consent or approval. Tenant’s sole remedy shall be an action or proceeding to enforce such provision, by specific performance, injunction or declaratory judgment. IN NO EVENT SHALL THE LANDLORD PARTIES BE LIABLE FOR, AND TENANT HEREBY WAIVES ANY CLAIM FOR, ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING LOSS OF PROFITS OR BUSINESS OPPORTUNITY, ARISING UNDER OR IN CONNECTION WITH THIS LEASE AGREEMENT.

SEC. 41 ACKNOWLEDGMENT OF NON-APPLICABILITY OF DTPA: It is the understanding and intention of the parties that Tenant’s rights and remedies with respect to the transactions provided for and contemplated in this Lease Agreement (collectively, this “Transaction”) and with respect to all acts or practices of Landlord, past, present or future, in connection with this Transaction, are and shall be governed by legal principles other than the Texas Deceptive Trade Practices - Consumer Protection Act (the “DTPA”). Accordingly, Tenant hereby (a) agrees that under Section 17.49(f) of the DTPA this Transaction is not governed by the DTPA and (b) certifies, represents and warrants to Landlord that (i) Tenant has been represented by legal counsel in connection with this Transaction who has not been directly or indirectly identified, suggested or selected by the Landlord and Tenant has conferred with Tenant’s counsel concerning all elements of this Lease Agreement (including, without limitation, this Section 41) and this Transaction and (ii) the Leased Premises will not be occupied by Tenant as Tenant’s family residence. Tenant expressly recognizes that the total consideration as agreed to by Landlord has been predicated upon the inapplicability of the DTPA to this Transaction and that Landlord, in determining to proceed with the entering into of this Lease Agreement, has expressly relied on the inapplicability of the DTPA to this Transaction.

SEC. 42 ATTORNEYS’ FEES: In the event either party defaults in the performance of any of the terms, agreements or conditions contained in this Lease Agreement and the other party places the enforcement of this Lease Agreement, or any part thereof, or the collection of any Rent due or to become due hereunder, or recovery of the possession of the Leased Premises, in the hands of an attorney who files suit upon the same, and should such non-defaulting party prevail in such suit, the defaulting party agrees to pay the other party’s reasonable attorneys’ fees.

SEC. 43 AUTHORITY OF PARTIES: If Tenant is a corporation, partnership or other entity, Tenant warrants and represents unto Landlord that (i) Tenant is a duly organized and existing legal entity, in good standing in the State of Texas, (ii) Tenant has full right and authority to execute, deliver and perform this Lease Agreement, (iii) the person executing this Lease Agreement was authorized to do so and (iv) upon request of Landlord, such person will deliver to Landlord satisfactory evidence of his or her authority to execute this Lease Agreement on behalf of Tenant.

     B. Landlord represents and warrant to Tenant that (i) Landlord is a corporation operating under Chapter 505 of the Texas Local Government Code, (ii) Landlord has full right and authority to execute, deliver and perform this Lease Agreement, (iii) the person executing this Lease Agreement was authorized to do so and (iv) upon request of Tenant, such person will deliver to Tenant satisfactory evidence of his or her authority to execute this Lease Agreement on behalf of Landlord (the Parties agreeing that a copy of minutes from meetings of the City Council of the City of Pearland, Texas approving this Lease Agreement will be sufficient to satisfy the obligation set forth in this subsection (iv)).

SEC. 44 INABILITY TO PERFORM: Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant, the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist attacks (including bio-chemical attacks), civil disturbances and other causes beyond the reasonable control of such party (Tenant’s or Landlord’s financial inability, such as inability to obtain financing or lack of capital, excepted) (“Force Majeure”); provided, however, nothing in this Section 44 shall excuse Tenant from the prompt payment of any Rent or other charge required of Tenant hereunder. In addition, any party asserting that an event of Force

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Majeure has occurred must deliver to the other party written notice of such an event within fifteen (15) days after the commencement of the event. Such notice must include a reasonably detailed description of the event together with the anticipated period of delay.

SEC. 45 JOINT AND SEVERAL TENANCY: If more than one person executes this Lease Agreement as Tenant, their obligations hereunder are joint and several, and any act or notice of or to, or refund to, or the signature of, any one or more of them, in relation to the renewal or termination of this Lease Agreement, or under or with respect to any of the terms hereof shall be fully binding on each and all of the persons executing this Lease Agreement as a Tenant.

SEC. 46 EXECUTION OF THIS LEASE AGREEMENT: The submission of an unsigned copy of this Lease Agreement to Tenant for Tenant’s consideration does not constitute an offer to lease the Leased Premises or an option to or for the Leased Premises. This Lease Agreement shall become effective and binding only upon the execution and delivery of this Lease Agreement by both Landlord and Tenant.

SEC. 47 WAIVER OF TRIAL BY JURY; COUNTERCLAIM: Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either party against the other on any matters in any way arising out of or connected with this Lease Agreement, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Leased Premises, or the enforcement of any remedy under any applicable Laws. If Landlord commences any summary proceeding against Tenant, Tenant shall not interpose any counterclaim of any nature or description in any such proceeding (unless failure to impose such counterclaim would preclude Tenant from asserting in a separate action the claim which is the subject of the counterclaim), and will not seek to consolidate any such proceeding with any other action which may have been or will be brought in any other court by Tenant.

SEC. 48 CALCULATION OF TIME PERIODS: Should the calculation of any of the various time periods provided for herein result in an obligation becoming due on a Saturday, Sunday or legal holiday, then the due date of such obligation or scheduled time of occurrence of such event shall be delayed until the next business day.

SEC. 49 RENEWAL OPTIONS: Tenant shall have, and is hereby granted, the options (the “Renewal Options”) to extend the Term of this Lease Agreement for two (2) additional periods of five (5) years each (as applicable, the “Extended Term”) upon and subject to the following terms, conditions and provisions:

     A. The Renewal Options may only be exercised by Tenant giving irrevocable written notice thereof to Landlord no earlier than fourteen (14) months nor later than nine (9) months prior to the expiration of the then current Term of this Lease Agreement. If Tenant fails to give Landlord such written notice of exercise of such Renewal Option within such specified time period, Tenant shall be deemed to have elected not to exercise, and to have waived, such Renewal Option and the Renewal Option shall automatically terminate and expire and be of no further force and effect. It is expressly agreed that Tenant shall not have the option to extend the Term of this Lease Agreement beyond the Extended Term. If Tenant exercises either of the Renewal Options, such Extended Term shall commence immediately upon the expiration of the then current Term of this Lease Agreement (as applicable, the “Extended Term Commencement Date”).

     B. If Tenant exercises either of the Renewal Options (in accordance with and subject to the provisions of this Section 49), the Extended Term shall be upon, and subject to, all of the terms, covenants and conditions provided in this Lease Agreement except for any terms, covenants and conditions that are expressly or by their nature inapplicable to the Extended Term (including, without limitation, the right to renew the Term of this Lease Agreement beyond the Extended Term) and except that (i) the annual Base Rent during the applicable Extended Term shall be equal to the Prevailing Market Rental Rate (as defined and determined in accordance with Section 50 below) at the time Tenant exercises such Renewal Option, and (ii) the Leased Premises and all leasehold improvements relating thereto will be provided in the condition they exist (i.e., “AS IS” and “WITH ALL FAULTS”) on the Extended Term Commencement Date, and this Lease Agreement shall be deemed to have been automatically amended as of the Extended Term Commencement Date in accordance with this Section 49. Tenant and Landlord shall promptly (but in no event longer than fifteen (15) days after Landlord’s submission of the amendment to Tenant) execute and deliver an appropriate amendment of this Lease Agreement to evidence such terms following commencement of the Extended Term.

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     C. Notwithstanding any provision herein to the contrary, Tenant shall not have the right to extend the Term of this Lease Agreement pursuant to this Section 49 and such right shall automatically terminate and be of no further force and effect if, at the time Tenant exercises such Renewal Option or on the Extended Term Commencement Date, Tenant is in default under this Lease Agreement beyond any applicable grace period.

SEC. 50 PREVAILING MARKET RENTAL RATE DETERMINATION:

     A. As used in this Lease Agreement, the term “Prevailing Market Rental Rate” means, as to any space subject to this Lease Agreement for which it is being determined (the “Subject Premises”), the annual amount of “gross” rental that a willing tenant would pay in a similar type transaction (i.e., renewal) and a willing landlord would accept in arm’s length, bona fide negotiations for lease of the subject premises to be executed at the time of determination and to commence on the commencement of the subject lease term, based upon other lease transactions made in the Building and other comparable buildings in the Houston, Texas metropolitan area, taking into consideration all relevant terms and conditions of any comparable leasing transactions, including, without limitation: (i) location, quality and age of the building (taking into consideration renovations); (ii) use and size of the space in question; (iii) extent of leasehold improvement allowances (considering existing improvements); (iv) the amount of any abatement of rental or other charges; (v) lease takeovers/assumptions; (vi) refurbishment and repainting allowances; (vii) any and all other concessions or inducements; (viii) extent of services provided or to be provided; (ix) distinction between “gross” and “net” lease; (x) any other adjustments (including by way of indexes) to base rental; (xi) credit standing and financial stature of the tenant or subtenant; and (xii) length of term.

     B. Within fifteen (15) days after receipt of Tenant’s notice of exercise of the Renewal Option, Landlord will notify Tenant in writing of its determination of the Prevailing Market Rental Rate for the Subject Premises. Tenant shall deliver written notice to Landlord within fifteen (15) days after receipt of Landlord’s Prevailing Market Rental Rate determination that it either (i) accepts Landlord’s determination of the Prevailing Market Rental Rate or (ii) rejects Landlord’s determination of Prevailing Market Rental Rate. In the event Tenant rejects the Landlord’s determination of the Prevailing Market Rental Rate for the Renewal Option in accordance with the preceding sentence, Tenant and Landlord shall negotiate in good faith for the ensuing thirty (30) days in order to reach agreement on the Prevailing Market Rental Rate for the Renewal Option. If at the end of this thirty (30) day period, Tenant and Landlord are unable to mutually agree with respect to the Prevailing Market Rental Rate for the Extended Term, then (i) the parties shall proceed with the arbitration process described in Section 50C. below to determine the Prevailing Market Rental Rate with respect to the Subject Premises or (ii) Tenant may choose to terminate negotiations of the Prevailing Market Rental Rate by delivery of written notice to Landlord within five (5) days after the expiration of such thirty (30) day period and the Expiration Date shall be the last day of the initial ten year Term or the last day of the first Extended Term, as applicable.

     C. If at the end of the thirty (30) day period described above Tenant and Landlord are unable to mutually agree with respect to the Prevailing Market Rental Rate for the Extended Term and Tenant does not exercise its right to terminate negotiations as set forth in Section 50B, then Landlord and Tenant shall each nominate and appoint a Qualified Broker (as defined below) to determine the Prevailing Market Rental Rate for the Subject Premises. Upon the appointment of the two (2) Qualified Brokers, they shall be instructed to separately, fairly and impartially determine the Prevailing Market Rental Rate for the Subject Premises. The two (2) Qualified Brokers shall afford to Landlord and Tenant the right to submit evidence with respect to such rate and each Qualified Broker shall, with all possible speed, make his determinations and deliver a written report thereof to Landlord and Tenant within thirty (30) days after his appointment. If the higher of the two (2) Prevailing Market Rental Rate determinations is not more than one hundred five percent (105%) of the lower determination, the average of the rates so determined shall be binding upon Landlord and Tenant and shall be the Prevailing Market Rental Rate for purposes of the Subject Premises. If the higher determination is more than one hundred five percent (105%) of the lower determination, the two (2) Qualified Brokers shall within five (5) days after both of such Qualified Brokers have submitted their written reports to Landlord and Tenant select by mutual agreement a third (3rd) Qualified Broker and give written notice of such appointment to Landlord and Tenant. If the two (2) Qualified Brokers fail to agree upon the third Qualified Broker within said five (5) day period, a third (3rd) Qualified Broker shall be selected by mutual agreement of Landlord and Tenant within a further period of five (5) days. If Landlord and Tenant cannot so agree on the third (3rd) Qualified Broker, then either Landlord or Tenant may elect to have the third Qualified Broker appointed by any Federal District Judge for the Southern District of Texas. The third (3rd) Qualified Broker shall be instructed to fairly and impartially determine which of the two (2) original Qualified Broker’s determination

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of the Prevailing Market Rental Rate most closely approximates his determination thereof, and the original Qualified Broker’s determination so selected shall be binding upon Landlord and Tenant and shall be the Prevailing Market Rental Rate for purposes of the Subject Premises. The fees and expenses of all of the Qualified Brokers shall be divided equally between Landlord and Tenant. If any Qualified Broker appointed as aforesaid shall thereafter become unable or unwilling to act, such Qualified Broker’s successor shall be appointed in the same manner as provided in this Section 50C. for the appointment of that Qualified Broker.

     D. As used herein, the term “Qualified Broker” means a real estate broker who (i) is licensed in the State of Texas, (ii) has been actively and continuously engaged in leasing space in other comparable buildings in Southeast Texas for not less than the previous ten (10) year period, (iii) during the preceding three (3) year period has individually represented a party to a comparable space lease of at least 50,000 square feet; and (iv) has not represented Landlord or Tenant during the preceding five (5) year period.

SEC. 51 PURCHASE OPTION:

     A. Tenant shall have the right (the “Purchase Option”) to purchase, subject to the terms and conditions contained herein, all, but not less than all, of the Leased Premises, together with all of Landlord’s right, title and interest appurtenant thereto (the Leased Premises and rights described above in this Section 51 being herein referred to as the “Purchase Option Property”). The Purchase Option shall be in effect from the Commencement Date until the sixty-first (61st) day preceding the tenth (10th) anniversary of the Commencement Date (the “Purchase Option Period”). Provided Tenant is not in default hereunder (after the expiration of any applicable notice and cure periods), Tenant may exercise the Purchase Option by execution and delivery to Landlord of a Purchase and Sale Agreement (the “Purchase Agreement”) in form and substance reasonably acceptable to Landlord and Tenant, not later than the last day of the Purchase Option Period.

If Tenant fails to exercise the Purchase Option in accordance with the terms of this Lease Agreement within the Purchase Option Period, then the Purchase Option and the rights thereunder of Tenant shall automatically and immediately terminate without notice.

     B. The conveyance of the Purchase Option Property shall occur on the first business day that is sixty (60) calendar days after Landlord and Tenant execute and deliver to one another the Purchase Agreement as required by Section 52A hereof at 1:00 p.m. local time at the office of Andrews Kurth LLP, 600 Travis Street, Suite 4200, Houston, Texas 77002. At the closing, Tenant shall pay to Landlord the Purchase Price (defined below), and the Purchase Option Property shall be conveyed by Landlord by special warranty deed on an “AS-IS,” “WHERE-IS,” “WITH ALL FAULTS” basis. Landlord shall have the obligation to deliver a title insurance policy to Tenant, the cost of which shall be borne by Landlord; provided, however, that during the periods in which the Pearland Economic Development Corporation is the Landlord hereunder, the cost of such a title insurance policy shall be borne by Tenant.

     C. The “Purchase Price” shall mean an amount equal the fair market value of the Purchase Option Property agreed upon in writing between Landlord and Tenant within thirty (30) days following Tenant’s exercise of the Purchase Option. Landlord and Tenant agree to act in good faith to determine the Purchase Price and that the factors used to determine the Purchase Price of the Purchase Option Property shall include, among other things, the size of the Purchase Option Property, the improvements located thereon and the location of the Purchase Option Property. If, however, Landlord and Tenant have not agreed upon the Purchase Price within such thirty (30) day period, then Tenant may choose to terminate negotiations and rescind its exercise of the purchase option by delivery of written notice to Landlord within five (5) days after the expiration of such thirty (30) day period, and in such event, Tenant’s exercise of the purchase option shall be deemed rescinded without any further action required by Landlord or Tenant. If at the end of the thirty (30) day period described above Tenant and Landlord are unable to mutually agree with respect to the Purchase Price and Tenant has not exercised the right to terminate negotiations as set forth in the preceding sentence, the Fair Market Value will be determined by averaging two (2) current appraisals from licensed real estate appraisers with at least five (5) years experience appraising similar property in the Houston, Texas metropolitan area, one (1) obtained by Landlord and one (1) obtained by Tenant. The parties shall obtain such appraisals within thirty (30) days. If the value determined by one (1) appraiser exceeds the value determined by the other appraiser by more than ten percent (10%) of the lower appraisal, then the two (2) appraisers shall select a third independent, qualified, licensed, real estate appraiser with at least five (5) years experience appraising similar

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property in the Houston, Texas metropolitan area. Such third appraiser shall select the one (1) of the two (2) appraisals which the third appraiser determines is closest to the value of the Purchase Option Property determined by the third appraiser, provide written notice of such decision to the parties and such appraisal shall be the Purchase Price of the Purchase Option Property. Landlord and Tenant shall each bear the cost of their own appraisers, and the cost of the third appraiser shall be shared equally between Landlord and Tenant.

     D. If Tenant elects to exercise the Purchase Option and, for any reason other than a default by Landlord, as seller, under the Purchase and Sale Agreement, Tenant shall fail to purchase the Property as provided for herein and in the Purchase and Sale Agreement, then such Purchase Option shall no longer be available to Tenant and the terms of this Lease Agreement shall otherwise remain in full force and effect as if such Purchase Option were never exercised.

SEC. 52 FIRST EXPANSION OPTION:

     A. Subject to and upon the terms, provisions and conditions set forth in this Section 52, Tenant shall have, and is hereby granted, the one-time option (the “First Expansion Option”) to cause Landlord to construct on the land identified as “Phase 2” in Exhibit I attached hereto (the “First Expansion Option Land”), and to lease from Landlord, certain new improvements to contain not more than thirty-four thousand (34,000) square feet, which improvements may be additions to or expansions of the Building and/or the Improvements (such First Expansion Option Land and improvements, the “First Expansion Option Premises”). Tenant may exercise the First Expansion Option by written notice delivered to Landlord at any time prior to the sixth (6th) anniversary of the Commencement Date; provided, however, that if Tenant exercises the First Expansion Option at any time after the third (3^rd) anniversary of the Commencement Date, it shall be a condition to the effectiveness of such exercise that Tenant simultaneously exercise the first Renewal Option and extend the term for an additional five (5) year period. If Tenant does not exercise the First Expansion Option by the required time period, the First Expansion Option shall be waived.

     B. The First Expansion Options may be exercised only if, at the time of such exercise and at the time of Landlord’s delivery of the First Expansion Option Premises to Tenant (a) no Event of Default exists and (b) Tenant is in possession of and operating from the entire Leased Premises (unless Landlord, in its sole discretion, elects to waive such condition(s)). If such condition(s) are not satisfied or waived by Landlord, any purported exercise of the First Expansion Option shall be null and void.

     C. If Tenant elects to exercise the First Expansion Option, the First Expansion Premises shall be subject to all of the terms, covenants and conditions of this Lease, except that Base Rent for the First Expansion Premises shall be determined in accordance with the terms of Section 50 above for the Prevailing Market Rental Rate applied, mutatis mutandis, for the determination of such Base Rent; provided, however, that in no event shall the Prevailing Market Rental Rate be less than an amount that will cause Landlord to recover its costs and expenses to acquire the First Expansion Option Land (including, but not limited to, closing and other typical acquisition costs such as title insurance and environmental studies), to construct the First Expansion Option Premises (including, but not limited to, hard costs, soft costs, contractor’s fees and costs and fees paid or incurred for architect, engineering, permitting, and other related and similar costs), to finance one hundred percent of each of the foregoing (including, but not limited to, interest and fees) and to recover costs which were, in the reasonable judgment of Landlord, necessary for the efficient and proper development of the project and to protect Landlord’s interests therein. Tenant’s obligation to pay the rent for the First Expansion Premises shall commence on the date (the “First Expansion Rental Commencement Date”) that is the earlier to occur of (i) the date that is thirty (30) days after the date on which Tenant commences operations from any portion of the First Expansion Premises or (ii) the date that is thirty (30) days after the date on which Substantial Completion with respect to the First Expansion Option Premises occurs.

     D. If Tenant exercises the First Expansion Option, Landlord and Tenant agree that the terms and conditions of this Lease Agreement governing the development, construction and acceptance of the Improvements, including, without limitation, Exhibit D, will apply, mutatis mutandis, to the development, construction and acceptance of the First Expansion Premises; provided, however, that, with respect to the First Expansion Option, the Target Date shall be the date that is a reasonable outside date for completion of the proposed improvements given

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the scope of work and the Tenant shall have no right to terminate this Lease Agreement for the failure by Landlord to cause Substantial Completion of the First Expansion Option Premises to occur on or before a certain date.

     E. In the event Tenant timely exercises the First Expansion Option, pursuant to the provisions of this Section 52, Landlord and Tenant shall execute and deliver an amendment to this Lease Agreement (in a form provided by Landlord) specifying (a) the First Expansion Rental Commencement Date, (b) the Base Rent schedule for the First Expansion Premises, (c) a description of the First Expansion Option Premises, and (d) that the First Expansion Option Premises shall be included in the Leased Premises.

SEC. 53 SECOND EXPANSION OPTION:

     A. Subject to and upon the terms, provisions and conditions set forth in this Section 53 and only if Tenant shall have exercised the First Expansion Option, Tenant shall have, and is hereby granted, the one-time option (the “Second Expansion Option”) to cause Landlord to construct on the land identified as “Phase 3” in Exhibit I attached hereto (the “Second Expansion Option Land”), and to lease from Landlord, certain new improvements to contain not more than forty-five thousand (45,000) square feet, which improvements may be additions to or expansions of the Building and/or the Improvements (such Second Expansion Option Land and improvements, the “Second Expansion Option Premises”). Tenant may exercise the Second Expansion Option by written notice delivered to Landlord at any time prior to the sixth (6th) anniversary of the Commencement Date; provided, however, that if Tenant exercises the Second Expansion Option at any time after the third (3^rd) anniversary of the Commencement Date, it shall be a condition to the effectiveness of such exercise that Tenant simultaneously exercise the first Renewal Option and extend the Term for an additional five (5) year period. If Tenant does not exercise the Second Expansion Option by the required time period, the Second Expansion Option shall be waived.

     B. The Second Expansion Options may be exercised only if, at the time of such exercise and at the time of Landlord’s delivery of the Second Expansion Option Premises to Tenant (a) no Event of Default exists, (b) Tenant is in possession of and operating from the entire Leased Premises, including the First Expansion Option Premises and (c) Tenant has exercised the first Renewal Option (unless Landlord, in its sole discretion, elects to waive such condition(s)). If such condition(s) are not satisfied or waived by Landlord, any purported exercise of the Second Expansion Option shall be null and void.

     C. If Tenant elects to exercise the Second Expansion Option, the Second Expansion Premises shall be subject to all of the terms, covenants and conditions of this Lease, except that Base Rent for the Second Expansion Premises shall be determined in accordance with the terms of Section 50 above for the Prevailing Market Rental Rate applied, mutatis mutandis, for the determination of such Base Rent; provided, however, that in no event shall the Prevailing Market Rental Rate be less than an amount that will cause Landlord to recover its costs and expenses to acquire the Second Expansion Option Land (including, but not limited to, closing and other typical acquisition costs such as title insurance and environmental studies), to construct the Second Expansion Option Premises (including, but not limited to, hard costs, soft costs, contractor’s fees and costs and fees paid or incurred for architect, engineering, permitting, and other related and similar costs), to finance one hundred percent of each of the foregoing (including, but not limited to, interest and fees) and to recover costs which were, in the reasonable judgment of Landlord, necessary for the efficient and proper development of the project and to protect Landlord’s interests therein. Tenant’s obligation to pay the rent for the Second Expansion Premises shall commence on the date (the “Second Expansion Rental Commencement Date”) that is the earlier to occur of (i) the date that is thirty (30) days after the date on which Tenant commences operations from any portion of the Second Expansion Premises or (ii) the date that is thirty (30) days after the date on which Substantial Completion with respect to the Second Expansion Option Premises occurs.

     D. If Tenant exercises the Second Expansion Option, Landlord and Tenant agree that the terms and conditions of this Lease Agreement governing the development, construction and acceptance of the Improvements, including, without limitation, Exhibit D, will apply, mutatis mutandis, to the development, construction and acceptance of the Second Expansion Premises; provided, however, that, with respect to the Second Expansion Option, the Target Date shall be the date that is a reasonable outside date for completion of the proposed improvements given the Scope of Work and the Tenant shall have no right to terminate this Lease Agreement for the failure by Landlord to cause Substantial Completion of the Second Expansion Option Premises to occur on or before a certain date.

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     E. In the event Tenant timely exercises the Second Expansion Option, pursuant to the provisions of this Section 53, Landlord and Tenant shall execute and deliver an amendment to this Lease Agreement (in a form provided by Landlord) specifying (a) the Second Expansion Rental Commencement Date, (b) the Base Rent schedule for the Second Expansion Premises, (c) a description of the Second Expansion Option Premises, and (d) that the Second Expansion Option Premises shall be included in the Leased Premises.

SEC. 54 TENANT’S RIGHT OF FIRST REFUSAL:

     A. In the event Tenant (a) fails to exercise the First Expansion Option prior to the sixth (6th) anniversary of the Commencement Date or (b) exercises the First Expansion Option prior to the sixth (6th) anniversary of the Commencement Date but does not occupy the First Expansion Option Premises (unless Landlord is then constructing the First Expansion Option Premises or the parties are then negotiating the terms to govern the First Expansion Option Premises in accordance with the terms of Section 52 of this Lease Agreement, such as determination of the Prevailing Market Rental Rate) as of the sixth (6th) anniversary of the Commencement Date, Landlord shall have the right to terminate this Lease Agreement with respect to the First Expansion Option Land, Tenant’s interest in the First Expansion Option Land will automatically revert to Landlord without any further action required by Tenant and except as otherwise set forth in this Section 54, the Tenant shall have no further rights with respect thereto. In such event, Landlord may construct additional building improvements on the First Expansion Option Land, which additional building improvements may be additions to or expansions of the Building and/or the Improvements (the “FEO Improvements”), and in connection with any bona fide offer Landlord receives to rent all or any portion of the FEO Improvements, before or after the construction thereof, which offer Landlord shall be ready and willing to accept, then Tenant shall have the right to rent such portion of the FEO Improvements at the same rent, and upon the same terms and conditions as shall be offered by the prospective tenant. Landlord shall give Tenant notice of the rent and all material terms and conditions of such offer by such prospective tenant within ten (10) days after receipt; and Tenant shall have a period of thirty (30) days after such notice from Landlord in which to elect to rent such portion of the FEO Improvements at the same rent and on the same terms and conditions as offered by such prospective tenant. If Tenant so notifies Landlord within said thirty (30) days, this Lease Agreement shall be amended appropriately thereafter to reflect the addition of such portion of the FEO Improvements; provided that the terms of this Lease Agreement, as amended, with respect to the FEO Improvements shall be consistent with the terms set forth in the bona fide offer.

     B. If Tenant elects not to lease such portion of the FEO Improvements or shall fail to give Landlord appropriate notice within the time provided for herein, then Landlord may lease such portion of the FEO Improvements to another tenant, but only at the same rent, and on the same terms and conditions of such offer; provided, however, that if the lease of such portion of the FEO Improvements to such other tenant is not executed within one hundred twenty (120) days following Landlord’s delivery of the offer to Tenant, then Landlord shall again offer to lease such portion of the FEO Improvements to Tenant pursuant to the terms and conditions of such offer before proceeding to lease such portion of the FEO Improvements to such other tenant.

     C. In the event Tenant (a) fails to exercise the Second Expansion Option prior to the sixth (6th) anniversary of the Commencement Date or (b) exercises the Second Expansion Option prior to the sixth (6th) anniversary of the Commencement Date but does not occupy the Second Expansion Option Premises (unless Landlord is then constructing the Second Expansion Option Premises or the parties are then negotiating the terms to govern the Second Expansion Option Premises in accordance with the terms of Section 53 of this Lease Agreement, such as determination of the Prevailing Market Rental Rate) as of the sixth (6th) anniversary of the Commencement Date, Landlord shall have the right to terminate this Lease Agreement with respect to the Second Expansion Option Land, Tenant’s interest in the Second Expansion Option Land will automatically revert to Landlord without any further action required by Tenant, and except as otherwise set forth in this Section 54, the Tenant shall have no further with respect thereto. In such event, Landlord may construct additional building improvements on the Second Expansion Option Land, which additional building improvements may be additions to or expansions of the Building and/or the Improvements (the “SEO Improvements”), and in connection with any bona fide offer Landlord receives to rent all or any portion of the SEO Improvements, before or after the construction thereof, which offer Landlord shall be ready and willing to accept, then Tenant shall have the right to rent such portion of the SEO Improvements at the same rent, and upon the same terms and conditions as shall be offered by the prospective tenant. Landlord shall give Tenant notice of the rent and all material terms and conditions of such offer by such prospective tenant within ten (10) days after receipt; and Tenant shall have a period of thirty (30) days after such notice from Landlord

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in which to elect to rent such portion of the SEO Improvements at the same rent and on the same terms and conditions as offered by such prospective tenant. If Tenant so notifies Landlord within said thirty (30) days, this Lease Agreement shall be amended appropriately thereafter to reflect the addition of such portion of the SEO Improvements; provided that the terms of this Lease Agreement, as amended, with respect to the SEO Improvements shall be consistent with the terms set forth in the bona fide offer.

     D. If Tenant elects not to lease such portion of the SEO Improvements or shall fail to give Landlord appropriate notice within the time provided for herein, then Landlord may lease such portion of the SEO Improvements to another tenant, but only at the same rent, and on the same terms and conditions of such offer; provided, however, that if the lease of such portion of the SEO Improvements to such other tenant is not executed within one hundred twenty (120) days following Landlord’s delivery of the offer to Tenant, then Landlord shall again offer to lease such portion of the SEO Improvements to Tenant pursuant to the terms and conditions of such offer before proceeding to lease such portion of the SEO Improvements to such other tenant.

     E. In the event Landlord terminates this Lease Agreement with respect to the First Expansion Option Land or the Second Expansion Option Land pursuant to the terms and conditions of this Section 54, Tenant hereby agrees to provide, grant and permit easements requested by Landlord over and across the remaining portions of the Leased Premises for vehicular and pedestrian ingress and egress to and from the First Expansion Option Land, the FEO Improvements, the Second Expansion Option Land and/or the SEO Improvements, as appropriate, utility services, and easements therefor over and across the remaining portions of the Leased Premises, and all other easements and rights (including, without limitation, creating common areas between the premises for shared use, such as shared walls, drives and loading docks) as may be necessary for the use thereof and for the construction of improvements and operations from such improvements located on the First Expansion Option Land and/or the Second Expansion Option Land, as appropriate. Notwithstanding the foregoing, Landlord and Tenant agree that Tenant will not be obligated to provide, grant or permit any easements that could reasonably be expected to (i) cause Tenant to cease its manufacturing operations within Building, (ii) unreasonably interfere with Tenant’s operations in the Leased Premises or (iii) prohibit Tenant’s use of the Leased Premises for the Permitted Use; provided, however, Tenant acknowledges that the shared use between Tenant and the proposed owners and/or tenants of the First Expansion Option Land, the FEO Improvements, the Second Expansion Option Land and/or the SEO Improvements of certain portions of the Leased Premises will, by its nature, cause a certain amount of interference with Tenant’s operations at the Leased Premises, and Tenant agrees that the mere sharing of certain portions of the Leased Premises will not alone constitute a breach of subsections (i), (ii) or (iii) of this sentence.

SEC. 55 TENANT’S SELF-HELP REMEDY: In the event (i) Landlord fails to timely keep, observe or perform any of Landlord’s obligations under Section 8A. of this Lease Agreement on Landlord’s part to be kept, performed or observed and (ii) such failure has a material adverse affect on Tenant’s ability to use and operate the Leased Premises in accordance with the terms of this Lease Agreement, then (any such event, circumstance or failure by Landlord being herein referred to as a “Landlord Failure”), Tenant shall have the right, but not the obligation, upon satisfaction of the requirements and conditions set forth in this Section 55, to take all commercially reasonable efforts and measures to remedy and cure such Landlord Failure (such rights of Tenant being herein referred to as “Tenant’s Self-Help Rights”). Prior to exercising Tenant’s Self-Help Rights, Tenant shall deliver written notice to Landlord of the relevant Landlord Failure and Tenant’s intention to exercise Tenant’s Self-Help Rights with respect to such Landlord Failure (a “Tenant’s Notice of Intent”). Each Tenant’s Notice of Intent shall describe, in reasonable detail, the particular Landlord Failure for which Tenant intends to exercise Tenant’s Self-Help Rights. In the event all of the matters set forth in subsections (i) and (ii) below do not occur on or before twenty (20) calendar days after the date Tenant delivers Tenant’s Notice of Intent to Landlord and provided a Landlord Failure has occurred, Tenant shall have the right to exercise Tenant’s Self-Help Rights with respect to the particular Landlord Failure described in Tenant’s Notice of Intent:

     (i) Landlord has (a) fully remedied or cured the Landlord Failure described in Tenant’s Notice of Intent or (b) delivered to Tenant a commercially reasonable remedial plan to fully remedy and cure the Landlord Failure described in Tenant’s Notice of Intent in accordance with the terms of this Lease Agreement on or before the earliest reasonably possible date (a “Remedial Plan”); and

     (ii) Only if Landlord has delivered a Remedial Plan to Tenant pursuant to the above clause (i), Landlord has (a) commenced commercially reasonable efforts to fully cure and remedy the Landlord

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Failure described in Tenant’s Notice of Intent in accordance with the Remedial Plan so that such failure may be fully cured and remedied in accordance with the terms of this Lease Agreement at the earliest reasonably possible date without regard to Landlord’s access to, or the availability of, funds for same and (b) thereafter continuously and diligently prosecutes the full cure and remedy of such Landlord Failure.

     B. In the event Landlord timely delivers a Remedial Plan to Tenant pursuant to the above clause (i) but thereafter fails to continuously and diligently prosecute the full cure and remedy of the Landlord Failure described in Tenant’s Notice of Intent so that such Landlord Failure may be fully cured and remedied at the earliest reasonably possible date, without regard to Landlord’s access to, or the availability of any funds for the same, Tenant shall have the right to exercise Tenant’s Self-Help Rights with respect to the particular Landlord Failure described in Tenant’s Notice of Intent in question upon the delivery of a second Notice to Landlord stating that such failure has occurred.

     C. Notwithstanding the foregoing, in the event of an Emergency (as defined below) that is either created or perpetuated by Landlord’s failure to timely keep, observe or perform any of Landlord’s obligations under Section 8A. of this Lease Agreement on its part to be kept, performed or observed (in such circumstance, also being a “Landlord Failure” hereunder), Tenant’s Self-Help Rights with respect to such Landlord Failure shall not be conditioned upon satisfaction of the above requirements or conditions, except that in such circumstances Tenant shall (i) use reasonable efforts to notify Landlord by telephone of any such Landlord Failure prior to Tenant exercising Tenant’s Self-Help Rights with respect to the same and (ii) as soon as reasonably possible, but in no event later than two (2) calendar days after Tenant commences to exercise Tenant’s Self-Help Rights, deliver written notice to Landlord of such Landlord Failure and Tenant’s exercise of Tenant’s Self-Help Rights with respect to the same. Such written notice shall also describe, in reasonable detail, the particular Landlord Failure and the steps Tenant has taken to cure or remedy the same. As used herein, the term “Emergency” means any circumstance in which (i) Tenant in good faith believes that immediate action is required in order to safeguard lives or the Leased Premises against the likelihood of injury, damage or destruction due to an identified threat, or (ii) Laws require that immediate action is taken in order to safeguard lives or the Leased Premises.

     D. In the event Tenant is entitled to exercise Tenant’s Self-Help Rights pursuant to this Lease Agreement with respect to a particular Landlord Failure and thereafter commences to exercise Tenant’s Self-Help Rights, (i) Tenant shall continuously and diligently prosecute the full cure and remedy of such Landlord Failure and perform all related additional work in accordance with the requirements of this Lease, and (ii) provided Tenant first delivers Notice to Landlord of Tenant’s intention to receive a credit pursuant to this Section 54, specifying the amount of such credit, and within thirty (30) days after Landlord’s receipt of such notice, Landlord fails to deliver Notice to Tenant that Landlord disputes Tenant’s right to receive the claimed credit, Tenant shall be entitled to receive a credit against the next occurring installments of Base Rent for the documented, actual, reasonable, out-of-pocket costs incurred by Tenant in taking commercially reasonable efforts and measures to remedy and cure the relevant Landlord Failure.

     E. Dispute Resolution.

     (i) With respect to any dispute or controversy regarding Tenant’s right to receive a credit against Base Rent pursuant to this Section 54 or to the existence of a Landlord Failure under this Section 55 (such dispute or controversy being herein referred to as a “Rent Credit Dispute or Controversy”), Landlord and Tenant shall first attempt in good faith to settle and resolve such Rent Dispute or Controversy by mutual agreement in accordance with the terms of this Section 55E. In the event a Rent Credit Dispute or Controversy arises, either Landlord or Tenant shall have the right to notify the other party that it has elected to implement the procedures set forth in this Section 55E. Within fifteen (15) days after delivery of any such written notice by one party to the other party regarding a Rent Credit Dispute or Controversy, Landlord and Tenant shall meet at a mutually agreed time and place to attempt, with diligence and in good faith, to resolve and settle the Rent Credit Dispute or Controversy. If a mutual resolution and settlement is not obtained within thirty (30) days after the first meeting, then such Rent Credit Dispute or Controversy shall be finally settled and resolved by binding arbitration in accordance with the provisions set forth in this 55E. Notwithstanding the foregoing or anything herein to the contrary, (i) nothing shall prohibit or limit either Party from seeking injunctive relief or another form of ancillary relief at any time from any court of competent jurisdiction in Harris County, Texas, including during the pendency of meetings between

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Landlord and Tenant pursuant to this Section 55E. and (ii) nothing shall prohibit or limit Landlord or Tenant from exercising its rights or remedies under this Lease Agreement. Only Rent Credit Disputes or Controversies are subject to arbitration and all other disputes or controversies are subject to the terms of this Lease Agreement.

     (ii) Landlord and Tenant each agree that any Rent Credit Dispute or Controversy which is not resolved by mutual agreement pursuant to the provisions of Section 55E.(i) shall be submitted to binding arbitration hereunder and if submitted shall be resolved exclusively and finally through such binding arbitration in accordance with the Arbitration Procedures set forth in Exhibit G attached hereto. This Section 55E and Exhibit G constitute a written agreement by Landlord and Tenant to submit to arbitration any Rent Credit Dispute or Controversy arising after the Commencement Date within the meaning of Section 171.001 of the Texas Civil Practice and Remedies Code. With respect to any Rent Credit Dispute or Controversy under which Tenant claims it has a right to offset, reduce or fail to pay any Rent, Tenant shall not exercise such claimed right to offset, reduce or fail to pay such Rent until such Rent Credit Dispute or Controversy is finally resolved or settled in accordance with Section 55E. and then only in accordance with the result of such resolution or settlement.

SEC. 56 CONSTRUCTION OF IMPROVEMENTS:

     A. Landlord and Tenant have approved the build-to-suit building plans and construction drawings for the Improvements described in Exhibit J attached hereto and agree that, notwithstanding anything to the contrary contained in this Lease Agreement, the terms “Building Plans” and “Construction Drawings”, as used in this Lease Agreement, including, without limitation, Exhibit D, shall mean the building plans and construction drawings, respectively, for the Improvements described in Exhibit J, as amended pursuant to the terms and conditions of this Lease Agreement. From and after the Effective Date, Tenant may make written requests for modifications to the Construction Drawings, specifying in detail the requested modification (each, a “Tenant Request”). Subject to Section 56B. below, Landlord shall provide Tenant with a written response (a “Landlord Response”) within five (5) business days after Landlord’s receipt of the Tenant Request indicating:

     (i) the estimate of any increase in cost associated with the Tenant Request;

     (ii) the number of days of Tenant Delay (defined in Exhibit D) associated with the Tenant Request; and

     (iii) any additional requirements necessary to accommodate the Tenant Request.

     Landlord’s indication in the Landlord Response as to the foregoing shall be based upon the reasonable determination of the architect, contractors and/or subcontractors of Landlord who are constructing the Improvements.

     B. Notwithstanding anything to the contrary in Section 56A. above, Tenant and Landlord hereby agree that Landlord shall not be required to accommodate any Tenant Request that would increase the total project costs beyond those which Landlord would otherwise be obligated to spend based on the Building Plans and Construction Drawings approved by Landlord and Tenant as of the Effective Date (after giving effect to any cost savings realized by Landlord at the time of such request or as a result of such request) unless Tenant pays to Landlord immediately upon Tenant’s delivery of the Amendment (defined below) associated with such Tenant Request, the amount of such increase. Landlord hereby covenants and agrees to apply any funds deposited with it pursuant to this Section 56B. to the payment of Building costs as and when due. Subject to Landlord’s receipt of written confirmation from Tenant, after Tenant’s receipt of the Landlord Response, that Tenant desires Landlord to implement a Tenant Request, Landlord will accommodate such Tenant Request if it does not increase the total project costs beyond those which Landlord would otherwise be obligated to spend based on the Building Plans and Construction Drawings approved by Landlord and Tenant as of the Effective Date (after giving effect to any cost savings realized by Landlord at the time of such request or as a result of such request).

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     C. After receiving the Landlord Response, should Tenant desire to make the modifications described in the Tenant Request, Tenant shall execute an Amendment to Lease Agreement (an “Amendment”) in the form attached hereto as Exhibit F and deliver such Amendment to Landlord. If the Amendment is delivered to Landlord, along with any payment, if necessary, pursuant to Section 56B. and the Amendment (i) accurately depicts the modification described in the Tenant Request, and (ii) contains the number of days of Tenant Delay that was included in Landlord’s Response (along with the aggregate number of Tenant Delays as of the date of such Amendment inclusive of the number of Tenant delays in connection with such Amendment), Landlord shall execute the Amendment within five (5) days from Landlord’s receipt thereof.

     D. Landlord shall construct the Improvements in accordance with the Construction Drawings pursuant to the terms and conditions of this Lease, including, without limitation, Exhibit D; provided, however, Landlord and Tenant agree that Tenant shall be responsible for the construction and delivery of the following items set forth on the Construction Drawings, and that Landlord shall have no responsibility therefor: clocks, laboratory casework, fume hoods, ovens for production area, flammable storage cabinets, warehouse rack system, audio-visual (AV) equipment and projection screens, televisions and video conference equipment, lunchroom appliances, markerboards and tackboards, sharps disposals, paging system, phone switch and phone equipment, computers and servers, compressor for lab air, systems furniture, furniture (interior and exterior), building signage, interior graphics, vending machines, crash rails, clean room (workstations and storage shelving), clean room (gowning, PPE storage shelving, etc.), and production room (workstations and storage shelving).

SEC. 57 PERMITTED ENCUMBRANCES: As of the Effective Date, the Lease Agreement is subject and subordinate only to those encumbrances described on attached Exhibit K.

SEC. 58 RELATIONSHIP OF THE PARTIES; NO PARTNERSHIP. The relationship of Tenant and Landlord under this Lease Agreement is that of independent parties, each acting in its own best interests, and notwithstanding anything in this Lease Agreement to the contrary, no aspect of this Lease Agreement shall create or evidence, nor is it intended to create or evidence, a partnership, joint venture or other business relationship or enterprise between Tenant and Landlord.

SEC. 59 CONSENT TO REMOVAL OF PERSONAL PROPERTY. In the event Tenant grants to any bank or lending institution related to or affiliated with Silicon Valley Bank or its successors or assigns (“Permitted Lender”), a security interest in all or any portion of Tenant’s personal property located at or in the Leased Premises, within thirty (30) days after Tenant’s written request therefor, Landlord will enter into an agreement with such Permitted Lender on reasonable and customary terms whereby Landlord will grant to such Permitted Lender the right to enter upon the Leased Premises for the purpose of exercising any right such Permitted Lender may have under the terms of the agreements between Tenant and such Permitted Lender granting such security interest and establishing the debt secured thereby.

SEC. 60 EXHIBITS: Schedule 1 and Exhibits A through K are attached hereto and made a part of this Lease Agreement for all purposes.

[END OF TEXT]

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     IN WITNESS WHEREOF, Landlord and Tenant, acting herein by duly authorized individuals, have caused these presents to be executed in multiple counterparts, each of which shall have the force and effect of an original on this 9^th day of September, 2009 (the “Effective Date”).

LANDLORD:
PEARLAND ECONOMIC DEVELOPMENT
CORPORATION, a corporation operating under Chapter 505
of the Texas Local Government Code
By:	/s/ Ramon Lozano
Name:	Ramon Lozano
Title:	Assistant Director of Economic Development
TENANT:
CARDIOVASCULAR SYSTEMS, INC.,
a Delaware corporation
By:	/s/ James E. Flaherty
Name:	James E. Flaherty
Title:	CFO
ADDRESS:
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, Minnesota 55112
Attention: James E. Flaherty
Telephone: (651) 259-1611
Facsimile: (651) 259-1696

Signature Page to Lease Agreement

SCHEDULE 1 TO LEASE AGREEMENT

BASE RENT

Base Rent (without regard to Tenant’s exercise, if any, of the First Expansion Option or the Second Expansion Option):

Years Following the Rent
Commencement Date	Base Rent	Annual Base Rent*		Monthly Base Rent
1–5	$9.00/square foot	$	414,000.00	1/12 of Annual Base Rent
6–10	$10.00/square foot	$	460,000.00	1/12 of Annual Base Rent

“Rent Commencement Date” means the date that is the thirty (30) days after the date on which the Commencement Date occurs.

* Annual Base Rent assumes that the Leased Premises shall consist of 46,000 square feet. The Annual Base Rent shall be adjusted appropriately if the final square footage of the Leased Premises after construction does not equal 46,000 square feet.

Schedule 1 - - 1

EXHIBIT A

DEPICTION OF THE LAND

(see attached)

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EXHIBIT B

ACCEPTANCE OF PREMISES MEMORANDUM

This Memorandum is an amendment to the Lease Agreement (the “Lease Agreement”) executed on the           day of                     , 200                     between the Pearland Economic Development Corporation, a corporation operating under Section 505 of the Texas Local Government Code, as Landlord and Cardiovascular Systems, Inc., a Delaware corporation, as Tenant for that certain leased premises more particularly described in the Lease Agreement.

Landlord and Tenant hereby agree that:

1.	The Commencement Date of the Lease Agreement is hereby agreed to be the           day of                     , 200___.
2.	The Rent Commencement Date of the Lease Agreement is hereby agreed to be the           day of                     , 200___.
3.	The Expiration Date of the Lease Agreement is hereby agreed to be the           day of                     , 20___.

All other terms and conditions of the Lease Agreement are hereby ratified and acknowledged to be unchanged.

Agreed and Executed this           day of                     , 200___.

Landlord:

PEARLAND ECONOMIC DEVELOPMENT CORPORATION, a corporation operating under Section 505 of the Texas Local Government Code

By:

Name:

Title:

Tenant:

CARDIOVASCULAR SYSTEMS, INC.,
a Delaware corporation

By:

Name:

Title:

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EXHIBIT C

TENANT’S ESTOPPEL CERTIFICATE

(Addressee)

RE:     Lease Agreement by and between Pearland Economic Development Corporation and Cardiovascular Systems, Inc.

Gentlemen:

The undersigned (“Tenant”) has executed and entered into that certain lease agreement (“Lease Agreement”) attached hereto as Exhibit “A” and made a part hereof for all purposes with respect to those certain premises (“Leased Premises”) more fully described in the Lease Agreement. Tenant understands that the entity to whom this letter is addressed (“Addressee”) has committed to loan or invest a substantial sum of money in reliance upon this certification by the undersigned, which certification is a condition precedent to making such loan or investment, or that Addressee intends to take some other action in reliance upon this certification.

With respect to the Lease Agreement, Tenant certifies to you the following, with the intention that you may rely fully thereon:

1.	A true and correct copy of the Lease Agreement, including any and all amendments and modifications thereto, is attached hereto as Exhibit “A”;
2.	The original Lease Agreement is dated                     , 200___, and has been assigned, modified, supplemented or amended only in the following respects:
	(Please write “None” above or, on a separate sheet of paper, state the effective date of and describe any oral or written modifications, supplements or amendments to the Lease Agreement and attach a copy of such modifications, supplements or amendments, with the Lease Agreement as Exhibit A);
3.	Tenant is in actual occupancy of the Leased Premises under the Lease Agreement;
4.	The initial term of the Lease Agreement commenced on                     , 200___, and ends at 11:59 p.m. on                     , 200___. The current monthly base rent is $                     , and no rentals or other payments in advance of the current calendar month have been paid by Tenant, except as follows:
	(Please write “None” above or describe such payments on a separate sheet of paper);
5.	Base Rent with respect to the Lease Agreement has been paid by Tenant through                     , 200___; all Additional Rent and other charges have been paid for the current periods;
6.	There are no unpaid concessions, bonuses, free months’ rent, rebates or other matters affecting the rent for Tenant, except as follows:
	(Please write “None” above or describe such matters on a separate sheet of paper);
7.	No security or other deposit has been paid by Tenant with respect to the Lease Agreement, except as follows:
	(Please write “None” above or describe such deposits on a separate sheet of paper);

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8.	The Lease Agreement is in full force and effect and there are no events or conditions existing which, with notice or the lapse of time or both, could constitute a monetary or other default of the Landlord under the Lease Agreement, or entitle Tenant to any offset or defense against the prompt current payment of rent or constitute a default by Tenant under the Lease Agreement, except as follows:
	(Please write “None” above or describe such default on a separate sheet of paper);
9.	All improvements required to be made by Landlord under the terms of the Lease Agreement have been satisfactorily completed and accepted by Tenant as being in conformity with the Lease Agreement, except as follows:
	(Please write “None” above or describe such improvements on a separate sheet of paper);
10.	Tenant has no option to expand or rent additional space or any right of first refusal with regard to any additional space, under the Lease Agreement other than the Leased Premises, except as set forth in Sections 52 and 53 of the Lease:
	(Please write “None” above or describe such right or option on a separate sheet of paper);
11.	Tenant has no right or option to renew the Lease Agreement for any period of time after the expiration of the initial term of the Lease Agreement, except as set forth in Section 49 of the Lease:
	(Please write “None” above or describe such right on a separate sheet of paper);
12.	To Tenant’s knowledge, any and all broker’s leasing and other commissions relating to and/or resulting from Tenant’s execution of the Lease Agreement and occupancy of the Leased Premises have been paid in full and no broker’s leasing or other commissions will be or become due or payable in connection with or as a result of either Tenant’s execution of a new Lease Agreement covering all or any portion of the Leased Premises or any other space within the Project or Tenant’s renewal of the Lease Agreement, except as follows:
	(Please write “None” above or describe such right on a separate sheet of paper);
13.	To Tenant’s knowledge, the use, maintenance or operation of the Leased Premises complies with, and will at all times comply with, all applicable federal, state, county or local statutes, laws, rules and regulations of any governmental authorities relating to environmental, health or safety matters (being hereinafter collectively referred to as the “Environmental Laws”);
14.	The Leased Premises have not been used and Tenant does not plan to use the Leased Premises for any activities which, directly or indirectly, involve the use, generation, treatment, storage, transportation or disposal of any petroleum product or any toxic or hazardous chemical, material, substance, pollutant or waste;
15.	Tenant has not received any notices, written or oral, of violation of any Environmental Law or of any allegation which, if true, would contradict anything contained herein and there are not writs, injunctions, decrees, orders or judgments outstanding, no lawsuits, claims, proceedings or investigations pending or threatened, relating to the use, maintenance or operation of the Leased Premises, nor is Tenant aware of a basis for any such proceeding;
16.	There are no actions, whether voluntary or otherwise, pending against Tenant under the bankruptcy or insolvency laws of the United States or of any state;
	(Please write “None” above or describe such default on a separate sheet of paper);
17.	Tenant has no right of refusal or option to purchase the Leased Premises or any portion thereof except as set forth in Sections 51, 52, 53 and 54 of the Lease:
	(Please write “None” above or describe such default on a separate sheet of paper); *
18.	Tenant understands that the Lease Agreement may be assigned to Addressee and Tenant agrees to attorn to Addressee in all respects in accordance with, and subject to, the conditions of the Lease Agreement.

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Dated:                     , 200__.

Very truly yours,

By:

Name:

Title:

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EXHIBIT D

IMPROVEMENTS

SEC.1 PLANS.

     A. Building Plans. Landlord will cause its architect and mechanical, structural and electrical engineer (the “Design Professionals”) to prepare a set of build to suit Building plans (the “Proposed Building Plans”) for the construction of all improvements to the Building (collectively, the “Improvements”). Within ten (10) business days after delivery of the Proposed Building Plans to Tenant, Tenant shall either approve (which approval shall not be unreasonably withheld, conditioned or delayed) the Proposed Building Plans or notify Landlord of the item(s) of the Proposed Building Plans that Tenant disapproves and the reason(s) therefor. If Tenant disapproves the Proposed Building Plans, Landlord shall cause the Design Professionals to revise and resubmit same to Tenant for approval (the “Revised Building Plans”). Within seven (7) business days after delivery of the Revised Building Plans to Tenant, Tenant shall either approve the Revised Building Plans or notify Landlord of the item(s) of the Revised Building Plans which Tenant disapproves and the reason(s) therefor. If Tenant disapproves the Revised Building Plans, Landlord shall cause the Design Professionals to further revise and resubmit same to Tenant for approval, which process shall continue until the plans are approved. Tenant shall have seven (7) business days after delivery of the each set of Revised Building Plans to either approve the Revised Building Plans or notify Landlord of the item(s) of the Revised Building Plans which Tenant disapproves and the reason(s) therefor. Should Tenant fail to respond to Landlord’s request for approval within the time periods allotted above, Landlord shall deliver to Tenant notice of such failure, and Tenant shall have an additional five (5) business day period in which to respond to Landlord’s request for approval. Should Tenant fail to respond to Landlord’s request for approval within such five (5) business day period, Tenant shall have been deemed to have approved such Proposed Building Plans or Revised Building Plans, as applicable. Provided, however, that Landlord’s notice must specifically include a statement providing that Tenant’s approval shall be deemed granted if Tenant fails to respond within such five (5) business day period. The Proposed Building Plans or Revised Building Plans, as approved (or deemed approved) by Tenant, are hereinafter referred to as the “Building Plans”. Landlord shall instruct and use commercially reasonable efforts to cause its architects and/or engineers to design the Improvements and prepare the Building Plans in full compliance with Laws. The terms of the preceding sentence shall not waive or otherwise restrict the warranties of Landlord set forth in Section 5 of this Exhibit D.

     B. Construction Drawings. Landlord shall cause the Design Professionals to prepare construction drawings (in accordance with the Building Plans) and specifications including complete sets of detailed architectural, structural, mechanical, electrical and plumbing working drawings (the “Proposed Construction Drawings”) for the Improvements and shall deliver the Proposed Construction Drawings to Tenant for approval (which approval shall not be unreasonably withheld, conditioned or delayed). Within ten (10) business days after delivery of the Proposed Construction Drawings to Tenant, Tenant shall either approve the Proposed Construction Drawings or notify Landlord of the item(s) of the Proposed Construction Drawings that Tenant disapproves and the reason(s) therefor. If Tenant disapproves the Proposed Construction Drawings, Landlord shall cause the Design Professionals to revise and resubmit same to Tenant for approval (the “Revised Construction Drawings”). Within five (5) business days after delivery of the Revised Construction Drawings to Tenant, Tenant shall either approve the Revised Construction Drawings or notify Landlord of the item(s) of the Revised Construction Drawings which Tenant disapproves and the reason(s) therefor. If Tenant disapproves the Revised Construction Drawings, Landlord shall cause the Design Professionals to further revise and resubmit same to Tenant for approval, which process shall continue until the plans are approved. Tenant shall have five (5) business days after delivery of each set of Revised Construction Drawings to either approve the Revised Construction Drawings or notify Landlord of the item(s) of the Revised Construction Drawings which Landlord disapproves and the reason(s) therefor. Should Tenant fail to respond to Landlord’s request for approval within the time periods allotted above, Landlord shall deliver to Tenant notice of such failure, and Tenant shall have an additional five (5) business day period in which to respond to Landlord’s request for approval. Should Tenant fail to respond to Landlord’s request for approval within such five (5) business day period, Tenant shall have been deemed to have approved such Proposed Construction Drawings or Revised Construction Drawings, as applicable. Provided, however, that Landlord’s notice must specifically include a statement providing that Tenant’s approval shall be deemed granted if Tenant fails to respond within such five (5) business day period. The Proposed Construction Drawings or Revised Construction Drawings, as approved (or deemed approved) by Tenant, are hereinafter referred to as the “Construction Drawings”.

D-1

     C. Changes. Tenant may from time to time make requests for modifications to the Construction Drawings by delivering written notice to Landlord in accordance with Section 56A. of the Lease Agreement. No delays in designing and constructing the Improvements caused by such Tenant requests shall delay the Commencement Date. Landlord may make requests for modifications to the Construction Drawings in accordance with Section 56A. of the Lease Agreement.

SEC 2. CONSTRUCTION OF IMPROVEMENTS. Subject to Tenant Delays, Landlord shall diligently construct or cause to be constructed the Improvements in accordance with the Construction Drawings in a good and workmanlike manner using materials specified in the Construction Drawings and in compliance with Laws and so as to attain Substantial Completion by not later than the target date (the “Target Date”) for Substantial Completion set forth in the Build-out Notice, which Target Date shall be the date that is one hundred five (105) days after the date on which Landlord receives the Build-out Notice. Landlord assumes no liability for special or consequential damages of any kind whatsoever in connection with the design or construction of the Improvements. EXCEPT AS SET FORTH IN THE SECOND TO LAST SENTENCE OF SECTION 1A. OF THIS EXHIBIT D, THE FIRST SENTENCE OF THIS SECTION 2 (SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 5 OF THIS EXHIBIT D) AND SECTION 5 OF THIS EXHIBIT D, LANDLORD MAKES NO REPRESENTATIONS, WARRANTIES, OR GUARANTIES REGARDING THE IMPROVEMENTS, EXPRESSED OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR OF HABITABILITY. Further, Landlord agrees to assign to Tenant its rights, if any, to pursue special and consequential damages against the architect and general contractor providing services under this Exhibit D in connection with the design and/or construction of the Improvement for damages incurred by Tenant; provided, however, that, as a condition to such assignment, Tenant will not seek to recover special or consequential damages from or against Landlord.

SEC 3. SUBSTANTIAL COMPLETION. “Substantial Completion” shall occur when: (i) the project architect has issued a certificate in the form of AIA Document G-704 indicating that the Improvements are substantially complete in accordance with the Construction Drawings and such certificate has been confirmed by Tenant, (ii) all systems and portions of the Improvements are operational as designed and the only remaining work is so minor in nature that Tenant could commence its installation of equipment and move-in process (the “Tenant Improvements Work”) and the completion of the remainder of the work by Landlord would not materially interfere with the Tenant Improvements Work and (iii) Landlord has obtained and delivered to Tenant a permanent certificate of occupancy for the Improvements. When Landlord believes that Substantial Completion has been achieved, Tenant and Landlord shall conduct an inspection of the Leased Premises within five (5) days after such date in order to develop a punch-list of incomplete, minor detail items (the “Punch-List Items”) to be completed by Landlord. In the event any items other than Punch-List Items remain to be completed, Substantial Completion shall be deemed not to have occurred. Landlord shall use all reasonable efforts to complete all Punch-List Items within thirty (30) days after Substantial Completion. Landlord shall use reasonable efforts to minimize interference with the use of the Leased Premises by Tenant in the completion of such Punch-List Items. If Substantial Completion is delayed because of (a) any acts or omissions of Tenant or its agents, representatives, employees or contractors, or (b) Tenant requested changes in the approved Construction Drawings (collectively, “Tenant Delay”), then the Commencement Date shall not be extended, but rather shall start on the date on which it would have occurred but for such event. This Lease Agreement shall remain in full effect notwithstanding any delay in Substantial Completion and Landlord shall have no liability to Tenant if Substantial Completion has not occurred on or prior to the Target Date for any reason. In the event Landlord does not cause Substantial Completion to occur within sixty (60) days from the Target Date, as such date may be extended in connection with delays related to (a) events of Force Majeure or (b) a Tenant Delay, Tenant shall have the right, following Landlord’s failure to satisfy such deadline but before Substantial Completion shall occur, to terminate this Lease Agreement upon delivery of written notice thereof to Landlord and reimbursement to Landlord of all amounts paid to Tenant by Landlord prior to such date pursuant to the terms of that certain Corporate Job Creation Agreement of even date herewith by and between Landlord and Tenant, and, except as otherwise set forth in this Lease Agreement, the parties shall have no further rights or obligations hereunder.

SEC. 4 EARLY ENTRY BY TENANT. Upon delivery to Landlord of not less than forty-eight (48) hours’ written notice thereof, Tenant may enter the Leased Premises before Substantial Completion to conduct the Tenant Improvements Work, provided that such entry shall be coordinated with Landlord and shall not materially interfere with the construction of the Improvements contemplated in this Exhibit D. Prior to such entry, Tenant shall deliver

D-2

to Landlord evidence that the insurance required under this Lease Agreement has been obtained, and Tenant shall pay all utility charges reasonably allocable to Tenant by Landlord in connection with such early entry. Any such entry shall be on the terms of this Lease Agreement, but, prior to the Rent Commencement Date, no Rent shall accrue during the period that Tenant so enters the Leased Premises. Tenant shall conduct its activities therein so as not to materially interfere with Landlord’s construction activities, and shall do so at its risk and expense. If, in Landlord’s judgment, Tenant’s activities therein materially interfere with Landlord’s construction activities, Landlord may terminate Tenant’s right to enter the Leased Premises before the Commencement Date.

SEC. 5 WARRANTY. Landlord will cause the Improvements, when completed, to comply with all Laws, as enforced and interpreted as of the Effective Date. For a period of one (1) year after Substantial Completion of the Improvements, Landlord shall cause to be repaired, replaced and re-executed any defective materials, equipment and work which was initially prepared or supplied or performed in connection with this Exhibit D, including latent defects and work performed not in accordance with the approved Construction Drawings. Upon the expiration of this warranty, Landlord will assign to Tenant all manufacturers’, suppliers’, contractors’ and subcontractors’ warranties on materials, equipment and fixtures and labor incorporated into the Improvements (other than those components of the Improvements that Landlord is obligated to maintain pursuant to the Lease Agreement) or that it otherwise obtains to the extent necessary for Tenant to fulfill its maintenance and repair obligations as set out in this Lease Agreement. Further, Landlord shall furnish to Tenant all printed service and maintenance instructions and manuals issued by the manufacturer of each item of equipment furnished in accordance with this Exhibit D.

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EXHIBIT E

INSURANCE REQUIREMENTS

SEC.1 TENANT’S INSURANCE.

     A. Tenant, at its expense, shall obtain and keep in full force and effect during the Term:

     (i) a policy of commercial general liability insurance on an occurrence basis against claims for personal injury, bodily injury, death and/or property damage occurring in or about the Leased Premises, under which Tenant is named as the insured and (a) Landlord, (b) any lender whose loan is secured by a lien against the Leased Premises, (c) their respective shareholders, members, partners, affiliates and subsidiaries, successors and assigns, and (d) any directors, officers, employees, agents, or contractors of such persons or entities (collectively, the “Landlord Parties”) are named as additional insureds. Such insurance shall provide primary coverage without contribution from any other insurance carried by or for the benefit of the Landlord Parties, and Tenant shall obtain blanket broad-form contractual liability coverage to insure its indemnity obligations set forth in Section 28 of the Lease Agreement. The minimum limits of liability applying exclusively to the Leased Premises shall be a combined single limit with respect to each occurrence in an amount of not less than $5,000,000; provided, however, that Landlord shall retain the right to require Tenant to increase such coverage from time to time to that amount of insurance which in Landlord’s reasonable judgment is then being customarily required by landlords for buildings comparable to the Building. The deductible or self insured retention amount for such policy shall not exceed $10,000;

     (ii) insurance against loss or damage by fire, and such other risks and hazards as are insurable under then available standard forms of “Special Form Causes of Loss” or “All Risk” property insurance policies with extended coverage, insuring Tenant’s movable fixtures and movable partitions, telephone and other equipment, computer systems, trade fixtures, furniture, furnishings, and other items of personal property which are removable without material damage to the Building (“Tenant’s Property”) for the full insurable value thereof or replacement cost thereof, having a deductible amount (or self-insured retention amount), not in excess of $25,000;

     (iii) during the performance of any alteration by or on behalf of Tenant, until completion thereof, Builder’s Risk insurance on an “all risk” basis and on a completed value form including a Permission to Complete and Occupy endorsement, for full replacement value covering the interest of Landlord and Tenant (and their respective contractors and subcontractors) in all work incorporated in the Building and all materials and equipment in or about the Leased Premises; and

     (iv) Workers’ Compensation Insurance, as required by Laws;

     (v) Business Interruption Insurance in an amount equal to at least one year’s Rent; and

     (vi) such other insurance in such amounts as Landlord’s lender or other beneficiary under a deed of trust encumbering all or any portion of Landlord’s interest in the Leased Premises may require from time to time.

     B. All insurance required to be carried by Tenant (i) shall contain a provision that (x) no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained, and (y) it shall be noncancellable and/or no material change in coverage shall be made thereto unless the Landlord Parties receive thirty (30) days’ prior notice of the same, by certified mail, return receipt requested, and (ii) shall be effected under valid and enforceable policies issued by reputable insurers permitted to do business in the State of Texas and rated in Best’s Insurance Guide, or any successor thereto as having a “Best’s Rating” of at least “A-” and a “Financial Size Category” of at least “X” or, if such ratings are not then in effect, the equivalent thereof or such other financial rating as Landlord may at any time consider appropriate.

E-1

     C. On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate policies or certificates of insurance, including evidence of waivers of subrogation required to be carried pursuant to this Exhibit E and that the Landlord Parties are named as additional insureds (the “Policies”). Evidence of each renewal or replacement of the Policies shall be delivered by Tenant to Landlord at least ten (10) days prior to the expiration of the Policies. In lieu of the Policies, Tenant may deliver to Landlord a certification from Tenant’s insurance company (on the form currently designated “Acord 27” (Evidence of Property Insurance) and “Acord 25-S” (Certificate of Liability Insurance), or the equivalent, provided that attached thereto is an endorsement to Tenant’s commercial general liability policy naming the Landlord Parties as additional insureds) which shall be binding on Tenant’s insurance company, and which shall expressly provide that such certification (i) conveys to the Landlord Parties all the rights and privileges afforded under the Policies as primary insurance, and (ii) contains an obligation of the insurance company to advise all Landlord Parties in writing by certified mail, return receipt requested, at least thirty (30) days in advance of any termination or change to the Policies that would affect the interest of any of the Landlord Parties.

SEC. 2 LANDLORD’S INSURANCE.

     A. Landlord, at its sole cost and expense but subject to the terms and conditions of the Lease Agreement, shall obtain and keep (or cause to be maintained and kept on its behalf) in full force and effect during the Term a policy (which policy may be a blanket policy) of commercial general liability insurance on an occurrence basis against claims for personal injury, bodily injury, death and/or property damage, with minimum limits in an amount of not less than $2,000,000 with respect to each occurrence and $4,000,000 with respect to annual aggregate occurrences. On or prior to the Commencement Date, Landlord shall deliver to Tenant appropriate policies or certificates of insurance evidencing such coverage, including evidence of waivers of subrogation required to be carried pursuant to this Exhibit E (the “Landlord Policies”) and that (i) Tenant, (ii) any lender whose loan is secured by a lien against the Tenant’s interest in the Leased Premises, (iii) their respective shareholders, members, partners, affiliates and subsidiaries, successors and assigns, and (iv) any directors, officers, employees, agents, or contractors of such persons or entities (collectively, the “Tenant Parties”) are named as additional insureds. Evidence of each renewal or replacement of the Landlord Policies shall be delivered by Landlord to Tenant at least ten (10) days prior to the expiration of the Landlord Policies. In lieu of the Landlord Policies, Landlord may deliver to Tenant a certification from Landlord’s insurance company (on the form currently designated “Acord 25-S” (Certificate of Liability Insurance), or the equivalent, provided that attached thereto is an endorsement to Landlord’s commercial general liability policy naming the Tenant Parties as additional insureds) which shall be binding on Landlord’s insurance company, and which shall expressly provide that such certification (i) conveys to the Tenant Parties all the rights and privileges afforded under the Landlord Policies as primary insurance, and (ii) contains an obligation of the insurance company to advise all Tenant Parties in writing by certified mail, return receipt requested, at least thirty (30) days in advance of any termination or change to the Landlord Policies that would affect the interest of any of the Tenant Parties.

     B.  During the performance of the initial construction of the Improvements contemplated in Exhibit D of this Lease Agreement until completion thereof, Landlord will obtain or cause to be obtained a Builder’s Risk insurance on an “all risk” basis for full replacement value of all work incorporated in the Improvements and all materials and equipment in or about the Leased Premises. On or prior to the Effective Date, Landlord shall deliver to Tenant appropriate policies or certificates of insurance evidencing such coverage, including evidence of waivers of subrogation required to be carried pursuant to this Exhibit E.

SEC. 3 WAIVER OF SUBROGATION. Landlord and Tenant shall each procure an appropriate clause in or endorsement to any property insurance covering the Leased Premises and personal property, fixtures and equipment located therein, wherein the insurer waives subrogation or consents to a waiver of right of recovery, and Landlord and Tenant agree not to make any claim against, or seek to recover from, the other for any loss or damage to its property or the property of others resulting from fire or other hazards to the extent covered by the property insurance that was required to be carried by that party under the terms of the Lease Agreement or is otherwise carried by either party in excess of the amounts required to be carried under the terms of the Lease Agreement.

E-2

EXHIBIT F

FORM OF AMENDMENT TO LEASE AGREEMENT

AMENDMENT TO LEASE AGREEMENT

     This Amendment No.            to Lease Agreement (this “Amendment No.            ”) is entered into as of                                         , 200            by Pearland Economic Development Corporation, a corporation operating under Section 505 of the Texas Local Government Code (“Landlord”), and Cardiovascular Systems, Inc., a Delaware corporation (“Tenant”). All capitalized terms used herein but not defined herein shall have the meaning ascribed thereto in the Lease Agreement (defined below).

RECITALS

     WHEREAS, Landlord and Tenant entered into that certain Lease Agreement, dated as of                     , 2009 (as amended from time to time, the “Lease Agreement”), whereby Landlord agreed to Lease Agreement the Leased Premises to Tenant.

     WHEREAS, the Building being constructed by Landlord pursuant to the Lease Agreement is being completed based upon the Building Plans and Construction Drawings as described on Exhibit D attached to the Lease Agreement.

AGREEMENTS

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency are hereby acknowledged, Landlord and Tenant hereby agree as follows:

     1. Definitions. All capitalized terms used herein but not defined herein shall have the meaning ascribed thereto in the Lease Agreement.

     2. Amendment to Exhibit B-2. Exhibit B-2 to the Lease Agreement is hereby amended as follows:

     3. Amendment to Schedule 1. Schedule 1 to the Lease Agreement is hereby amended by deleting such Schedule 1 in its entirety and replacing with the Schedule 1 attached hereto.

     4. Tenant Delay. The number of days of Tenant Delay in connection with Tenant’s Request that necessitated this Amendment No. ___ is                      and the sum of all Tenant Delay days caused by Tenant’s Request (inclusive of the number of days of Tenant Delay set forth immediately above) as of the date of this Amendment No. ___ is                     .

     5. No Other Amendments. Except as specifically provided in this Amendment No. ___, no other amendments, revisions or changes are made or permitted hereby to the Lease Agreement. All other terms and conditions of the Lease Agreement remain in full force and effect and apply fully to this Amendment No.           .

     6. Conforming References. Upon the effectiveness of this Amendment No. , each reference in the Lease Agreement to “this Lease Agreement,” “thereunder,” “hereto,” “herein,” or words of like import, shall mean and be a reference to the Lease Agreement as amended hereby.

     7. Counterparts. This Amendment No.            may be executed in one or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by Landlord and Tenant and delivered to each of them.

     8. Applicable Law. This Amendment No.            and all rights and liabilities of the parties hereto with respect to the Lease Agreement shall be governed by the laws of the State of Texas.

F-1

WITNESS THE EXECUTION hereof as of the date first above written.

Landlord:

PEARLAND ECONOMIC DEVELOPMENT CORPORATION, a corporation operating under Section 505 of the Texas Local Government Code

By:

Name:

Title:

Tenant:

CARDIOVASCULAR SYSTEMS, INC.,
a Delaware corporation

By:

Name:

Title:

F-2

EXHIBIT G

ARBITRATION PROCEDURES

     1. Arbitration. Binding arbitration of Rent Credit Disputes and Controversies shall be conducted in accordance with the following procedures:

     (a) The party seeking arbitration hereunder shall request such arbitration by delivering written notice to the opposing party which written notice shall include a clear statement of the Rent Credit Dispute and Controversy. If a legal proceeding relating to the matter(s) in dispute has previously been filed in a court of competent jurisdiction (other than a proceeding for injunctive or ancillary relief) then such written notice of election under this Section 1(a) shall be delivered within ninety (90) calendar days after the date the electing party receives service of process in such legal proceeding. Except to the extent provided in this Exhibit G, the arbitration shall be conducted in accordance with the Commercial Rules of the American Arbitration Association (as supplemented and modified by the Expedited Procedures of the Commercial Arbitration Rules (the “Expedited Procedures”) and provided that the procedures for large, complex, commercial disputes shall not apply) by a single arbitrator to be appointed upon the mutual agreement of the parties within twenty (20) calendar days after the date the written request for arbitration was delivered to the opposing party. In order to facilitate any such appointment, the party seeking arbitration shall submit a brief description (no longer than two (2) pages) of the Rent Credit Dispute or Controversy to the opposing party. In the event the parties are unable to agree on a single arbitrator, then the arbitrator shall be appointed pursuant to the Expedited Procedures. The party seeking arbitration shall make the parties’ request for appointment of an arbitrator and furnish a copy of the aforesaid description of the Rent Credit Dispute or Controversy.

     (b) Within ten (10) calendar days of the date the arbitrator is appointed, the arbitrator shall notify the parties in writing of the date of the arbitration hearing, which hearing date shall be not less than thirty (30) calendar days from the date of the arbitrator’s appointment. The arbitration hearing shall be held in Harris County, Texas. There shall be no evidence by affidavit allowed and each party shall disclose a list of all documentary evidence to be used and a list of all witnesses and experts to be called by the party in the arbitration hearing at least ten (10) calendar days prior to the arbitration hearing. The arbitrator shall issue a final ruling within ten (10) calendar days after the conclusion of the arbitration hearing. Any decision of the arbitrator shall state the basis of the award and shall include both findings of fact and conclusions of law. Any award rendered pursuant to the foregoing, which may include an award or decree of specific performance hereunder, shall be final and binding on, and nonappealable by, the parties (except as provided by Laws as grounds for the vacating of an arbitration award) and judgment thereon may be entered or enforcement thereof sought by either party in a court of competent jurisdiction. The foregoing deadlines shall be tolled during the period that no arbitrator is serving until a replacement is appointed in accordance with this Exhibit G.

     (c) Notwithstanding the foregoing, nothing contained herein shall be deemed to give the arbitrator appointed hereunder any authority, power or right to alter, change, amend, modify, waive, add to or delete from any of the provisions of this Lease Agreement.

     2. Further Qualifications of Arbitrators: Conduct. Every person nominated or recommended to serve as an arbitrator shall be and remain at all times neutral and wholly impartial, shall be experienced and knowledgeable in the substantive Laws applicable to the subject matter of the Rent Credit Dispute or Controversy. All arbitrators shall, upon written request by either party, provide the parties with a statement that they can and shall decide any Rent Credit Dispute or Controversy referred to them impartially. No arbitrator shall currently be employed by either party or a related party or affiliate of either party or currently have, or in the preceding two (2) calendar years had, any material financial dependence upon a party or any related party or affiliate of a party, nor shall any arbitrator have any material financial interest in the Rent Credit Dispute or Controversy. Further, all arbitrators must meet the qualifications and adhere to the standards of Sections 154.052 and 154.053 of Chapter 154, Texas Civil Practice And Remedies Code.

G-1

     3. Applicable Law and Arbitration Act. The agreement to arbitrate set forth in this Exhibit G shall be enforceable in either federal or state court. The enforcement of such agreement and all procedural aspects thereof, including the construction and interpretation of this agreement to arbitrate, the scope of the arbitrable issues, allegations of waiver, delay or defenses as to arbitrability and the rules (except as otherwise expressly provided herein) governing the conduct of the arbitration, shall be governed by and construed pursuant to the Texas General Arbitration Act, Tex. Civ. Prac. & Remedies Code §§ 171.001 et seq. and any successor statute. In deciding the substance of any such Rent Credit Dispute or Controversy, the arbitrator shall apply the substantive Laws of the State of Texas. Except for an award of a credit against Base Rent, the arbitrator shall not have authority, power and right to award damages or provide for any other remedies of any kind, at law, in equity or otherwise.

     4. Consolidation. If the parties initiate multiple arbitration proceedings, the subject matters of which are related by common questions of Laws or fact and which could result in conflicting awards or obligations, then the parties hereby agree that all such proceedings may be consolidated into a single arbitral proceeding.

     5. Pendency of Dispute; Interim Measures. The existence of any Rent Credit Dispute or Controversy eligible for referral or referred to arbitration hereunder, or the pendency of the dispute settlement or resolution procedures set forth herein, shall not in and of themselves relieve or excuse either party from its ongoing duties and obligations under this Lease Agreement or any right, duty or obligation arising herefrom; provided, however, that during the pendency of arbitration proceedings and prior to a final award, upon written request by a party, the arbitrator may issue interim measures for preservation or protection of the status quo.

     6. Complete Defense. The parties agree that compliance by a party with the provisions of this Exhibit G shall be a complete defense to any suit, action or proceeding instituted in any federal or state court, or before any administrative tribunal by the other party with respect to any Rent Credit Dispute or Controversy which is subject to arbitration as set forth herein, other than a suit or action alleging non-compliance with a final and binding arbitration award rendered hereunder and other than a suit or action to vacate the arbitration award as permitted by Laws.

     7. Costs of Arbitration. The arbitrator may award attorneys’ fees and the cost of the arbitration to the prevailing party. Except as otherwise provided herein, the cost of the arbitration shall be shared equally among the participants to the arbitration.

G-2

EXHIBIT H

INTENTIONALLY DELETED

H-1

EXHIBIT I

DEPICTION OF THE FIRST EXPANSION OPTION LAND AND SECOND EXPANSION OPTION LAND

(see attached)

I-1

EXHIBIT J

BUILDING PLANS AND CONSTRUCTION DRAWINGS

(see attached)

J-1

08/27/09

The following list of drawings will be used for the completion of the building.

Phase I Core and Shell:

Cover Page — Addendum #1 05/06/09
G-100 — Addendum #1 05/06/09
A-100 — PR #3 08/25/09
A-110 — PR #1 07/16/09
A-111 — ASI #4 06/30/09
A-200 — PR #1 07/16/09
A-201 — PR #1 07/16/09
A-320 — Issued For Construction 04/24/09
A-321 — PR #1 07/16/09
A-500 — Issued For Construction 04/24/09
A-501 — Addendum #3 05/15/09
S-101 — Addendum #3 05/15/09
S-201 — Addendum #2 05/12/09
S-202 — Addendum #3 05/15/09
S-203 — Addendum #3 05/15/09
S-301 — Addendum #3 05/15/09
S-401 — Addendum #3 05/15/09
S-501 — Addendum #3 05/15/09
S-501 detail 15 — PR #1 07/16/09
S-502 — Addendum #3 05/15/09
S-601 — Issued For Construction 04/24/09
S-701 — Addendum #3 05/15/09
S-702 — Addendum #5 06/01/09
S-703 — Issued For Construction 05/26/09
S-704 — Addendum #5 06/01/09
S-705 — Issued For Construction 05/26/09
C1.0 — Issued For Construction 04/24/09
C1.1 — Addendum #1 05/06/09
C2.0 — Addendum #3 05/15/09
C2.1 — Addendum #3 05/15/09
C3.0 — Addendum #3 05/15/09
C3.1 — Addendum #3 05/15/09
C4.0 — Addendum #3 05/15/09
C4.1 — Addendum #3 05/15/09
C5.0 — Issued For Construction 04/24/09
C5.1 — Addendum #1 05/06/09

EXHIBIT K

PERMITTED ENCUMBRANCES

A.	An easement five (5) feet wide along portion of the south property line and an aerial easement five (5) feet wide from a plane of twenty (20) feet above the ground upward, located adjacent thereto for the use of public utilities as reflected by instrument recorded under Clerk’s File No. H537616 of the Real Property Records of Harris County, Texas.
B.	½ Interest of all oil, gas and other minerals, royalties, bonuses, rentals and all other rights in connection with same, all of which are expressly excepted herefrom and not insured hereunder, as set forth in instrument recorded in Volume 2579 page 509 of the Deed records of Harris County, Texas.
C.	All oil, gas and other minerals, royalties, bonuses, rentals and all other rights in connection with same, all of which are expressly excepted herefrom and not insured hereunder, as set forth in instrument filed under Harris County Clerk’s File No. 20060169567.
D.	Boundary Line and monument agreement as set forth in instrument recorded under Clerk’s File No. J077627 of the Real Property Records of Harris County, Texas.
E.	Right-of-way dedications, easements, restrictions and other encumbrances set forth in that certain Subdivision Plat recorded under Harris County Clerk’s File No. 20090190246.

K-1

EX-10.37

Exhibit 10.37

September 9, 2009

Silicon Valley Bank
301 Carlson Parkway, Suite 255
Minnetonka, MN 55305

     Re: Cardiovascular Systems, Inc.

Gentlemen:

     Reference is made to the Loan and Security Agreement between us dated September 12, 2008 (as amended from time to time, the “Loan Agreement”). (Capitalized terms used in this Agreement, which are not defined, shall have the meanings set forth in the Loan Agreement. The Loan Agreement and all other present and future documents and agreements relating thereto are collectively referred to herein as the “Loan Documents”.)

     Reference is also made to the Subordination Agreement (the “Subordination Agreement”), of substantially even date, between Pearland Economic Development Corporation (“Pearland”) and Bank, and consented to by the undersigned, and to the Consent to Removal of Personal Property (the “Landlord Consent”), of substantially even date, between Pearland and Bank, and consented to by the undersigned, with respect to the undersigned’s location in Pearland, Texas (the “Premises”).

     The undersigned hereby agrees to promptly give Bank written notice if Pearland ever ceases to be the owner of, or the undersigned’s landlord with respect to, the Premises. If Pearland ever ceases to be the owner of, or the undersigned’s landlord with respect to, the Premises, or if the Subordination Agreement is ever terminated, the undersigned shall promptly provide the Bank with replacement landlord consents reasonably satisfactory to the Bank; provided, however, that the undersigned shall have no obligation to provide a replacement landlord consent if the undersigned establishes to the reasonable satisfaction of the Bank that the Landlord Consent is binding upon the owner or landlord (as the case may be) of the Premises. In addition, the undersigned acknowledges and agrees that (1) a notice from Pearland to Bank, or a notice from Pearland to the undersigned, that a default has occurred under the “Jobs Agreement” (as defined in the Subordination Agreement) shall constitute an Event of Default under the Loan Agreement unless within 30 days thereafter Bank receives written notice from Pearland that all defaults under the Jobs Agreement have been cured or waived, and (2) a notice to Bank pursuant to the Landlord Consent that Borrower has vacated the “Real Property” (as defined in the Landlord Consent) and that the “Exercise Period” (as defined in the Landlord Consent) is commencing shall constitute an Event of Default under the Loan Agreement if any “Collateral” (as defined in the Landlord Consent) remains on the Real Property.

     This letter agreement and the other written agreements and documents between us set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, oral representations, oral agreements and oral understandings between the parties with respect to the subject matter hereof. Except as herein expressly modified the Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed.

     This letter agreement may not be modified or amended, nor may any rights hereunder be waived, except in a writing signed by the parties hereto. In the event of any litigation between the parties based upon, arising out of, or in any way relating to this letter agreement, the

Silicon Valley Bank
Page Two

prevailing party shall be entitled to recover all of his costs and expenses (including without limitation attorneys’ fees) from the non-prevailing party. This letter agreement is being entered into, and shall be governed by the laws of the State of California. This letter agreement is part of the Loan Agreement and the terms thereof are incorporated herein by reference. This letter agreement may be executed and delivered by exchanging original signed counterparts, or signed counterparts by facsimile, or a combination of the foregoing, and this letter agreement shall be fully effective if so executed and delivered.

Sincerely yours, CARDIOVASCULAR SYSTEMS, INC.
By	/s/ James E. Flaherty
Title	CAO

Accepted and agreed:

SILICON VALLEY BANK

By	/s/ Adam Glick
Title	Relationship Manager

EX-14.1

Exhibit 14.1

CODE OF ETHICS AND BUSINESS CONDUCT

To Our Employees, Officers, Consultants and Directors:

Ethical business practices provide a critical foundation for our success and protect our reputation in the industry and community. Integrity in the manner in which we manage and operate Cardiovascular Systems, Inc. (“CSI” or the “Company”) is a key element in our corporate culture. We place a high value on honesty, fair dealing and ethical business practice.

The following Code of Ethics and Business Conduct (Code) is designed to help you understand what CSI expects of its employees, officers, consultants and directors (Representatives). It does not cover every ethical issue, but the basics are here to help your general understanding. For Representatives, compliance with the Code is a condition of employment. This Code supplements and does not replace or modify the Company’s other policies or procedures, including provisions of CSI’s current employee handbook(s) and other statements of policy or procedure issued from time to time. This Code is also supplemented by other subsidiary policies, such as “CSI’s Standard Operating Procedures For Interactions With Health Care Professionals (SOP)”, that has been adopted and will be amended by the Company from time to time to reflect the laws, regulations and mores influencing current Company business practices.

Ethical behavior is everyone’s responsibility. You must show that responsibility by:

• Knowing and complying with the requirements and expectations that applies to your job, which includes following this Code

• Promptly reporting suspected violations of the law or the Code.

• Cooperating with any investigation of a potential ethics or business conduct violation.

• Seeking assistance when you have questions about CSI’s Code or when faced with a challenging ethical situation.

• Never acting unethically or dishonestly even if directed by another person to do so.

• Never retaliate against an individual because that individual has reported a suspected violation of the Code.

If a potential course of action seems questionable, please seek guidance from your supervisor or our Executive Vice President Robert J. Thatcher. We encourage open communications regarding the possible violation of CSI’s Code.

TABLE OF CONTENTS

Compliance with Laws and CSI Code of Conduct	3
Accuracy of Company Records	3
Securities Trading Policies	4
Contact with Government Officials	4
Conflicts of Interest	5
Political Contributions and Related Policies	6
Business Courtesies and Gratuities	6
Company Opportunities	7
Intellectual Property and Confidential Information	8
Protection and Proper Use of Company Assets	8
Fair Dealing with Competitors, Customers and Suppliers	8
Personal Behavior in the Workplace	9
Accountability for Adherence to the Code	9
Reporting Any Suspected Illegal or Unethical Behavior	9
Public Disclosure of Code and Waivers	10
Coordination with Other CSI Policies	10
Monitoring	11
Certificate of Compliance	12

Compliance with Laws and CSI Code of Conduct

All CSI Representatives are expected and directed to comply with all laws and CSI’s Code of Ethics and Business Conduct.

Each Representative has an obligation to behave according to ethical standards that comply with CSI’s policy, and the letter and spirit of applicable laws, rules and regulations. It is everyone’s responsibility to know and understand legal and policy requirements as they apply to his or her Company responsibilities.

Representatives should promptly report all known or suspected violations of applicable law or CSI’s Code to his or her supervisor or Robert J. Thatcher, Executive Vice President. Or, as an alternative, he or she may anonymously contact Brent Blackey, our Chairman of the Audit Committee, by email at brent.blackey@holidaycompanies.com, or Robert Ranum, our Legal Counsel, by email at rranum@fredlaw.com, in order to report suspected violations or incidents that he or she believes do not meet CSI standards.

Accuracy of Company Records

Each officer and employee must help maintain the integrity of CSI’s financial and other records.

Management, directors, audit committee members, shareholders, creditors, governmental entities and others depend on CSI’s business records for reliable and accurate information. CSI’s books, records, accounts and financial statements must appropriately and accurately reflect CSI’s transactions and conform to applicable legal requirements and CSI’s system of internal controls. CSI is committed to full, fair, accurate, timely and understandable disclosure in all reports filed with the SEC and in other public communications, and each person subject to this Code is required to provide truthful, complete and timely information in support of this commitment.

There is no excuse for participating in the creation of or not reporting a deliberately false or misleading CSI record. In addition, an employee, officer or director must not destroy, alter, falsify or cover up documents with the intent to impede or obstruct any investigation of suspected wrongdoing.

Representatives must not participate in any misstatement of CSI’s accounts, and they must avoid improper influence on the conduct of an audit. No circumstances justify the maintenance of “off-the-books” accounts. All arrangements or requisition contracts under which funds are disbursed shall accurately state the purposes for which these funds are paid and shall not be misleading.

Business records and communications often become public and you are expected to avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of individuals or companies that could be misunderstood. This obligation applies in any communication, including, but not limited to e-mail, internal memoranda and formal reports. Records are expected to be retained or destroyed according to CSI’s record retention policies. In the event of litigation or governmental investigation you are expected to consult CSI’s legal counsel concerning the records you hold.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

3

Securities Trading Policies

Never trade securities on the basis of confidential information acquired in the course of your CSI duties or while you are at the workplace.

Representatives who have material information about the Company that has not been released to the public may not disclose the information to others or use that information for securities trading purposes or any other purpose except to conduct Company business. Such insider information may relate to, among other things, strategies, plans of CSI, new products or processes, mergers, acquisitions or dispositions of businesses or securities, problems facing the Company, sales, profitability, negotiations relating to significant contracts or business relationships, significant litigation or financial information.

If any information is of the type that a reasonable investor would consider important in reaching an investment decision, the Company Representative who possesses such information must not buy or sell Company securities, nor provide the information to others, until such information becomes public. Use of material, non-public information in the above manner is not only illegal, but also unethical. Representatives who directly or indirectly involve themselves in illegal insider trading will be subject to immediate termination by the Company. In order to assist the Company in its efforts to ensure compliance with laws against insider trading, the Company has adopted a separate policy “CONFIDENTIAL INFORMATION AND SECURITITES TRADING BY CARDIOVASCULAR SYSTEMS, INC. PERSONNEL” (Securities Trading) that goes into more detail regarding this matter and also includes a requirement that all Representatives certify that they have read and understand this separate Securities Trading policy.

Any Representative that have questions regarding this policy, please contact our Chief Financial Officer:

Larry Betterley
651-259-2080
lbetterley@csi360.com

Contact with Government Officials

CSI complies with all applicable laws, rules and regulations relating to lobbying or attempting to influence government officials.

Bribery, kickbacks or other improper or illegal payments have no place in CSI’s business. In addition, information provided to governments must be accurate and interactions with government officials must be honest and ethical. All activities that might constitute lobbying or attempts to influence government officials must first be reviewed with and approved by legal counsel.

Before doing business with foreign, national, state or local government, a Representative must know the applicable rules. The Company strictly prohibits making illegal payments to government officials of any country. The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. Additionally, a number of U.S. laws and regulations address when U.S. government personnel may or may not accept business gratuities. In addition to violating Company’s policies, the promise, offer, or delivery of a gift, favor or other gratuity to a government official or

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

4

employee in violation of these rules could constitute a criminal offense. A Representative, who is in doubt, must not make the mistake of interpreting the rules by him or herself. Such a Representative must discuss the matter with his or her supervisor, Chief Administrative Officer or other management of the Company.

Conflicts of Interest

Each Representative must avoid any situation in which his or her personal interests conflict with or interfere with CSI’s interests.

Each Representative owes CSI a duty of loyalty. Representatives must make business decisions solely in the best interests of CSI. Conflicts may arise when a Representative receives improper personal benefits as a result of the person’s position with the Company or gains personal enrichment through access to confidential information. A conflict situation can also arise when a Representative takes actions or has interests that may make it difficult to perform his or her CSI work objectively and effectively. For that reason, all Representatives must exercise great care not to allow their personal interests to potentially conflict with CSI’s interests. Each Representative shall act with honesty and integrity, avoiding actual or apparent conflicts of interest between personal and professional relationships.

CSI Representatives are generally free to engage in outside activities of their choice. It is important, however, that such activities do not adversely affect CSI’s business, involve misuse of CSI position or resources, divert for personal gain any business opportunity from which CSI may profit, or constitute a potential source of discredit to the CSI name. The following is a non-exhaustive list of examples of prohibited conflicts of interest for Representatives of CSI:

• Consulting with or employment in any capacity with a competitor, supplier or customer of CSI.

• Having a substantial equity, debt, or other financial interest in any competitor, supplier or customer. For competitors, substantial interest is considered to be 5% or more of that entity’s net worth.

• Having a financial interest in any transaction involving the purchase or sale by CSI of any product, material, equipment, services or property.

• Misusing CSI’s confidential or proprietary information, including the unauthorized disclosure or use of such information.

• Where an employee receives gifts or other benefits from a supplier.

• Using materials, equipment or other assets of CSI for any unauthorized or undisclosed purpose.

• Receiving loans or guarantees of obligations from the Company without Board of Director authorization.

Representatives also owe CSI a duty of loyalty. The duty of loyalty mandates that the best interests of the Company and its shareholders takes precedence over any interest possessed by a Representative not shared by the shareholders generally.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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Whenever a Representative believes a situation (either existing or anticipated) involves, or may reasonably be expected to involve, a conflict of interest with the Company (or the appearance of a conflict), he or she should promptly advise the Chief Administrative Officer, a Corporate Officer, or the Chairman of the Audit Committee.

Political Contributions and Related Policies

Generally CSI’s funds or resources may not be used to make a political contribution to any political candidate or political party.

Exceptions to this basic policy are allowed only where such contributions are permitted by law and permission is granted in advance by the Company’s Chief Executive Officer, Chief Administrative Officer or Board of Directors. Company policy does not permit the use of any Company facilities or resources by Representatives for political campaigning, political fundraising or partisan political purposes. A decision by Representative to contribute any personal time, money or other resources to a political campaign or political activity must be totally voluntary.

Business Courtesies and Gratuities

CSI’s policy is not to offer or accept kickbacks or bribes, or gifts of substantial value.

CSI Representatives may only exchange non-monetary and modestly-valued gifts that promote goodwill with our business partners and do not improperly influence others. We will accept only approved and widely available discounts and do not encourage, accept or exchange gratuities or payments for providing services to others.

Business courtesies such as meals, transportation and entertainment provided to a vendor, supplier, customer or other business associations must be modest in amount and related to a legitimate business purpose (e.g., explanation or demonstration of CSI products, application of products, service capabilities, or training). Such courtesies must not violate the law, regulations, or reasonable customs of the market-place. If you have any question about whether any business courtesies, gratuities or gifts are appropriate, please contact your supervisor or other CSI management. CSI’s SOP for guidance when having interactions with Health Care Professionals or customers because there is a general prohibition on most gifts to Health Care Professionals and customer.

CSI’s Representatives having relationship with Customers and Health Care Professionals have a separate SOP for guidance as these relationships are highly regulated

Representatives must deal fairly and honestly with the Company’s customers (including potential customers and Health Care Professionals or entities in a position to recommend or influence the purchase or use of Company products) and not take actions that are prohibited by applicable law or ethical standards. The Company intends to follow its own company-established “CSI’s Standard Operating Procedures For Interactions With Health Care Professionals” (“SOP”) which are largely based upon the standards set forth by AdvaMed in its Code of Ethics on Interactions with Health Care Professionals — Revised and Restated Code of Ethics effective July 1, 2009 which is found at http://www.advamed.org. All Representatives who deal with customers and Health Care Professionals are separately required to read and understand the SOP and sign an acknowledgement related thereto.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
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The SOP is intended to provide Representatives guidance about appropriate interactions with customers and Health Care Professionals when conducting business within the United States to enable the Company to remain in compliance with the Federal Anti-kickback Statute and Stark Law. Representatives conducting business on behalf of CSI, must also comply with this SOP and these policies apply to any expenditure by CSI Representatives, regardless of whether the expenditure is reimbursed by the Company. In other words, any “personal” money given to or spent for the benefit of a CSI customer is considered money given or spent by the Company.

As used in this Code, and the Guidelines, the term “customer” means any individual or organization that purchases, recommends, uses, or prescribes products manufactured or distributed by CSI or an individual who is in a position to determine whether a CSI product is purchased, recommended, used, or prescribed. This can include physicians, nurses, office administrators, purchasing agents, within hospitals, clinical practices, HMOs, GPOs, etc.

The following general standards and principles should at all times guide our interactions with customers and Health Care Professionals:

*	CSI will encourage ethical business practices and socially responsible industry conduct, and will not use any unlawful inducement in order to sell, recommend or arrange the sale, or prescription of its products.
*	At CSI, we believe that enduring customer relationships are based on integrity and trust. We seek to gain advantage over competitors through superior products, research, engineering, manufacturing, marketing and service, never through improper business practices.
*	CSI’s relationships with customers are intended to benefit patient care and enhance the practice of medicine. Interactions should be focused on informing customers and prospective customers about products, providing scientific and educational information, and supporting medical research and education and should not, at any time, entice representatives of customers to place their own personal interests above those of the organizations they represent or the patients who will use or need the Company’s products.
*	CSI will not, directly or indirectly, offer or solicit any kind of payments or contributions for the purpose of obtaining, giving, keeping or rewarding business.

No Payments in exchange for business

Representatives may not make payments to customers or provide meals, travel expenses, entertainment, gifts, or other benefits to customers or Health Care Professionals in exchange for the customer’s agreement to purchase products or services from the Company, or as a reward for the purchase of products or services, nor may Representatives provide benefits to a customer’s friends, relatives, or organizations closely affiliated with the customer in exchange for or as a reward for such business. See CSI’s SOP for guidance when having interactions with Health Care Professionals or customers because any and all entertainment and recreation with Health Care Professionals or customers is prohibited and there is a general prohibition on most gifts.

Company Opportunities

     Do not use a Company opportunity for personal gain.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
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Representatives owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. Representatives are prohibited (without the specific consent of the Board of Directors or an appropriate committee thereof) from (1) taking for themselves personally opportunities that are discovered through the use of company property, information or their position, (2) using company property, information or their position for personal gain, or (3) competing with the Company directly or indirectly.

Intellectual Property and Confidential Information

CSI invests substantial resources in developing proprietary intellectual property and confidential information which need to be protected.

Confidential information is information that is not generally known or readily available to others. It includes non-public information that might be of value to competitors if it were disclosed. It must not be shared with others outside CSI except pursuant to approved business relationships or when required by law. Confidential information includes, but is not limited to, intellectual property and trade secrets, technical know-how, business plans and information, marketing and sales programs and information, customer and prospective customer information and lists, pricing information and policies, financial information, personnel information such as salaries, benefits and performance information and any other information which the Company deems confidential.

Every CSI Representative is obligated to protect the Company’s confidential information as well as that of its customers, suppliers and third parties who disclose information to CSI in confidence. CSI Representatives must not accept confidential information from a third party, including competitors, unless specifically authorized to do so by an authorized supervisor or officer of the Company and following an appropriate grant of rights from such third party.

Every CSI Representative must also protect the confidentiality of any patient information or records they may learn of or have access to in the course of Company business (“Patient Information”). Patient information is protected not only by the policies of the Company, but also by federal and state laws. Any patient information must be secured and protected as required by such federal and state law.

Every CSI Representative must actively protect Confidential Information and Patient Information, including by refraining from discussing sensitive matters in non-private places, limiting access to work areas, disposing of documentation in accordance with Company policies and directions, and not removing such information from the Company’s premises except as expressly authorized by the Company. Any request for Confidential Information or Patient Information, including a subpoena or any legal process, should be immediately referred to Chief Administrative Officer or a Corporate Officer.

Protection and Proper Use of Company Assets

     Our shareholders trust us to manage Company assets appropriately.

Collectively, Representatives have a responsibility for safeguarding and making proper and efficient use of the Company’s assets. Each of us has an obligation to prevent the Company’s property from loss, damage, misuse, theft, embezzlement or destruction. We seek to ensure that the Company equipment, supplies and other assets are used for legitimate business purposes unless otherwise specifically authorized, and to protect all tangible and intangible Company property.

Fair Dealing with Competitors, Customers and Suppliers

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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     Respect the rights of competitors, customers and suppliers.

CSI’s success depends on building productive relationships with our customers and suppliers based on integrity, ethical behavior and mutual trust. In addition, customers have individual needs and expectations representing unique opportunities for mutual success.

The Company bases its supplier relationships on fundamental concepts of integrity, fairness, and mutual respect.

CSI strives to outperform its competition fairly and honestly. CSI seeks and develops competitive advantages through superior performance, not through unethical or illegal business practice. Each Company Representative should endeavor to deal fairly with the Company’s customers, suppliers and competitors. No one should take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other intentional unfair dealing.

Personal Behavior in the Workplace

CSI is committed to providing equal opportunity in employment and will not tolerate illegal discrimination or harassment.

CSI strives to enhance and support the diversity of its employee group. All are expected to deal with each other in an atmosphere of trust and respect in a manner consistent with CSI’s core values. Please refer to applicable portions of our Employee Handbook for guidance related to personal behavior in the workplace and all Representatives are expected to adhere the Employee Handbook.

Accountability for Adherence to the Code

Each Representative must accept responsibility for adherence to this Code. Violations of this Code may lead to serious sanctions including, for an employee, discipline up to and including immediate termination, in the sole discretion of the Company. The Company may, in addition, seek civil recourse against Representative and/or refer alleged criminal misconduct to law enforcement agencies.

Reporting Any Suspected Illegal or Unethical Behavior

     CSI maintains an open door policy and an anonymous telephone hotline for Representatives to raise concerns and to encourage the reporting of suspected violations of law or the Code of Ethics and Business Conduct without fear of retribution or retaliation.

If you have questions about an ethical situation, you are encouraged to talk with your supervisor or with a Corporate Officer such as the Chief Administrative Officer about any behavior you believe may be illegal or unethical. You will be assured confidentiality, to the limit of the law. If you do not feel it is appropriate to discuss the issue with these persons, CSI has established a hotline so that you can report concerns or potential violations anonymously (see below). Anonymous callers should supply detailed information to address the concern.

It is against the Company’s policy to retaliate against any Representative for good faith reporting of violation of this Code. If you feel you have been retaliated against for raising your good faith reporting, you should immediately contact your supervisor, the Chief Administrative Officer or the Compliance Hotline.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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COMPLIANCE HOTLINE

If you believe someone may be unintentionally or intentionally violating the law or the principles or standards included in the Code of Conduct document, report the known or suspected violations by contacting:

David L. Martin
Chief Executive Officer
651.259.1605
dmartin@csi360.com

Robert J. Thatcher
Executive Vice President
651.259.1630
rthatcher@csi360.com

If you would like to anonymously notify the board of directors of a suspected violation, contact the Chairman of the Audit Committee or CSI’s Legal Counsel in the following manner:

Brent G. Blackey
Chairman of the Audit Committee
952.832.8635
brent.blackey@holidaycompanies.com

Robert K. Ranum
Legal Counsel
Fredrikson & Byron, P.A.
612.492.7067
rranum@fredlaw.com

Each report of a known or suspected violation will be promptly and thoroughly investigated. If a violation has occurred, CSI will take appropriate actions to prevent similar violations. The Company strictly prohibits retaliation against Representatives for reports made in good faith. Anyone who retaliates against an employee(s) for reporting actual or suspected violations will be subject to appropriate disciplinary action up to, and including, termination.

Public Disclosure of Code and Waivers

The existence and content of this Code of Ethics and Business Conduct is disclosed to shareholders and made available as part of the Company’s filings with the SEC and is also on the Company’s website. It is expected that waivers of this Code rarely, if ever, would be acceptable. Any waiver of a provision of the Code for an executive officers or directors may granted only by the Board of Directors, with only the independent members voting, or an appropriate Board Committee consisting of independent directors, and such waiver must be promptly disclosed to shareholders.

Coordination with Other CSI Policies

The provisions of this Code of Conduct are in addition to, and do not modify, replace or supersede CSI’s other policies or procedures including, but not limited to, those policies and procedures set forth in any employee handbook, or CSI’s other statements of policy or procedure, whether written or oral.

Additionally, this Code of Conduct is not intended to be and does not constitute a contract of employment between CSI and its Representatives. If you are an employee and do not have an Employment

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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Agreement with CSI, you are an employee at-will. This means that you have the option of resigning from your employment at any time, for any reason or no reason, with or without prior notice. Conversely, CSI has same option to terminate your employment at any time, for any reason or no reason, with or without prior notice.

Monitoring

     CSI will periodically reaffirm its commitment to compliance with the Code of Ethics and Business Conduct.

CSI intends to conduct periodic training sessions regarding the Code. In addition, CSI will periodically distribute copies of the Code and the Certification of Compliance card to each Representatives to remind such persons of the contents of the Code as well as to reestablish their commitment to compliance with it.

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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Please make sure you return your
Certificate of Compliance

CERTIFICATE OF COMPLIANCE

     This Certificate must be read and signed by all directors, officers, employees and contractors (Representatives).

     I certify that I have received, read and understood CSI’s Code of Ethics and Business Conduct. I understand what types of conduct violate these policies. I agree to comply with the terms of the Code and understand that if I am an employee, violation of these terms may result in discipline up to and including immediate termination of employment in the discretion of CSI.

Representative’s Signature
Date	Location
Printed Name

Return to:

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN 55112
Attn: Robert J. Thatcher

Telephone: 651.259.1630

NOT TO BE DISCLOSED OR REPRODUCED
WITHOUT WRITTEN PERMISSION OF CSI
Policy Rev 1

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-135954, 333-158755, 333-158987, 333-160609 and 333-160610) of Cardiovascular Systems, Inc. of our report dated September 28, 2009 relating to the consolidated financial statements, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 28, 2009

EX-23.2

Exhibit 23.2

ValueKnowledge LLC
Business Valuations/Seeking Fairness
15 Spinning Wheel Road, Suite 210, Hinsdale, IL 60521
tel: 630-655-8411 fax: 630-455-9078
www.valueknowledge.com

September 28, 2009

Cardiovascular Systems, Inc.
651 Campus Dr.
St. Paul, MN 55112

Re: Consent of ValueKnowledge LLC

Ladies and Gentlemen:

We hereby consent to the references to our firm’s name for the purpose of the incorporation by reference of such information from the Cardiovascular Systems, Inc. Form 10-K for the fiscal year ended June 30, 2009 into the Registration Statements of Cardiovascular Systems, Inc. on Forms S-8 (File Nos. 333-158987, 333-158755, 333-135954, 333-160609, and 333-160610).

Sincerely,

ValueKnowledge LLC

EX-31.1

EXHIBIT 31.1

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, David L. Martin, certify that:

1.	I have reviewed this report on Form 10-K of Cardiovascular Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 28, 2009

/s/ David L. Martin  

David L. Martin 

President and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Laurence L. Betterley, certify that:

1.	I have reviewed this report on Form 10-K of Cardiovascular Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 28, 2009

/s/ Laurence L. Betterley  

Laurence L. Betterley 

Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the filing of the Annual Report on Form 10-K for the year ended June 30, 2009 (the “Report)m by Cardiovascular Systems, Inc. (the “Company”), I, David L. Martin, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

     1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 28, 2009

/s/ David L. Martin  

David L. Martin 

President and Chief Executive Officer 

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the filing of the Annual Report on Form 10-K for the year ended June 30, 2009 (the “Report) by Cardiovascular Systems, Inc. (the “Company”), I, Laurence L. Betterley, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

     1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 28, 2009

/s/ Laurence L. Betterley  

Laurence L. Betterley 

Chief Financial Officer