10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

Commission File No. 000-52082

CARDIOVASCULAR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	No. 41-1698056
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

651 Campus Drive
St. Paul, Minnesota 55112-3495
(Address of Principal Executive Offices)
Registrant’s telephone number (651) 259-1600

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 (§232.405 of this chapter) 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 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
(Do not check if a smaller reporting company) Smaller reporting company þ

     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

The number of shares outstanding of the registrant’s common stock as of May 14, 2010 was: Common Stock, $0.001 par value per share, 15,002,150 shares.

Cardiovascular Systems, Inc.
Consolidated Financial Statements
Table of Contents

	PAGE
PART I. FINANCIAL INFORMATION		3
ITEM 1. Consolidated Financial Statements (unaudited)		3
Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009		3
Consolidated Statements of Operations for the three and nine months ended March 31, 2010 and 2009		4
Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009		5
Notes to Consolidated Financial Statements		6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		23
ITEM 4. Controls and Procedures		23
PART II. OTHER INFORMATION		24
ITEM 1. Legal Proceedings		24
ITEM 1A. Risk Factors		24
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
ITEM 3. Defaults Upon Senior Securities		24
ITEM 5. Other Information		24
ITEM 6. Exhibits		24
Signatures		25
Exhibit Index		26
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cardiovascular Systems, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, except per share and share amounts)
(Unaudited)

	March 31,			June 30,
	2010			2009
ASSETS
Current assets
Cash and cash equivalents	$	23,552		$	33,411
Accounts receivable, net		9,801			8,474
Inventories		4,562			3,369
Auction rate securities put option		2,800			—
Investments		16,375			—
Prepaid expenses and other current assets		991			798
Total current assets		58,081			46,052
Auction rate securities put option		—			2,800
Investments		—			20,000
Property and equipment, net		1,959			1,719
Patents, net		1,704			1,363
Other assets		216			436
Total assets	$	61,960		$	72,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	20,601		$	25,823
Accounts payable		4,943			4,751
Accrued expenses		6,335			5,600
Total current liabilities		31,879			36,174
Long-term liabilities
Long-term debt, net of current maturities		8,183			4,379
Grant payable		2,963			—
Lease obligation and other liabilities		659			1,485
Total long-term liabilities		11,805			5,864
Total liabilities		43,684			42,038
Commitments and contingencies
Stockholders’ equity
Common stock, $0.001 par value; authorized 100,000,000 common shares at March 31, 2010 and June 30, 2009; issued and outstanding 14,864,089 at March 31, 2010 and 14,113,904 at June 30, 2009, respectively		15			14
Additional paid in capital		153,975			146,455
Common stock warrants		11,208			11,282
Accumulated deficit		(146,922	)		(127,419	)
Total stockholders’ equity		18,276			30,332
Total liabilities and stockholders’ equity	$	61,960		$	72,370

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

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Cardiovascular Systems, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share and share amounts)
(Unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Revenues	$	16,519		$	15,115		$	46,814		$	40,766
Cost of goods sold		3,847			3,920			10,850			11,954
Gross profit		12,672			11,195			35,964			28,812
Expenses
Selling, general and administrative		16,382			14,253			47,150			45,626
Research and development		2,459			3,428			7,421			11,851
Total expenses		18,841			17,681			54,571			57,477
Loss from operations		(6,169	)		(6,486	)		(18,607	)		(28,665	)
Other (expense) income
Interest expense		(341	)		(971	)		(1,075	)		(1,831	)
Interest income		58			171			245			3,180
Decretion of redeemable convertible preferred stock warrants		—			3,157			—			2,991
Gain (impairment) on investments		—			300			—			(1,933	)
State income taxes		(66	)		—			(66	)		—
Total other (expense) income		(349	)		2,657			(896	)		2,407
Net loss	$	(6,518	)	$	(3,829	)	$	(19,503	)	$	(26,258	)
Decretion of redeemable convertible preferred stock		—			25,778			—			22,781
Net (loss) income available to common shareholders	$	(6,518	)	$	21,949		$	(19,503	)	$	(3,477	)
Net (loss) income per common share:
Basic	$	(0.44	)	$	2.63		$	(1.33	)	$	(0.57	)
Diluted	$	(0.44	)	$	(0.32	)	$	(1.33	)	$	(0.57	)
Weighted average common shares used in computation:
Basic		14,878,859			8,343,660			14,681,014			6,096,523
Diluted		14,878,859			12,048,581			14,681,014			6,096,523

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

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Cardiovascular Systems, Inc.
Consolidated Statements Cash Flows
(Dollars in thousands)
(Unaudited)

	Nine Months Ended
	March 31,
	2010			2009
Cash flows from operating activities
Net loss	$	(19,503	)	$	(26,258	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization of property and equipment		399			305
Provision for doubtful accounts		77			95
Amortization of patents		36			27
Decretion of redeemable convertible preferred stock warrants		—			(2,991	)
Amortization of debt discount		216			1,023
Stock-based compensation		6,460			4,931
Impairment on Investments		—			1,933
Gain on auction rate securities put option		—			(2,700	)
Changes in assets and liabilities
Accounts receivable		(1,404	)		(3,290	)
Inventories		(1,193	)		1,039
Prepaid expenses and other assets		77			1,938
Accounts payable		192			(1,446	)
Accrued expenses and other liabilities		2,872			(1,042	)
Net cash used in operations		(11,771	)		(26,436	)
Cash flows from investing activities
Expenditures for property and equipment		(639	)		(750	)
Sales of investments		3,625			—
Costs incurred in connection with patents		(377	)		(312	)
Cash acquired in Replidyne merger, net of transaction costs paid		—			37,805
Net cash provided by investing activities		2,609			36,743
Cash flows from financing activities
Proceeds from employee stock purchase plan		702			—
Payment of deferred financing costs		(50	)		—
Issuance of common stock warrants		—			1,814
Issuance of convertible preferred stock warrants		—			75
Exercise of stock options and warrants		285			502
Proceeds from long-term debt		4,411			18,031
Payments on long-term debt		(6,045	)		(480	)
Net cash (used in) provided by financing activities		(697	)		19,942
Net change in cash and cash equivalents		(9,859	)		30,249
Cash and cash equivalents
Beginning of period		33,411			7,595
End of period	$	23,552		$	37,844

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

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CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and nine months ended March 31, 2010 and 2009)
(dollars in thousands, except per share and share amounts)
(unaudited)

1. Business Overview

Company Description and Merger

     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 incorporated in 1989 (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008 (the “Merger Agreement”). Pursuant to the Merger Agreement, CSI-MN continued after the merger as the surviving corporation and a wholly owned subsidiary of Replidyne. At the effective time of the merger, Replidyne, Inc. 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° PAD system in treating peripheral arterial disease. Prior to the merger, Replidyne was a biopharmaceutical company focused on discovering, developing, in-licensing and commercializing innovative anti-infective products.

2. Summary of Significant Accounting Policies

Interim Financial Statements

     The Company has prepared the unaudited interim consolidated financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. The year end consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures as required by accounting principles generally accepted in the United States of America. These interim consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position, the results of its operations and its cash flows for the interim periods. These interim consolidated financial statements should be read in conjunction with the consolidated annual financial statements and the notes thereto included in the Form 10-K filed by the Company with the SEC on September 28, 2009. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

Fair Value of Financial Instruments

     Effective July 1, 2008, the Company adopted fair value guidance issued by the FASB, which provides a framework for measuring fair value under Generally Accepted Accounting Principles and expands disclosures about fair value measurements. In February 2008 the FASB provided a one-year deferral on the effective date of the guidance for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at least annually. This guidance did not have a material impact on the Company’s financial position or consolidated results of operations for the three months ended March 31, 2010.

     The fair value guidance classifies inputs into the following hierarchy:

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

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

     Level 3 Inputs — unobservable inputs

     The following table sets forth the fair value of the Company’s auction rate securities that were measured on a recurring basis as of March 31, 2010. Assets are measured on a recurring basis if they are remeasured at least annually:

	Level 3
				Auction Rate
	Trading			Securities Put
	Securities			Option
Balance at June 30, 2009	$	20,000		$	2,800
Sale of investments		(3,625	)		—
Balance at March 31, 2010	$	16,375		$	2,800

     As of March 31, 2010, 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.

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 FASB guidance that 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.

Recent Accounting Pronouncements

     In January 2010, the FASB issued further guidance regarding additional disclosures relating to fair value of transfers in and out of Levels 1 and 2 and for activity in Level 3 and clarifies certain other existing disclosure requirements. This guidance had no impact on the Company’s financial position, results of operations or cash flows.

     In October 2009, the FASB issued guidance providing principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact of adopting this pronouncement.

3. Selected Consolidated Financial Statement Information

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.

7

     At March 31, 2010 and June 30, 2009, respectively, inventories were comprised of the following:

	March 31,		June 30,
	2010		2009
Inventories
Raw materials	$	1,501	$	1,536
Work in process		246		348
Finished goods		2,815		1,485
	$	4,562	$	3,369

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. 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. 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 section of the balance sheet. Realized gains and losses were accounted for on the specific identification method. After accepting the UBS offer, the Company recorded ARS as trading investments and unrealized gains and losses are included in earnings. During the nine months ended March 31, 2010, issuers of the Company’s ARS have redeemed $3,625 at par value. At March 31, 2010, the Company recorded $16,375 as the fair value of the ARS. The ARS are classified as a current asset at March 31, 2010, due to the expectation the Company will sell its ARS to UBS AG under the Rights prior to April 1, 2011.

     The Rights represent a firm agreement in accordance with FASB guidance, 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 March 31, 2010, the Company recorded $2,800 as the fair value of the put option asset. 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 Company has elected to measure the put option at fair value, 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 are included in earnings.

     In determining fair value of its ARS, the Company utilized various valuation methods and considered, among other factors, estimates of present value of the ARS based upon expected cash flows, the likelihood and potential timing of issuers of the ARS 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.

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4. Debt

Loan and Security Agreement with Silicon Valley Bank

     On March 29, 2010, the Company entered into an amended and restated loan and security agreement with Silicon Valley Bank. The agreement includes a $10,000 term loan and a $15,000 line of credit. The terms of each of these loans are as follows:

• The $10,000 term loan has a fixed interest rate of 9.0% and a final payment amount equal to 1.0% 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 3.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. In connection with entering into the agreement, the Company amended a warrant previously granted to Silicon Valley Bank. The warrants provide an option to purchase 8,493 shares of common stock at an exercise price of $5.48 per share. This warrant is immediately exercisable and expires ten years after the date of amendment. The balance outstanding on the term loan at March 31, 2010 was $10,000.

• The $15,000 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 6.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on (a) 80% of eligible domestic receivables, plus (b) the lesser of 40% of eligible inventory or 25% of eligible domestic receivables or $2,500, minus (c) to the extent in effect, certain loan reserves as defined in the agreement. 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, and cancellation fees. There was no balance outstanding on the line of credit at March 31, 2010. The agreement provides that initially 50% of the outstanding principal balance of the $10,000 term loan reduces available borrowings under the line of credit. Upon the achievement of certain financial covenants, the amount reducing available borrowings will be reduced to zero. There was not an outstanding balance on the line of credit at March 31, 2010.

     Prior to the amendment and restatement, the Company’s loan and security agreement with Silicon Valley Bank included a $3,000 term loan, a $10,000 accounts receivable line of credit, and a $5,500 term loan that reduced the availability of funds on the accounts receivable line of credit.

     Borrowings from Silicon Valley Bank are secured by all of the Company’s assets, other than the Company’s auction rate securities. The borrowings are subject to prepayment penalties and financial covenants, including maintaining certain liquidity and fixed charge coverage ratios, and certain three-month EBITDA targets. 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 the Company’s financial status or otherwise. Any non-compliance by the Company under the terms of 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.

Loan Payable

     At March 31, 2010 and June 30, 2009, the Company maintained a margin loan with UBS Bank USA with maximum available borrowings, including interest, equal to the par value of auction rate securities held. At March 31, 2010 and June 30, 2009, maximum available borrowings were $19,325 and $22,950, respectively. This maximum borrowing amount is not set forth in the written agreement for the loan and 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 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, 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 but are not included in the written loan agreement and are therefore subject to change. As of March 31, 2010 and June 30, 2009, the margin requirements include maximum borrowings, including interest, of $19,325 and $22,950, respectively. 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. The outstanding balance on this loan at March 31, 2010 was $19,232 and is included in debt maturities during the three months ending June 30, 2010.

9

     As of March 31, 2010, debt maturities (including debt discount) were as follows:

Three months ending June 30, 2010	$	19,196
Fiscal 2011		2,302
Fiscal 2012		3,811
Fiscal 2013		3,475
Total	$	28,784
Less: Current Maturities		(20,601	)
Long-term debt	$	8,183

5. Stock Options and Restricted Stock Awards

     The Company has a 2007 Equity Incentive Plan (the “2007 Plan”), 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 the Company also granted options and restricted stock awards 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 through 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. 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 determined by the closing price of the Company’s common stock at the date of grant. 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.

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

     Stock option activity for the nine months ended March 31, 2010 is as follows:

				Weighted
	Number of			Average
	Options(a)			Exercise Price
Options outstanding at June 30, 2009		3,707,882		$	10.43
Options granted		12,940		$	5.01
Options exercised		(37,313	)	$	8.36
Options forfeited or expired		(154,088	)	$	8.92
Options outstanding at March 31, 2010		3,529,421		$	10.46

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(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.

     Options typically vest over two to 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 fair value of each restricted stock award is 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 for the nine months ended March 31, 2010 is as follows:

				Weighted
	Number of			Average Fair
	Shares			Value
Restricted stock awards outstanding at June 30, 2009		744,377		$	10.81
Restricted stock awards granted		693,822		$	7.37
Restricted stock awards forfeited		(157,972	)	$	8.54
Restricted stock awards vested		(173,427	)	$	6.81
Restricted stock awards outstanding at March 31, 2010		1,106,800		$	8.38

6. Texas Production Facility

     Effective on September 9, 2009, the Company entered into the Build-To-Suit Lease Agreement (the “Lease Agreement”) with the Pearland Economic Development Corporation (the “PEDC”) for the construction and lease of an approximately 46,000 square foot production facility located in Pearland, Texas (the “Facility”). The Facility will primarily serve as an additional manufacturing location for the Company.

     The Lease Agreement provides that the PEDC will lease the Facility and the land immediately surrounding the Facility (the “Leased Premises”) to the Company for an initial term of ten years, beginning the later of the date of “Substantial Completion” of the project (as that term is defined in the Lease Agreement) or April 1, 2010 (the “Commencement Date”). Annual fixed rent payments are $414 for each of the first five years of the initial term and $460 for each of the last five years of the initial term. Rent is payable in monthly installments beginning thirty days after the Commencement Date. The Company will also be responsible for paying the future taxes and operating expenses on the Leased Premises. The lease has been classified as an operating lease for financial statement purposes. Upon an event of default under the Lease Agreement, the Company will be liable for the difference between the balance of the rent owed for the remainder of the term and the fair market rental value of the Leased Premises for such period.

     The Company has the option to renew the lease for up to two additional periods of five years each. If the Company elects to exercise one or both of these options, the rent for such extended terms will be set at the prevailing market rental rates at such times, as determined in the Lease Agreement. After the Commencement Date and until shortly before the tenth anniversary of the Commencement Date, the Company will have the option to purchase all, but not less than all, of the Leased Premises at fair market value, as determined in the Lease Agreement. Further, within six years of the Commencement Date and subject to certain conditions, the Company has options to cause the PEDC to make two additions or expansions to the Facility of a minimum of 34,000 and 45,000 square feet each.

     The Company and the PEDC previously entered into a Corporate Job Creation Agreement (the “Job Creation Agreement”), dated June 17, 2009 (the “Effective Date”). The Job Creation Agreement provided the Company with $2,975 in net cash incentive funds, which the Company received on or about September 9, 2009. The Company has recognized the net cash incentive funds received of $2,975 as a long term liability on the balance sheet. The liability will be reduced over a 60 month period as expenditures are incurred using a systematic methodology that is intended to reduce the majority of the liability in the first 24 months of the agreement. The Company believes it will be able to comply with the conditions specified in the grant agreement. The PEDC will provide the Company with an additional $1,700 of net cash incentive funds (collectively with the $2,975 that the Company previously received, the “Cash Incentives”), in the following amounts and upon achievement of the following milestones:

• $1,020, upon the hiring of the 75^th full-time employee at the Facility; and

• $680, upon the hiring of the 125^th full-time employee at the Facility.

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     In order to retain all of the Cash Incentives, beginning one year and 90 days after the Commencement Date, the Company must not have fewer than 25 full-time employees at the Facility for more than 120 consecutive days. Failure to meet this requirement will result in an obligation to make reimbursement payments to the PEDC in the following percentages during the following time periods:

• 100% of all the Cash Incentives received, if the failure occurs within 24 months from the Effective Date;

• 60% of all the Cash Incentives received, if the failure occurs between 24 and 36 months from the Effective Date;

• 40% of all the Cash Incentives received, if the failure occurs between 36 and 48 months from the Effective Date; and

• 20% of all the Cash Incentives received, if the failure occurs between 48 and 60 months from the Effective Date.

     The Company will not have any reimbursement requirements for the Cash Incentives after 60 months from the Effective Date.

     The Job Creation Agreement also provides the Company with a net $1,275 award, of which $510 will be funded by a grant from the State of Texas for which the Company has applied through the Texas Enterprise Fund program (the “TEF Award”). The PEDC has committed, by resolution, to guarantee the TEF Award and will make payment to the Company for the remaining $765 in three installments. The grant from the State of Texas for the TEF Award is subject to reimbursement if the Company fails to meet certain job creation targets, as agreed to by the Company and the State of Texas.

7. Commitment and Contingencies

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 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.

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8. Earnings Per Share

Basic

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Numerator
Net loss	$	(6,518	)	$	(3,829	)	$	(19,503	)	$	(26,258	)
Plus: Accretion of redeemable convertible preferred stock (a)		—			25,778			—			22,781
Net (loss) income available to common shareholders	$	(6,518	)	$	21,949		$	(19,503	)	$	(3,477	)
Denominator
Weighted average common shares outstanding		14,878,859			8,343,660			14,681,014			6,096,523
Net loss per common share — basic	$	(0.44	)	$	2.63		$	(1.33	)	$	(0.57	)

(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.

Diluted

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Numerator
Net (loss) income available to common stockholders	$	(6,518	)	$	21,949		$	(19,503	)	$	(3,477	)
Less: Decretion of redeemable convertible preferred stock(a)		—			(25,778	)		—			—
Net loss available in diluted calculation	$	(6,517	)	$	(3,829	)	$	(19,503	)	$	(3,477	)
Denominator
Weighted average common shares — basic		14,878,859			8,343,660			14,681,014			6,096,523
Effect of dilutive stock options and warrants (b)(c)		—			—			—			—
Conversion of redeemable convertible preferred stock(a)		—			3,704,921			—			—
Weighted average common shares outstanding — diluted		14,878,859			12,048,581			14,681,014			6,096,523
Net loss per common share — diluted	$	(0.44	)	$	(0.32	)	$	(1.33	)	$	(0.57	)

(a)	The calculation for decretion 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. These amounts have been excluded from the calculation for the nine months ended March 31, 2009 because they are anti-dilutive.
(b)	At March 31, 2010 and 2009, 3,089,366 and 3,120,330 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 March 31, 2010 and 2009, 3,529,421 and 3,963,579 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.

9. Subsequent Event

     On April 14, 2010, the Company entered into a loan and security agreement with Partners for Growth III, L.P. (PFG). The agreement provides that PFG will make loans to the Company up to $4,000. The agreement has a five-year maturity until April 14, 2015. The loans bear interest at a floating per annum rate equal to 2.75% above Silicon Valley Bank’s prime rate, and such interest is

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payable monthly. The principal balance of and any accrued and unpaid interest on any notes are due on the maturity date and may not be prepaid by the Company at any time in whole or in part.

     Under the agreement, PFG provided the Company with an initial loan of $1,500 on April 15, 2010. In addition, for a period of one year until April 14, 2011, the Company may request additional proceeds from time to time, in minimum increments of $250, up to $4,000. After this period, the Company may only request additional proceeds (in increments of not less than $250) equal to the aggregate principal amount converted into the Company’s common stock through an optional conversion or mandatory conversion. At any time prior to the maturity date, PFG may at its option convert any amount into the Company’s common stock at the conversion price set forth in each note, which conversion price will be subject to adjustment upon certain events as provided in such note. The initial note has an initial conversion price of $5.43, which equaled the ten-day volume weighted average price per share of the Company’s common stock prior to the date of the agreement. The Company may also effect at any time a mandatory conversion of amounts, subject to certain terms, conditions and limitations provided in the agreement, including a requirement that the ten-day volume weighted average price of the Company’s common stock prior to the date of conversion is at least 15% greater than the conversion price.

     The loans are secured by certain of the Company’s assets including, among other things, accounts receivable, deposit accounts, inventory, equipment, general intangibles, investment property and certain other claims, rights and interests. PFG’s security interests are subject only to (a) the first security interests held by Silicon Valley Bank, except that PFG holds a first security interest in certain intellectual property, and (b) the liens of the Pearland Economic Development Corporation associated with the Company’s planned manufacturing facility in Pearland, Texas. The PFG loan and security agreement contains customary covenants limiting the Company’s ability to, among other things, incur debt or liens, make certain investments and loans, effect certain redemptions of and declare and pay certain dividends on its stock, permit or suffer certain change of control transactions, dispose of collateral, or change the nature of its business. In addition, the PFG loan and security agreement contains financial covenants requiring the Company to maintain certain liquidity and fixed charge coverage ratios, and certain three-month EBITDA targets. If the Company does not comply with the various covenants, PFG may, subject to various customary cure rights, decline to provide additional loans, require amortization of the loan over its remaining term, or require the immediate payment of all amounts outstanding under the loan and foreclose on any or all collateral, depending on which financial covenants are not maintained.

     In connection with the execution of the PFG loan and security agreement, the Company issued a warrant to PFG on April 14, 2010 which allows PFG to purchase 147,330 shares of the Company’s common stock at a price per share of $5.43, which price was based on the ten-day volume weighted average price per share of the Company’s common stock prior to the date of the agreement. The warrant vests with respect to 50% on the issue date, and thereafter, vests pro rata from time to time according to a percentage equal to (a) the additional loans actually drawn until April 14, 2011, divided by (b) $2,500. The warrant expires on the fifth anniversary of the issue date, subject to earlier expiration in accordance with the terms.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 1 of Part 1. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” discussed in our Form 10-K for the year ended June 30, 2009 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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 also intend to pursue approval of our product for coronary use.

     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 (the “Merger Agreement”). 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. Replidyne was a biopharmaceutical company focused on discovering, developing, in-licensing and commercializing anti-infective products.

     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 adjusted. As of immediately following the effective time of the merger, former CSI 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.

     CSI 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 commercial introduction of the Diamondback 360° in the United States in September 2007. We market the Diamondback 360° in the United States through a direct sales force and 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 March 31, 2010, we had an accumulated deficit of $146.9 million. We expect our losses to continue but generally decline as revenue grows from continued commercialization activities, development of additional product enhancements, accumulation of clinical data on our products, and further regulatory submissions. To date, we have financed our operations primarily through the private placement of equity securities and completion of the merger.

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

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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, and stock-based compensation 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.

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:

	Three Months Ended March 31,									Nine Months Ended March 31,
							Percent									Percent
	2010			2009			Change			2010			2009			Change
Revenues	$	16,519		$	15,115			9.3	%	$	46,814		$	40,766			14.8	%
Cost of goods sold		3,847			3,920			(1.8	)		10,850			11,954			(9.2	)
Gross profit		12,672			11,195			13.2			35,964			28,812			24.8
Expenses:
Selling, general and administrative		16,382			14,253			14.9			47,150			45,626			3.3
Research and development		2,459			3,428			(28.3	)		7,421			11,851			(37.4	)
Total expenses		18,841			17,681			6.6			54,571			57,477			(5.1	)
Loss from operations		(6,169	)		(6,486	)		(4.9	)		(18,607	)		(28,665	)		(35.1	)
Other (expense) income:
Interest expense		(341	)		(971	)		(64.9	)		(1,075	)		(1,831	)		(41.3	)
Interest income		58			171			(66.1	)		245			3,180			(92.3	)
Decretion of redeemable convertible preferred stock warrants		—			3,157			—			—			2,991			—
Gain (impairment) on investments		—			300			—			—			(1,933	)		—
Other		(66	)		—			—			(66	)		—			—
Total other (expense) income		(349	)		2,657			113.1			(896	)		2,407			137.2
Net loss		(6,518	)		(3,829	)		70.2			(19,503	)		(26,258	)		(25.7	)
Decretion of redeemable convertible preferred stock		—			25,778			—			—			22,781			—
Net income (loss) available to common shareholders	$	(6,518	)	$	21,949			129.7		$	(19,503	)	$	(3,477	)		460.8

Comparison of Three Months Ended March 31, 2010 with Three Months Ended March 31, 2009

     Revenues. Revenues increased by $1.4 million, or 9.3%, from $15.1 million for the three months ended March 31, 2009 to $16.5 million for the three months ended March 31, 2010. This increase was attributable to a $792,000, or 5.8%, increase in sales of the Diamondback 360° and a $612,000, or 43.1%, increase in sales of supplemental and other products during the three months ended March 31, 2010 compared to the three months ended March 31, 2009. Supplemental products include our Viper product line and distribution partner products, some of which have been introduced over the last year. As of March 31, 2010, we had a 151-person direct sales organization. As of March 31, 2009, we had a 119-person direct sales organization. We expect our revenue to increase as we continue to increase the number of physicians using the devices, increase the usage per physician, continue to focus on physician education programs, and introduce new and improved products. Currently, all of our revenues are in the United States, however, we may potentially sell internationally in the future.

     Cost of Goods Sold. Cost of goods sold decreased by $73,000, or 1.8%, from $3.9 million for the three months ended March 31, 2009 to $3.8 million for the three months ended March 31, 2010. This decrease in cost of goods sold resulted in an increase to gross margin of 3%, from 74% for the three months ended March 31, 2009 to 77% for the three months ended March 31, 2010. Cost of goods sold represents 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 three months ended March 31, 2009 to March 31, 2010 is primarily due to manufacturing efficiencies, product cost reductions, and shipment of fewer lower margin control units. Cost of goods sold for the three

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months ended March 31, 2010 and 2009 includes $157,000 and $434,000, respectively, for stock-based compensation. We expect that gross margin will stay fairly consistent in the future as sales volumes increase, although quarterly fluctuations could occur based on timing of new product introductions, sales mix, pricing changes, or other unanticipated circumstances.

     Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $2.1 million, or 14.9%, from $14.3 million for the three months ended March 31, 2009 to $16.4 million for the three months ended March 31, 2010. The primary reason for the increase was sales and marketing expenses, which included the building of our sales team along with additional marketing programs. Selling, general and administrative expenses for the three months ended March 31, 2010 and 2009 includes $1.7 million and $1.4 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 programs and organization to further commercialize our products, though that growth should be at a lower rate than revenue growth.

     Research and Development Expenses. Research and development expenses decreased by $0.9 million, or 28.3%, from $3.4 million for the three months ended March 31, 2009 to $2.5 million for the three months ended March 31, 2010. 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 these expenses related to the decreased numbers and sizes of PAD development projects in fiscal 2010, as well as the timing of those projects. Research and development expenses for the three months ended March 31, 2010 and 2009 includes $300,000 and $220,000, 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 for the remainder of the fiscal year at a slightly higher rate than that incurred for the three months ended March 31, 2010, although fluctuations could occur based on the number of projects and studies and the timing of expenditures.

     Interest Expense. Interest expense decreased by $630,000, from $971,000 for the three months ended March 31, 2009 to $341,000 for the three months ended March 31, 2010. The decrease was primarily due to significantly reduced amortization of the debt discount during the three months ended March 31, 2010 due to the refinancing of debt in April 2009.

     Interest Income. Interest income decreased by $113,000, from $171,000 for the three months ended March 31, 2009 to $58,000 for the three months ended March 31, 2010. The decrease was primarily due to lower investment balances and reduced yields on investments.

     Gain (Impairment) on Investments. Gain (impairment) on investments was $300,000 for the three months ended March 31, 2009 and was due to an increase in the fair value of investments. There was no gain (impairment) on investments for the three months ended March 31, 2010.

     Decretion of Redeemable Convertible Preferred Stock. Decretion of redeemable convertible preferred stock reflects the change in estimated fair value of preferred stock at the balance sheet dates. Decretion of redeemable convertible preferred stock for the three months ended March 31, 2009 was $25.8 million. There was no decretion of redeemable convertible preferred stock during the three months ended March 31, 2010 because all preferred stock was converted to common stock in conjunction with the merger.

Comparison of the Nine Months Ended March 31, 2010 with Nine Months Ended March 31, 2009

     Revenues. Revenues increased by $6.0 million, or 14.8%, from $40.8 million for the nine months ended March 31, 2009 to $46.8 million for the nine months ended March 31, 2010. This increase was attributable to a $4.2 million, or 11.4%, increase in sales of the Diamondback 360° and a $1.8 million, or 50.4% increase in sales of supplemental and other products during the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009. Supplemental products include our Viper product line and distribution partner products, some of which have been introduced over the last year.

     Cost of Goods Sold. Cost of goods sold decreased by $1.1 million, or 9.2%, from $12.0 million for the nine months ended March 31, 2009 to $10.9 million for the nine months ended March 31, 2010. This decrease in cost of goods sold resulted in an increase to gross margin of 6%, from 71% for the nine months ended March 31, 2009 to 77% for the nine months ended March 31, 2010. Cost of goods sold represents 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 nine months ended March 31, 2009 to March 31, 2010 is primarily due to manufacturing efficiencies, product cost reductions, and shipment of fewer lower margin control units. Cost of goods sold for the nine months ended March 31, 2010 and 2009 includes $434,000 and $367,000, respectively, for stock-based compensation.

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.5 million, or, 3.3%, from $45.6 million for the nine months ended March 31, 2009 to $47.1 million for the nine months ended March 31, 2010. The primary reasons for the increase included increased sales and marketing expenses of $3.8 million, from building our sales team along with additional marketing programs, partially offset by reduced consulting and professional services primarily from a $1.7 million write-off of previously capitalized initial public offering costs in fiscal 2009. Selling, general and administrative expenses for the nine months ended March 31, 2010 and 2009 includes $5.2 million and $4.1 million, respectively, for stock-based compensation.

     Research and Development Expenses. Research and development expenses decreased by $4.5 million, or 37.4%, from $11.9 million for the nine months ended March 31, 2009 to $7.4 million for the nine months ended March 31, 2010. The reduction in these expenses related to costs of a coronary clinical trial occurring during the nine months ended March 31, 2009, along with the decreased number and size of PAD development projects in fiscal 2010, as well as the timing of those projects. Research and development expenses for the nine months ended March 31, 2010 and 2009 includes $876,000 and $441,000, respectively, for stock-based compensation.

     Interest Expense. Interest expense decreased by $756,000, or 41.3%, from $1.8 million for the nine months ended March 31, 2009 to $1.1 million for the nine months ended March 31, 2010. The decrease was primarily due to significantly reduced amortization of the debt discount during the nine months ended March 31, 2010 due to the refinancing of debt in April 2009.

     Interest Income. Interest income decreased by $2.9 million, from $3.2 million for the nine months ended March 31, 2009 to $245,000 for the nine months ended March 31, 2010. The decrease was due to $2.8 million recorded during the nine months ended March 31, 2009 related to accepting the UBS offer to repurchase our auction rate securities, establishing an auction rate securities put option agreement.

     Gain (Impairment)on Investments. Gain (impairment) on investments was $(1.9) million for the nine months ended March 31, 2009. This was due to a $1.6 million decrease in the fair value of investments and also the recognition of $343,000 in a previously recorded other comprehensive loss. There was no gain (impairment) of investments during the nine months ended March 31, 2010.

     Accretion of Redeemable Convertible Preferred Stock. Accretion of redeemable convertible preferred stock reflects the change in estimated fair value of preferred stock at the balance sheet dates. Accretion of redeemable convertible preferred stock for the nine months ended March 31, 2009 was $22.8 million. There was no accretion of redeemable convertible preferred stock during the nine months ended March 31, 2010 because all preferred stock was converted to common stock in conjunction with the merger.

LIQUIDITY AND CAPITAL RESOURCES

     We had cash and cash equivalents of $23.6 million at March 31, 2010 and $33.4 million at June 30, 2009. During the nine months ended March 31, 2010, net cash used in operations amounted to $11.8 million. As of March 31, 2010, we had an accumulated deficit of $146.9 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 as adjusted.

     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. These securities are currently not liquid, as we have an inability to sell the securities due to continued failed auctions. At March 31, 2010, we maintained a margin loan with UBS Bank USA with maximum available borrowings, including interest, equal to the par value of auction rate securities held. At March 31, 2010, maximum available borrowings were $19.3 million. This maximum borrowing amount is not set forth in the written agreement for the loan and 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, 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 but are not included in the written

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loan agreement and are therefore subject to change. 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 March 31, 2010 was $19.2 million.

Silicon Valley Bank

     On March 29, 2010, we entered into an amended and restated loan and security agreement with Silicon Valley Bank. The agreement includes a $10.0 million term loan and a $15.0 million line of credit. The terms of each of these loans are as follows:

• The $10.0 million term loan has a fixed interest rate of 9.0% and a final payment amount equal to 1.0% 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 3.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. In connection with entering into the agreement, we amended a warrant previously granted to Silicon Valley Bank. The warrant provides an option to purchase 8,493 shares of common stock at an exercise price of $5.48 per share. This warrant is immediately exercisable and expires ten years after the date of amendment. The balance outstanding on the term loan at March 31, 2010 was $10.0 million.

• The $15.0 million 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 6.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on (a) 80% of eligible domestic receivables, plus (b) the lesser of 40% of eligible inventory or 25% of eligible domestic receivables or $2.5 million, minus (c) to the extent in effect, certain loan reserves as defined in the agreement. 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, and cancellation fees. There was no balance outstanding on the line of credit at March 31, 2010. The agreement provides that initially 50% of the outstanding principal balance of the $10.0 million term loan reduces available borrowings under the line of credit. Upon the achievement of certain financial covenants, the amount reducing available borrowings will be reduced to zero. There was not an outstanding balance on the line of credit at March 31, 2010.

     Prior to the amendment and restatement, our loan and security agreement with Silicon Valley Bank included a $3.0 million term loan, a $10.0 million accounts receivable line of credit, and a $5.5 million term loan that reduced the availability of funds on the accounts receivable line of credit.

     Borrowings from Silicon Valley Bank are secured by all of our assets, other than our auction rate securities. The borrowings are subject to prepayment penalties and financial covenants, including maintaining certain liquidity and fixed charge coverage ratios and certain three-month EBITDA targets. 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.

Partners for Growth

     On April 14, 2010, we entered into a loan and security agreement with Partners for Growth III, L.P. (PFG). The agreement provides that PFG will make loans to us up to $4.0 million. The agreement has a five-year maturity until April 14, 2015. The loans bear interest at a floating per annum rate equal to 2.75% above Silicon Valley Bank’s prime rate, and such interest is payable monthly. The principal balance of and any accrued and unpaid interest on any notes are due on the maturity date and may not be prepaid by us at any time in whole or in part.

     Under the agreement, PFG provided us with an initial loan of $1,500,000 on April 15, 2010. In addition, for a period of one year until April 14, 2011, we may request additional proceeds from time to time, in minimum increments of $250,000, up to $4.0 million. After this period, we may only request additional proceeds (in increments of not less than $250,000) equal to the aggregate principal amount converted into our common stock through an optional conversion or mandatory conversion. At any time prior to the maturity date, PFG may at its option convert any amount into our common stock at the conversion price set forth in each note, which conversion price will be subject to adjustment upon certain events as provided in such note. The initial agreement has an initial conversion price of $5.43, which

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equaled the ten-day volume weighted average price per share of our common stock prior to the date of the agreement. We may also effect at any time a mandatory conversion of amounts, subject to certain terms, conditions and limitations provided in the agreement, including a requirement that the ten-day volume weighted average price of our common stock prior to the date of conversion is at least 15% greater than the conversion price.

     The loans are secured by certain assets including, among other things, accounts receivable, deposit accounts, inventory, equipment, general intangibles, investment property and certain other claims, rights and interests. PFG’s security interests are subject only to (a) the first security interests held by Silicon Valley Bank, except that PFG holds a first security interest in certain intellectual property, and (b) the liens of the Pearland Economic Development Corporation associated with our planned manufacturing facility in Pearland, Texas. The PFG loan and security agreement contains customary covenants limiting our ability to, among other things, incur debt or liens, make certain investments and loans, effect certain redemptions of and declare and pay certain dividends on our stock, permit or suffer certain change of control transactions, dispose of collateral, or change the nature of our business. In addition, the PFG Loan and Security Agreement contains financial covenants requiring us to maintain certain liquidity and fixed charge coverage ratios, and certain three-month EBITDA targets. If we do not comply with the various covenants, PFG may, subject to various customary cure rights, decline to provide additional loans, require amortization of the loan over its remaining term, or require the immediate payment of all amounts outstanding under the loan and foreclose on any or all collateral, depending on which financial covenants are not maintained.

     In connection with the execution of the PFG loan and security agreement, we issued a warrant to PFG on April 14, 2010 which allows PFG to purchase 147,330 shares of our common stock at a price per share of $5.43, which price was based on the ten-day volume weighted average price per share of our common stock prior to the date of the agreement. The warrant vests with respect to 50% on the issue date, and thereafter, vests pro rata from time to time according to a percentage equal to (a) the additional loans actually drawn until April 14, 2011, divided by (b) $2.5 million. The warrant expires on the fifth anniversary of the issue date, subject to earlier expiration in accordance with the terms.

     The reported changes in cash and cash equivalents and investments for the nine months ended March 31, 2010 and 2009 are summarized below.

     Cash and Cash Equivalents. Cash and cash equivalents was $23.6 million and $33.4 million at March 31, 2010 and June 30, 2009, respectively. This decrease is primarily attributable to net cash used in operations offset by net cash of $3.0 million received under an agreement to establish a manufacturing facility in Texas and proceeds from debt of $4.4 million.

     Investments. Investments were $16.3 million and $20.0 million at March 31, 2010 and June 30, 2009, 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 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. 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.

     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. 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 March 31, 2010 and June 30, 2009, we have determined the fair value of our auction rate security rights to be $2.8 million. As 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 provided by (used in) operating activities was $(11.8) million and $(26.4) million for the nine months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010 and 2009, we had a net loss of

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$19.5 million and $26.3 million, respectively. Changes in working capital accounts also contributed to the net cash provided by (used in) operating activities for the nine months ended March 31, 2010 and 2009. Significant changes in working capital during these periods included:

• Cash (used in) accounts receivable of $(1.4) million and $(3.3) million during the nine months ended March 31, 2010 and 2009, respectively. The reduction in amount used between periods is due to lower revenue growth in fiscal year 2010.

• Cash (used in) provided by inventories of $(1.2) million and $1.0 million during the nine months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010, cash (used in) inventories was primarily due to the timing of inventory purchases and shipments. For the nine months ended March 31, 2009, cash provided by inventories was due to improved inventory management.

• Cash provided by prepaid expenses and other current assets of $77,000 and $1.9 million during the nine months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010, cash provided by prepaid expenses and other current assets was primarily due to payment timing of vendor deposits and other expenditures. For the nine months ended March 31, 2009, cash provided by prepaid expenses and other current assets was primarily due to payment timing of vendor deposits and effect of the merger with Replidyne.

• Cash provided by (used in) accounts payable of $192,000 and $(1.4) million during the nine months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010 and 2009, cash provided by (used in) accounts payable was primarily due to timing of purchases, vendor payments, and effect of the merger with Replidyne.

• Cash provided by (used in) accrued expenses and other liabilities of $2.9 million and $(1.0) million during the nine months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010, cash provided by accrued expenses and other liabilities was primarily due to receipt of $3.0 million in net cash under an agreement to establish a manufacturing facility in Texas. For the nine months ended March 31, 2009, cash provided by (used in) accrued expenses and other liabilities was primarily due to timing of payments and effect of the merger with Replidyne.

     Investing Activities. Net cash provided by investing activities was $2.6 million and $36.7 million for the nine months ended March 31, 2010 and 2009, respectively. Cash provided by investing activities primarily related to net cash acquired in the merger with Replidyne along with the redemption of certain auction rate securities, offset by purchases of property and equipment. Net cash provided by the merger with Replidyne was $37.8 million for the nine months ended March 31, 2009. Cash provided by the redemption of auction rate securities was $3.6 million for the nine months ended March 31, 2010. Purchases of property and equipment (used) cash of $(639,000) and $(750,000) for the nine months ended March 31, 2010 and 2009, respectively.

     Financing Activities. Net cash (used in) provided by financing activities was $(647,000) and $19.9 million in the nine months ended March 31, 2010 and 2009, respectively.

     Cash provided by financing activities during these periods included:

• Proceeds from long-term debt of $4.4 million and $18.0 million during the nine months ended March 31, 2010 and 2009, respectively;

• Proceeds from purchases under our employee stock purchase plan of $702,000 during the nine months ended March 31, 2010;

• Exercise of stock options and warrants of $285,000 and $502,000 during the nine months ended March 31, 2010 and 2009, respectively;

• Issuance of common stock warrants of $1.8 million during the nine months ended March 31, 2009; and

• Issuance of convertible preferred stock warrants of $75,000 during the nine months ended March 31, 2009.

     Cash (used in) financing activities in these periods included:

• Payment of deferred financing costs of $50,000 during the nine months ended March 31, 2010.

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• Payment of long-term debt of $(6.0) million and $(480,000) during the nine months ended March 31, 2010 and 2009, 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 revenue and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our revenue 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 March 31, 2010, we believe our current cash and cash equivalents and available debt capacity 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.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In January 2010, the FASB issued further guidance regarding additional disclosures relating to fair value of transfers in and out of Levels 1 and 2 and for activity in Level 3 and clarifies certain other existing disclosure requirements. This guidance had no impact on our financial position, results of operations or cash flows.

     In October 2009, the FASB issued guidance providing principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. We are currently evaluating the impact of adopting this pronouncement.

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-Q, including Item 2 of Part I, 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-Q contains forward-looking statements that involve risks and uncertainties, including approval of our product for coronary use; our expectation that our losses will continue but generally decline; our plans to continue to expand our sales and marketing efforts; the expected benefits of the Rights from UBS; our expectation of increased revenue, and selling, general and administrative expenses; the possibility of selling our products internationally in the future; our expectation that research and development expenses for the remainder of the fiscal year will be incurred at a slightly higher rate than for the three months ended March 31, 2010; our expectation that gross margin will stay fairly consistent; 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.

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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 360º; success of our clinical trials; competition from other devices; unanticipated developments affecting our estimates regarding expenses, future revenues and capital requirements; our inability to expand our sales and marketing organization; our actual research and development efforts and needs; the sufficiency of UBS’s financial resources to purchase our auction rate securities; our ability to obtain and maintain intellectual property protection for product candidates; our actual financial resources; and general economic conditions. These and additional risks and uncertainties are described more fully in our Form 10-K filed with the SEC on September 28, 2009. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis and retrieval system (EDGAR) at www.sec.gov.

You should read these risk factors and the other cautionary statements made in this Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. We cannot assure you that the forward-looking statements in this Form 10-Q 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-Q 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 3. 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 and U.S. government securities. Our cash and cash equivalents as of March 31, 2010 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 ARS, resulting in failed auctions for $23.0 million of our ARS. Currently, affected securities of $16.4 million are not liquid and will not become liquid until a future auction for these investments is successful or 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 — Critical Accounting Policies and Significant Judgments and Estimates — Investments.”

ITEM 4T. 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 Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2010. 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 Report, 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.

Changes in Internal Control Over Financial Reporting

     There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Refer to Item 3 (Legal Proceedings) in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 and Item 1 (Legal Proceedings) in the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2009 and December 31, 2009.

ITEM 1A. RISK FACTORS

     In addition to the other information set forth in this report, including the important information in “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the year ended June 30, 2009 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this report, and materially adversely affect our financial condition or future results. Although we are not aware of any other factors that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 5. OTHER INFORMATION

     Under our loan and security agreement with Silicon Valley Bank we are required to maintain certain financial covenants. Period to the amendment and restatement of this agreement on March 29, 2010, we were not in compliance with one of the financial covenants for the month ended February 28, 2010, which would have constituted an event of default under the agreement and all amounts outstanding under the agreement would have been due to Silicon Valley Bank. However, Silicon Valley Bank waived this covenant for such period. The amount outstanding under the agreement with Silicon Valley Bank at February 28, 2010 was $5.9 million.

ITEM 6. EXHIBITS

(a) Exhibits — See Exhibit Index on page following signatures

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SIGNATURES

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

Dated: May 14, 2010	CARDIOVASCULAR SYSTEMS, INC.
	By	/s/ David L. Martin
		David L. Martin
		President and Chief Executive Officer (Principal Executive Officer)
	By	/s/ Laurence L. Betterley
		Laurence L. Betterley
		Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX
CARDIOVASCULAR SYSTEMS, INC.
FORM 10-Q

Exhibit No.	Description
10.1	Loan and Security Agreement, dated March 29, 2010, by and between Cardiovascular Systems, Inc. and Silicon Valley Bank.
10.2	Amended and Restated Warrant to Purchase Stock, dated March 29, 2010, issued by Cardiovascular Systems, Inc. to Silicon Valley Bank.
10.3	Loan and Security Agreement, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.4	Intellectual Property Security Agreement, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.5	Copyright Collateral Agreement and Notice, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.6	Domain Rights Collateral Agreement and Notice, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.7	Patent Collateral Agreement and Notice, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.8	Trademark Collateral Agreement and Notice, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.9	Letter Agreement, dated April 14, 2010, by and between Cardiovascular Systems, Inc. and Partners for Growth III, L.P.
10.10	Senior Convertible Promissory Note, dated April 14, 2010, issued by Cardiovascular Systems, Inc. to Partners for Growth III, L.P.
10.11	Warrant, dated April 14, 2010, issued by Cardiovascular Systems, Inc. to Partners for Growth III, L.P.
10.12†	Summary of Amendment to Fiscal 2010 Executive Officer Annual Cash Incentive Compensation.
31.1	Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Compensatory plan or agreement.

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EX-10.1

Exhibit 10.1

LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of March 29, 2010 (the “Effective Date”) between SILICON VALLEY BANK, a California corporation (“Bank”), and CARDIOVASCULAR SYSTEMS, INC., a Delaware corporation (“Borrower”), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. This Agreement amends and restates in its entirety the Loan and Security Agreement, dated September 12, 2008, between Borrower and Bank, as the same has from time to time been previously amended (the “Prior LSA”). Except for the provisions of the Prior LSA being amended and restated in this Agreement, all other existing documents, instruments and agreements by Borrower with or in favor of Bank shall continue in full force and effect, including all UCC-1 financing statements and other documents filed with governmental offices which perfect liens or security interests in favor of Bank. The parties agree as follows:

     1 ACCOUNTING AND OTHER TERMS

     Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

     2 LOAN AND TERMS OF PAYMENT

     2.1 Promise to Pay. Borrower hereby unconditionally promises to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

     2.1.1 Revolving Advances.

          (a) Availability. Subject to the terms and conditions of this Agreement and to deduction of Reserves, Bank shall make Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein. The outstanding “Advances” under the Revolving Line pursuant to the Prior LSA shall be the beginning balance of the Advances under this Agreement, which Borrower agrees are owed without any defense, offset or counter-claim of any kind.

          (b) Streamline Period. During certain periods of time (each, a “Streamline Period”), provided that the Streamline Requirements are all met, Borrower’s reporting requirements shall be reduced, and certain proceeds shall be deposited in Borrower’s operating accounts instead of being applied to the Advances, as set forth in other provisions of this Agreement. Such a Streamline Period shall be deemed to be in effect as of the Effective Date. If at any time during any Streamline Period the Streamline Requirements are not met, upon written notice from Bank to Borrower the Streamline Period shall immediately cease to be effective, and any terms or conditions of this Agreement that are dependent upon the existence of a Streamline Period will immediately revert to the respective terms and conditions that are to be in force when a Streamline Period is not in effect, without the need for any further action on the part of Bank or Borrower. Further, if following the cessation of a Streamline Period the Streamline Requirements are thereafter satisfied for a period of at least 60 days (for which period Borrower must have confirmed via its monthly Compliance Certificates that the Streamline Requirements were satisfied as of two consecutive month ends during such period), Borrower may elect to again put a Streamline Period into effect pursuant to the terms hereof by giving Bank at least 30 days prior written notice, specifying the date the Streamline Period is to begin. Thus, it is the intention of the parties that Borrower have the opportunity for successive Streamline Periods to apply when and to the extent the conditions thereto are satisfied.

          (c) Termination; Repayment. The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable. Borrower may terminate the Revolving Line

prior to the Revolving Line Maturity Date, effective five (5) Business Days after written notice of termination is given to Bank, on which date Borrower shall repay the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line. If the Borrower terminates the Revolving Line prior to the Revolving Line Maturity Date, or if Bank terminates the Revolving Line prior to the Revolving Line Maturity Date due to the occurrence and continuance of an Event of Default, or if the Obligations under the Revolving Line otherwise become due and payable as the result of an Event of Default (including, without limitation, becoming due and payable as the result of an Insolvency Proceeding), Borrower shall immediately pay to Bank, in addition to the payment of any other expenses or fees then-owing, a termination fee in an amount equal to (i) 2% of the Maximum Dollar Amount if such termination or becoming due and payable occurs on or before the first year anniversary of the Effective Date or (ii) 1% of the Maximum Dollar Amount if such termination or becoming due and payable occurs after the first year anniversary of the Effective Date but before the second year anniversary of Effective Date. Without limitation on the fact that such fee shall be due as set forth in the preceding sentence, such fee shall bear interest until paid at a rate equal to the highest rate applicable to the Revolving Line. Notwithstanding any termination of the Revolving Line, Bank’s liens and security interests in the Collateral and all of Bank’s rights and remedies under this Agreement shall continue until Borrower fully satisfies all Obligations.

     2.1.2 Letters of Credit Sublimit.

          (a) Availability. As part of the Revolving Line, Bank shall issue or have issued Letters of Credit denominated in Dollars or a Foreign Currency for Borrower’s account. The aggregate Dollar Equivalent amount utilized for the issuance of Letters of Credit shall at all times reduce the amount otherwise available for Advances under the Revolving Line. The aggregate Dollar Equivalent of the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed the lesser of (A) One Million Dollars ($1,000,000), minus (i) the sum of all amounts used for Cash Management Services, and minus (ii) the FX Reduction Amount, or (B) the lesser of the Maximum Dollar Amount or the Borrowing Base, minus (i) the sum of all outstanding principal amounts of any Advances (including any amounts used for Cash Management Services), and minus (ii) the FX Reduction Amount.

          (b) Cash Collateral: Documentation; Liability. If, on the Revolving Line Maturity Date (or the effective date of any termination of this Agreement), there are any outstanding Letters of Credit, then on such date Borrower shall provide to Bank cash collateral in an amount equal to 105% of the Dollar Equivalent of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment), to secure all of the Obligations relating to such Letters of Credit. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s standard Application and Letter of Credit Agreement (the “Letter of Credit Application”). Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. Borrower further agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Bank and opened for Borrower’s account or by Bank’s interpretations of any Letter of Credit issued by Bank for Borrower’s account, and Borrower understands and agrees that Bank shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

          (c) Reimbursement for Draws. The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit Application.

          (d) Foreign Currency Letters of Credit. Borrower may request that Bank issue a Letter of Credit payable in a Foreign Currency. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the Dollar Equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges).

          (e) Letter of Credit Reserve. To guard against fluctuations in currency exchange rates, upon the issuance of any Letter of Credit payable in a Foreign Currency, Bank shall create a reserve (the “Letter of Credit Reserve”) under the Revolving Line in an amount equal to ten percent (10%) of the face amount of such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank from time to time to account for

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fluctuations in the exchange rate. The availability of funds under the Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

     2.1.3 Foreign Exchange Sublimit. As part of the Revolving Line, Borrower may enter into foreign exchange contracts with Bank under which Borrower commits to purchase from or sell to Bank a specific amount of Foreign Currency (each, a “FX Forward Contract”) on a specified date (the “Settlement Date”). FX Forward Contracts shall have a Settlement Date of at least one (1) FX Business Day after the contract date and shall be subject to a reserve of ten percent (10%) of each outstanding FX Forward Contract (the “FX Reserve”). The aggregate amount of FX Forward Contracts at any one time may not exceed ten (10) times the lesser of (A) One Million Dollars ($1,000,000), minus (i) the sum of all amounts used for Cash Management Services, and minus (ii) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), or (B) the lesser of Maximum Dollar Amount or the Borrowing Base, minus (i) the sum of all outstanding principal amounts of any Advances (including any amounts used for Cash Management Services), and minus (ii) the Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve). The amount otherwise available for Credit Extensions under the Revolving Line shall be reduced by an amount equal to ten percent (10%) of each outstanding FX Forward Contract (the “FX Reduction Amount”). Any amounts needed to fully reimburse Bank for any amounts not paid by Borrower in connection with FX Forward Contracts will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

     2.1.4 Cash Management Services Sublimit. Borrower may use the Revolving Line for Bank’s cash management services, which may include merchant services, direct deposit of payroll for which Bank has credit exposure, business credit card, and check cashing services identified in Bank’s various cash management services agreements (collectively, the “Cash Management Services”), in an aggregate amount not to exceed the lesser of (A) One Million Dollars ($1,000,000), minus (i) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), and minus (ii) the FX Reduction Amount, or (B) the lesser of Maximum Dollar Amount or the Borrowing Base, minus (i) the sum of all outstanding principal amounts of any Advances, minus the Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), and minus (ii) the FX Reduction Amount. Any amounts Bank pays on behalf of Borrower for any Cash Management Services will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

     2.1.5 Term Loan.

          (a) Availability Combination of Term Loans. Term Loan A and Term Loan C are outstanding pursuant to the Prior LSA in the outstanding principal balances of $1,795,670.12 and $3,792,949.96, respectively, as of March 29, 2010. Within five (5) days from the Effective Date, Bank shall make a term loan to Borrower in an amount (the “New Term Loan Advance”) equal to the Term Loan Commitment Amount minus the sum of the outstanding principal balances of Term Loan A and Term Loan C as of the date of the New Term Loan Advance, subject to the satisfaction of the terms and conditions of this Agreement. Effective upon Bank making the New Term Loan Advance, its balance shall be combined with the outstanding balances of Term Loan A and Term Loan C to constitute the “Term Loan” referred to in this Agreement and thereafter such combined loans shall be subject to the terms of this Agreement and not the terms of the Prior LSA. No portion of the Term Loan may be reborrowed after repayment.

          (b) Repayment. Borrower shall continue to pay interest on Term Loan A and Term Loan C in accordance with the Prior LSA until the New Term Loan Advance is made. The Borrower shall pay Bank accrued interest on the Term Loan beginning on the first day of the calendar month following the month during which the New Term Loan Advance is made and continuing on the same day of each succeeding month. Borrower shall repay the Term Loan in 30 equal monthly payments of principal and accrued interest, each in the amount necessary to fully amortize the Term Loan over such period (such amount to be calculated by Bank), commencing on November 1, 2010 and continuing on the first day of each calendar month thereafter until the Term Loan Maturity Date on which date the entire unpaid principal balance of the Term Loan, plus the Final Payment, plus any

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and all accrued and unpaid interest, and plus all other sums, if any, that shall have become due and payable hereunder with respect to the Term Loan, shall be paid.

          (c) Mandatory Prepayment. Reference is made to the definition of “Borrowing Base” (contained in Section 13.1) which subtracts the amount of the Full Term Loan Reserve, to the extent it is in effect, in calculating the Borrowing Base. If at any time, and from time to time, such a subtraction of the amount of the Full Term Loan Reserve shall cause the Borrowing Base to be less than zero, then Borrower shall immediately make a prepayment of the principal of Term Loan in the amount by which zero exceeds the Borrowing Base.

          (d) Permitted Prepayment. At Borrower’s option, so long as an Event of Default has not occurred and is not continuing, Borrower shall have the option to prepay all, but not less than all, of the Term Loan, provided Borrower (i) provides written notice to Bank of its election to prepay the Term Loan at least thirty (30) days prior to such prepayment, and (ii) pays, on the date of the prepayment (A) all accrued and unpaid interest with respect to the Term Loan through the date the prepayment is made; (B) all unpaid principal with respect to the Term Loan; (C) a fee equal to the Make-Whole Premium; (D) the Final Payment; and (E) all other sums, if any, that shall have become due and payable hereunder with respect to the Term Loan. Without limitation on the fact that such amounts shall be due on the date of the prepayment, they shall bear interest from the date due until paid at a rate equal to the highest rate applicable to the Term Loan.

          (e) Fee and Final Payment Due Upon Acceleration. If all or any portion of the Term Loan has become due and payable according to the terms hereof because of the occurrence and continuance of an Event of Default, Borrower shall pay to Bank on the date that it has become due and payable according to the terms hereof, in addition to any other sums owing, a fee equal to the Make-Whole Premium, plus the Final Payment. Without limitation on the fact that such amounts shall be due as set forth in the preceding sentence, they shall bear interest from the date due until paid at a rate equal to the highest rate applicable to the Term Loan.

     2.2 Overadvances. If, at any time, the sum of (a) the outstanding principal amount of any Advances (including any amounts used for Cash Management Services), plus (b) the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus (c) the FX Reduction Amount, exceeds the lesser of either the Maximum Dollar Amount or the Borrowing Base (such excess being an “Overadvance”), Borrower shall immediately pay to Bank in cash such Overadvance. Without limiting Borrower’s obligation to repay Bank any amount of the Overadvance, Borrower agrees to pay Bank interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

     2.3 Payment of Interest on the Credit Extensions.

          (a) Interest Rate.

               (i) Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a floating per annum rate equal to 2.0 percentage points above the Prime Rate, provided that the interest rate in effect on any day shall not be less than 6.0% per annum, which interest shall be payable monthly.

               (ii) Term Loan. Subject to Section 2.3(b), the principal amount outstanding under the Term Loan shall accrue interest at a per annum rate equal to 9.0%, which interest shall be payable monthly.

          (b) Default Rate. Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is five percentage points (5.00%) above the rate that is otherwise applicable thereto (the “Default Rate”) unless Bank otherwise elects from time to time in its sole discretion to impose a smaller increase. Fees and expenses which are required to be paid by Borrower pursuant to the Loan Documents (including, without limitation, Bank Expenses) but are not paid when due shall bear interest until paid at a rate equal to the highest rate applicable to the Obligations. Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.

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          (c) Adjustment to Interest Rate. Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.

          (d) 360-Day Year. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

          (e) Debit of Accounts. Bank may debit any of Borrower’s deposit accounts, including the Designated Deposit Account, for principal and interest payments or any other amounts Borrower owes Bank when due. These debits shall not constitute a set-off.

          (f) Payment; Interest Computation; Float Charge. Unless otherwise provided, interest is payable monthly on the last calendar day of each month (including with respect to interest on amount outstanding under the Revolving Line). In computing interest, (i) all Payments received after 12:00 p.m. Pacific time on any day shall be deemed received at the opening of business on the next Business Day, and (ii) the date of the making of any Credit Extension shall be included and the date of payment shall be excluded; provided, however, that if any Credit Extension is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit Extension. In addition, Bank shall be entitled to charge Borrower a “float” charge in an amount equal to two (2) Business Days interest, at the interest rate applicable to the Advances whether or not any Advances are outstanding, on all Payments received by Bank, unless at the time of receipt a Streamline Period is in effect and no Event of Default has occurred and is continuing. The float charge for each month shall be payable on the last day of the month. Bank shall not, however, be required to credit Borrower’s account for the amount of any item of payment which is unsatisfactory to Bank in its good faith business judgment, and Bank may charge Borrower’s Designated Deposit Account for the amount of any item of payment which is returned to Bank unpaid.

     2.4 Fees. Borrower shall pay to Bank:

          (a) Commitment Fee. A fully earned, non-refundable commitment fee of (i) $125,000 on the Effective Date, and (ii) $110,000 on the first anniversary of the Effective Date; and

          (b) Letter of Credit Fees. Bank’s customary fees and expenses for the issuance or renewal of Letters of Credit, including, without limitation, a letter of credit fee of two percent (2.00%) per annum of the Dollar Equivalent of the face amount of each Letter of Credit issued, upon the issuance of such Letter of Credit, each anniversary of the issuance during the term of such Letter of Credit, and upon the renewal of such Letter of Credit by Bank; and

          (c) Collateral Monitoring Fee. A collateral monitoring fee of $1,000 for each month during which either (i) the Streamline Period is not in effect for the entire month or (ii) an Event of Default has occurred, payable in arrears on the last day of each month (prorated for any partial month at the beginning and upon termination of this Agreement); and

          (d) Unused Revolving Line Facility Fee. A fee (the “Unused Revolving Line Facility Fee”), payable monthly, in arrears, on a calendar year basis, in an amount equal to 0.375% per annum of the average unused portion of the Revolving Line, as determined by Bank. The unused portion of the Revolving Line, for the purposes of this calculation, shall not include amounts utilized or reserved with respect to products provided in connection with Cash Management Services, Letters of Credit or pursuant to the Partial Term Loan Reserve or Full Term Loan Reserve, or the FX Reduction Amounts. Borrower shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of this Agreement or the suspension or termination of Bank’s obligation to make loans and advances hereunder; and

          (e) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees and expenses, and expenses for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due (or, if there is no stated due date, upon demand by Bank).

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     2.5 Payments; Application of Payments.

          (a) All payments (including prepayments) to be made by Borrower under any Loan Document shall be made in immediately available funds in U.S. Dollars, without setoff or counterclaim, before 12:00 p.m. Pacific time on the date when due. Payments of principal and/or interest received after 12:00 p.m. Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment shall be due the next Business Day, and additional fees or interest, as applicable, shall continue to accrue until paid.

          (b) All payments with respect to the Obligations may be applied in such order and manner as Bank shall determine in its sole discretion. Borrower shall have no right to specify the order or the accounts to which Bank shall allocate or apply any payments required to be made by Borrower to Bank or otherwise received by Bank under this Agreement when any such allocation or application is not specified elsewhere in this Agreement.

     3 CONDITIONS OF LOANS

     3.1 Conditions Precedent to New Term Loan Advance. Bank’s obligation to make the New Term Loan Advance is subject to the condition precedent that Borrower shall have delivered, in form and substance satisfactory to Bank, such documents, and completed such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:

          (a) duly executed original signatures to the Loan Documents to which it is a party;

          (b) duly executed original signatures to the Warrant;

          (c) its Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the Effective Date;

          (d) duly executed original signatures to the completed Borrowing Resolutions for Borrower;

          (e) if any loan agreement has been entered into between Borrower and PFG, duly executed original signatures to a subordination agreement by PFG, in favor of Bank and acceptable to Bank in its sole discretion, and consented to by Borrower, whereby PFG subordinates the repayment of, and any liens securing, any indebtedness of Borrower to PFG, and agrees not to exercise any of its rights or remedies in connection therewith for a period of time acceptable to Bank;

          (f) certified copies, dated as of a recent date, of financing statement searches, as Bank shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

          (g) a new, updated, Perfection Certificate executed by Borrower;

          (h) a copy of its Registration Rights Agreement and any amendments thereto;

          (i) a landlord’s consent in favor of Bank for each of Borrower’s locations by the respective landlords thereof, together with the duly executed original signatures thereto (provided that Borrower may have up to 30 days after the Effective Date to provide the same to Bank); and

          (j) payment of the fees and Bank Expenses then due as specified in Section 2.4 hereof.

     3.2 Conditions Precedent to all Credit Extensions. Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following conditions precedent:

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          (a) (i) to obtain an Advance, except as otherwise provided in Section 3.4, timely receipt of an executed Transaction Report, and (ii) to obtain the New Term Loan Advance, timely receipt of an executed Payment/Advance Form;

          (b) the representations and warranties in this Agreement shall be true in all material respects on the date of the Transaction Report or Payment/Advance Form (as applicable) and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in this Agreement remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

          (c) in Bank’s good faith business judgment, there has not been a Material Adverse Change.

     3.3 Covenant to Deliver.

     Borrower agrees to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition precedent to any Credit Extension. Borrower expressly agrees that a Credit Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrower’s obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in Bank’s sole discretion.

     3.4 Procedures for Borrowing Advances. Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, to obtain an Advance, Borrower shall notify Bank (which notice shall be irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m. Pacific time on the Funding Date of the Advance. Together with such notification, Borrower must promptly deliver to Bank by electronic mail or facsimile a completed Transaction Report executed by a Responsible Officer or his or her designee. Bank shall credit Advances to the Designated Deposit Account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee.

     4 CREATION OF SECURITY INTEREST

     4.1 Grant of Security Interest. Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority to Bank’s Lien under this Agreement). If Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank. The grant of security interest and pledge by Borrower contained herein is without limitation on any security interest granted by Borrower under any other Loan Document and without limitation on the security interests granted by Borrower under the Prior LSA, which security interests granted under the Prior LSA shall continue, uninterrupted, as amended and restated by this Agreement.

     If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations) and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at Borrower’s sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrower.

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     4.2 Authorization to File Financing Statements. Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code.

     5 REPRESENTATIONS AND WARRANTIES

          Borrower represents, warrants and agrees as follows:

     5.1 Due Organization and Authorization. Borrower is duly existing and in good standing in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. In connection with this Agreement, Borrower has delivered to Bank a completed certificate signed by Borrower entitled “Perfection Certificate”. Borrower represents and warrants to Bank that (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction (except as previously consented to in writing by Bank); and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete (it being understood and agreed that Borrower may from time to time update certain information in the Perfection Certificate after the Effective Date to the extent permitted by one or more specific provisions in this Agreement). If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational identification number.

     The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any of its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect), or (v) constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

     5.2 Collateral. Borrower has good title to the Collateral, free of Liens except Permitted Liens. Borrower has no Collateral Accounts other than (a) the Collateral Accounts with Bank and (b) the Collateral Accounts, if any, described in the Perfection Certificate delivered to Bank in connection herewith, or of which Borrower has given Bank notice, for which Borrower has taken such actions as are necessary to give Bank a perfected security interest therein, pursuant to documentation reasonably acceptable to Bank. The Accounts are bona fide, existing obligations of the Account Debtors.

     The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate. None of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate or as permitted pursuant to Section 7.2. In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then Borrower will first receive the written consent of Bank and such bailee must execute and deliver a bailee agreement in form and substance satisfactory to Bank in its sole discretion.

     All Inventory is in all material respects of good and marketable quality, free from material defects.

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     Borrower is the sole owner of the Intellectual Property which it owns or purports to own except for (a) non-exclusive licenses granted to its customers in the ordinary course of business, (b) over-the-counter software that is commercially available to the public, and (c) material Intellectual Property licensed to Borrower and noted on the Perfection Certificate. Each Patent which it owns or purports to own and which is material to Borrower’s business is valid and enforceable, and no part of the Intellectual Property which Borrower owns or purports to own and which is material to Borrower’s business has been judged invalid or unenforceable, in whole or in part. To the best of Borrower’s knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to have a material adverse effect on Borrower’s business.

     Except as noted on the Perfection Certificate, Borrower is not a party to, nor is it bound by, any Restricted License.

     5.3 Accounts Receivable; Inventory.

          (a) For each Account with respect to which Advances are requested, on the date each Advance is requested and made, such Account shall be an Eligible Account.

          (b) All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of Borrower’s Books are genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Eligible Account shall comply in all material respects with all applicable laws and governmental rules and regulations. Borrower has and will have no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor whose accounts are shown as Eligible Accounts in any Transaction Report. To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are and will be genuine, and all such documents, instruments and agreements are and will be legally enforceable in accordance with their terms.

          (c) For any item of Inventory consisting of Eligible Inventory in any Transaction Report, such Inventory (i) consists of raw materials or finished goods, in good, new, and salable condition, which is not perishable, returned, consigned, obsolete, not sellable, slow moving, damaged, or defective, and is not comprised of demonstrative or custom inventory, works in progress, packaging or shipping materials, or supplies; (ii) meets all applicable governmental standards; (iii) has been manufactured in compliance with the Fair Labor Standards Act; (iv) is not subject to any Liens, except the first priority Liens granted or in favor of Bank under this Agreement or any of the other Loan Documents; and (v) is located at the locations identified by Borrower in the Perfection Certificate where it maintains Inventory (or at any location permitted under Section 7.2).

     5.4 Litigation. There are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than $250,000, except as disclosed in the Perfection Certificate.

     5.5 Financial Statements; Financial Condition. All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

     5.6 Solvency. The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

     5.7 Regulatory Compliance. Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding

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Company Act of 2005. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted.

     5.8 Subsidiaries; Investments. Other than as disclosed in the Perfection Certificate, Borrower does not have any Subsidiaries, other than Subsidiaries organized with the prior written consent of Bank, and does not own any stock, partnership interest or other equity securities in any other Person, except for Permitted Investments.

     5.9 Tax Returns and Payments; Pension Contributions. Borrower has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower. Borrower may defer payment of any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank in writing of the commencement of, and any material development in, the proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

     5.10 Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital, and to fund its general business requirements and not for personal, family, household or agricultural purposes.

     5.11 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

     5.12 UBS Loan. On August 21, 2008, Borrower received net proceeds of $11,000,000 from a loan by UBS Bank USA to Borrower, and as of the Effective Date, including such loan Borrower has loans outstanding from UBS Bank USA in the aggregate of $19,168,793, including principal and accrued interest, and Borrower can borrow additional amounts from UBS Bank USA that would allow such aggregate amount of loans outstanding to increase to $19,325,000 of principal and accrued interest (collectively, the “UBS Loans”). Borrower has provided Bank copies of all of the agreements, instruments and documents relating to the UBS Loans, including Borrower’s acceptance on November 7, 2008 of an offer of Rights to sell the ARS to UBS during the period June 30, 2010 through July 2, 2012, at par value (the “UBS Loan Documents”). The UBS Loans are secured only by the Auction Rate Securities (UBS), and the UBS Loan Documents do not require Borrower to provide or contemplate Borrower providing any additional collateral or proceeds from any other Borrower assets, except that the UBS Loan Documents require Borrower to repay the UBS Loans in the event that Borrower receives net proceeds exceeding $50,000,000 from an initial public offering of Borrower’s stock.

     5.13 Indebtedness. Borrower is not liable for any Indebtedness other than Permitted Indebtedness.

     5.14 Definition of “Knowledge.” For purposes of the Loan Documents, whenever a representation or warranty is made to Borrower’s knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar

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qualification, knowledge or awareness means the actual knowledge, after reasonable investigation, of the Responsible Officers.

     6 AFFIRMATIVE COVENANTS

     Borrower shall do all of the following:

     6.1 Government Compliance.

          (a) Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to cause a Material Adverse Change. Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could reasonably be expected to cause a Material Adverse Change.

          (b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of its obligations under the Loan Documents to which it is a party and the grant of a security interest to Bank in all of its property. At Bank’s request, Borrower shall promptly provide copies of any such obtained Governmental Approvals to Bank.

     6.2 Financial Statements, Reports, Certificates.

          (a) Borrower shall provide Bank with the following:

(i)	a Transaction Report (and any schedules related thereto) (y) weekly and at the time of each request for an Advance if a Streamline Period is not in effect or an Event of Default has occurred and is continuing, and (z) within thirty (30) days after the end of each month if a Streamline Period is in effect and no Event of Default has occurred and is continuing;
(ii)	within thirty (30) days after the end of each month,

(A)	monthly accounts receivable agings, aged by invoice date,
(B)	monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any,
(C)	monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, and
(D)	a Deferred Revenue report providing such information concerning Deferred Revenue as Bank shall reasonably request;

(iii)	as soon as available, and in any event within thirty (30) days after the end of each month, monthly unaudited financial statements;
(iv)	within thirty (30) days after the end of each month a monthly Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such month, Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Bank shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks, to the extent such check amounts are not included in the Borrower’s accounts payable;
(v)	[Reserved];
(vi)	within thirty (30) days after the beginning of each fiscal year of Borrower, (A) annual operating budgets (including income statements, balance sheets and cash

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flow statements, by month) for such fiscal year of Borrower, and (B) annual financial projections for such fiscal year (on a quarterly basis), as approved by Borrower’s board of directors, together with any related business forecasts used in the preparation of such annual financial projections; and

(vii) as soon as available, and in any event within 90 days following the end of Borrower’s fiscal year, annual financial statements certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Bank, except that the opinion may be qualified for uncertainty of the Borrower’s ability to continue as a going concern.

          (b) At all times that Borrower is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, within five (5) days after filing, all reports on Form 10-K, l0-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Borrower’s or another website on the Internet.

          (c) Prompt written notice of (i) any material change in the composition of the Intellectual Property, (ii) the registration of any Copyright, including any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not previously disclosed to Bank in writing, or (iii) Borrower’s knowledge of an event that materially adversely affects the value of the Intellectual Property.

          (d) Prompt written report of any legal action pending or threatened in writing against Borrower or any of its Subsidiaries that could result in damages or costs to Borrower or any of its Subsidiaries of more than Two Hundred Fifty Thousand Dollars ($250,000), individually or when aggregated with all other legal actions pending or threatened in writing against Borrower or any of its Subsidiaries that have not previously been disclosed to Bank pursuant to the Perfection Certificate or other written report.

          (e) Other financial information reasonably requested by Bank.

     6.3 Accounts Receivable.

          (a) Schedules and Documents Relating to Accounts. Borrower shall deliver to Bank Transaction Reports and schedules of collections, as provided in Section 6.2, on Bank’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Bank’s Lien and other rights in all of Borrower’s Accounts, nor shall Bank’s failure to advance or lend against a specific Account affect or limit Bank’s Lien and other rights therein. If requested by Bank, Borrower shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, Borrower shall deliver to Bank, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary endorsements, and copies of all credit memos.

          (b) Disputes. Borrower shall promptly notify Bank of all disputes or claims relating to Accounts. Borrower may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and reports the same to Bank in the regular reports provided to Bank; and (ii) no Default or Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, no Credit Extension(s) shall exceed any limit thereon contained herein.

          (c) Collection of Accounts. Until payment in full in cash of all Advances and all other Obligations relating to the Revolving Line (other than inchoate indemnity obligations) and Bank’s obligations to make Advances and any other Credit Extensions relating to the Revolving Line have terminated (provided that Borrower’s obligation under this sentence shall not end at a time when any Event of Default exists), Borrower shall be a party to a three party agreement (the “Lockbox Agreement”) with Bank and a lockbox provider (the “Lockbox Provider”). The Lockbox Agreement and Lockbox Provider shall be acceptable to Bank. Borrower shall use the lockbox address as the payment address on all invoices issued by Borrower and shall direct all its Account Debtors

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to remit their payments to the lockbox address. The Lockbox Agreement shall provide that the Lockbox Provider shall remit all collections received in the lockbox to Bank. Upon Bank’s receipt of such collections, Bank shall apply the same as follows:

(i)	If a Streamline Period is in effect, Bank shall deposit such proceeds into the operating account of Borrower at Bank that has been designated by Borrower; and
(ii)	If a Streamline Period is not in effect, Bank shall apply such proceeds to the outstanding Advances, and if all outstanding Advances have been paid in full, Bank shall deposit the remainder into the operating account of Borrower at Bank that has been designated by Borrower; and
(iii)	If a Default or Event of Default has occurred and is continuing, without limiting Bank’s other rights and remedies, Bank shall have the right to apply such proceeds to the outstanding Obligations in such order as it shall determine in its discretion.

It is understood and agreed by Borrower that this Section does not impose any affirmative duty on Bank to do any act other than to turn over such amounts. Without limitation on the foregoing, whether or not an Event of Default has occurred and is continuing, Borrower shall immediately deliver all payments on and proceeds of Accounts to an account maintained with Bank to be applied (i) prior to an Event of Default, pursuant to the terms of Section 2.5(b) hereof, and (ii) after the occurrence and during the continuance of an Event of Default, pursuant to the terms of Section 9.4 hereof.

          (d) Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) provide a copy of such credit memorandum to Bank, upon request from Bank. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall immediately notify Bank of the return of the Inventory.

          (e) Verification. Bank may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, either in the name of Borrower or Bank or such other name as Bank may choose.

          (f) No Liability. Bank shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Bank be deemed to be responsible for any of Borrower’s obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Bank from liability for its own gross negligence or willful misconduct.

     6.4 Remittance of Proceeds. Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations pursuant to the terms of this Agreement; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Bank the proceeds of (a) the sale of surplus, worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year), or (b) the disposition of marketable securities that are held with or managed by Bank or Bank’s Affiliates, provided that if such proceeds are to be moved from the account in which the marketable securities were held immediately prior to such disposition, they are only moved to an operating account of Borrower with Bank for use thereafter in the ordinary course of Borrower’s business. Borrower agrees

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that it will maintain all proceeds of Collateral in an account maintained with Bank. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

     6.5 Taxes; Pensions. Timely file, and require each of its Subsidiaries to timely file, all required tax returns and reports, and timely pay, and require each of its Subsidiaries to timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower and each of its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

     6.6 Access to Collateral; Books and Records. At reasonable times, on five (5) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy Borrower’s Books. The foregoing inspections and audits shall be at Borrower’s expense, and the charge therefor shall be $850 per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of- pocket expenses. In the event Borrower and Bank schedule an audit more than ten (10) days in advance, and Borrower cancels or seeks to reschedules the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.

     6.7 Insurance. Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as an additional lender loss payee and waive subrogation against Bank, and all liability policies shall show, or have endorsements showing, Bank as an additional insured. All policies (or the loss payable and additional insured endorsements) shall provide that the insurer must give Bank at least twenty (20) days notice before canceling, amending, or declining to renew its policy. At Bank’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Bank’s option, be payable to Bank on account of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to Fifty Thousand Dollars ($50,000) with respect to any loss, but not exceeding One Hundred Thousand Dollars ($100,000) in the aggregate for all losses under all casualty policies in any one year, toward the replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Bank has been granted a first priority security interest, and (b) after the occurrence and during the continuance of an Event of Default, all proceeds payable under such casualty policy shall, at the option of Bank, be payable to Bank on account of the Obligations. If Borrower fails to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.7, and take any action under the policies Bank deems prudent.

     6.8 Operating Accounts.

          (a) Maintain all of its and all of its Subsidiaries’ operating and other deposit accounts, securities accounts, and any other accounts at which Borrower or its Subsidiaries maintain funds or investments (including without limitation any Collateral Accounts, but excluding the Auction Rate Securities (UBS)) with Bank and Bank’s Affiliates.

          (b) Without limitation on subsection “a” above, (i) provide Bank five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates, and (ii) for each Collateral Account that Borrower at any time maintains, Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder. The provisions of “ii” of the previous sentence shall not apply to (y) deposit accounts exclusively used for payroll, payroll taxes and other

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employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Bank by Borrower as such, or (z) the Auction Rate Securities (UBS).

     6.9 Financial Covenants. Borrower shall maintain at all times, to be tested as of the last day of each month, unless otherwise noted, on a consolidated basis:

          (a) Liquidity Ratio. A Liquidity Ratio of greater than 1.50 to 1.00, to be tested as of the last day of each month during which any Advances were outstanding. In addition, if, at the time an Advance is requested by the Borrower, the Liquidity Ratio has not been tested with respect to the monthly financial statements of Borrower most recently received by Bank, then the Liquidity Ratio shall be tested with respect to such financial statements prior to the Advance being made.

          (b) EBITDA. Maintain EBITDA as of the last day of each month, for the three month period ending as of last day of such month, of at least the following for each such period ending during the following intervals:

	Minimum EBITDA
Interval	(Amounts are Negative)
Effective Date through March 31, 2010		[$7,800,000]
April 1,2010 through June 30, 2010		[$6,500,000]
July 1, 2010 through September 30, 2010		[$5,700,000]
October 1,2010 through December 31, 2010		[$4,300,000]
January 1,2011 through March 31, 2011		[$3,400,000]
April 1,2011 and thereafter		[$2,000,000]

          (c) Fixed Charge Coverage Ratio. A Fixed Charge Coverage Ratio of greater than 1.25 to 1.00, to be tested as of the last day of each month, provided that Borrower shall not be required to maintain the foregoing Fixed Charge Coverage Ratio until on and after the date that the Partial Term Loan Reserve becomes zero.

          (d) Waiver Regarding Performance to Plan Covenant. Reference is made to the fact that the Section 6.9(b) of the Prior LSA contained a requirement that Borrower’s monthly net revenue equal or exceed certain projections and that Borrower failed to satisfy’ such requirements with respect to December 2009, January 2010, February, 2010 and March, 2010 (if the Effective Date is after March 31, 2010). Bank hereby waives any Default or Event of Default that may have occurred as a result of such failure.

     6.10 Intellectual Property Rights.

          (a) (i) Protect, defend and maintain the validity and enforceability of its Intellectual Property; (ii) promptly advise Bank in writing of material infringements of its Intellectual Property; and (iii) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.

          (b) Provide written notice to Bank within ten (10) days of entering or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (i) any Restricted License to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (ii) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under this Agreement and the other Loan Documents.

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          (c) If Borrower (i) obtains any Patent, registered Trademark, registered Copyright, registered mask work, or any pending application for any of the foregoing, whether as owner, licensee or otherwise, or (ii) applies for any Patent or the registration of any Trademark, then Borrower shall immediately provide written notice thereof to Bank and shall execute such intellectual property security agreements and other documents and take such other actions as Bank shall request in its good faith business judgment to perfect and maintain a perfected security interest in favor of Bank in such property subject to senior Permitted Liens. If Borrower decides to register any Copyrights or mask works in the United States Copyright Office, Borrower shall: (x) provide Bank with at least fifteen (15) days prior written notice of Borrower’s intent to register such Copyrights or mask works together with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a perfected security interest in favor of Bank in the Copyrights or mask works intended to be registered with the United States Copyright Office subject only to senior Permitted Liens; and (z) record such intellectual property security agreement with the United States Copyright Office contemporaneously with filing the Copyright or mask work application(s) with the United States Copyright Office. Borrower shall promptly provide to Bank copies of all applications that it files for Patents or for the registration of Trademarks, Copyrights or mask works, together with evidence of the recording of the intellectual property security agreement necessary for Bank to perfect and maintain a perfected security interest in such property subject only to senior Permitted Liens.

     6.11 Litigation Cooperation. From the date hereof and continuing through the termination of this Agreement, make available to Bank, without expense to Bank, Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to Borrower.

     6.12 Further Assurances. Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement.

     7 NEGATIVE COVENANTS

     Borrower shall not do any of the following without Bank’s prior written consent:

     7.1 Dispositions. Convey, sell, lease, transfer, or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for (a) Transfers of Inventory in the ordinary course of business; (b) Transfers of worn-out or obsolete Equipment; and (c) Transfers consisting of Permitted Liens and Permitted Investments; and (d) Transfers of non-exclusive licenses for the use of the property of Borrower or its Subsidiaries in the ordinary course of business.

     7.2 Changes in Business, Management, Ownership, or Business Locations.

          (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto;

          (b) liquidate or dissolve; or

          (c) permit or suffer any Change in Control; or

          (d) without at least thirty (30) days prior written notice to Bank: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain assets and property of Borrower with an aggregate value of less than $10,000) or deliver any portion of the Collateral valued, individually or in the aggregate, in excess of Fifty Thousand Dollars ($50,000) to a bailee at a location other than to a bailee and at a location already disclosed in the Perfection Certificate, (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change its organizational number (if any) assigned by its jurisdiction of organization. If Borrower intends to deliver any portion of the Collateral valued,

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individually or in the aggregate, in excess of Fifty Thousand Dollars ($50,000) to a bailee, and Bank and such bailee are not already parties to a bailee agreement governing both the Collateral and the location to which Borrower intends to deliver the Collateral, then Borrower will first receive the written consent of Bank, and such bailee shall execute and deliver a bailee agreement in form and substance satisfactory to Bank in its sole discretion.

     7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except that a Subsidiary of Borrower may merge or consolidate into another Subsidiary of Borrower.

     7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

     7.5 Encumbrance. Create, incur, allow, or suffer any Lien on any of its property or assets, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Lien” herein.

     7.6 Maintenance of Collateral Accounts. Maintain any Collateral Account except pursuant to the terms of Section 6.8 hereof.

     7.7 Investments; Distributions. (a) Directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, provided that (i) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof, (ii) Borrower may pay dividends solely in common stock, (iii) Borrower may repurchase the stock of former employees or consultants pursuant to stock repurchase agreements so long as no Default or Event of Default has occurred at the time of such repurchase and would not exist after giving effect to such repurchase, provided such repurchase does not exceed an aggregate of $50,000 in any fiscal year, and (iv) upon the exercise of non-qualified stock option grants to purchase Borrower stock by an option holder who is, or upon the vesting of restricted stock grants for Borrower stock to, an employee, member of the Board of Directors or consultant of Borrower, Borrower may issue shares pursuant to such exercise or vesting on a net issuance basis and pay the applicable withholding taxes to taxing authorities on behalf of such employee, member of the Board of Directors or consultant of Borrower receiving such shares.

     7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

     7.9 Subordinated Debt. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or the amount of any permitted payments thereunder or adversely affect the subordination thereof to Obligations owed to Bank. Nothing in this Section 7.9 restricts Borrower from converting any of the Subordinated Debt to PFG to equity securities of Borrower in accordance with its Loan Agreement with PFG, and borrowing from PFG an amount equal to the Subordinated Debt so converted, provided that the total amount of outstanding Subordinated Debt to PFG shall not at any time exceed $4,000,000.

     7.10 Compliance. Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the

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Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

     7.11 UBS Loans. Borrower shall not make any payments of principal with respect to the UBS Loans other than payments from proceeds from the sale of Auction Rate Securities (UBS) and except that the Borrower may repay the UBS Loans in the event Borrower receives net proceeds exceeding $50,000,000 from an initial public offering of Borrower’s stock. The Borrower shall not provide any collateral or other security for the UBS Loans other than the Auction Rate Securities (UBS). Neither the UBS Loans nor the UBS Loan Documents shall be amended to increase the rate of interest or any fees, costs or expenses, or to accelerate the payment of the principal or interest or any. other amount with respect to the UBS Loans or the UBS Loan Documents.

     7.12 Capital Expenditures. Contract for, purchase or make any expenditure or commitments for unfinanced Capital Expenditures in any fiscal year in an aggregate amount in excess of $2,000,000.

     8 EVENTS OF DEFAULT

     Any one of the following shall constitute an event of default (an “Event of Default”) under this Agreement:

     8.1 Payment Default. Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable. During the cure period, the failure to make or pay any payment specified under clause (a) or (b) hereunder is not an Event of Default (but no Credit Extension will be made during the cure period);

     8.2 Covenant Default.

          (a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, or 6.9, or violates any covenant in Section 7; or

          (b) Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Cure periods provided under this section shall not apply, among other things, to financial covenants or any other covenants set forth in subsection (a) above;

     8.3 Material Adverse Change. A Material Adverse Change occurs;

     8.4 Attachment; Levy; Restraint on Business. (a) (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrower or of any entity under control of Borrower (including a Subsidiary) on deposit or otherwise maintained with Bank or any Bank Affiliate, or (ii) a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency, and the same under subclauses (i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; or

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(b) (i) any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents Borrower from conducting any part of its business;

     8.5 Insolvency. (a) Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within thirty (30) days (but no Credit Extensions shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);

     8.6 Other Agreements. There is, under any agreement to which Borrower is a party with a third party or parties, (a) any default resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually or in the aggregate in excess of $200,000; or (b) any default by Borrower that could result in a Material Adverse Change with respect to Borrower; provided, however, that the Event of Default under this Section 8.6 caused by the occurrence of a default under such other agreement shall be cured or waived for purposes of this Agreement upon Bank receiving written notice from the party asserting such default of such cure or waiver of the default under such other agreement, if at the time of such cure or waiver under such other agreement (x) Bank has not declared an Event of Default under this Agreement and/or exercised any rights with respect thereto; (y) any such cure or waiver does not result in an Event of Default under any other provision of this Agreement or any Loan Document; and (z) in connection with any such cure or waiver under such other agreement, the terms of any agreement with such third party are not modified or amended in any manner which could in the good faith judgment of Bank be materially less advantageous to Borrower;

     8.7 Judgments. One or more judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of $200,000 or more (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower and shall remain unsatisfied, unvacated, or unstayed for a period of ten (10) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction, vacation, or stay of such judgment, order, or decree);

     8.8 Misrepresentations. Borrower or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;

     8.9 Subordinated Debt or Lien. Any document, instrument, or agreement evidencing any Subordinated Debt shall for any reason be revoked or invalidated or otherwise cease to be in full force and effect; any Person shall be in breach thereof or contest in any manner the validity or enforceability thereof or deny that it has any further liability or obligation thereunder; a default or breach occurs under any agreement between Borrower and any creditor of Borrower that signed a subordination, intercreditor, or other similar agreement with Bank, or any creditor that has signed such an agreement with Bank breaches any terms of such agreement; or the Obligations shall for any reason be subordinated or shall not have the priority contemplated by this Agreement or any such subordination, intercreditor, or other similar agreement; or

     8.10 [intentionally omitted]

     8.11 UBS Loan. A default or breach occurs with respect to the UBS Loans or the UBS Loan Documents.

     9 BANK’S RIGHTS AND REMEDIES

     9.1 Rights and Remedies. If an Event of Default has occurred and is continuing, Bank may, without notice or demand, do any or all of the following:

          (a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

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          (b) stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

          (c) demand that Borrower (i) deposit cash with Bank in an amount equal to 105% of the Dollar Equivalent of the aggregate face amount of all Letters of Credit remaining undrawn (plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment)), to secure all of the Obligations relating to such Letters of Credit, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all letter of credit fees scheduled to be paid or payable over the remaining term of any Letters of Credit;

          (d) terminate any FX Forward Contracts;

          (e) verify the amount of, demand payment of and performance under, and collect any Accounts and General Intangibles, settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Bank considers advisable, notify any Person owing Borrower money of Bank’s security interest in such funds;

          (f) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

          (g) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

          (h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, Patents, Copyrights, mask works, rights of use of any name, trade secrets, trade names, Trademarks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;

          (i) place a “hold” on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

          (j) demand and receive possession of Borrower’s Books; and

          (k) exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

     9.2 Power of Attorney. Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust all claims under any of Borrower’s insurance policies that relate to any of the Collateral; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Bank or a third party as the Code permits. Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfect or continue the perfection of Bank’s security interest in the

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Collateral regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity obligations) have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations) have been fully repaid and performed and Bank’s obligation to provide Credit Extensions terminates.

     9.3 Protective Payments. If Borrower fails to obtain the insurance called for by Section 6.7 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest rate applicable to the Obligations, and secured by the Collateral. Bank will make reasonable efforts to provide Borrower with notice of Bank obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.

     9.4 Application of Payments and Proceeds. Borrower shall have no right to specify the order or the accounts to which Bank shall allocate or apply any payments required to be made by Borrower to Bank or otherwise received by Bank under this Agreement when any such allocation or application is not specified elsewhere in this Agreement. If an Event of Default has occurred and is continuing, Bank may apply any funds in its possession, whether from Borrower account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations in such order as Bank shall determine in its sole discretion. If with respect to any payment or other credit Bank has the right under this Agreement or the other Loan Documents to determine the application of such payment or credit, then Bank may apply and reverse and reapply such payment or credit to the Obligations in such manner as Bank shall determine in its sole discretion. Any surplus shall be paid to Borrower by credit to the Designated Deposit Account or to other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Bank shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Bank of cash therefor.

     9.5 Bank’s Liability for Collateral. So long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral.

     9.6 No Waiver; Remedies Cumulative. Bank’s failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by the party granting the waiver and then is only effective for the specific instance and purpose for which it is given. Bank’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election and shall not preclude Bank from exercising any other remedy under this Agreement or other remedy available at law or in equity, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, or acquiescence.

     9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

     10 NOTICES

     All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when

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sent by electronic mail or facsimile transmission (provided that if transmission occurs after normal business hours during a day, then upon the next Business Day); (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Bank or Borrower may change its mailing or electronic mail address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

If to Borrower:	Cardiovascular Systems, Inc.
	651 Campus Drive
	Saint Paul, MN 55112
	Attn: Larry Betterley
	Fax: (651) 259-1696
	Email: LBetter1ey@csi360.com
If to Bank:	Silicon Valley Bank
	301 Carlson Parkway, Suite 255
	Minnetonka, MN 55305
	Attn: Ben Johnson
	Fax: (952) 475-8471
	Email: BJohnson@svb.com

     11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE.

     California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court.

TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County,

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California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

     12 GENERAL PROVISIONS

     12.1 [Reserved].

     12.2 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Bank’s prior written consent (which may be granted or withheld in Bank’s discretion). Bank has the right, without the consent of or notice to Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights, and benefits under this Agreement and the other Loan Documents (other than the Warrant, as to which assignment, transfer and other such actions are governed by the terms of the Warrant).

     12.3 Indemnification. Borrower agrees to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank (each, an “Indemnified Person”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or expenses (including Bank Expenses) in any way suffered, incurred, or paid by such Indemnified Person as a result of, following from, consequential to, or arising from transactions between Bank and Borrower contemplated by the Loan Documents (including reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.

     12.4 Time of Essence. Time is of the essence for the performance of all Obligations in this Agreement.

     12.5 Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

     12.6 [Reserved].

     12.7 Amendments in Writing; Waiver; Integration. No purported amendment or modification of any Loan Document, or waiver, discharge or termination of any obligation under any Loan Document, shall be enforceable or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as, or evidence, an amendment, supplement or waiver or have any other effect on any Loan Document. Any waiver granted shall be limited to the specific circumstance expressly described in it, and shall not apply to any subsequent or other circumstance, whether similar or dissimilar, or give rise to, or evidence, any obligation or commitment to grant any further waiver. The Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of the Loan Documents merge into the Loan Documents.

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     12.8 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

     12.9 Survival. All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in Section 12.3 to indemnify the Indemnified Persons shall survive until all statutes of limitation with respect to the Claims, losses and expenses for which indemnity is given shall have run. The provisions of Section 12.10 shall survive termination of this Agreement.

     12.10 Confidentiality. In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with Bank, collectively, “Bank Entities”); (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall use commercially reasonable efforts to obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise required in connection with Bank’s examination or audit; (e) as Bank considers appropriate in exercising remedies under the Loan Documents; and (f) to third-party service providers of Bank so long as such service providers have executed a confidentiality agreement with Bank with terms no less restrictive than those contained herein. Confidential information does not include information that either: (i) is in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

     Bank Entities may use the confidential information for reporting purposes and the development and distribution of databases and market analyses so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly prohibited by Borrower. The provisions of the immediately preceding sentence shall survive the termination of this Agreement.

     12.11 Attorneys’ Fees, Costs and Expenses. In any action or proceeding between Borrower and Bank arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

     12.12 Electronic Execution of Documents. The words “execution,”“signed,”“signature” and words of like import in any Loan Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.

     12.13 Captions. The headings used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

     12.14 Construction of Agreement. The parties mutually acknowledge that they and their attorneys have participated in the preparation and negotiation of this Agreement. In cases of uncertainty this Agreement shall be construed without regard to which of the parties caused the uncertainty to exist.

     12.15 Relationship. The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different from those of parties to an arm’s-length contract.

     12.16 Third Parties. Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge the obligation or liability of any

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person not an express party to this Agreement; or (c) give any person not an express party to this Agreement any right of subrogation or action against any party to this Agreement.

     13 DEFINITIONS

     13.1 Definitions. As used in the Loan Documents, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, and the singular includes the plural. As used in this Agreement, the following terms have the following meanings:

     “Account” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

     “Account Debtor” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

     “Advance” or “Advances” means an advance (or advances) under the Revolving Line.

     “Affiliate” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

     “Agreement” is defined in the preamble hereof.

     “Auction Rate Securities” shall have the meaning commonly attributed thereto but shall include without limitation any bonds sold by U.S. states, cities, and public authorities, funds, corporations or student loan agencies with a long-term nominal maturity for which the interest rate is reset through a dutch auction.

     “Auction Rate Securities (UBS)” means the Auction Rate Securities owned by Borrower and held with UBS Financial Services Inc. or its Affiliates and serving as collateral for the UBS Loans.

     “Availability Amount” is (a) the lesser of (i) the Maximum Dollar Amount or (ii) the amount available under the Borrowing Base, minus (b) the aggregate Dollar Equivalent amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) plus an amount equal to the Letter of Credit Reserve, minus (c) the FX Reduction Amount, minus (d) any amounts used for Cash Management Services, and minus (e) the outstanding principal balance of any Advances.

     “Bank” is defined in the preamble hereof.

     “Bank Expenses” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating, amending, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

     “Borrower” is defined in the preamble hereof.

     “Borrower’s Books” are all Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

     “Borrowing Base” is (a) 80% of Eligible Accounts, plus (b) the lesser of 40% of the value of Borrower’s Eligible Inventory (valued at the lower of cost or wholesale fair market value) or 25% of Eligible Accounts or $2,500,000 (in the case of both “a” and “b”, as determined by Bank from Borrower’s most recent Transaction Report), minus (c) the greater of the Partial Term Loan Reserve and the Full Term Loan Reserve, to the extent the same are in effect. Bank may decrease the foregoing percentages in its good faith business judgment based on

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events, conditions, contingencies, or risks which, as determined by Bank (after taking into account any Reserves that Bank may have established as a consequence of such events, conditions, contingencies, or risks), may adversely affect Collateral.

     “Borrowing Resolutions” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary or assistant secretary on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that such certificate contains a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate.

     “Business Day” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

     “Capital Expenditure” means expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of capitalized lease obligations, which, in accordance with GAAP, would be classified as capital expenditures.

     “Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., (c) Bank’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition. For purposes of clarity, and without limitation, it is agreed that that “Cash Equivalents” do not include any Auction Rate Securities.

     “Cash Management Services” is defined in Section 2.1.4.

     “Change in Control” means any event, transaction, or occurrence as a result of which any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing twenty percent (20%) or more of the combined voting power of Borrower’s then outstanding securities.

     “Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

     “Collateral” is any and all properties, rights and assets of Borrower described on Exhibit A.

     “Collateral Account” is any Deposit Account, Securities Account, or Commodity Account.

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     “Commodity Account” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

     “Compliance Certificate” is that certain certificate in the form attached hereto as Exhibit B.

     “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation, in each case, directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

     “Control Agreement” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

     “Copyrights” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.

     “Credit Extension” is any Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash Management Services, Term Loan, or any other extension of credit by Bank for Borrower’s benefit.

     “Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

     “Default Rate” is defined in Section 2.3(b).

     “Deferred Revenue” is all amounts received or invoiced in advance of performance under contracts and not yet recognized as revenue.

     “Deposit Account” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

     “Designated Deposit Account” is Borrower’s deposit account, account number 3300613328, maintained with Bank.

     “Dollars,” “dollars” or use of the sign “$” means only lawful money of the United States and not any other currency, regardless of whether that currency uses the “$” sign to denote its currency or may be readily converted into lawful money of the United States.

     “Dollar Equivalent” is, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by Bank at such time on the basis of the then-prevailing rate of exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

     “EBITDA” shall mean (a) Net Income minus any non-cash income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) stock-based compensation expense (to the extent not payable in cash), plus (f) non-cash

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expenses incurred from applying GAAP to the terms of this Agreement and related Warrant and to the terms of the Subordinated Debt to PFG and related warrant, plus (g) any other non-cash charges.

     “Effective Date” is defined in the preamble hereof.

     “Eligible Accounts” means Accounts which arise in the ordinary course of Borrower’s business that meet all Borrower’s representations and warranties in Section 5.3. Bank reserves the right at any time and from time to time after the Effective Date, to adjust any of the criteria set forth below and to establish new criteria in its good faith business judgment. Unless Bank agrees otherwise in writing, Eligible Accounts shall not include:

     (a) Accounts for which the Account Debtor is Borrower’s Affiliate, officer, employee, or agent;

     (b) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date regardless of invoice payment period terms;

     (c) Accounts with credit balances over ninety (90) days from invoice date, to the extent of such credit balance;

     (d) Accounts owing from an Account Debtor, fifty percent (50%) or more of whose Accounts have not been paid within ninety (90) days of invoice date;

     (e) Accounts owing from an Account Debtor which does not have its principal place of business in the United States or Canada;

     (f) Accounts billed or payable outside of the United States;

     (g) Accounts owing from an Account Debtor to the extent that Borrower is indebted or obligated in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise - sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by Borrower in the ordinary course of its business;

     (h) Accounts owing from an Account Debtor whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, for the amounts that exceed that percentage, unless Bank approves in writing;

     (i) Accounts owing from an Account Debtor which is a United States government entity or any department, agency, or instrumentality thereof, unless both (i) the Account has been pre-approved by Bank in writing, and (ii) Borrower has assigned its payment rights to Bank and the assignment has been acknowledged under the Federal Assignment of Claims Act of 1940, as amended;

     (j) Accounts for demonstration or promotional equipment, or in which goods are consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on approval”, or other terms if Account Debtor’s payment may be conditional;

     (k) Accounts owing from an Account Debtor that has not been invoiced or where goods or services have not yet been rendered to the Account Debtor (sometimes called memo billings or pre-billings);

     (l) Accounts subject to contractual arrangements between Borrower and an Account Debtor where payments shall be scheduled or due according to completion or fulfillment requirements where the Account Debtor has a right of offset for damages suffered as a result of Borrower’s failure to perform in accordance with the contract (sometimes called contracts accounts receivable, progress billings, milestone billings, or fulfillment contracts);

     (m) Accounts owing from an Account Debtor the amount of which may be subject to withholding based on the Account Debtor’s satisfaction of Borrower’s complete performance (but only to the extent of the amount withheld; sometimes called retainage billings);

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     (n) Accounts subject to trust provisions, subrogation rights of a bonding company, or a statutory trust;

     (o) Accounts owing from an Account Debtor that has been invoiced for goods that have not been shipped to the Account Debtor unless Bank, Borrower, and the Account Debtor have entered into an agreement acceptable to Bank in its sole discretion wherein the Account Debtor acknowledges that (i) it has title to and has ownership of the goods wherever located, (ii) a bona fide sale of the goods has occurred, and (iii) it owes payment for such goods in accordance with invoices from Borrower (sometimes called “bill and hold” accounts);

     (p) Accounts for which the Account Debtor has not been invoiced;

     (q) Accounts that represent non-trade receivables or that are derived by means other than in the ordinary course of Borrower’s business;

     (r) [intentionally omitted];

     (s) Accounts subject to chargebacks, debit memos or others payment deductions taken by an Account Debtor (but only to the extent of the chargebacks or deductions);

     (t) Accounts arising from product returns and/or exchanges (sometimes called “warranty” or “RMA” accounts);

     (u) Accounts owing from an Account Debtor with respect to which Borrower has received Deferred Revenue (but only to the extent of such Deferred Revenue);

     (v) Accounts in which the Account Debtor disputes liability or makes any claim (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; and

     (w) Accounts for which Bank in its good faith business judgment determines collection to be doubtful, including, without limitation, accounts represented by “refreshed” or “recycled” invoices.

     “Eligible Inventory” means Inventory that meets all of Borrower’s representations and warranties in Section 5.3 and is otherwise acceptable to Bank in all respects, in Bank’s good faith business judgment.

     “Equipment” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

     “ERISA” is the Employee Retirement Income Security Act of 1974, and its regulations.

     “Event of Default” is defined in Section 8.

     “Final Payment” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due with respect to the Term Loan on the earlier to occur of (a) the Term Loan Maturity Date, (b) the acceleration of the Term Loan, or (c) the prepayment of the Term Loan, equal to the Term Loan Commitment Amount multiplied by the Final Payment Percentage.

     “Final Payment Percentage” is one percent (1.0%)

     “Fixed Charge Coverage Ratio” is the ratio of (a) EBITDA for the 12 month period ending as of the date for which it is being measured, minus the sum of Capital Expenditures, cash taxes paid and dividends and distributions made (other than dividends or distributions by a Person payable in its stock, or split-ups or reclassifications of its stock) for such period calculated on a consolidated basis for Borrower and its Subsidiaries, divided by (b) the sum of principal payments made on Indebtedness during and Interest Expense (to the extent such

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Interest Expense is to be settled in cash) for such period calculated on a consolidated basis for Borrower and its Subsidiaries.

     “Foreign Currency” means lawful money of a country other than the United States.

     “Full Term Loan Reserve” means, as of any date of determination, (a) when a Streamline Period is in effect, an amount equal to zero and (b) when a Streamline Period is not in effect, an amount equal to 100% of the outstanding principal balance of the Term Loan as of such date of determination.

     “Funding Date” is any date on which a Credit Extension is made to or for the account of Borrower which shall be a Business Day.

     “FX Business Day” is any day when (a) Bank’s Foreign Exchange Department is conducting its normal business and (b) the Foreign Currency being purchased or sold by Borrower is available to Bank from the entity from which Bank shall buy or sell such Foreign Currency.

     “FX Forward Contract” is defined in Section 2.1.3.

     “FX Reduction Amount” is defined in Section 2.1.3.

     “FX Reserve” is defined in Section 2.1.3.

     “GAAP” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

     “General Intangibles” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all Intellectual Property, claims, income and other tax refunds, security and other deposits, payment intangibles, contract rights, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

     “Governmental Approval” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

     “Governmental Authority” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

     “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

     “Indemnified Person” is defined in Section 12.3.

     “Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

     “Intellectual Property” means all of a Person’s right, title, and interest in and to the following:

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     (a) its Copyrights, Trademarks and Patents;

     (b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how, operating manuals;

     (c) any and all source code;

     (d) any and all design rights which may be available to such Person;

     (e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above; and

     (f) all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.

     “Interest Expense” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Credit Extension and other Indebtedness of Borrower and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

     “Inventory” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

     “Investment” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

     “Letter of Credit” means a standby letter of credit issued by Bank or another institution based upon an application, guarantee, indemnity or similar agreement on the part of Bank as set forth in Section 2.1.2.

     “Letter of Credit Application” is defined in Section 2.1.2(b).

     “Letter of Credit Reserve” has the meaning set forth in Section 2.1.2(e).

     “Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

     “Liquidity Ratio” is the ratio of (a) Borrower’s unrestricted cash and Cash Equivalents held with Bank and Bank’s Affiliates plus Borrower’s Eligible Accounts, divided by (b) the sum of the outstanding principal amount of any Advances (including any amounts used for Cash Management Services), plus the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus the FX Reduction Amount, plus all other indebtedness for borrowed money (other than the UBS Loans and the Subordinated Debt to PFG) or the deferred price of property or services (other than unsecured indebtedness to trade creditors incurred in the ordinary course of business).

     “Liquidity Ratio Condition” is the condition that Borrower maintain at all times a Liquidity Ratio of greater than 2.25 to 1.00.

     “Loan Documents” are, collectively, this Agreement, the Warrant, the Perfection Certificate, the letter agreement dated September 9, 2009 between Borrower and Bank with respect to the Pearland Economic

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Development Corporation, any note, or notes or guaranties executed by Borrower, and any other present or future agreement by Borrower with or for the benefit of Bank in connection with this Agreement or the Prior LSA, all as amended, restated, or otherwise modified.

     “Lockbox Agreement” is defined in Section 6.3(c).

     “Lockbox Provider” is defined in Section 6.3(c).

     “Make-Whole Event Date” shall mean (a) in the case of a prepayment pursuant to Section 2.1.5(d) hereof, the date of such prepayment, and (b) in the case of all or a portion of the Term Loan becoming due and payable according to the terms hereof because of the occurrence and continuance of an Event of Default, the date such amount of the Term Loan has become due and payable according to the terms hereof.

     “Make-Whole Premium” is an amount equal to 3% of the Term Loan Commitment Amount if the Make-Whole Event Date occurs on or before the first anniversary of the Effective Date; 2% of the Term Loan Commitment Amount if the Make-Whole Event Date occurs after the first anniversary of the Effective Date but on or before the second anniversary of the Effective Date; and 1% of Term Loan Commitment Amount if the Make-Whole Event Date occurs after the second anniversary of the Effective Date but before the Term Loan Maturity Date.

     “Material Adverse Change” is (a) a material impairment in the perfection or priority of Bank’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; or (c) a material impairment of the prospect of repayment of any portion of the Obligations; or (d) Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 6.9 during the next succeeding financial reporting period.

     “Maximum Dollar Amount” is $15,000,000.

     “Net Income” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.

     “New Term Loan Advance” is defined in Section 2.1.5(a).

     “Obligations” are Borrower’s obligations to pay when due any debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, whether under this Agreement, the Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank, and to perform Borrower’s duties under the Loan Documents.

     “Operating Documents” are, for any Person, such Person’s formation documents, as certified with the Secretary of State of such Person’s state of formation on a date that is no earlier than 30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

     “Overadvance” is defined in Section 2.2.

     “Partial Term Loan Reserve” means, as of any date of determination, an amount equal to 50% of the outstanding principal balance of the Term Loan as of such date; provided that, on and after the date that Borrower has maintained a Fixed Charge Coverage Ratio of greater than 1.50 to 1.00 as of the last day of each of two consecutive fiscal quarters, Borrower has provided to Bank financial statements and Compliance Certificates

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     confirming the same, and Bank has had a reasonable time to review the same, the Partial Term Loan Reserve shall be zero.

     “Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

     “Payment” means all checks, wire transfers and other items of payment received by Bank (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrower’s outstanding Credit Extensions or, if the balance of the Credit Extensions has been reduced to zero, for credit to its deposit accounts.

     “Payment/Advance Form” is that certain form attached hereto as Exhibit C.

     “Perfection Certificate” is defined in Section 5.1.

     “Permitted Indebtedness” is:

     (a) Borrower’s Indebtedness to Bank under this Agreement and the other Loan Documents;

     (b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate;

     (c) Subordinated Debt to PFG in an amount not to exceed $4,000,000, and other Subordinated Debt;

     (d) the UBS Loans;

     (e) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

     (f) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;

     (g) Indebtedness secured by Permitted Liens described in subparts b-f of the definition of Permitted Liens;

     (h) other Indebtedness not exceeding $50,000 in the aggregate outstanding at any time; and

     (i) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (e) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be.

     “Permitted Investments” are:

     (a) Investments shown on the Perfection Certificate and existing on the Effective Date;

     (b) Cash Equivalents;

     (c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

     (d) Investments consisting of Collateral Accounts in which Bank has a perfected security interest;

     (e) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directors, not exceeding $100,000 in the aggregate for the foregoing “i” and “ii” outstanding at any time;

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     (f) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;

     (g) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions to, customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph shall not apply to Investments of Borrower in any Subsidiary;

     (h) other Investments not exceeding $50,000 in the aggregate outstanding at any time.

     “Permitted Liens” are:

     (a) Liens existing on the Effective Date and shown on the Perfection Certificate or arising under this Agreement and the other Loan Documents;

     (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

     (c) purchase money Liens (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment securing no more than $100,000 in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment;

     (d) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, have no priority over Bank’s security interest, and are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

     (e) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA), provided, they have no priority over any of Bank’s Liens;

     (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;

     (g) leases or subleases of real property granted in the ordinary course of business, and leases, subleases, non-exclusive licenses or sublicenses of property (other than real property or Intellectual Property) granted in the ordinary course of Borrower’s business, if the leases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest therein;

     (h) non-exclusive license of Intellectual Property granted to third parties in the ordinary course of business;

     (i) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Sections 8.4 or 8.7;

     (j) Liens in favor of UBS Bank USA against the Auction Rate Securities (UBS) securing the UBS Loans;

     (k) Liens securing Subordinated Debt if such liens are subordinated to the Liens in favor of Bank pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank

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(except that the security interest of PFG in the Intellectual Property may have priority over the security interest of the Bank therein pursuant to a subordination agreement between PFG and Bank in form and substance acceptable to the Bank in its good faith business judgment); and

     (l) Liens in favor of Pearland Economic Development Corporation against equipment and furniture within Borrower’s facility in Pearland, Texas, provided that such Liens are subject to the Subordination Agreement, dated September 9, 2009, between Bank and Pearland Economic Development Corporation.

     “Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

     “PFG” means Partners for Growth II, L.P., a Delaware limited partnership.

     “Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest rate.

     “Prior LSA” is defined in the preamble hereof.

     “Registered Organization” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made.

     “Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

     “Reserves” means, as of any date of determination, such amounts as Bank may from time to time establish and revise in its good faith business judgment, reducing the amount of Advances and other financial accommodations which would otherwise be available to Borrower (a) to reflect events, conditions, contingencies or risks which, as determined by Bank in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower, or (iii) the security interests and other rights of Bank in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Bank’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower to Bank is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Bank determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

     “Responsible Officer” is any of the Chief Executive Officer, President, Chief Financial Officer, Chief Administrative Officer and Controller of Borrower.

     “Restricted License” is any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Bank’s right to sell any Collateral.

     “Revolving Line” is an Advance or Advances in an aggregate amount of up to the Maximum Dollar Amount outstanding at any time.

     “Revolving Line Maturity Date” is March 29, 2012.

     “Securities Account” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

     “Settlement Date” is defined in Section 2.1.3.

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     “Streamline Period” is defined in Section 2.1.1(b).

     “Streamline Requirements” are all of the following: (a) no Default or Event of Default exists and (b) Borrower meets the Liquidity Ratio Condition.

     “Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of Borrower’s now existing or hereafter arising indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank entered into between Bank and the other creditor), on terms acceptable to Bank in its sole discretion. “Subordinated Debt” shall include indebtedness up to the principal amount of $4,000,000 owed by Borrower to PFG, provided that PFG has executed and delivered to Bank such a subordination agreement.

     “Subsidiary” is, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless the context otherwise requires, each reference to a Subsidiary herein shall be a reference to a Subsidiary of Borrower.

     “Term Loan” is defined in Section 2.1.5(a).

     “Term Loan Commitment Amount” is $10,000,000.

     “Term Loan Maturity Date” is March 29, 2013.

     “Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business connected with and symbolized by such trademarks.

     “Transaction Report” is that certain report of transactions and schedule of collections in the form attached hereto as Exhibit D.

     “Transfer” is defined in Section 7.1.

     “UBS Loan” is defined in Section 5.12.

     “UBS Loan Documents” is defined in Section 5.12.

     “Unused Revolving Line Facility Fee” is defined in Section 2.4(d).

     “Warrant” is that certain Warrant to Purchase Stock of substantially even date executed by Borrower in favor of Bank, which Warrant amends, restates and replaces the Warrant delivered by Borrower to Bank in connection with the Prior LSA.

[Signature page follows.]

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     IN WITNESS WHEREOF, the parties here to have caused this Agreement to be executed as of the Effective Date.

BORROWER:

CARDIOVASCULAR SYSTEMS, INC.

By:	/s/ Laurence L. Betterley
	Name:	LAURENCE L. BETTERLEY
	Title:	CFO

BANK:

SILICON VALLEY BANK
By:	/s/ Derek Johnson
	Name:	Derek Johnson
	Title:	Relationship Manager

[Signature page to Loan and Security Agreement]

EXHIBIT A

COLLATERAL

The Collateral consists of all of Borrower’s right, title and interest in and to the following personal property:

     All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles (except as provided below), commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, all certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

     All Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

     Notwithstanding the foregoing, the Collateral does not include any of the following, whether now owned or hereafter acquired: Auction Rate Securities (UBS).

     Pursuant to the terms of a certain negative pledge arrangement with Bank, Borrower has agreed not to encumber any of its Auction Rate Securities (UBS), except in favor of UBS Bank USA or its Affiliates to secure the UBS Loans.

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EX-10.2

Exhibit 10.2

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.

AMENDED AND RESTATED
WARRANT TO PURCHASE STOCK

Company:	Cardiovascular Systems, Inc., a Delaware Corporation
Number of Shares:	8,493
Class of Stock:	Common Stock
Warrant Price:	$5.482 per share
Restated Warrant Date	March 29, 2010
Issue Date:	September 12, 2008
Expiration Date:	The 10th anniversary after the Restated Warrant Date
Credit Facility:	This Warrant is issued in connection with the Term Loan referenced in the Loan and Security Agreement dated March 29, 2010 between Silicon Valley Bank and Company

     Reference is made to the Amended and Restated Warrant to Purchase Stock (the “Pre-Amendment Warrant”), with an Issue Date of September 12, 2008 and a Restated Warrant Date of February 25, 2009, by Company, in favor of SVB Financial Group. This Warrant amends and restates the Pre-Amendment Warrant.

     THIS WARRANT CERTIFIES THAT, for good and valuable consideration, SVB FINANCIAL GROUP (SVB Financial Group, together with any registered holder from time to time of this Warrant or any holder of the shares issuable or issued upon exercise of this Warrant, “Holder”) is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the “Shares”) of the Company at the Warrant Price, all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

ARTICLE 1. EXERCISE.

          1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Article 1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

          1.2 Conversion Right. In lieu of exercising this Warrant as specified in Article 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of

Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Article 1.3.

          1.3 Fair Market Value. If the Company’s common stock is traded in a public market and the Shares are common stock, the fair market value of each Share shall be the closing price of a Share reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Company’s common stock is traded in a public market and the Shares are preferred stock, the fair market value of a Share shall be the closing price of a share of the Company’s common stock reported for the business day immediately before Holder delivers its Notice of Exercise to the Company (or, in the instance where the Warrant is exercised immediately prior to the effectiveness of the Company’s initial public offering, the initial “price to public” per share price specified in the final prospectus relating to such offering), in both cases, multiplied by the number of shares of the Company’s common stock into which a Share is convertible in accordance with the Company’s Articles of Incorporation. If the Company’s common stock is not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment.

          1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant and, if applicable, the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired.

          1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation on surrender and cancellation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

          1.6 Treatment of Warrant Upon Acquisition of Company.

               1.6.1 “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company’s securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction.

               1.6.2 Treatment of Warrant at Acquisition.

A) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition that is not an asset sale and in which the sole consideration is cash, either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will expire upon the consummation of such Acquisition. The Company shall provide Holder with written notice of its request relating to the foregoing (together with such reasonable information as Holder may request in connection with

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such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition.

B) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition that is an “arms length” sale of all or substantially all of the Company’s assets (and only its assets) to a third party that is not an Affiliate (as defined below) of the Company (a “True Asset Sale”), either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will continue until the Expiration Date if the Company continues as a going concern following the closing of any such True Asset Sale. The Company shall provide Holder with written notice of its request relating to the foregoing (together with such reasonable information as Holder may request in connection with such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition.

C) Upon the closing of any Acquisition other than those particularly described in subsections (A) and (B) above, the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price and/or number of Shares shall be adjusted accordingly.

As used herein “Affiliate” shall mean any person or entity that owns or controls directly or indirectly ten (10) percent or more of the stock of Company, any person or entity that controls or is controlled by or is under common control with such persons or entities, and each of such person’s or entity’s officers, directors, joint venturers or partners, as applicable.

ARTICLE 2. ADJUSTMENTS TO THE SHARES.

          2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on the Shares payable in common stock, or other securities, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend occurred. If the Company subdivides the Shares by reclassification or otherwise into a greater number of shares or takes any other action which increase the amount of stock into which the Shares are convertible, the number of shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

          2.2 Reclassification, Exchange, Combinations or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exercise or conversion of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exercise or

3

conversion of this Warrant. The amendment to this Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Article 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.

          2.3 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time in the manner set forth in the Company’s Articles or Certificate of Incorporation as if the Shares were issued and outstanding on and as of the date of any such required adjustment. The provisions set forth for the Shares in the Company’s Articles or Certificate (as applicable) of Incorporation relating to the above in effect as of the Restated Warrant Date may not be amended, modified or waived, without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to Holder.

          2.4 No Impairment. The Company shall not, by amendment of its Articles or Certificate (as applicable) of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, and shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder’s rights under this Article against impairment.

          2.5 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder the amount computed by multiplying the fractional interest by the fair market value of a full Share.

          2.6 Certificate as to Adiustments. Upon each adjustment of the Warrant Price, the Company shall promptly notify Holder in writing, and, at the Company’s expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.

ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

          3.1 Representations and Warranties. The Company represents and warrants to Holder as follows:

               (a) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

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               (b) The Company’s capitalization table attached hereto as Schedule 1 is true and complete as of the Restated Warrant Date.

          3.2 Notice of Certain Events. If at any time the Company shall plan (a) the declaration of any dividend upon its common stock payable in cash or stock or any other distribution to the holders of its common stock; (b) to offer for sale any shares of the Company’s capital stock (or other securities convertible into such capital stock), other than (i) pursuant to the Company’s stock option or other compensatory plans, (ii) in connection with commercial credit arrangements or equipment financings, or (iii) in connection with strategic transactions for purposes other than capital raising; (c) any capital reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with or into, or a sale, lease, license, or other conveyance of all or substantially all its assets to, another entity or entities; (e) a voluntary or involuntary dissolution, liquidation or winding up of the Company; or (f) offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company’s securities for cash; then, in any one or more of said cases, the Company shall give Holder: (1) at least 20 days’ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any of the matters referred to in (a) through (e) above, and (2) in the case of any of the matters referred to in (c) through (e) above, at least 20 days’ prior written notice of the date when the same shall take place, and (3) in the case of the matter referred to in (f) above, the same notice as is given to the holders of such registration rights. Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of common stock shall be entitled thereto, and such notice in accordance with the foregoing clause (2) shall also specify the date on which the holders of common stock shall be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event. Company will also provide information requested by Holder reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements.

          3.3 Registration. The Company agrees that the Shares shall have certain “piggyback” and “S-3” registration rights pursuant to and as set forth in the Company’s Registration Rights Agreement dated March 16, 2009 (the “Registration Rights Agreement”), as if for such purpose Holder (and its successors and assigns to the extent permitted hereunder) were an “Investor” (as used therein) and the Shares were “Investor Securities” (as used therein). The provisions set forth in the Registration Rights Agreement relating to the above in effect as of the Restated Warrant Date may not be amended, modified or waived without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification, or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to Holder. Holder, Company and the shareholders party to the Registration Rights Agreement have agreed, pursuant to the Registration Rights Agreement, that Holder will become a party thereto upon Holder’s exercise or conversion of this Warrant.

          3.4 No Shareholder Rights. Except as provided in this Warrant, Holder will not have any rights as a shareholder of the Company until the exercise of this Warrant.

ARTICLE 4. REPRESENTATIONS, WARRANTIES OF HOLDER. Holder represents and warrants to the Company as follows:

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          4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder will be acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that Holder has not been formed for the specific purpose of acquiring this Warrant or the Shares.

          4.2 Disclosure of Information. Holder has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

          4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

          4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

          4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise or conversion hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise or conversion hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available.

ARTICLE 5. MISCELLANEOUS.

          5.1 Term. This Warrant is exercisable in whole or in part at any time and from time to time on or before the Expiration Date.

          5.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 [BELOW][OF THE WARRANT PURSUANT TO WHICH THESE SHARES WERE ISSUED], MAY

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NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.

          5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require SVB Financial Group to provide an opinion of counsel if the transfer is to Silicon Valley Bank or any other affiliate of SVB Financial Group. Addilionally, and without limitation on the preceding sentence, if Holder proposes to make such a transfer or assignment in accordance with Rule 144 under the Act, in lieu of Holder providing an opinion of counsel in connection with any such proposed transfer or assignment, Holder may provide representations and warranties in customary form and reasonably satisfactory to the Company relating to its compliance with Rule 144, and the Company shall cause its legal counsel to issue an opinion as to the availability of an exemption under Rule 144 with respect to such proposed transfer or assignment.

          5.4 Transfer Procedure. Subject to the provisions of Article 5.3 and upon providing the Company with written notice, SVB Financial Group and any subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any transferee, provided, however, in connection with any such transfer, (a) SVB Financial Group or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee, (b) Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable), and (c) the transferee shall agree to be bound by the restrictions on transfer contained herein and all other provisions of this Warrant to the same extent as Holder. The Company may refuse to transfer this Warrant or the Shares to any person who directly competes with the Company, unless, in either case, the stock of the Company is publicly traded.

          5.5 Notices. All notices and other communications from the Company to Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or Holder, as the case may (or on the first business day after transmission by facsimile) be, in writing by the Company or such Holder from time to time. Effective upon receipt of the fully executed Warrant and the initial transfer described in Article 5.4 above, all notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

SVB Financial Group
Attn: Treasury Department
3003 Tasman Drive, HA 200
Santa Clara, CA 95054
Telephone: (408) 654-7400
Facsimile: (408) 496-2405

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Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:

Cardiovascular Systems, Inc.
Attn: Chief Financial Officer
651 Campus Drive
St. Paul, Minnesota 55112-3495
Telephone: (651) 259-1600
Facsimile: (651) 259-1696

          5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

          5.7 Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

          5.8 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised or converted, and the Company shall promptly deliver a certificate representing the Shares (or such other securities) issued upon such conversion to Holder.

          5.9 Counterparts. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement.

          5.10 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Minnesota, without giving effect to its principles regarding conflicts of law.

[Signature page follows]

8

“COMPANY”
CARDIOVASCULAR SYSTEMS, INC.
By:	/s/ David L. Martin	By:	/s/ Laurence L. Betterley
	Name: David L. Martin		Name: Laurence L. Betterley
	(Print)		(Print)
	Title: Chairman of the Board,           President or Vice President		Title: Chief Financial Officer,           Secretary, Assistant Treasurer           or Assistant Secretary

“HOLDER” SVB FINANCIAL GROUP
By:	/s/ Derek Johnson
	Name:	Derek Johnson
		(Print)
	Title:	Relationship Manager

9

EX-10.3

Exhibit 10.3

Partners for Growth

Loan and Security Agreement

Borrower: Cardiovascular Systems, Inc., a Delaware corporation

Address: 651 Campus Drive, St. Paul, MN 55112

Date: April 14, 2010

THIS LOAN AND SECURITY AGREEMENT (“Agreement”) is entered into on the above date between PARTNERS FOR GROWTH III, L.P. (“PFG”), whose address is 180 Pacific Avenue, San Francisco, CA 94111 and the borrower(s) named above (formerly known as Replidyne, Inc., the “Borrower”), whose chief executive office is located at the above address (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) being signed by the parties concurrently, is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 7 below.)

1. LOANS.

     1.1 Loans. PFG will make loans to Borrower (the “Loan”) up to the Credit Limit specified in Section 1 of the Schedule, provided no Default or Event of Default has occurred and is continuing.

     1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rates shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the first day of each month for interest accrued during the prior month.

     1.3 Fees. Borrower shall pay PFG the fees shown on the Schedule, which are in addition to all interest and other sums payable to PFG and are not refundable.

     1.4 Loan Requests. To obtain a Loan, Borrower shall make a request to PFG by facsimile or telephone. Loan requests may also be made by Borrower by email, but the same shall not be deemed made until PFG acknowledges receipt of the same by email or otherwise in writing. Loan requests received after 12:00 Noon Pacific time will not be considered to have been received by PFG until the next Business Day. PFG may rely on any telephone request for a Loan given by a person whom PFG believes in good faith is an authorized representative of Borrower, and Borrower will indemnify PFG for any loss PFG suffers as a result of that reliance. On the date of each borrowing pursuant to a request made in compliance with this Section and Section 1 of the Schedule, Borrower shall execute and deliver to PFG a promissory note in the form appended as Exhibit C reflecting such borrowing (each, a “Note” and collectively, the “Notes”).

     1.5 Late Fee. If any payment of accrued interest for any month is not made within three business days after the later of the date a bill therefor is received by Borrower or three business days after the due date therefor, or if any payment of principal or any other payment is not made within three Business Days after the date due, then Borrower shall pay PFG a late payment fee equal to 5% of the amount of such late payment, provided, however, that upon the third occurrence of a late payment and thereafter, the late payment fee shall be 10% of the amount of each future late payment occurring thereafter. The provisions of this paragraph shall not be construed as PFG’s consent to Borrower’s failure to pay any amounts when due, and PFG’s acceptance of any such late payments shall not restrict PFG’s exercise of any remedies arising out of any such failure.

2. SECURITY INTEREST.

     2.1 Grant of Security Interest. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to PFG a security interest in all of the following (collectively, the “Collateral”): all right, title and interest of Borrower in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all General Intangibles (including without limitation all Intellectual Property); all Investment Property; all Other Property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above, and all Borrower’s books relating to any and all of the above; provided, however, that Collateral shall not include Auction Rate Securities (UBS).

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3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

     Borrower represents and warrants to PFG as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and until the later of (i) all Obligations have been paid and performed in full, and (ii) such time as PFG no longer has any obligation to consider Borrower requests of PFG to make Loans (the “End Date”):

     3.1 Corporate Existence and Authority. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would result in a Material Adverse Change. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby, including, without limitation, the Notes, (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors’ rights generally), and (iii) do not violate Borrower’s articles or certificate of incorporation, or Borrower’s by-laws, or any law or any material agreement or instrument to which Borrower or its property is subject, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any agreement or instrument to which Borrower or its property is subject.

     3.2 Name; Trade Names and Styles. As of the date hereof, the name of Borrower set forth in the heading to this Agreement is its correct name, as set forth in its Articles or Certificate of Incorporation. Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names as of the date hereof. Borrower shall give PFG 30 days’ prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, if applicable to Borrower.

     3.3 Place of Business; Location of Collateral. As of the date hereof, the address set forth in the heading to this Agreement is Borrower’s chief executive office. In addition, as of the date hereof, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will give PFG at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth in the Representations, except that Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $50,000 fair market value of Equipment is located.

     3.4 Title to Collateral; Perfection; Permitted Liens.

          (a) Borrower is, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased to Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Upon the filing of a UCC financing statement and recording of Intellectual Property security documents, PFG will have and will continue to have, a First-Priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend PFG and the Collateral against all claims of others.

          (b) Borrower has set forth in the Representations all of Borrower’s Deposit Accounts, and Borrower will give PFG five Business Days advance written notice before establishing any new Deposit Accounts and will cause the institution where any such new Deposit Account is maintained to execute and deliver to PFG a control agreement in form sufficient to perfect PFG’s security interest in the Deposit Account, subject to the rights of the Senior Lender, and otherwise in customary form and reasonably satisfactory to PFG.

          (c) In the event that Borrower shall at any time after the date hereof have any commercial tort claims against others, which it is asserting, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify PFG thereof in writing and provide PFG with such information regarding the same as PFG shall request (unless providing such information would waive the Borrower’s attorney-client privilege). Such notification to PFG shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to PFG, and Borrower shall execute and deliver all such documents and take all such actions as PFG shall request in connection therewith.

          (d) None of the Collateral is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by PFG, use all commercially reasonable efforts to cause such third party to execute and deliver to PFG, in form acceptable to PFG, such waivers and subordinations as PFG

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shall specify in its good faith business judgment. Borrower will keep in full force and effect, and will comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located.

     3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise PFG in writing of any material loss or damage to the Collateral.

     3.6. SEC Filings and the Sarbanes-Oxley Act. The Borrower has timely filed with or furnished to the Securities and Exchange Commission (the “SEC”) each report, statement, schedule, form or other document or filing required to be filed or furnished by Borrower with the SEC for the three full years prior to the date hereof and any subsequent interim periods following the end of the last full year and Borrower will timely file with or furnish with the SEC each report, statement, schedule, form or other document or filing required to be filed or furnished by Borrower with the SEC (all such documents collectively being the “SEC Documents”) subsequent to the date hereof and until the End Date. Each SEC Document complied, and each SEC Document filed subsequent to the date hereof and prior to the End Date will comply, in all material respects with the applicable requirements of the Securities Act and the Exchange Act, and did not or will not contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Borrower has and at all times will comply in all material respects with the Sarbanes-Oxley Act of 2002. As of the date hereof and the date of any subsequent Loan request, the Company shall not have any comments from the staff of the SEC that remain unresolved to the satisfaction of the SEC.

     3.7 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in accordance with GAAP.

     3.8 Financial Condition, Statements and Reports. The audited financial statements and the unaudited interim financial statements of the Borrower included in the SEC Documents are and will be true and correct in all material respects and fairly present the financial position of the Borrower in all material respects as of the dates thereof and the results of operations and cash flows for the periods then ended in accordance with GAAP. Since the date of the balance sheet included in last Form 10-K or 10-Q, as the case may be, there has been no Material Adverse Change. To the extent that Borrower ceases for any reason to file current reports with the SEC, all financial statements then and thereafter delivered to PFG will be prepared in conformity with GAAP and will fairly present the results of operations and financial condition of Borrower in all material respects, in accordance with GAAP, at the times and for the periods therein stated. Between the last date covered by any SEC Document and the date hereof, there has been no Material Adverse Change.

     3.9 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all required tax returns and reports, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any of the foregoing which are contested by Borrower in good faith, provided that Borrower (i) contests the same by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies PFG in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the same from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay, all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

     3.10 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations applicable to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.

     3.11 Litigation. There is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower’s knowledge) threatened against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform PFG in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower involving claims of $250,000 or more for a single claim or in the aggregate for all claims.

     3.12 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve

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System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

     3.13 No Default. At the date hereof, no Default or Event of Default has occurred, and no Default or Event of Default will have occurred after giving effect to any Loans being made concurrently herewith.

     3.14 Intellectual Property Rights. Borrower owns or otherwise holds the right to use all intellectual property rights, including, without limitation, all patents, copyrights, trademarks, Domain Rights (as defined below), trade secrets and computer software, necessary for the conduct of its business as currently conducted, except where the failure to hold such rights would not have a Material Adverse Change. Borrower shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property, other than intellectual property that Borrower has made a determination not to maintain; (b) promptly advise PFG in writing of material infringements of its intellectual property; and (c) not allow any intellectual property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent. If, before the Obligations have been paid and/or performed in full, Borrower shall (i) adopt, use, acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. equivalent; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 2.1 shall automatically apply thereto, and Borrower shall use all commercially reasonable efforts to give PFG advance notice thereof in writing and in any event shall thereafter give PFG prompt notice thereof in writing. Borrower shall further provide PFG with a copy of the foregoing and shall take such further actions as PFG may reasonably request from time to time to perfect or continue the perfection of PFG’s interest in such Collateral.

     3.15 Domain Rights and Related Matters. Borrower (a) is the sole record, legal and beneficial owner of all domain names and domain name rights used in connection with its business and that of any Subsidiaries from time to time, free and clear of any rights or claims of any third party; (b) the information provided in the Representations with respect to domain names and ownership thereof, domain registry, domain servers, location and administrative contact information, web hosting and related services and facilities (collectively, “Domain Rights”) is true, accurate and complete and Borrower shall promptly notify PFG of any changes to such information; (c) shall maintain all Domain Rights in full force and effect so long as any Obligations remain outstanding; (d) shall, upon request of PFG, notify such third parties (including domain registrars, hosting companies and internet service providers) of PFG’s security interest in Borrower’s Domain Rights; and (e) promptly advise PFG in writing of any disputes or infringements of its Domain Rights.

3.16 Conversion Stock

     (a) The shares of Borrower’s Common Stock issuable upon conversion of the Notes (the “Conversion Stock”) have been duly and validly reserved for issuance. The Conversion Stock, when issued upon conversion of Notes, will be validly authorized, issued and fully paid. The issuance and delivery of the Conversion Stock is not subject to preemptive or any similar rights of the stockholders of Borrower (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws and restrictions created by PFG. The Conversion Stock will be issued without any legends other than the Securities Act legend in the form set forth in the Note, until such time as it is removed pursuant to the provisions hereof.

     (b) The capitalization table of Borrower provided to PFG as part of the Representations is true, correct, accurate and complete as of the date hereof.

     (c) No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or other person or entity is required on the part of Borrower in connection with the execution, delivery and performance of this Agreement or the issuance, sale and delivery of the Conversion Stock, except (i) such filings as shall have been made prior to and shall be effective on and as of the date hereof, (ii) notice filings required pursuant to applicable state securities laws on or after the date hereof, and (iii) filings necessary to perfect security interests of PFG. All stockholder consents required in connection with conversion of Notes and issuance of the Conversion Stock have either been obtained by Borrower or no such consents are required.

     (d) Borrower shall maintain authorized but unissued Common Stock in number sufficient to accommodate the conversion of all Notes outstanding at any time and from time to time upon Optional or Mandatory Conversion.

     (e) Assuming the accuracy of the representations and warranties of PFG contained in Exhibit D hereof, the offer, sale and issuance of the Notes are, and the Conversion Stock upon conversion thereof will be, exempt from the registration requirements of the Securities Act pursuant to 506 of Regulation D under the Securities Act and from the registration and qualification requirements of applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of such securities to any person or

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persons so as to bring the sale of the Notes and issuance of Conversion Stock upon conversion thereof by the Company within the registration provisions of the Securities Act.

     (f) Borrower is and will remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and (i) has filed and will file all required reports under Section 13 or 15(d) of the Exchange Act, as applicable, during the 12 months preceding the initial issuance of any Notes, other than Form 8-K reports; and (ii) has submitted and will submit 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 12 months preceding such sale (a “Reporting Issuer”).

     (g) The Conversion Stock issuable upon conversion of the Notes has been authorized for quotation on the NasdaqGM. Any filings required by such market, including, without limitation, the Financial Industry Regulatory Authority (“FINRA”) shall be timely made and any required authorizations or approvals for the entry into this Agreement and the consummation of the transactions contemplated herein, including, without limitation, the issuance of the Conversion Stock, have been obtained.

     (h) Unless required to do so by Special Request under Section 6 of the Schedule, Borrower shall not at any time provide PFG with any material nonpublic information and will publicly disclose the terms of this Agreement on Form 8-K under the Exchange Act (including it as an exhibit thereto only if Borrower deems it required under applicable law) promptly following the date hereof; provided, if applicable, that Borrower makes no representation or warranty with respect to any information provided to Borrower in writing pursuant to a Special Request.

     (i) Borrower has not and shall not pay any commission or other remuneration either directly or indirectly for soliciting the conversion of any Notes.

     (j) Borrower has not and shall not engage any placement agent, finder or broker dealer in connection with the offer and sale of the Notes and the Conversion Stock.

     (k) neither Borrower nor any of its predecessors or affiliates has been subject to any order, judgment or decree of any court of competent jurisdiction temporarily, preliminarily or permanently enjoining such person for a failure to comply with Regulation D under the Securities Act and Borrower shall comply in all respects with Regulation D in connection with any future securities offerings made in reliance on Regulation D.

     (l) neither Borrower nor any person acting on its behalf has used or will use any form of general solicitation or general advertising in connection with the offer or sale of the Notes or the Conversion Stock.

4. ADDITIONAL DUTIES OF BORROWER.

          Borrower will at all times comply with all of the following covenants throughout the term of this Agreement and until the End Date:

     4.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

     4.2. Remittance of Proceeds. Subject to the rights of the Senior Lender, all proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to PFG in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as PFG shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to PFG (i) the proceeds of Accounts arising in the ordinary course of business, or (ii) the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year) or (iii) subject to the notice specified in subclause (A), below, the proceeds of the exclusive licensing of Intellectual Property, so long as such exclusive licensing transaction(s) would not constitute a disposition of any significant part of the value of Borrower’s Intellectual Property, taken as a whole. Borrower agrees that it will not commingle proceeds of Collateral (other than those described in subclauses (i), (ii) and (iii) above) with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for PFG, except as set forth above, and subject to the rights of the Senior Lender. In addition to the foregoing, Borrower further agrees that: (A) it shall give PFG thirty (30) days advance notice of any sale or exclusive licensing of Intellectual Property, and (B) except as specified in clause (iii), above, it shall segregate any proceeds of the sale or exclusive licensing of Intellectual Property for the benefit of PFG, it being acknowledged that the rights of the Senior Lender in respect of such Collateral transactions and proceeds thereof are junior to the rights of PFG. PFG may, in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other “blocked account” as PFG may specify, pursuant to a blocked account agreement in such form as PFG may specify in its good faith business judgment, provided that PFG’s exercise of rights under such blocked account shall be subject to the

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rights of the Senior Lender. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

     4.3 Insurance. Borrower shall at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to PFG, in such form and amounts as PFG may reasonably require and as are customary and in accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to PFG. All such insurance policies shall name PFG as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to PFG. Upon receipt of the proceeds of any such insurance, subject to the rights of the Senior Lender, PFG shall apply such proceeds in reduction of the Obligations as PFG shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, PFG shall release to Borrower insurance proceeds with respect to property totaling less than $100,000, which shall be utilized by Borrower for the replacement of the property with respect to which the insurance proceeds were paid. PFG may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, PFG may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to PFG copies of all material reports made to insurance companies.

     4.4 Reports. Borrower, at its expense, shall provide PFG with the written reports set forth in the Schedule.

     4.5 Access to Collateral, Books and Records. At reasonable times, and on three (3) Business Day’s notice, PFG, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records. The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $750 per person per day (or such higher amount as shall represent PFG’s then current standard charge for the same), plus reasonable out-of-pocket expenses; provided, however, that so long as to Default or Event of Default then exists, Borrower shall only be obligated to reimburse for one such inspection and audit per year. Notwithstanding the foregoing, Borrower shall not be required to disclose to PFG any document or information (i) where disclosure is prohibited by applicable law or any agreement binding on Borrower, or (ii) is subject to attorney-client or similar privilege or constitutes attorney work product. If Borrower is withholding any information under the preceding sentence, it shall so advise PFG in writing, giving PFG a general description of the nature of the information withheld.

     4.6 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without PFG’s prior written consent (which shall be a matter of its good faith business judgment and shall be conditioned on Borrower then being in compliance with the terms of this Agreement), do any of the following:

          (i) permit or suffer any Change in Control;

          (ii) acquire any assets, except in the ordinary course of business, or make any Investments other than Permitted Investments;

          (iii) enter into any other transaction outside the ordinary course of business;

          (iv) sell or transfer any Collateral (including without limitation the sale or transfer of Collateral which is then leased back by Borrower), except for (A) the sale of finished Inventory in the ordinary course of Borrower’s business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business, (B) the making of Permitted Investments, (C) the granting of Permitted Liens, and (D) the non-exclusive licensing of Intellectual Property in the ordinary course of business;

          (v) store any Inventory or other Collateral with any warehouseman or other third party, unless there is in place a bailee agreement in such form as PFG shall specify in its good faith business judgment, subject to the rights of the Senior Lender;

          (vi) unless within the ordinary course of Borrower’s business, sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis;

          (vii) make any loans of any money or other assets, other than Permitted Investments;

          (viii) incur any Indebtedness, other than Permitted Indebtedness;

          (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity;

          (x) pay or declare any dividends on Borrower’s stock (except for dividends payable solely in stock of Borrower);

          (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower’s stock, except as required in the ordinary course of business and consistent with past practice in connection with redeeming or purchasing stock of departing employees, up to a maximum aggregate of $50,000 in any fiscal year, except that upon the exercise of non-qualified stock option grants to purchase Borrower stock by an option holder who is, or upon the vesting of restricted stock grants for Borrower stock to, an employee, member of the Board of Directors or consultant of Borrower, Borrower may issue

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shares pursuant to such exercise or vesting on a net issuance basis and pay the applicable withholding taxes to taxing authorities on behalf of such employee, member of the Board of Directors or consultant of Borrower receiving such stock;

          (xii) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto;

          (xiii) without at least thirty (30) days prior written notice to PFG: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than $10,000 in Borrower’s assets or property or a bailee agreement as contemplated in clause (v) above is obtained in advance of such premises holding Collateral), (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, (5) cause or permit its inactive Subsidiary, Shturman Cardiology Systems, B.V., to begin to trade or hold any Non-trivial assets, or (6) change any organizational number (if any) assigned by its jurisdiction of organization;

          (xiv) liquidate or dissolve or elect to liquidate or dissolve;

          (xv) permit a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof (other than by the sale of Borrower’s equity securities in a public offering or to private equity investors so long as Borrower identifies to PFG the private equity investors prior to the closing of the transaction); or

          (xvi) fail to segregate any and all proceeds from time to time of the sale or exclusive licensing of Intellectual Property and notify PFG of the same; or

          (xvii) permit the UBS Loans to be secured by any assets of Borrower other than the Auction Rate Securities (UBS); or

          (xiii) the Board of directors shall resolve to or approve, or Borrower shall otherwise take any steps to effect, any of the foregoing actions in clauses (i) through (xviii), inclusive.

Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction.

     4.7 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against PFG with respect to any Collateral or relating to Borrower, Borrower shall, without expense to PFG, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that PFG may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding.

     4.8 Changes. Borrower agrees to promptly notify PFG in writing of any changes in the information set forth in the Representations.

     4.9 Current Public Information. At all times during the term of this Agreement and so long as PFG beneficially owns any Notes or Conversion Stock, Borrower shall be and remain a Reporting Issuer.

     4.10 Listing. At all times during the term of this Agreement and so long as PFG beneficially owns any Notes or Conversion Stock, Borrower shall cause the common stock to be authorized for quotation on the NasdaqGM.

     4.11 Legends. Borrower shall remove any restrictive securities legends on each Note and/or Conversion Stock resulting from conversion of each Note six (6) months following the issuance of each such Note. The foregoing six (6) month period for any Conversion Stock shall commence on the issue date of the Note from which such Conversion Stock is converted.

     4.12 Notice of Default under Senior Loan Documents. Borrower shall provide prompt notice (and in no event later than three (3) Business Days notice) of any default under the Senior Loan Documents, regardless of the applicability of any Senior Lender forbearance, waiver of default or extension of time or cure period.

     4.13 Further Assurances. Borrower agrees, at its expense, on request by PFG, to execute all documents and take all actions, as PFG, may, in its good faith reasonable business judgment, deem necessary or useful in order to perfect and maintain PFG’s perfected First-Priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement.

5. TERM; SURVIVAL OF OBLIGATIONS.

     5.1 Maturity Date. This Agreement shall continue in effect until the End Date, subject to Sections 5.2 and 5.3 below.

     5.2 Early Termination. PFG’s commitment to make additional Loans under this Agreement may be terminated prior to the Maturity Date by PFG at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately.

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     5.3 Payment of Obligations. On the maturity date set forth on the Schedule (the “Maturity Date”) or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of PFG’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until the End Date. No termination shall in any way affect or impair any right or remedy of PFG, nor shall any such termination relieve Borrower of any Obligation to PFG, until the End Date. Upon payment and performance in full of all the Obligations and termination of this Agreement, PFG shall promptly terminate its financing statements with respect to the Borrower and deliver to Borrower such other documents as may be required to fully terminate PFG’s security interests.

     5.4 Survival of Certain Obligations. Without limiting the survival of obligations addressed otherwise in this Agreement and notwithstanding any other provision of this Agreement, the obligations of Borrower under Sections 3.6, 3.7, 3.15, 4.7, 4.9 and 4.11 shall survive the termination of this Agreement until PFG no longer owns any Conversion Stock, and the obligations of PFG under Section 8.1 shall survive termination of this Agreement.

6. EVENTS OF DEFAULT AND REMEDIES.

     6.1 Events of Default. The occurrence of any of the following events shall constitute an “Event of Default” under this Agreement, and Borrower shall give PFG immediate written notice thereof:

          (a) Any warranty, representation, statement, report or certificate made or delivered to PFG by Borrower or any of Borrower’s officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect when made or deemed to be made; or

          (b) Borrower shall fail to pay any Loan or any interest thereon or any other monetary Obligation within three (3) Business Days after the date due; or

          (c) Borrower shall fail to timely issue Conversion Stock when due or to comply with Sections 4.9, 4.10, or 4.11 (without any grace or cure period); or

          (d) Borrower (i) shall fail to comply with any of the financial covenants set forth in the Schedule, or (ii) shall breach any of the provisions of Section 4.6 hereof, or (iii) shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or (iv) shall fail to permit PFG to conduct an inspection or audit as provided in Section 4.5 hereof or (v) shall fail to provide PFG with a Report under Section 6 of the Schedule within two (2) Business Days after the date due; or

          (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within ten (10) Business Days after the date due; or

          (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral with an aggregate value greater than $100,000 which is not cured within ten (10) days after the occurrence of the same; or

          (g) any default or event of default occurs under any obligation greater than $100,000 secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or

          (h) Borrower breaches any material contract or obligation, which has resulted or may reasonably be expected to result in a Material Adverse Change; or

          (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, or Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or

          (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 45 days after the date commenced; or

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          (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or

          (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or

          (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations (other than as permitted in the applicable subordination agreement), or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or

          (n) a default or breach shall occur under any other Loan Document, which default or breach shall be continuing after the later of any applicable expressly specified cure period or 5 Business Days; or

          (o) a Material Adverse Change shall occur.

PFG may cease making any Loans hereunder during any of the cure periods provided above, and thereafter if an Event of Default has occurred and is continuing.

     6.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, PFG, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following, subject to the rights of the Senior Lender: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes PFG without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as PFG deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should PFG seek to take possession of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that PFG retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to PFG at places designated by PFG which are reasonably convenient to PFG and Borrower, and to remove the Collateral to such locations as PFG may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, PFG shall have the right to use Borrower’s premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time PFG obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. PFG shall have the right to conduct such disposition on Borrower’s premises without charge, for such time or times as PFG deems reasonable, or on PFG’s premises, or elsewhere and the Collateral need not be located at the place of disposition. PFG may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes PFG to endorse or sign Borrower’s name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in PFG’s good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Exercise any and all rights under any present or future control agreements relating to Deposit Accounts or Investment Property; and (i) Demand and receive possession of any of Borrower’s federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys’ fees, expenses, costs, liabilities and obligations incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of PFG’s rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be the Default Rate.

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     6.3 Standards for Determining Commercial Reasonableness. Borrower and PFG agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least ten (10) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by PFG, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, PFG may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. PFG shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

     6.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting PFG’s other rights and remedies, but in all cases subject to the rights of the Senior Lender, Borrower grants to PFG an irrevocable power of attorney coupled with an interest, authorizing and permitting PFG (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but PFG agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner and subject to the rights of the Senior Lender: (a) Execute on behalf of Borrower any documents that PFG may, in its good faith business judgment, deem advisable in order to perfect and maintain PFG’s security interest in the Collateral, or in order to exercise a right of Borrower or PFG, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into PFG’s possession; (d) Endorse all checks and other forms of remittances received by PFG; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give PFG the same rights of access and other rights with respect thereto as PFG has under this Agreement; (j) Execute on behalf of Borrower and file in Borrower’s name such documents and instruments as may be necessary or appropriate to effect the transfer of Domain Rights, domain names, domain registry administrative contacts and domain and website hosting services into the name of PFG or its designees, and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall PFG’s rights under the foregoing power of attorney or any of PFG’s other rights under this Agreement be deemed to indicate that PFG is in control of the business, management or properties of Borrower.

     6.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by PFG first to the reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by PFG in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as PFG shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to PFG for any deficiency. If, PFG, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, PFG shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by PFG of the cash therefor.

     6.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, PFG shall have all the other rights and remedies accorded a secured party under the Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between PFG and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by PFG of one or more of its rights or remedies shall not be deemed an election, nor bar PFG from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of PFG to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed.

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7. DEFINITIONS. As used in this Agreement, the following terms have the following meanings:

     “Account Debtor” means the obligor on an Account.

     “Accounts” means all present and future “accounts” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower.

     “Affiliate” means, with respect to Borrower, a Person that, directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, Borrower.

     “Auction Rate Securities” shall have the meaning commonly attributed thereto but shall include without limitation any bonds sold by U.S. states, cities, and public authorities, funds, corporations or student loan agencies with a long-term nominal maturity for which the interest rate is reset through a Dutch auction.

     “Auction Rate Securities (UBS)” means the Auction Rate Securities owned by Borrower and held with UBS Financial Services Inc. or its Affiliates in account number CP-03041-LJ, or other account number that may be assigned from time to time by UBS, and serving as collateral for the UBS Loans.

     “Business Day” means a day on which PFG is open for business.

     “Capital Expenditure” means expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of capitalized lease obligations, which, in accordance with GAAP, would be classified as capital expenditures.

     “Cash” means unrestricted and unencumbered (except for the liens of PFG and the Senior Lender) cash or cash equivalents in deposit accounts or investment accounts for which there is in effect a deposit account control agreement among Borrower, PFG and the depositary institution in respect of such accounts, unless the requirement for a deposit account control agreement has been waived by PFG.

     “Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., (c) certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition. For purposes of clarity, and without limitation, it is agreed that that “Cash Equivalents” do not include any Auction Rate Securities.

     “Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing twenty percent (20%) or more of the combined voting power of Borrower’s then outstanding securities (except for transactions permitted in the parenthetical in Section 4.6(xv)); or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Borrower (together with any new directors whose election by the Board of Directors of Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directions at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office.

     “Code” means the Uniform Commercial Code as adopted and in effect in the State of California from time to time.

     “Collateral” has the meaning set forth in Section 2 above.

     “Compliance Certificate” means Borrower’s certification of its compliance with the terms and conditions of this Agreement and such other matters as PFG may reasonably require to be addressed in such certificate, in the form as initially set forth as Exhibit B hereto, as such form may be amended from time to time upon advance notice from PFG.

     “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation, in each case, directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices;

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but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

     “continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by PFG or cured within any applicable cure period.

     “Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

     “Default Rate” means the lesser of fourteen percent (14%) per annum and the maximum rate of interest that may lawfully be charged to a commercial borrower under applicable usury laws.

     “Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit.

     “Equipment” means all present and future “equipment” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

     “Event of Default” means any of the events set forth in Section 6.1 of this Agreement.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     “First-Priority” means, in relation to PFG’s security interest in Collateral, a security interest that is prior to any other security interest, with the exception of security interests corresponding to Permitted Liens that are expressly stated to be senior in priority and payment to the security interests of PFG, including without limitation, the security interest of the Senior Lender.

     “Fixed Charge Coverage Ratio” is the ratio of (a) EBITDA for the twelve (12) month period ending as of the date for which it is being measured, minus the sum of Capital Expenditures, cash taxes paid and dividends and distributions made (other than dividends or distributions by a Person payable in its stock, or split-ups or reclassifications of its stock) for such period calculated on a consolidated basis for Borrower and its Subsidiaries, divided by (b) the sum of principal payments made on Indebtedness during and Interest Expense (to the extent such Interest Expense is to be settled in cash) for such period calculated on a consolidated basis for Borrower and its Subsidiaries.

     “GAAP” means generally accepted accounting principles consistently applied.

     “General Intangibles” means all present and future “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

     “good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of PFG’s business judgment.

     “including” means including (but not limited to).

     “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

     “Intellectual Property” means all present and future: (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) Domain Rights as described in Section 3.15 hereof, (g)

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computer software and computer software products; (h) designs and design rights; (i) technology; (j) all claims for damages by way of past, present and future infringement of any of the rights included above; and (k) all licenses or other rights to use any property or rights of a type described above.

     “Interest Expense” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Loan and other Indebtedness of Borrower and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

     “Inventory” means all present and future “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

     “Investment” means any beneficial ownership interest in any Person (including any stock, partnership interest or other equity or debt securities issued by any Person), and any loan, advance or capital contribution to any Person.

     “Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

     “Loan Documents” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between PFG and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

     “Material Adverse Change” means any of the following: (i) a material adverse change in the business, operations, or financial or other condition or prospects of the Borrower, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) a material impairment of the value or priority of PFG’s security interests in the Collateral.

     “Net Income” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.

     “Obligations” means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to PFG, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, including indebtedness under any obligation to purchase equity derivatives purchased or otherwise issued to PFG from time to time, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by PFG in Borrower’s debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

     “Other Property” means the following as defined in the Code in effect on the date hereof with such additions to such terms as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

     “Payment” means all checks, wire transfers and other items of payment received by PFG for credit to Borrower’s outstanding Obligations.

     “Permitted Indebtedness” means:

          (i) the Loans and other Obligations; and

          (ii) Indebtedness existing on the date hereof and shown on Exhibit A hereto;

          (iii) Subordinated Debt;

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          (iv) Indebtedness owing to Senior Lender not to exceed the Senior Debt Limit specified in the Schedule;

          (v) other Indebtedness secured by Permitted Liens, including Indebtedness to the Pearland Economic Development Corporation, so long as such Indebtedness consists of development finance for Borrower’s planned manufacturing facility in Pearland, Texas;

          (vi) reimbursement obligations in respect of letters of credit in an aggregate face amount outstanding not to exceed $300,000 at any time outstanding, which has been reported to PFG in writing, and, in the case of reimbursement obligations to the Senior Lender in respect of letters of credit which do not exceed the Senior Debt Limit (taking into account all other Indebtedness to Senior Lender).

     “Permitted Investments” are:

          (i) Investments (if any) shown on Exhibit A and existing on the date hereof;

          (ii) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition;

          (iii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc; and

          (iv) bank certificates of deposit issued maturing no more than 1 year after issue.

     “Permitted Liens” means the following:

          (i) purchase money security interests in specific items of Equipment;

          (ii) leases of specific items of Equipment;

          (iii) liens for taxes not yet payable;

          (iv) additional security interests and liens consented to in writing by PFG, which consent may be withheld in its good faith business judgment. PFG will have the right to require, as a condition to its consent under this subparagraph (iv), that the holder of the additional security interest or lien sign an intercreditor agreement on PFG’s then standard form, acknowledge that the security interest is subordinate to the security interest in favor of PFG, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agrees that any uncured default in any obligation in an amount greater than $100,000 secured by the subordinate security interest shall also constitute an Event of Default under this Agreement;

          (v) security interests being terminated substantially concurrently with this Agreement;

          (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent;

          (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase;

          (viii) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods;

          (ix) statutory, common law or contractual liens of depository institutions or institutions holding securities accounts (including rights of set-off) securing only customary charges and fees in connection with such accounts;

          (x) liens of the Pearland Economic Development Corporation in respect of Collateral associated with the Pearland, Texas manufacturing facility intended to be financed by the Pearland Economic Development Corporation and secured solely by such financed property; and

          (xi) liens in favor of Senior Lender securing an amount not in excess of the Senior Debt Limit.

     “Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity.

     “Prime Rate” means the rate quoted by Silicon Valley Bank from time to time as its prime lending rate.

     “Representations” means the written Representations and Warranties provided by Borrower to PFG referred to in the Schedule.

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     “Securities Act” means the Securities Act of 1933, as amended.

     “Senior Lender” has the meaning set forth in Section 8 of the Schedule.

     “Special Request” in relation to Reports (Section 6 of the Schedule) means a PFG written request for information other than information, reports and certificates required to be delivered under the terms of Section 6 of the Schedule on a scheduled periodic basis.

     “Subordinated Debt” means debt incurred by Borrower subordinated to Borrower’s debt to PFG (pursuant to a subordination agreement entered into between PFG, Borrower and the subordinated creditor), on terms acceptable to PFG in its absolute discretion.

     “Subsidiary” means, with respect to any Person, any Person of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person.

     “Trivial” and “Non-trivial” mean trivial and non-trivial, respectively, from the perspective of a reasonable lender in PFG’s position, as determined by PFG in its good faith business discretion, and “Non-trivial” includes a lesser level of significance that does the term “material.”

     “UBS Loans” means all sums borrowed by Borrower from UBS Bank USA pursuant to loan documents dated on or about August 21, 2008, in the original principal amount of $11,000,000 and as at the date hereof, totaling as of April 8, 2010, $19,152,467 in principal and accrued interest, and such additional amounts as Borrower can borrow from UBS Bank USA, such Indebtedness secured solely by Auction Rate Securities (UBS).

     Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

8. GENERAL PROVISIONS.

     8.1 Confidentiality. Without limiting the obligations of Borrower in this Agreement to not disclose material non-public information to PFG without PFG’s express consent, PFG agrees to use the same degree of care that it exercises with respect to its own proprietary information, to maintain the confidentiality of any and all proprietary, trade secret or confidential information provided to or received by PFG from the Borrower, which indicates that it is confidential, including business plans and forecasts, non-public financial information, confidential or secret processes, formulae, devices and contractual information, customer lists, and employee relation matters, provided that PFG may disclose such information (i) to its officers, directors, employees, attorneys, accountants, affiliates, participants, prospective participants, assignees and prospective assignees, and such other Persons to whom PFG shall at any time be required to make such disclosure in accordance with applicable law or legal process, provided such persons are informed of the confidential nature of the information and PFG’s obligations hereunder, and (ii) in its good faith business judgment in connection with the enforcement of its rights or remedies after an Event of Default, or in connection with any dispute with Borrower or any other Person relating to Borrower. The confidentiality agreement in this Section supersedes any prior confidentiality agreement of PFG relating to Borrower.

     8.2 Interest Computation. In computing interest on the Obligations, all Payments received after 12:00 Noon, Pacific Time, on any day shall be deemed received on the next Business Day.

     8.3 Payments. All Payments may be applied, and in PFG’s good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as PFG shall determine in its good faith business judgment.

     8.4 Monthly Accountings. PFG shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by PFG), unless Borrower notifies PFG in writing to the contrary within sixty (60) days after such account is rendered, describing the nature of any alleged errors or omissions.

     8.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally, or by reputable private delivery service, or by regular first-class mail, or certified mail return receipt requested, or by fax to the most recent fax number a party has for the other party (and if by fax, sent concurrently by one of the other methods provided herein), or by electronic mail to the most recent electronic mail address for Borrower provided for the chief financial officer or financial controller executing the Representations (and if by electronic mail, with an electronic delivery and/or read receipt), addressed to PFG or Borrower at the addresses shown in the heading to this Agreement, in the Representations or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private

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delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid, or on the first business day of receipt during business hours in the case of notices sent by fax or electronic mail, as provided herein.

8.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

8.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and PFG and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

     8.8 Waivers; Indemnity. The failure of PFG at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of PFG later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of PFG or its agents or employees, but only by a specific written waiver signed by an authorized officer of PFG and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by PFG on which Borrower is or may in any way be liable, and notice of any action taken by PFG, unless expressly required by this Agreement. Borrower hereby agrees to indemnify PFG and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys’ fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between PFG and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

     8.9 No Liability for Ordinary Negligence. Neither PFG, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of PFG, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG, but nothing herein shall relieve PFG from liability for its own gross negligence or willful misconduct or breach of this Agreement.

     8.10 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of PFG.

     8.11 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

     8.12 Attorneys’ Fees and Costs. Borrower shall reimburse PFG for all reasonable attorneys’ fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by PFG, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys’ fees and costs PFG incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce PFG’s security interest in, the Collateral; and otherwise represent PFG in any litigation relating to Borrower. If either PFG or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys’ fees and costs to which PFG may be entitled pursuant to this Paragraph shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

     8.13 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and PFG; provided, however, that

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Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of PFG, and any prohibited assignment shall be void. No consent by PFG to any assignment shall release Borrower from its liability for the Obligations.

     8.14 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

     8.15 Limitation of Actions. Any claim or cause of action by Borrower against PFG, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, incurred, done, omitted or suffered to be done by PFG, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by (a) the filing of a complaint within one year after the earlier to occur of (i) the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, or (ii) the date this Agreement is terminated, and (b) the service of a summons and complaint on an officer of PFG, or on any other person authorized to accept service on behalf of PFG, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of PFG in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document.

     8.16 Loan Monitoring. At reasonable times and upon reasonable advance notice to Borrower, PFG shall have the right to visit personally with Borrower up to four times per calendar year at its principal place of business or such other location as the parties may mutually agree, for the purpose of meeting with Borrower’s management in order to remain as up-to-date with Borrower’s business as is practicable and to maintain best practices in terms of lender loan monitoring and diligence. Reasonable out-of-pocket costs, including travel and lodging for up to two PFG staff for two of the four visits shall be at Borrower’s expense and reimbursed in the same manner as other PFG expenses under this Agreement.

     8.17 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and PFG acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against PFG or Borrower under any rule of construction or otherwise.

     8.18 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of PFG and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to PFG to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at PFG’s option, be litigated in courts located within California, and that the exclusive venue therefor shall be San Francisco County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding.

     8.19 Mutual Waiver of Jury Trial. BORROWER AND PFG EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN PFG AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF PFG OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH PFG OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the San Francisco County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in San Francisco County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such

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proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the San Francisco County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

     [Signature Page Follows]

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Borrower:		PFG:
CARDIOVASCULAR SYSTEMS, INC.		PARTNERS FOR GROWTH III, L.P.
By	/s/ Laurence L. Betterley, CFO	By	/s/ Lorraine Nield
	President or Vice President		Name: Lorraine Nield
			Title:   Manager, Partners for Growth III, LLC
By	/s/ James E. Flaherty			Its General Partner
	Secretary or Ass’t Secretary

Signature Page to Loan and Security Agreement

Partners For Growth

Schedule to

Loan and Security Agreement

Borrower: Cardiovascular Systems, Inc., a Delaware corporation

Address: 651 Campus Drive, St. Paul, MN 55112

Date: April 14, 2010

This Schedule forms an integral part of the Loan and Security Agreement between PARTNERS FOR GROWTH III, L.P. and the above-borrower of even date.

1. LOAN (Section 1.1):
(a) Loans:	The Loan shall consist of term loans pursuant to Notes issued by Borrower in an aggregate principal amount for all Notes of not more than $4,000,000 (the “Credit Limit”), which shall be disbursed as follows:
	(i) on the date hereof, such amount not less than $1,500,000 as Borrower requests upon the procedures specified in Section 1.4 of the Agreement, with the amount of such initial borrowing to be notified by Borrower at least two (2) Business Days prior to the date hereof;
	(ii) from time to time upon five (5) Business Days advance written notice to PFG (upon the procedures specified in Section 1.4 of the Agreement), in minimum increments of $250,000, such amount(s) as Borrower may request up to the Credit Limit; provided, that Borrower’s right to request Loans shall terminate one (1) year from the date hereof (such one-year period from the date hereof, the “Availability Period”). After the Availability Period and prior to the Maturity Date, Borrower may only request Loans (in increments of not less than $250,000) equal to the aggregate principal amount of Notes issued prior to the expiry of the Availability Period that are converted into Common Stock during or after the Availability Period. For example only, Borrower issues $3,000,000 in Notes during the Availability Period. If neither PFG by Optional Conversion nor Borrower by Mandatory Conversion cause the conversion of any Notes, Borrower would be unable to borrow any more than the $3,000,000 borrowed prior to the expiry of the Availability Period. However, if PFG converted $350,000 in Notes prior to the expiry of the Availability Period and another $250,000 in Notes after the expiry

	of the Availability Period, and Borrower through Mandatory Conversion effected the conversion of $250,000 in Notes after the expiry of the Availability Period, then Borrower would at such time be able to issue Notes in consideration of new Loans of up to $850,000.
	The principal amounts of the Notes shall accrue interest at the rates set forth Section 2 of this Schedule and shall, regardless of the date of issue, be repaid in full on the Maturity Date, unless previously converted, together with accrued and unpaid interest and all other outstanding monetary Obligations.
	Notes may not be prepaid by Borrower in whole or in part at any time prior to the Maturity Date.
	Notwithstanding anything to the contrary set forth herein, Borrower may not make any Loan request or effect any Mandatory Conversion if either (i) the aggregate number of shares of Common Stock issuable upon conversion of the Notes relating to such Loan request or subject to such mandatory conversion coupled with the number of shares of Common Stock issued or issuable upon conversion of all other Notes issued prior to the date thereof (whether or not such Notes remain outstanding) exceeds 2,957,000 shares, less the number of shares of Common Stock subject to the Warrant, or (ii) the aggregate number of shares of Common Stock issuable upon conversion of Notes and the Warrant would cause PFG to become the beneficial holder of more than 10% of the Borrower’s outstanding shares of Common Stock.
	PFG shall not acquire directly or indirectly any shares of Borrower’s Common Stock except upon (i) conversion of Notes, (ii) exercise or exchange of the Warrant, (iii) with the advance written consent of Borrower, or (iv) upon adjustment pursuant to the terms of the Note or the Warrant.
(b) Optional Conversion:	At any time prior to the Maturity Date, PFG may at its option convert any Notes (or any parts thereof) into the common stock of Borrower (an “Optional Conversion”) at the Conversion Price set forth in the applicable Note. PFG may exercise its right to convert the Loan or part thereof by sending notice thereof via facsimile or electronic mail specifying the Note(s) to be converted into Conversion Stock (a “Conversion Notice”). The date on which a Conversion Notice is sent to Borrower shall be a Conversion Date. Pursuant to the terms of the Conversion Notice, Borrower will use its reasonable best efforts to issue the Conversion Stock within two (2) business days of the delivery of the Conversion Notice and in any event shall issue the Conversion Stock within three (3) business days of the delivery of the Conversion Notice.
(c) Mandatory Conversion:	Subject to PFG’s reasonable determination that each of the following terms, conditions and limitations have been met, Borrower may at any

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time and from time to time upon three (3) Business Days’ notice (a “Mandatory Conversion Notice”) effect a mandatory conversion of a Note (such Borrower-initiated conversion, a “Mandatory Conversion”):

(i) No Default or Event of Default may have occurred and be continuing at the time of any notice of Mandatory Conversion;

(ii) (A) The Conversion Stock issuable under a Mandatory Conversion must be issued without a restrictive legend and be immediately and freely tradable by PFG under Rule 144 of the Securities Act, and (B) PFG is not then and for the preceding six months has not been subject to compliance with Section 16 of the Exchange Act with respect to the Notes or Conversion Stock;

(iii) The Market Price of the common stock on the date of the Mandatory Conversion Notice must be at least fifteen percent (15%) greater than the stated Conversion Price of the Note being converted; provided, that Borrower may reduce the Conversion Price to a price that represents a fifteen percent (15%) discount to the Market Price if necessary to satisfy this condition and effect a Mandatory Conversion;

(iv) The number of shares of Conversion Stock issuable upon a Mandatory Conversion may not exceed fifty percent (50%) of the average daily trading volume of Borrower’s Common Stock over the ten (10) trading days prior to any Borrower Mandatory Conversion Notice;

(v) Not more than $250,000 in value of Notes may be converted at any one time by Mandatory Conversion;

(vi) There shall be a minimum of five (5) trading days between Mandatory Conversions;

(vii) Accrued and unpaid interest on a Note to be converted shall be paid in cash on the effective date of conversion;

(viii) the representation and warranty set forth in Section 3.16(h) of the Agreement is true and correct without regard to the last proviso set forth therein; and

(ix) Each Mandatory Conversion Notice shall include the relevant calculations acceptable to Borrower to show that a Mandatory Conversion meets or will at the effective date of conversion meet the foregoing requirements and shall be certified by an executive officer with direct knowledge of the foregoing.

The term “Market Price” shall mean the volume-weighted average price per share of Borrower’s Common Stock for the ten (10) consecutive trading days prior to the date of the Mandatory Conversion Notice, as reasonably determined by PFG. The term “Conversion Stock” shall mean the shares of Borrower’s Common Stock issuable upon an Optional or Mandatory Conversion.

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(d) Amortization Trigger:	If Borrower should fail to maintain a Liquidity Ratio (as defined below) of at least 1.5 : 1.0, measured monthly, PFG may elect to amortize all or (at PFG’s sole option) part of the Loan, over a 24-month period from the date such PFG election is made (the “Amortization Right”), which Amortization Right must be exercised, if at all, not later than the twentieth (20th) Business Day following the date PFG receives the Borrower report certifying compliance (or failure to comply) with the Liquidity Ratio and, if PFG so elects, Borrower shall thereafter commence to make monthly payments of principal and interest on all then outstanding Notes in conformity with the amortization schedule notified at such time by PFG. PFG may suspend Borrower’s obligation to make amortized payments at any time upon notice in its sole discretion. If PFG at any time exercises the Amortization Right, PFG’s obligation to make Loans to Borrower under Section 1(a) of this Schedule (other than the initial Note) and Borrower’s right to request borrowings under this Agreement shall terminate.
	“Liquidity Ratio” shall mean the ratio of (a) Borrower’s Cash and Cash Equivalents held with the Senior Lender and its Affiliates plus Borrower’s Eligible Accounts under the Senior Debt Documents, divided by (b) the sum of the outstanding principal amount of Indebtedness to the Senior Lender (including any amounts used for Cash Management Services as defined in the Senior Loan Documents), plus the face amount of any outstanding letters of credit under the Senior Debt Documents (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve, each as defined in the Senior Loan Documents), plus the FX Reduction Amount (as defined in the Senior Loan Documents), plus all other indebtedness for borrowed money (other than the UBS Loans and the Subordinated Debt to PFG) or the deferred price of property or services (other than unsecured indebtedness to trade creditors incurred in the ordinary course of business).
(e) Conditions to Each Note Issuance / Borrowing:	As a condition to the issuance of each Note and Loan, counsel to Borrower shall issue and deliver an opinion of counsel in favor of PFG in the form appended as Exhibit E hereto to the effect that the Notes and Conversion Stock (when issued under each Note) will be exempt from registration under the Securities Act.

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2. INTEREST.
Interest Rate (Section 1.2):
	Each Note shall bear interest at a per annum rate equal to the Prime Rate from time to time, plus 2.75%, adjusted as and when the Prime Rate changes.
	Interest shall be calculated on the basis of a 360-day year and a year of twelve months of 30 days each for the actual number of days elapsed. Accrued interest for each month shall be payable monthly, on the first day of each month for interest accrued during the prior month.
3. FEES (Section 1.3):
Loan Fee:	$80,000, payable concurrently herewith, less any amounts paid to PFG towards the Loan Fee upon execution and delivery of the term sheet in respect of the Loan. The Loan Fee shall be deemed to include any and all advances against Notes during the term of the Loan.
4. MATURITY DATE
(Section 5.1):	April 14, 2015.
5. FINANCIAL COVENANTS
(Section 4.1):
	Borrower shall maintain at all times, to be tested as of the last day of each month, unless otherwise noted, on a consolidated basis:
(a) EBITDA:	Maintain EBITDA as of the last day of each month, for the three month period ending as of last day of such month, of at least the following for each such period ending during the following intervals:

	Minimum EBITDA
	(parentheses denotes
Interval	a negative number)
Effective Date through March 31, 2010	($7,800,000)
April 1, 2010 through June 30, 2010	($6,500,000)
July 1, 2010 through September 30, 2010	($5,700,000)

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	Minimum EBITDA
	(parentheses denotes
Interval	a negative number)
October 1, 2010 through December 31, 2010	($4,300,000)
January 1, 2011 through March 31, 2011	($3,400,000)
April 1, 2011 and thereafter	($2,000,000)

“EBITDA”

shall mean (a) Net Income, minus any non-cash income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) stock-based compensation expense (to the extent not payable in cash), plus (f) non-cash expenses incurred from applying GAAP to the terms of this Agreement and related Warrant and to the Senior Debt and related warrant issued under the Senior Loan Documents, plus (g) any other non-cash charges.

(b) Fixed Charge Coverage Ratio:

A Fixed Charge Coverage Ratio of greater than 1.25 to 1.00, to be tested as of the last day of each month, provided that Borrower shall not be required to maintain the foregoing Fixed Charge Coverage Ratio until on and after the date that it is required to be measured under the Senior Loan Documents (as in effect on the date hereof and without regard to any waiver of the same by the Senior Lender). If at any time the Senior Lender ceases to determine whether the Fixed Charge Coverage Ratio is in effect and subject to testing, PFG shall make a good faith determination as to whether the Fixed Charge Coverage Ratio would be in effect based upon the Senior Loan Documents (in their form on the date hereof).

6. REPORTING.
(Section 4.4):
	Subject to the proviso at the end of this Section, Borrower shall from time to time provide PFG with the following:
	(a)	Monthly Compliance Certificates, within 30 days after the end of each month, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month: (i) Borrower was in full compliance with all of the terms and conditions of this Agreement and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as PFG shall then reasonably request, including, without limitation, a statement that at the end of such month there were no held checks, to the extent such check amounts are not included in Borrower’s

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		accounts payable, (ii) Borrower was in full compliance with all of the terms and conditions of the Senior Loan Documents (without giving effect to any Senior Lender forbearance or waiver), and (iii) the representation and warranty set forth in Section 3.16(h) of the Agreement remains true and correct; and
	(b)	Monthly notice of whether the Fixed Charge Coverage Ratio is then being tested under the Senior Loan Documents, together with copies of the notice or other determination of the same by the Senior Lender from time to time;
	provided, however, if in the reasonable judgment of Borrower, any such reports contain material non-public information, Borrower shall either not provide such reports or shall redact portions thereof containing the information it reasonably believes to be material and non-public and, in each case, shall provide notice to PFG that does not disclose the underlying material non-public information but does provide a reasonable description of the basis for non-delivery or redaction. Notwithstanding the foregoing, PFG may make a Special Request for information that would otherwise not be provided by Borrower or would be provided in redacted form.
7. BORROWER INFORMATION:
	Borrower represents and warrants that the information set forth in the Representations and Warranties of the Borrower dated April 14, 2010, previously submitted to PFG (the “Representations”) is true and correct as of the date hereof.

8. ADDITIONAL PROVISIONS
	(a)	Senior Lender.
			(1	)	Senior Lender. As used herein, “Senior Lender” means Silicon Valley Bank, and “Senior Loan Documents” means all present and future documents instruments and agreements entered into between Borrower and Senior Lender or by third parties relating to Borrower and Senior Lender.
			(2	)	Senior Debt Limit. Borrower shall not permit the total Indebtedness of Borrower to Senior Lender (including, but not limited to, monies borrowed by Borrower, interest on loans due from Borrower, fees and expenses for which Borrower is obligated, sums due from Borrower in connection with issuance of commercial

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				letters of credit, issuance of forward contracts for foreign exchange reserve, and any other direct or indirect financial accommodation Senior Lender may provide to Borrower) to exceed: (i) with respect to Borrower’s term facility with the Senior Lender (the “SVB Term Loan”) the lesser of $10,000,000 and the principal amount at any time outstanding under the SVB Term Loan, plus (ii) with respect to Borrower’s revolving line of credit facility with the Senior Lender (the “SVB LOC”) the lesser of $15,000,000 and the aggregate of (A) outstanding borrowings under the SVB LOC, plus (B) such amount as Borrower is able to borrow under the SVB LOC at such time based on the borrowing base then in effect (collectively, the “Senior Debt Limit”), plus (iii) the amount of all unpaid interest, fees and other charges under the Senior Loan Documents.
		(3	)	Senior Loan Documents. Borrower represents and warrants that it has provided PFG with true and complete copies of all existing Senior Loan Documents, and Borrower covenants that it will, in the future, provide PFG with true and complete copies of any future Senior Loan Documents, including without limitation any amendments to any existing Senior Loan Documents.
(b)	Deposit Accounts.Concurrently, Borrower shall cause the banks and other institutions where its Deposit Accounts are maintained other than UBS with respect to the account holding Auction Rate Securities (UBS), to enter into control agreements with PFG, in form and substance satisfactory to PFG in its good faith business judgment and sufficient to perfect PFG’s security interest in said Deposit Accounts, subject to the security interest of the Senior Lender. Said control agreements shall permit PFG, in its discretion, to withdraw from said Deposit Accounts accrued interest on the Obligations monthly (subject to the rights of the Senior Lender).
(c)	Subordination of Inside Debt. All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on PFG’s standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute

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and deliver to PFG a subordination agreement on PFG’s standard form.

(d)

Special Requests. PFG may at any time and from time to time deliver a Special Request to Borrower for information or reports that are not part of the regularly-scheduled reports or certificates required to be delivered to PFG by Borrower, including unaudited financial statements, accounts receivable and accounts payable and agings, deferred revenue schedules, annual Board-approved operating budgets and forecasts (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower, and copies of any and all reports and certificates delivered to the Senior Lender. Borrower shall provide information pursuant to such Special Requests as soon as such information is available and in no event later than thirty (30) days after such request, and if such information or reports are not available within such time, Borrower shall specify the reasons therefor in detail and a further time within which such information or reports shall be delivered, in any event no later than an additional thirty (30) days.

9. CONDITIONS
	In addition to any other conditions to the Loan set out in this Agreement, PFG will not make any Loan until PFG shall have received, in form and substance reasonably satisfactory to PFG, such documents, and completion of such other matters, as PFG may reasonably deem necessary or appropriate, including that there shall be no discovery of any facts or circumstances which would, as determined by PFG in its sole discretion, negatively affect or be reasonably expected to negatively affect the collectability of the Obligations, PFG’s security interest in Borrower’s Collateral or the value thereof, including, without limitation, with respect to the initial Loan, the conditions set forth in clauses (a) through (q), below, and with respect to each subsequent Loan, the conditions set forth in clauses (a), (f) (to the extent required in order for the Representations to be true, correct, complete, accurate and current), (l) and (p):
	(a)	duly executed original signatures of Borrower to the Loan Documents to which Borrower is a party;
	(b)	Borrower’s respective constitutional documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the date hereof, together with a foreign qualification certificate from the State of Minnesota;

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(c)	duly executed original signatures to borrowing resolutions for Borrower and resolutions authorizing the issuance of the Warrant, the Warrant Stock (as defined in the Warrant) and the Conversion Stock;
(d)	account control agreements as required by Section 8(b) of this Schedule, duly executed by Borrower and each relevant depositary institution in favor of PFG;
(e)	certified copies, dated as of a recent date, of financing statement searches, as PFG shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the Loan, will be terminated or released;
(f)	the Representations, duly executed by Borrower,
(g)	a landlord consent executed in favor of PFG by the Borrower’s principal office lessor in respect of Borrower’s premises;
(h)	if Borrower’s constitutional documents or stockholders agreements include a redemption right at the option of stockholders, which right would become exercisable while any Loan is outstanding, the written waiver of such right by the requisite stockholders until such time as all Obligations are indefeasibly paid and discharged.
(i)	a duly executed warrant in the name of PFG to purchase 147,330 shares of Borrower’s Common Stock (collectively, the “Warrant”);
(j)	the insurance policies and/or endorsements required pursuant to Section 4.3;
(k)	payment of the Fee specified in Section 3 of this Schedule and PFG’s expenses incurred in connection with the Loan;
(l)	a duly executed Compliance Certificate dated the date hereof;
(m)	the closing of the amendment to the Senior Loan Documents;
(n)	as and when required by PFG, a subordination agreement with the Pearland Economic Development Corporation in respect of relative priorities of liens, to which PFG has agreed with Borrower to subordinate, and repayment in respect of Collateral associated with Borrower’s planned manufacturing facility in Pearland, Texas;

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(o)	closing of the Loan on or before April 14, 2010;
(p)	an opinion of counsel in form satisfactory to Borrower and its counsel that the Note issued concurrently with execution of this Agreement and the Conversion Stock (when issued upon conversion of the Notes) will be exempt from registration under the Securities Act; and
(q)	Senior Lender and PFG shall have entered into a subordination agreement in respect of the relative priorities of their liens and repayment.

[Signature Page Follows]

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Borrower:			PFG:
	CARDIOVASCULAR SYSTEMS, INC.		PARTNERS FOR GROWTH III, L.P.
	By	/s/ Laurence L. Betterley, CFO	By	/s/ Lorraine Nield
		President or Vice President		Name: Lorraine Nield
				Title: Manager, Partners for Growth III, LLC
	By	/s/ James E. Flaherty		Its General Partner
		Secretary or Ass’t Secretary

Signature Page – Schedule to Loan and Security Agreement

EX-10.4

Exhibit 10.4

INTELLECTUAL PROPERTY SECURITY AGREEMENT

     This Intellectual Property Security Agreement is entered into as of April 14, 2010, by and between PARTNERS FOR GROWTH III, L.P. (“PFG”) and Cardiovascular Systems, Inc., a Delaware corporation (individually and collectively, “Grantor”), with reference to the following facts:

     A. PFG and Grantor, as Borrower, are parties to that certain Loan and Security Agreement of even date with this Agreement (as amended from time to time, the “Loan Agreement”). (Capitalized terms used herein have the meaning assigned in the Loan Agreement.)

     B. Pursuant to the Loan Agreement, Grantor has granted to PFG a security interest in all of the Collateral. The Collateral includes without limitation all Intellectual Property (including without limitation the Intellectual Property described herein).

     Grantor agrees as follows:

     1. To secure performance of all of its “Obligations” as defined in the Loan Agreement, Grantor grants to PFG a security interest in all of Grantor’s right, title and interest in Grantor’s Intellectual Property, including without limitation (i) the trademarks and servicemarks listed or required to be listed from time to time on Schedule A hereto, whether registered or not, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks, and (ii) the patents and patent applications listed or required to be listed from time to time on Schedule B hereto and all like protections including, without limitation, all improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, (iii) all copyrights, maskworks, software, computer programs and other works of authorship listed or required to be listed from time to time on Schedule C hereto, and all extensions and renewals thereof, (iv) all domain names and domain name rights used in connection with its business and that of its Subsidiaries, all legal and equitable rights in domain names and ownership thereof, domain registry, domain servers, web hosting and related contracts, services and facilities (collectively, “Domain Rights”) listed or required to be listed from time to time on Schedule D hereto, and all extensions and renewals thereof, and (iv) all rights to recover for past or future infringement of any of the foregoing, and (v) all right, title and interest in and to any and all present and future license agreements with respect to any of the foregoing, and (vi) all present and future accounts, accounts receivable and other rights to payment arising from, in connection with or relating to any of the foregoing.

     2. Grantor represents and warrants that (i) listed on Schedule A hereto are all trademark

registrations and pending registrations owned or controlled by Grantor, (ii) listed on Schedule B are all patents and patent applications owned or controlled by Grantor, (iii) listed on Schedule C are all copyrights, software, computer programs, mask works, and other works of authorship owned or controlled by Grantor which are registered with the United States Copyright Office, and (iv) listed on Schedule D are all Domain Rights in which Grantor has any legal, contractual or equitable right.

     3. Grantor shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property, other than intellectual property of immaterial business and monetary value that Grantor’s executive management has made a determination not to maintain; (b) promptly advise PFG in writing of material infringements of its intellectual property; and (c) not allow any intellectual property material to Grantor’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent. If, before the Obligations have been paid and/or performed in full, Grantor shall (i) adopt, use, acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. equivalent; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 1 shall automatically apply thereto, and Grantor shall use commercially reasonable efforts to give PFG advance notice thereof in writing and in any event shall thereafter give PFG prompt notice thereof in writing, in no event later than five Business Days from the date of any such action. Grantor shall further provide PFG with a copy of the foregoing and shall take such further actions as PFG may reasonably request from time to time to perfect or continue the perfection of PFG’s interest in such intellectual property.

     4. This Agreement is being executed and delivered pursuant to the Loan Agreement; nothing herein limits any of the terms or provisions of the Loan Agreement, and PFG’s rights hereunder and under the Loan Agreement are cumulative. This Agreement, the Loan Agreement and the other Loan Documents 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. This 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 Agreement, the prevailing party shall be entitled to recover all of its costs and expenses (including without limitation attorneys’ fees) from the non-prevailing party. This Agreement and all acts, transactions, disputes and controversies arising hereunder or relating hereto, and all rights and obligations of PFG and Grantor shall be governed by, and construed in accordance with the internal laws (and not the conflict of laws rules) of the State of California.

     4. Grantor agrees that simultaneously with the execution of this Agreement, and thereafter

upon any amendment of Schedule A, Schedule B, Schedule C or Schedule D, the appropriate entities constituting Grantor shall execute notices in the forms appended hereto (each, a “Notice”), as appropriate, with respect to all of the pledged Intellectual Property, now owned or hereafter acquired, and shall deliver each Notice to PFG for the purpose of recordation at the U.S. Patent and Trademark Office or the U.S. Copyright Office, or otherwise, as appropriate. Whether or not Grantor executes such a Notice reflecting new Intellectual Property, Grantor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to file such notices, liens or other instruments as may be customary from time to time for PFG to perfect security interests in Grantor’s Intellectual Property. With respect to the power of attorney granted in the attached Domain Rights Collateral Agreement and Notice, so long as no default has occurred and is continuing under the Loan Documents, PFG shall not take any action referenced therein in the name of Grantor.

[Signature Page Follows]

Address of Grantor:	Cardiovascular Systems, Inc.
Cardiovascular Systems, Inc.	By:	/s/ Laurence L. Betterley
651 Campus Drive		Name:	Laurence L. Betterley
St. Paul, MN 55112		Title:	CFO

Address of PFG:	PARTNERS FOR GROWTH III, L.P.
Partners for Growth III, L.P.	By:	/s/ Lorraine Nield
180 Pacific Avenue		Name:	Lorraine Nield
San Francisco, California 94111		Title:	Manager, Partners for Growth III, LLC
		Its:	General Partner

EX-10.5

Exhibit 10.5

COPYRIGHT COLLATERAL AGREEMENT AND NOTICE

     This Copyright Collateral Agreement and Notice dated as of April 14, 2010, is between Cardiovascular Systems, Inc., a Delaware corporation with its principal place of business at 651 Campus Drive, St. Paul, MN 55112 (“Assignor”) and Partners for Growth III, L.P., 180 Pacific Avenue, San Francisco, CA 94111 (“Assignee”) pursuant to a Loan and Security Agreement dated April 14, 2010, by and between Assignor and Assignee and pursuant to certain other loan documents referenced therein (collectively, the “Loan Documents”).

     WHEREAS, Assignor is the owner of certain copyrightable works which are the subject of United States copyright registrations and/or copyright applications as listed on Exhibit 1 hereto (the “Copyrights”); and

     WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Copyrights and all proceeds thereof and all other related claims and rights as more fully described in a certain Intellectual Property Security Agreement (the “Security Agreement”) in favor of the Assignee dated April 14, 2010, by and between Assignor and Assignee;

     NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Copyrights and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor.

Executed as of the date first above written.

Assignor:		Assignee:
Cardiovascular Systems, Inc.		PARTNERS FOR GROWTH III, L.P.
By	/s/ David L. Martin	By	/s/ Lorraine Nield
	Chief Executive Officer		Name:	Lorraine Nield
			Title:	Manager, Partners for Growth III, LLC Its General Partner
By	/s/ James E. Flaherty
	Secretary

EX-10.6

Exhibit 10.6

DOMAIN RIGHTS COLLATERAL AGREEMENT AND NOTICE

     This Domain Rights Collateral Agreement and Notice dated as of April 14, 2010, is between Cardiovascular Systems, Inc., a Delaware corporation with its principal place of business at 651 Campus Drive, St. Paul, MN 55112 (“Assignor”) and Partners for Growth III, L.P., 180 Pacific Avenue, San Francisco, CA 94111 (“Assignee”) pursuant to a Loan and Security Agreement dated April 14, 2010, by and between Assignor and Assignee and pursuant to certain other loan documents referenced therein (collectively, the “Loan Documents”).

     WHEREAS, Assignor is the owner of certain Domain Rights as defined in the Loan Documents which are, as of the date hereof, as listed on Exhibit 1 hereto (the “Domain Rights”); and

     WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Domain Rights and all proceeds thereof and all other related claims and rights as more fully described in a certain Intellectual Property Security Agreement (the “Security Agreement”) in favor of the Assignee dated April 14, 2010, by and between Assignor and Assignee;

     NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations: (1) Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Domain Rights and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor; and (2) Assignor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to take any action and file any notice on behalf of Assignor that Assignor itself could file in respect of its Domain Rights, including without limitation, to transfer Domain Rights, change administrative contacts in respect of Domain Rights, maintain Domain Rights, and provide instructions to domain hosting services and any domain name registrars.

     Executed as of the date first above written.

Assignor:		Assignee:
Cardiovascular Systems, Inc.		PARTNERS FOR GROWTH III, L.P.
By	/s/ David L. Martin	By	/s/ Lorraine Nield
	Chief Executive Officer		Name:	Lorraine Nield
			Title:	Manager, Partners for Growth III, LLC
				Its General Partner
By	/s/ James E. Flaherty
	Secretary

EX-10.7

Exhibit 10.7

PATENT COLLATERAL AGREEMENT AND NOTICE

     This Patent Collateral Agreement and Notice dated as of April 14, 2010, is between Cardiovascular Systems, Inc., a Delaware corporation with its principal place of business at 651 Campus Drive, St. Paul, MN 55112 (“Assignor”) and Partners for Growth III, L.P., 180 Pacific Avenue, San Francisco, CA 94111 (“Assignee”) pursuant to a Loan and Security Agreement dated April 14, 2010, by and between Assignor and Assignee and pursuant to certain other loan documents referenced therein (collectively, the “Loan Documents”).

     WHEREAS, Assignor is the owner of certain United States patents and/or patent applications as listed on Exhibit 1 hereto (the “Patents”); and

     WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Patents and all proceeds thereof and all other related claims and rights as more fully described in a certain Intellectual Property Security Agreement (the “Security Agreement”) in favor of the Assignee dated April 14, 2010, by and between Assignor and Assignee;

     NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Patents and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor.

     Executed as of the date first above written.

Assignor:		Assignee:
Cardiovascular Systems, Inc.		PARTNERS FOR GROWTH III, L.P.
By	/s/ David L. Martin	By	/s/ Lorraine Nield
	Chief Executive Officer		Name:	Lorraine Nield
			Title:	Manager, Partners for Growth III, LLC
				Its General Partner
By	/s/ James E. Flaherty
	Secretary

EX-10.8

Exhibit 10.8

TRADEMARK COLLATERAL AGREEMENT AND NOTICE

     This Trademark Collateral Agreement and Notice dated as of April 14, 2010, is between Cardiovascular Systems, Inc., a Delaware corporation with its principal place of business at 651 Campus Drive, St. Paul, MN 55112 (“Assignor”) and Partners for Growth III, L.P., 180 Pacific Avenue, San Francisco, CA 94111 (“Assignee”) pursuant to a Loan and Security Agreement dated April 14, 2010, by and between Assignor and Assignee and pursuant to certain other loan documents referenced therein (collectively, the “Loan Documents”).

     WHEREAS, Assignor is the owner of certain trademarks, including all federal applications and/or registrations therefor, together with the goodwill of the business connected with the use of and symbolized thereby, as listed on Exhibit 1 hereto (the “Marks”); and

     WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Marks and all proceeds thereof and all other related claims and rights as more fully described in a certain Intellectual Property Security Agreement (the “Security Agreement”) in favor of the Assignee dated April 14, 2010, by and between Assignor and Assignee;

     NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Marks and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor.

     Executed as of the date first above written.

Assignor:		Assignee:
Cardiovascular Systems, Inc.		PARTNERS FOR GROWTH III, L.P.
By	/s/ David L. Martin	By	/s/ Lorraine Nield
	Chief Executive Officer		Name:	Lorraine Nield
			Title:	Manager, Partners for Growth III, LLC
				Its General Partner
By	/s/ James E. Flaherty
	Secretary

EX-10.9

Exhibit 10.9

April 14, 2010

Partners for Growth III, L.P.
180 Pacific Avenue
San Francisco, CA 94111

     Re: Cardiovascular Systems, Inc.

Gentlemen:

     Reference is made to the Loan and Security Agreement between us dated April 14, 2010 (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 PFG, and consented to by the undersigned, and to the Landlord Consent (the “Landlord Consent”), of substantially even date, between Pearland and PFG, 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 PFG 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 PFG with replacement landlord consents reasonably satisfactory to the PFG; 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 PFG 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 PFG, 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 PFG receives written notice from Pearland that all defaults under the Jobs Agreement have been cured or waived, and (2) a notice to PFG pursuant to the Landlord Consent that Borrower has vacated or otherwise lost its right to occupy the “Real Property” (as defined in the Landlord Consent) 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 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/ Laurence L. Betterley
	Laurence L. Betterley
	Title: CFO
Accepted and agreed:
Partners for Growth III, L.P.
By:	/s/ Lorraine Nield
	Lorraine Nield, Manager, Partners for
	Growth III, LLC, its General Partner

EX-10.10

Exhibit 10.10

$1,500,000 April 14, 2010

THIS SENIOR CONVERTIBLE PROMISSORY NOTE (“NOTE”) AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE OR OTHER SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, OR ASSIGNED EXCEPT (i) PURSUANT TO REGISTRATIONS THEREOF UNDER SUCH LAWS, OR (ii) IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS WITHOUT SUCH REGISTRATIONS.

THIS NOTE IS BEING ISSUED PURSUANT TO A LOAN AND SECURITY AGREEMENT BETWEEN MAKER AND HOLDER DATED AS OF APRIL 14, 2010 (THE “LOAN AGREEMENT”).

SENIOR CONVERTIBLE PROMISSORY NOTE

     Cardiovascular Systems, Inc., a Delaware corporation (the “Maker”), for value received, promises to pay, so long as a Conversion Event has not occurred prior to April 14, 2015, to Partners for Growth III, L.P. (“Holder”) the principal sum of One Million Five Hundred Thousand Dollars (the “Principal Amount”) on April 14, 2015 or, if earlier, immediately upon Holder demand after the occurrence of an Event of Default under the Loan Agreement that is continuing (the “Maturity Date”) as provided herein. Capitalized terms used but not defined herein are used with the meanings given to them in the Loan Agreement. This Note is one of several Notes contemplated to be issued under the Loan Agreement, differing only as to issue date, Principal Amount, interest rate and Conversion Price. The terms of the Loan Agreement shall govern this Note and are incorporated by reference herein.

     1. Payments.

          (a) The interest rate payable hereunder shall be the Prime Rate from time to time, plus 2.75%, per annum, payable monthly on the basis set forth in Section 2 of the Schedule to the Loan Agreement. Any accrued and unpaid interest on this Note will be due and payable on the day that all principal is due and payable, whether on the Maturity Date, by acceleration, at the time of a Conversion Event or otherwise.

          (b) Payment shall be made in lawful tender of the United States in immediately available funds, and shall be credited first to accrued interest then due and payable with the remainder applied to principal. This Note may not be prepaid in whole or in part at any time prior to the Maturity Date.

     2. Ranking. This Note and all principal, interest and other amounts, if any, payable hereunder shall rank senior in right of payment to all other Maker Indebtedness, except as otherwise specified in the Loan Agreement.

     3. Conversion.

          (a) This Note may be converted into that number of shares of Common Stock (rounded down to the nearest whole share) determined by dividing the Principal Amount (excluding interest) of this Note by $5.43 (the “Conversion Price”), subject to adjustment below, at any time upon the election of the Holder hereof (the “Holder Conversion”) or at the election of Maker upon a “Force Conversion, as described in Section 1(c) of the Schedule to the Loan Agreement, all in accordance with and subject to the terms and conditions of the Loan Agreement (each a “Conversion Event”).

          (b) As soon as practicable after the occurrence of a Conversion Event, and in any event within the time periods specified in Sections 1(b) and 1(c) of the Schedule to the Loan Agreement, Maker at its expense will cause to be issued in the name of and delivered to Holder, a certificate or certificates for the number of shares of Conversion Stock to which Holder shall be entitled on such conversion. No fractional Conversion Stock shall be issued on conversion of the Note. If on conversion of the Note a fraction of a share of Conversion Stock results, Maker will pay the cash value of that fractional share based on the Conversion Price then in effect.

          (c) From and after the occurrence of a Conversion Event, Maker shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of this Note and all other Notes. Maker will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, dividend or other distribution of cash or property, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by Maker, but will at all times in good faith assist in the carrying out of all the provisions hereof, and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of Holder as set forth herein against impairment.

     4. Conversion Adjustments.

     (a) Adjustments. The Conversion Price shall be subject to adjustment from time to time in accordance with this Section 4.

     (b) Subdivisions, Combinations and Stock Dividends. If Maker shall at any time subdivide by split-up or otherwise, its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend, bonus issue or otherwise with respect to any Common Stock, the Conversion Price in effect immediately prior to such subdivision or share dividend or bonus issue shall be proportionately reduced. Conversely, in case the outstanding Common Stock of Maker shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

     (c) Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon conversion of this Note, Holder shall be entitled to receive, upon conversion of this Note, the number and kind of securities and property that Holder would have received in exchange for the securities that would have been issued on conversion if this Note had been converted immediately before such reclassification, exchange, substitution, or other event.

Maker or its successor shall promptly issue to Holder a certificate setting forth the number and kind of such new securities or other property issuable upon exchange or exercise of this Note as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exchange or exercise of this Note. The certificate shall provide for adjustments (as determined in good faith by Maker’s Board of Directors) which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4 including, without limitation, adjustments to the Conversion Price. The provisions of this Section 4(b) shall similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.

     (d) Notices of Record Date, Etc. In the event that Maker shall:

     (1) declare or propose to declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or not a regular cash dividend, or

     (2) offer for sale any additional shares of any class or series of Maker’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of waivers thereof) to pre-emptive rights of any class or series of stockholders, or

     (3) effect or approve any reclassification, exchange, substitution or recapitalization of the capital stock of Maker, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of Maker with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an assignment for the benefit of creditors), or

     (4) offer holders of registration rights the opportunity to participate in any public offering of Maker’s securities,

then, in connection with such event, Maker shall give to Holder:

     (i) at least ten (10) days prior written notice of the date on which the books of Maker shall close or a record shall be taken for such a dividend or offer in respect of the matters referred to in (1) or (2) above, or for determining rights to vote in respect of the matters referred to in (3) above; and

     (ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Note at the address of Holder; and

     (iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such registration rights.

     (e) Adjustment by Board of Directors. If any event occurs as to which, in the opinion of the Board of Directors of Maker, the provisions of this Section 4 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Conversion Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type contemplated in Section 4(b) and then in no event to an amount larger than the Conversion Price as adjusted pursuant to Section 4(b).

     (f) Officers’ Statement as to Adjustments. Whenever the Conversion Price is required to be adjusted as provided in Section 4, Maker shall forthwith file at each the Company’s principal office with a copy to the Holder notice parties set forth in Section 7 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of Maker, showing in reasonable detail the facts requiring such adjustment and the Conversion Price that will be effective after such adjustment; provided, however, such statement shall not be required to the extent the information requested in this Section 4.6 is available through Maker’s current reports filed with the Securities and Exchange Commission. If at any time the information described in this Section 4.6 is readily available through Maker’s reports filed with the Securities and Exchange Commission, Maker shall not be required to provide a separate notice of adjustment to the Holder; provided, however, if such information is not readily available through Maker’s current reports filed with the Securities Exchange Commission and made public, Maker shall cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to the record Holder of this Note at its notice address(es) appearing in Section 7.

     (g) Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant to Section 4, the Holder thereafter shall become entitled to receive any securities of Maker, other than Common Stock, thereafter the number of such other shares so receivable upon exchange of this Note shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 4.

     5. Events of Default. An Event of Default shall be deemed to have occurred under this Note if an Event of Default has occurred under the Loan Agreement or any other Loan Document (each, an “Event of Default”)

     6. No Offset Rights. Maker may not offset any amounts due or claimed to be due from Holder to Maker against amounts due to Holder under this Note.

     7. Series of Notes. This Note is one of a series of Notes of like tenor issued in an original aggregate principal amount of up to the Credit Limit under the Loan Agreement (plus such additional principal amounts of Notes that may be permitted to be issued as a result of Conversion Events and subsequent issue of Notes in accordance with the Loan Agreement.

     8. Costs and Expenses. Maker promises to pay all reasonable costs and expenses incurred, including reasonable attorneys’ fees, incurred by Holder in connection with the enforcement of, or collection of any amounts due under, this Note. Maker hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument, except for notices to which Maker is expressly entitled under this Note.

     9. Successors and Assigns. This Note shall be binding upon, and shall inure to the benefit of, Maker and Holder and their respective successors and assigns; provided, however, that neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by Maker without the prior written consent of Holder.

     10. Modifications and Amendments; Reissuance of Note. This Note may only be modified, amended, or terminated (other than by payment in full) by an agreement in writing signed by Maker and Holder. No waiver of any term, covenant or provision of this Note shall be effective unless given in writing by Holder. Upon receipt of evidence reasonably satisfactory to Maker of the loss, theft, destruction, or mutilation of this Note and of an unsecured agreement of indemnity reasonably satisfactory to Maker, and upon surrender or cancellation of this Note, if mutilated, Maker will make and deliver a new Note of like tenor in lieu of such lost, stolen, destroyed, or mutilated Note.

     11. Remedies Cumulative. Each and every right, power and remedy herein given to Holder, or otherwise existing, shall be cumulative and not exclusive and be in addition to all other rights, powers and remedies now or hereafter granted (including, without limitation, other rights of set-off under applicable law) or otherwise existing. Each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Holder.

     12. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed effectively given in the manner set forth in the Loan Agreement, addressed as follows:

     if to Holder, at

Partners for Growth III, L.P.
180 Pacific Avenue
San Francisco, California 94111
Attention: Chief Financial Officer
Fax: (415) 781-0510

     with a copy (not constituting notice) to

Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941

Fax: (415) 738-5371
Email: ben@greenspan-law.com

or

     if to Maker, at

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN 55112
Attn: Larry Betterley
Fax: (651) 259-1696
Email: lbetterley@csi360.com

     with a copy (not constituting notice) to:

Fredrikson & Byron
200 6th Street South
Minneapolis, MN 55402
Attn: Bert Ranum
Fax: (612) 492-7077
Email: rranum@fredlaw.com

or at such other address and facsimile number as Holder shall have furnished to Maker in accordance with this Section 12.

     13. Waiver. Holder shall not by any act (except by a written instrument in accordance with Section 10 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law.

     14. Miscellaneous; Interpretation. Section 3.16, Section 8 and Exhibit D of the Loan Agreement are expressly incorporated by reference herein. In the event of any direct conflict between the terms of this Note and the terms of the Loan Agreement or any other Loan Document referenced herein, except as to (i) the issue date of this Note, (ii) the Principal Amount of this Note, (iii) the interest rate applicable to this Note (due to its determination as of the issue date of a Note in accordance with Section 2 of the Schedule to the Loan Agreement, and (iv) the Conversion Price of this Note (due to its determination as of the issue date of a Note under Sections 1(b) and 1(c), as applicable, of the Schedule to the Loan Agreement), the terms of the Loan Agreement and such other Loan Document shall control.

     IN WITNESS WHEREOF, Maker has caused this Note to be signed on the date first set forth above.

MAKER:	CARDIOVASCULAR SYSTEMS, INC.
	/s/ Laurence L. Betterley
	Name:	Laurence L. Betterley
	Title:	CFO

ACKNOWLEDGED AND AGREED

HOLDER:	PARTNERS FOR GROWTH III, L.P.
	By	/s/ Lorraine Nield
		Name: Lorraine Nield
		Title: Manager, Partners for Growth III, LLC Its General Partner

EX-10.11

Exhibit 10.11

WARRANT

THIS WARRANT (“WARRANT”) WAS SOLD IN A PRIVATE TRANSACTION, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.

Company:	Cardiovascular Systems, Inc., a Delaware corporation
Number of Shares:	147,330
Class of Shares:	Common Stock, $0.001 par value per share
Exchange Price:	$5.43 per share
Issue Date:	April 14, 2010
Expiration Date:	April 14, 2015

     The term “Holder” shall initially refer to Partners for Growth III, L.P., a Delaware limited partnership, which is the initial holder of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.

     The Holder is subject to certain restrictions as set forth in the Agreement.

     The Company does hereby certify and agree that, for the sum of $3,007.76 paid to Holder on the date hereof, which the parties agree is fair consideration for this Warrant, Holder, or its permitted successors and assigns, hereby is entitled to exchange this Warrant in Cardiovascular Systems, Inc. (the “Company”) for One Hundred Forty-Seven Thousand Three Hundred Thirty (147,330) duly authorized, validly issued, fully paid and non-assessable shares of its Common Stock, $0.001 par value each, upon the terms and subject to the provisions of this Warrant. The shares of Common Stock issuable upon exchange of this Warrant are referred to herein as the “Warrant Stock,” and the Warrant and the Warrant Stock are sometimes together referred to as the “Securities.” Capitalized terms used but not defined in this Warrant have their meanings as set forth in that certain Loan and Security Agreement of even date herewith between the Company and Holder (the “Loan Agreement”).

Section 1 Term, Price and Exchange of Warrant.

     1.1 Term of Warrant. This Warrant shall be exchangeable for a period of five (5) years from the Issue Date (hereinafter referred to as the “Expiration Date”).

     1.2 Exchange Price. The price per share at which the Warrant Stock is issuable upon exchange of this Warrant shall be $5.43, subject to Section 1.3 (a) hereof and subject to adjustment from time to time as set forth herein (the “Exchange Price”).

1.3 Exercise of Warrant; Exchange of Warrant.

          (a) This Warrant may be exercised as to Vested Shares only (as such term is defined in Section 1.7), in whole or in part, upon surrender to the Company at its then principal offices in the United States of this Warrant to be exchanged, together with the form of election to exchange or exercise attached hereto as Exhibit A duly completed and executed, and upon payment to the Company of the Exercise Price for the number of shares of Warrant Stock in respect of which this Warrant is then being exercised (an “Exercise”). In whole or in part in lieu of an Exercise, Holder may exchange this Warrant as set forth in the remainder of this Section 1.3 (an “Exchange”).

          (b) Upon an Exchange, the Holder shall receive Warrant Stock such that, without the payment of any funds, the Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed using the following formula:

                                    Y * (A-B)    

X =

                                 A

Where

X   =   the number of shares of Warrant Stock to be issued to Holder

Y   =   the number of shares of Warrant Stock to be exchanged under this Warrant

A   =   the Fair Market Value of one share of Warrant Stock

B   =   the Exchange Price (as adjusted to the date of such Calculations)

*   =   multiplied by

          (c) For purposes of this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s common stock (the “Common Stock”) is or becomes listed on a national stock exchange or is quoted on the Nasdaq Global Select Market or Nasdaq Global Market, the highest closing sale price reported on such exchange or market during the trading day on which Holder delivers its Election of Exchange to the Company, or (ii) if the Common Stock is traded over-the-counter, the highest closing bid price reported for the Common Stock during the trading day on which Holder delivers its Election of Exchange to the Company, and if there has been no such reported bid price for such day, the next prior day(s) until the first such reported bid price. If the Common Stock is not traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Company’s Warrant Stock shall be the price per share which the Company could obtain from a willing buyer for shares of Common Stock sold by the Company from its authorized but unissued shares, as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith judgment, but in no event less than the price at which qualified employee stock options issued at such time are exercisable. In the event that Holder elects to convert the Warrant Stock through

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Exchange in connection with a transaction in which the Warrant Stock is converted into or exchanged for another security, Holder may effect a Exchange directly into such other security.

          (d) Upon surrender of this Warrant, and the duly completed and executed form of election to exchange or exercise, and payment of the Exchange Price or conversion of this Warrant through Exchange, the Company shall issue and deliver within 3 business days to the Holder or such other person as the Holder may designate in writing a certificate or certificates for the number of shares of Warrant Stock so purchased upon the Exchange or exercise of this Warrant. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Stock as of the date of the surrender of this Warrant, and the duly completed and executed form of election to exchange or exercise, and payment of the Exchange Price or conversion of this Warrant through Exchange; provided, that if the date of surrender of this Warrant and payment of the Exchange Price is not a business day, the certificates for the Warrant Stock shall be deemed to have been issued as of the next business day (whether before or after the Expiration Date). If this Warrant is exchanged or exercised in part, a new warrant of the same tenor and for the number of shares of Warrant Stock not exchanged or exercised shall be executed by the Company.

     1.4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the exchange of this Warrant. If any fraction of a share of Common Stock would be issuable upon the exchange of this Warrant (or any portion thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the last reported sale price of the Common Stock on the NASDAQ Global Select Market or Nasdaq Global Market or any other national securities exchange or market on which the Common Stock is then listed or traded.

     1.5 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the Fair Market Value of one share of Common Stock (or other security issuable upon the exchange hereof) as determined in accordance with Section 1.3(c) is greater than the Exchange Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Section 1.3 as to all Warrant Stock (or such other securities) for which it shall not previously have been exchanged or converted, and the Company shall promptly deliver a certificate representing the Warrant Stock (or such other securities) issued upon such conversion to the Holder.

     1.6 Treatment of Warrant Upon Acquisition of Company.

          (a) “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale or other disposition of all or substantially all of the assets of the Company in whatever form, or any reorganization, consolidation, or merger of the Company (whether in a single transaction or multiple related transactions) where the holders of the Company’s securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction(s).

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          (b) Treatment of Warrant at Acquisition. Upon the closing of any Acquisition, the successor entity (if applicable in such Acquisition) shall, as condition to such Acquisition, either: (i) assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities as would be payable for the Warrant Stock issuable upon exchange of the unexchanged portion of this Warrant as if such Warrant Stock were outstanding on the record date for the Acquisition (and the Warrant Price and/or number of shares of Warrant Stock shall be adjusted accordingly) or (ii) purchase this Warrant at its “Fair Value” (as such term is defined herein).

          (c) Purchase at Fair Value.

          For purposes of this Warrant, “Fair Value” shall mean that value determined by the parties using a Black-Scholes Option-Pricing Model (the “Black-Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this Warrant as of the date of the Acquisition, (C) an annual dividend yield equal to dividends declared on the underlying Common Stock during the term of this Warrant (calculated on an annual basis), and (D) a volatility factor of the expected market price of the Company’s Common Stock comprised of: (1) if the Company is publicly traded on a national securities exchange or is quoted on the Nasdaq Global Select Market or Nasdaq Global Market, its volatility over the one year period prior to the Acquisition, (2) if the Company is a non-public company, the volatility, over the one year period prior to the Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having similar revenues. The purchase price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-Acquisition closing contingencies or adjustments into account in determining the purchase price, and if the parties take any post-Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the Company’s shares (as determined under subclause (D)), and the increased value of such shares (including, but not limited to any earn-out or escrowed consideration) would be paid in full to Holder immediately after those post-Acquisition closing contingencies or adjustments can be determined or achieved.

     1.7 Vesting. This Warrant shall vest with respect to fifty percent (50%) of the Warrant Stock on the Issue Date (the “Initial Vesting”). The remaining Warrant Stock shall vest based upon the extent to which the Company draws Loans under the Loan Agreement, as follows. Subject to the terms and conditions of the Loan Agreement, after a mandatory Company borrowing as of the Closing of the Loan, the Company may borrow up to the difference between the amount of such mandatory borrowing at Closing and $4,000,000 (the “Availability Amount”) during the one-year period from such Loan Closing date (such period being defined in the Loan Agreement as the “Availability Period”). The Warrant Stock unvested after the Initial Vesting shall vest pro rata according to the percentage of the Availability Amount that is drawn by the Company,

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with such vesting to occur on the date of any such draw (up to the Credit Limit). At the expiry of the Availability Period, Holder’s rights under this Warrant to all unvested Warrant Stock shall terminate and expire. For example only, if the Company borrows $1,500,000 at the Closing of the Loan and if 6 months thereafter, the Company borrows an additional $1,250,000 under the Loan Agreement (resulting, for reference only, in $2,750,000 in aggregate principal borrowings by the Company and $1,250,000 in remaining credit available within the Credit Limit under the Loan Agreement), then an additional 50% of the remaining unvested Warrant Stock would immediately vest [$1,250,000 borrowed / $2,500,000 remaining credit = 50%]. If 3 days before the one-year anniversary of the Loan Agreement the Company borrowed an additional $500,000, then an additional 20% of Warrant Stock would vest (i.e., 70% in the aggregate of the Warrant Stock remaining unvested after the Initial Vesting would then be vested). If there were no further borrowings within the Availability Period, Holders rights in respect of the remaining unvested Warrant Stock would terminate.

     Section 2. Exchange and Transfer of Warrant.

          (a) This Warrant may be transferred, in whole or in part, without restriction, subject to (i) Holder’s compliance with applicable securities laws and delivery of an opinion of competent counsel as to the same, if so requested by the Company, and (ii) the transferee holder of the new Warrant assuming in writing the obligations of the Holder set forth in this Warrant and the Agreement. Notwithstanding and without complying with the foregoing requirements, Holder may at any time transfer this Warrant in part to SVB Financial Group and/or PFG Equity Investors, LLC. By its acceptance of this Warrant, each such specified transferee will be deemed to have made to the Company each of the representations and warranties set forth in Section 7 hereof and agrees to be bound by all of the terms and conditions of this Warrant as if the original Holder hereof. A transfer may be registered with the Company by submission to it of this Warrant, together with the annexed Assignment Form attached hereto as Exhibit B duly completed and executed. After the Company’s receipt of this Warrant and the Assignment Form so completed and executed, the Company will issue and deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) at the same Exchange Price per share and otherwise having the same terms and provisions as this Warrant, which the Company will register in the new holder’s name. In the event of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles the transferring holder to purchase the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions as this Warrant. Upon the due delivery of this Warrant for transfer, the transferee holder shall be deemed for all purposes to have become the holder of the new warrant issued for the portion of this Warrant so transferred, effective immediately prior to the close of business on the date of such delivery, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so transferred.

          (b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical new warrant to the Holder in substitution therefor upon the Company’s receipt of (i) evidence reasonably satisfactory to the Company of such event and (ii) if requested by the Company, an indemnity agreement

5

reasonably satisfactory in form and substance to the Company. In the event of the mutilation of or other damage to the Warrant, the Company shall execute and deliver an identical new warrant to the Holder in substitution therefor upon the Company’s receipt of the mutilated or damaged warrant.

          (c) The Company shall pay all reasonable costs and expenses incurred in connection with the exchange, exercise, transfer or replacement of this Warrant, including, without limitation, the costs of preparation, execution and delivery of a new warrant and of share certificates representing all Warrant Stock.

Section 3. Certain Covenants.

          (a) The Company shall at all times reserve for issuance and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exchange of this Warrant, such number of shares of Common Stock as shall from time to time be sufficient therefor.

          (b) The Company will not, by amendment or restatement of its Certificate of Incorporation or Bylaws or through reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. Without limiting the foregoing, the Company (i) will not increase the par value of any Warrant Stock receivable upon the exchange of this Warrant above the amount payable therefor upon such exchange and (ii) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares upon the exchange or exercise of this Warrant.

          (c) So long as Holder holds this Warrant, the Company shall deliver to Holder such reports as it provides to its stockholders generally, as and when delivered to such stockholders. Notwithstanding the foregoing, the Company shall provide Holder quarterly and annual financial statements upon request, if such statements are not publicly available. The parties shall not treat the Warrant or the Warrant Stock as being granted or issued as property transferred in connection with the performance of services or otherwise as compensation for services rendered.

Section 4. Adjustments to Exchange Price and Number of Shares of Warrant Stock.

     4.1 Adjustments. The Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4. Upon each adjustment of the Exchange Price pursuant to this Section 4, the Holder shall thereafter be entitled to acquire upon exchange, at the Exchange Price resulting from such adjustment, the number of shares of Common Stock of the Company obtainable by multiplying the Exchange Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.

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     4.2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise, its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend, bonus issue or otherwise with respect to any Common Stock, the Exchange Price in effect immediately prior to such subdivision or share dividend or bonus issue shall be proportionately reduced and the number of shares acquirable upon exchange hereunder shall be proportionately increased. Conversely, in case the outstanding Common Stock of the Company shall be combined into a smaller number of shares, the Exchange Price in effect immediately prior to such combination shall be proportionately increased.

     4.3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exchange or exercise of this Warrant, Holder shall be entitled to receive an amended warrant for the number and kind of securities and property that Holder would have received for the Warrant Stock if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exchange or exercise of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exchange or exercise of this Warrant. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Company’s Board of Directors) which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exchange of the new Warrant. The provisions of this Section 4.3 shall similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.

     4.4. Notices of Record Date, Etc. In the event that the Company shall:

          (1) declare or propose to declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or not a regular cash dividend, or

          (2) offer for sale any additional shares of any class or series of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of waivers thereof) to pre-emptive rights of any class or series of stockholders, or

          (3) effect or approve any reclassification, exchange, substitution or recapitalization of the capital stock of the Company, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an assignment for the benefit of creditors), or

7

          (4) offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities,

then, in connection with such event, the Company shall give to Holder:

     (i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such a dividend or offer in respect of the matters referred to in (1) or (2) above, or for determining rights to vote in respect of the matters referred to in (3) above; and

     (ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of Holder; and

     (iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such registration rights.

     4.5 Adjustment by Board of Directors. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of this Section 4 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Exchange Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type contemplated in Section 4.2 and then in no event to an amount larger than the Exchange Price as adjusted pursuant to Section 4.2.

     4.6 Officers’ Statement as to Adjustments. Whenever the Exchange Price and/or number of shares of Warrant Stock subject to the Warrant is required to be adjusted as provided in Section 4, the Company shall forthwith file at its principal office with a copy to the Holder notice parties set forth in Section 7 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of the Company, showing in reasonable detail the facts requiring such adjustment, the Exchange Price and number of issuable shares that will be effective after such adjustment; provided, however, such statement shall not be required to the extent the information requested in this Section 4.6 is available through the Company’s current reports filed with the Securities and Exchange Commission. If at any time the information described in this Section 4.6 is readily available through the Company’s reports filed with the Securities and Exchange

8

Commission, the Company shall not be required to provide a separate notice of adjustment to the Holder; provided, however, if such information is not readily available through the Company’s current reports filed with the Securities Exchange Commission and made public, the Company shall cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to the record Holder of this Warrant at its notice address(es) appearing in Section 7.

     4.7 Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant to Section 4, the Holder thereafter shall become entitled to receive any securities of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exchange of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 4.

Section 5. Rights and Obligations of the Warrant Holder.

     Except as otherwise specified in this Warrant, this Warrant shall not entitle the Holder to any rights of a holder of Common Stock in the Company until such time as this Warrant is exchanged or exercised. Subject to the Company’s ability to secure the requisite consents specified in Section 6.13, the Company hereby grants the following registration rights to Holder. If during the term of this Warrant the Company proposes to file a registration statement under the Securities Act with respect to an offering for its own account of any class of its equity securities (other than a registration statement on Form S-8 (or any successor form) or any other registration statement relating solely to employee benefit plans or filed in connection with an exchange offer, a transaction to which Rule 145 (or any successor provision) under the Securities Act applies or an offering of securities solely to the Company’s existing shareholders), then the Company shall in each case give written notice of such proposed filing to Holder as soon as practicable (but no later than 20 business days) before the anticipated filing date, and such notice shall offer Holder the opportunity to register such number of shares of Warrant Stock as Holder may request. Holder shall advise the Company in writing within 10 business days after the date on which the Company’s notice is so given, setting forth the number of shares of Warrant Stock for which registration is requested. If the Company’s offering is to be an underwritten offering, the Company shall, subject to the further provisions of this Agreement, use its reasonable best efforts to cause the managing underwriter or underwriters to permit the Holders of the Warrant Stock requested to be included in the registration for such offering to include such Warrant Stock in such offering on the same terms and conditions as any similar securities of the Company included therein, subject to Holder’s execution of an underwriting agreement with the managing underwriter or underwriters selected by the Company in the same manner as other holders participating in the registration. In connection with any such offering, the Company will (i) include only such information relating to the Holder and the sale of Holder’s securities as Holder shall specifically permit and (ii) indemnify the Holder against liabilities, losses and damages that Holder may incur in connection with

9

the offering, including those relating to the applicable securities laws, and any breach by the Company of this Warrant.

Section 6. Representations, Warranties and Covenants of the Company. The Company represents and warrants to, and covenants with, Holder that:

     6.1 Corporate Power: Authorization. The Company has all requisite corporate power and has taken all requisite corporate action to execute and deliver this Warrant, to sell and issue the Warrant and Warrant Stock and to carry out and perform all of its obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The person executing this Warrant is a duly authorized officer of the Company with all necessary legal authority to bind the Company generally and with the specific legal authority to cause the Company to execute and deliver this Warrant.

     6.2 Validity of Securities. This Warrant, when sold against the consideration therefor as provided therein, will be validly authorized, issued and fully paid. The issuance and delivery of the Warrant is not subject to preemptive or any similar rights of the stockholders of the Company (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws; and when the Warrant Stock is issued upon exercise and in accordance with the terms hereof, and this Warrant is converted into Warrant Stock, such securities will be, at each such issuance, validly issued and outstanding, fully paid and nonassessable, in compliance with all applicable securities laws and free of any liens or encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

     6.3 Capitalization. The authorized capital stock of the Company consists of 100,000,000 shares of common stock, of which 14,909,522 were issued and outstanding on February 10, 2010. All such issued and outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. As of the date hereof, the Company has reserved a total of 6,954,155 shares of its common stock for issuance under its 1991 Stock Option Plan, the 2003 Stock Option Plan, the 2006 Equity Incentive Plan relating to Replidyne activity prior to the merger in February 2009, and the 2007 Equity Incentive Plan (collectively, the “Company Stock Option Plans”), of which 3,529,421 shares are reserved for issuance upon exercise of outstanding options granted under the Company Stock Option Plans. No shares of the Company’s common stock remain available for issuance under the Company’s 1991 Company Stock Option Plan and the Company’s 2003 Stock Option Plan and the Company’s 2006 Equity Incentive Plan, and 210,251 shares of the Company’s common stock remain available for issuance under the Company’s 2007 Equity Incentive Plan. Except as specified in this Warrant (including as set forth in Schedule B), there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company’s capital stock or other securities.

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Schedule B hereto sets forth a capitalization table of the Company which is true, correct accurate and complete as of the date hereof.

     6.4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Restated Certificate of Incorporation or Bylaws, as amended, or any mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its obligations as contemplated hereby.

     6.5 Governmental and other Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings as shall have been made prior to and shall be effective on and as of the date hereof. All stockholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained by Borrower or no such consents are required.

     6.6 Authorized and Unissued Shares of Common Stock. During the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of this Warrant, a sufficient number of authorized but unissued shares of Common Stock when and as required to provide for the exercise of the rights represented hereby.

     6.7 Exempt from Registration. Assuming the accuracy of the representations and warranties of Holder in Section 7 hereof, the offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from the registration requirements of the Securities Act pursuant to 506 of Regulation D under the Securities Act and from the registration and qualification requirements of applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of Securities to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act.

     6.8 Reporting Obligations. Borrower is and will remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and (i) has filed and will file all required reports under Section 13 or 15(d) of the Exchange Act, as applicable, during the 12 months preceding the initial issuance of any Notes, other than Form 8-K reports; and (ii) has submitted and will submit 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 12 months preceding such sale (a “Reporting

11

Issuer”). Without limiting the foregoing, if the Company ceases to timely file periodic reports under the Exchange Act, the Company shall from time to time promptly provide a copy of its most recent annual, quarterly and other interim reports to Holder.

     6.9 Quotation on NASDAQ. The Warrant Stock issuable upon exchange of this Warrant has been authorized for quotation on the Nasdaq Global Market. Any filings required by such market, including, without limitation, the Financial Industry Regulatory Authority (“FINRA”) shall be timely made and any required authorizations or approvals for the consummation of the transactions contemplated herein, including, without limitation, the issuance of the Warrant Stock, have been obtained.

     6.10 Non-Public Information. The Company shall not at any time provide PFG any material nonpublic information, unless pursuant to Special Request (as defined in the Loan and Security Agreement of even date herewith) and will publicly disclose the terms of this Agreement on Form 8-K under the Exchange Act (including it as an exhibit thereto if it deems it required under applicable law) promptly following the date hereof.

     6.11 Delivery of Information; Accuracy. The Company acknowledges its delivery of certain Representations and Warranties dated April 14, 2010 (the “Representation Letter”), to Holder, which Representations and Warranties form the basis for Holder purchasing the Warrant. The information contained in Part B of the Representation Letter and all documents, instruments and other information delivered to Holder in connection therewith are true, correct, accurate and complete in all material respects.

     6.12 Legends. The Company shall remove any restrictive securities legends on Warrant Stock resulting from exchange of the Warrant six (6) months following the issuance of the Warrant.

     6.13 Piggyback Registration Rights. Holder acknowledges that the Company is party to that certain Registration Rights Agreement dated as of March 16, 2009 among the Company and certain holders of its Common Stock. The Company shall use its best efforts to procure for the benefit of Holder the registration rights set forth in Section 5 hereof.

Section 7. Representations and Warranties of Holder. Holder hereby represents and warrants to the Company as of the Closing Date as follows:

     7.1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Securities.

     7.2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or for resale in connection with, any

12

“distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein.

     7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the terms herein will not result in a breach of any of the terms or provisions of Holder’s constitutional documents or instruments.

Section 8. Restrictive Stock Legend.

     This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any share certificates issued pursuant to the exchange of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer necessary) bear the following legend:

THIS WARRANT AND THE WARRANT STOCK ISSUABLE UPON EXCHANGE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OF DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN CUSTOMARY FORM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.

Section 9. Notices.

     Any notice or other communication required or permitted to be given here shall be in writing and shall be effective (a) upon hand delivery or delivery by e-mail or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received) or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received), or (b) on the third business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communication shall be:

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     if to Holder, at

Partners for Growth III, L.P.
180 Pacific Avenue
San Francisco, California 94111
Attention: Chief Financial Officer
Fax: (415) 781-0510
Email: lorraine@pfgrowth.com

     with a copy (not constituting notice) to

Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941
Fax: (415) 738-5371
Email: ben@greenspan-law.com

or

     if to the Company, at

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN 55112
Attn: Larry Betterley
Fax: (651) 259-1696
Email: lbetterley@csi360.com

     with a copy (not constituting notice) to:

Fredrikson & Byron
200 6th Street South
Minneapolis, MN 55402
Attn: Bert Ranum
Fax: (612) 492-7077
Email: rranum@fredlaw.com

Each party hereto may from time to time change its address for notices under this Section 7 by giving at least 10 calendar days’ notice of such changes address to the other party hereto.

Section 10. Amendments and Waivers.

     This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which

14

enforcement of such change, waiver, discharge or termination is sought. This Warrant may only be amended by an instrument in writing signed by both parties.

Section 11. Applicable Law; Severability.

     This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. If any one or more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any provision thereof shall not in any way be affected or impaired thereby.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the day and year first above written.

COMPANY:		ACKNOWLEDGED AND AGREED:
CARDIOVASCULAR SYSTEMS, INC,.		HOLDER:
		Partners for Growth III, L.P.
By:	/s/ Laurence L. Betterley
	Name: Laurence L. Betterley	By:	/s/ Lorraine Nield
	Title: CFO		Lorraine Nield,Manager of Partners for Growth III, LLC, Its General Partner

Warrant Signature Page

Exhibit A

To:

ELECTION TO EXCHANGE OR EXERCISE

1. The undersigned hereby exercises its right to exchange its Warrant for                                           fully paid, validly issued and nonassessable Shares covered by the attached Warrant in accordance with the terms thereof.

1. The undersigned hereby elects to exercise the attached Warrant for fully paid, validly issued and nonassessable Shares by payment of $                     as specified in the attached Warrant. This right is exercised with respect to                      of shares.

     [Strike the paragraph above that does not apply.]

The undersigned requests that certificates for such shares be issued in the name of, and delivered to:

2. By its execution below and for the benefit of the Company, the undersigned hereby restates each of the representations and warranties in Section 4 of the Warrant Purchase Agreement as of the date hereof.

Date: ____________________________	[Holder]
	By
		Name:
		Title:

Exhibit B

ASSIGNMENT FORM

To:

     The undersigned hereby assigns and transfers this Warrant to

(Insert assignee’s social security or tax identification number)

(Print or type assignee’s name, address and postal code)

and irrevocably appoints                                                                to transfer this Warrant on the books of the Company.

Date:                                          

Partners for Growth III, L.P.

By
	Name:	, Manager of
	Partners for Growth III, LLC, Its General Partner

EX-10.12

Exhibit 10.12

CARDIOVASCULAR SYSTEMS, INC.
SUMMARY OF AMENDMENT TO FISCAL 2010
EXECUTIVE OFFICER ANNUAL CASH INCENTIVE COMPENSATION

On April 21, 2010, the Board of Directors and the Compensation Committee of Cardiovascular Systems, Inc. (the “Company”) awarded cash bonuses to the Company’s executive officers under the Cardiovascular Systems, Inc. Fiscal 2010 Executive Officer Annual Cash Incentive Compensation program, as amended (the “Cash Incentive Program”). Pursuant to the Cash Incentive Program, the Company’s executive officers were eligible to receive cash incentive compensation for the first half of fiscal 2010 based on pre-determined revenue and adjusted EBITDA financial goals set by the Board and the Compensation Committee. Although these plan goals were not achieved, the Board and the Compensation Committee concluded that the Company’s achieved financial performance and progress in other areas, including clinical trials, sales training, product protocol definition and customer education, justified the grant of bonuses to the executive team. For this performance during the first half of fiscal 2010, the Board and the Compensation Committee awarded cash bonuses equal to 75% of the target bonus amounts available to executive officers for such period under the Cash Incentive Program. The Company’s executive officers will be eligible to receive additional bonuses under the Cash Incentive Program for the second half of fiscal 2010 ranging from 50% to 150% of the target amounts for such period based on pre-determined revenue and adjusted EBITDA financial goals.

EX-31.1

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David L. Martin, certify that:

1.	I have reviewed this quarterly report on Form 10-Q 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 persons 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.

	By:	/s/ David L. Martin
Dated: May 14, 2010		David L. Martin
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Laurence L. Betterley, certify that:

1.	I have reviewed this quarterly report on Form 10-Q 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 persons 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.

	By:	/s/ Laurence L. Betterley
Dated: May 14, 2010		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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the “Report”) by Cardiovascular Systems, Inc. (“Registrant”), I, David L. Martin, the 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 Registrant.

	By:	/s/ David L. Martin
Dated: May 14, 2010		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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the “Report”) by Cardiovascular Systems, Inc. (“Registrant”), I, Laurence L. Betterley, the 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 Registrant.

	By:	/s/ Laurence L. Betterley
Dated: May 14, 2010		Laurence L. Betterley
		Chief Financial Officer