REPLIDYNE INC (Form: 8-K, Received: 03/03/2009 16:25:27)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 25, 2009

Cardiovascular Systems, Inc.

(Exact name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of Incorporation)


000-52082 (Commission File Number)		84-1568247 (IRS Employer Identification No.)

651 Campus Drive
St. Paul, Minnesota 55112-3495
(Address of Principal Executive Offices and Zip Code)

(651) 259-1600
(Registrant’s telephone number, including area code)

Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))


o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS


	Item 1.01. Entry Into Material Definitive Agreement
	Item 1.02 Termination of a Material Definitive Agreement
	Item 2.01 Completion of Acquisition or Disposition of Assets
	Item 2.03 Creation of Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
	Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
	Item 3.02 Unregistered Sales of Equity Securities
	Item 3.03 Material Modification to Rights of Security Holders
	Item 4.01 Changes in Registrant's Certifying Accountant
	Item 5.01 Change in Control of Registrant
	Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
	Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
	Item 5.05 Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics.
	Item 8.01 Other Events.
	Item 9.01 Financial Statements and Exhibits
EXHIBIT INDEX
EX-3.1
EX-3.2
EX-4.1
EX-4.2
EX-14.1
EX-16.1
EX-23.1
EX-99.1
EX-99.2
EX-99.3
EX-99.4


Item 1.01.		Entry Into Material Definitive Agreement

Background

On February 25 2009, Replidyne, Inc., a Delaware corporation (“Replidyne”), completed its business combination with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008, by and among Replidyne, Responder Merger Sub, Inc., a wholly-owned subsidiary of Replidyne (“Merger Sub”), and CSI-MN (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into CSI-MN, with CSI-MN continuing after the merger as the surviving corporation and a wholly owned subsidiary of Replidyne. At the effective time of the merger, Replidyne changed its name to Cardiovascular Systems, Inc. (“CSI”) and CSI-MN changed its name to CSI Minnesota, Inc. Following the merger of Merger Sub with CSI-MN, CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation. Unless the context otherwise requires, all references herein to “CSI” and the “Company” refer to CSI following the completion of the merger and the name change, all references to “Replidyne” refer to Replidyne prior to the completion of the merger and the name change, and all references to “CSI-MN” refer to CSI-MN prior to the completion of the merger and its name change.

Immediately prior to the merger:

•		each share of CSI-MN’s Series A convertible preferred stock automatically converted into approximately 1.005 shares of CSI-MN’s common stock;

•		each share of CSI-MN’s Series A-1 convertible preferred stock automatically converted into approximately 1.032 shares of CSI-MN’s common stock; and

•		each share of CSI-MN’s Series B convertible preferred stock automatically converted into approximately 1.010 shares of CSI-MN’s common stock.

At the effective time of the merger, each outstanding share of CSI-MN’s common stock, including each share issuable upon conversion of CSI-MN Series A, Series A-1 and Series B convertible preferred stock in accordance with the ratios described above, was converted into the right to receive 0.647 shares of CSI common stock.

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

In accordance with the terms of the merger agreement, immediately after the merger, current stockholders of Replidyne, together with holders of Replidyne options and warrants, were expected to own or have the right to acquire between 16.3% and 17.0% of the combined company, and current CSI-MN stockholders, optionholders and warrantholders were expected to own or have the right to acquire between 83.0% and 83.7% of the combined company, in each case assuming that Replidyne’s net assets at closing were between $35.0 and $37.0 million as calculated in accordance with the terms of the merger agreement, on a fully diluted basis using the treasury stock method of accounting for options and warrants.

At closing, Replidyne’s net assets, as calculated pursuant to the terms of the Merger Agreement, were $37.0 million. As of immediately following the effective time of the merger, former CSI-MN stockholders owned approximately 80.2% of the outstanding common stock of CSI, and Replidyne stockholders owned approximately 19.8% of the outstanding common stock of CSI. Options exercisable for a total of 5,681,974 shares of CSI-MN common stock (equivalent to a total of 3,676,208 shares of CSI common stock) and warrants exercisable for a total

of 4,836,051 shares of CSI-MN common stock (equivalent to a total of 3,128,740 shares of CSI common stock) were assumed by CSI in connection with the merger.

CSI’s common stock has been accepted for listing on the Nasdaq Global Market under the symbol “CSII” and trading commenced on February 26, 2009. As of February 25, 2009, immediately following the consummation of the merger, there were approximately 13.7 million shares of CSI common stock issued and outstanding. The full text of CSI’s press release dated February 25, 2009 announcing the completion of the merger is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

On February 25, 2009, following the effective time of the merger, the board of directors of CSI approved a merger with CSI’s wholly-owned subsidiary, CSI-MN, pursuant to which CSI-MN was merged with and into CSI.

Material CSI-MN Agreements

Following the completion of the merger, the following material CSI-MN agreements and arrangements became material agreements and arrangements of CSI:

Margin Loan

On August 21, 2008, CSI-MN obtained a margin loan from UBS Bank USA, with maximum borrowings available of $23.0 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 has a floating interest rate equal to 30-day LIBOR, plus 1.0%. 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 (“ARS”) 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 loan agreement and are therefore subject to change. From August 21, 2008, the date this loan was initially funded, through the date of this Form 8-K, the margin requirements included maximum borrowings, including interest, of $23.0 million. If these margin requirements are not maintained, UBS Bank may require us to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. CSI-MN has maintained the margin requirements under this loan. The outstanding balance on this loan at December 31, 2008 was $22.7 million.

Acceptance of UBS Settlement

On November 7, 2008, CSI-MN accepted an offer from UBS AG (“UBS”), providing rights related to its ARS (such rights shall be referred to as the “Rights”). CSI acquired the ARS and the Rights as a result of the Merger, as they were previously held by CSI-MN. The Rights permit CSI to require UBS to purchase its 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 CSI’s ARS at any time until July 2, 2012, so long as CSI receives payment at par value upon any sale or disposition. CSI 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 CSI 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.

UBS’s obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. Furthermore, UBS will only purchase up to an aggregate of $10.3 billion in ARS from its institutional clients. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

Loan and Security Agreement

On September 12, 2008, CSI-MN entered into a loan and security agreement with Silicon Valley Bank with maximum available borrowings of $13.5 million. CSI assumed this agreement from CSI-MN in connection with the merger, and the guarantors acknowledged this assumption. The agreement includes a $3.0 million term loan, a $5.0

million accounts receivable line of credit, and two term loans for an aggregate of $5.5 million that are guaranteed by certain of our affiliates. The terms of each of these loans are as follows:

•

The $3.0 million term loan has a fixed interest rate of 10.5% and a final payment amount equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with repayment terms that include interest only payments during the first six months followed by 30 equal principal and interest payments. This term loan also includes an acceleration provision that requires us to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. As part of the term loan agreement, CSI-MN granted Silicon Valley Bank a warrant to purchase 13,000 shares of CSI-MN’s Series B convertible preferred stock at an exercise price of $9.25 per share (which was converted into a warrant to purchase 8,493 shares of CSI common stock at an exercise price of $14.16 per share). This warrant is immediately exercisable and has a term of ten years, and was assigned an accounting value of $75,000. The balance outstanding on the term loan at December 31, 2008 was $3.0 million.

•

The accounts receivable line of credit has a two year maturity and a floating interest rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on 80% of eligible domestic receivables, which is defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and government receivables. All accounts receivable receipts will be 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 December 31, 2008.

•

One of the guaranteed term loans is for $3.0 million and the other guaranteed term loan is for $2.5 million, each with a one year maturity. Each of the guaranteed term loans has a floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0% (effective rate of 7.0% at December 31, 2008). Interest on borrowings is due monthly and the principal balance is due at maturity. One of our directors, an entity affiliated with one of our directors and one of our affiliates agreed to act as guarantors of these term loans. In consideration for the guarantees, CSI-MN issued the guarantors warrants to purchase an aggregate of 458,333 shares of CSI-MN’s common stock at an exercise price of $6.00 per share (which were converted into warrants to purchase an aggregate of 296,539 shares of CSI common stock at an exercise price of $9.28 per share). The balance outstanding on the guaranteed term loans at December 31, 2008 was $5.5 million (excluding debt discount of $1.3 million).

Borrowings from Silicon Valley Bank are collateralized by all of the Company’s assets, other than the Company’s ARS and intellectual property, and the investor guarantees. The borrowings are subject to prepayment penalties and financial covenants, including the Company’s achievement of minimum monthly net revenue goals. Any non-compliance by the Company under the terms of the Company’s debt arrangements could result in an event of default under the Silicon Valley Bank loan, which, if not cured, could result in the acceleration of this debt.

Real Property Lease

CSI’s principal executive offices are located in a 47,000 square foot facility located in St. Paul, Minnesota. CSI assumed this lease from CSI-MN as a result of the merger. CSI has leased this facility through November 2012 with an option to renew through November 2017. This facility accommodates CSI’s research and development, sales, marketing, manufacturing, finance and administrative activities.


Item 1.02		Termination of a Material Definitive Agreement

Termination of Replidyne Officers

Pursuant to the terms of the Merger Agreement, effective as of the effective time of the merger, the employment of the following Replidyne officers was terminated without cause: Kenneth Collins, president and chief executive officer; Mark Smith, chief financial officer; and Don Morrissey, senior vice president of corporate development. In connection with these terminations, CSI paid these former officers severance benefits due to them under their employment agreements with Replidyne dated April 4, 2006, as amended June 15, 2007. Pursuant to the employment agreements, because each executive’s employment was terminated without cause within one month before or 13 months following a change of control, each executive became entitled to the following additional benefits:

•

the equivalent of 12 months (or 18 months with respect to Mr. Collins) of the executive’s base salary as in effect immediately prior to the date of termination;

•

reimbursement for the cost of continued medical insurance coverage through the end of this 12 month period (or 18 month period with respect to Mr. Collins) or if earlier, the date on which the executive obtains alternative group health insurance; and

•

acceleration of vesting of all of the executive’s outstanding unvested options to purchase Replidyne common stock.

In addition, because each executive officer’s employment was terminated without cause within one month before or 13 months following a change of control of Replidyne, each executive officer was also entitled to payment of a bonus equal to the average of his annual bonus for the two years prior to such termination (or one and a half times the average of his annual bonus for the two years prior to such termination with respect to Mr. Collins).

In addition to the severance benefits due to them under their employment agreements, Messrs. Smith and Morrisey also became entitled to receive certain retention bonuses in connection with the closing of the merger. On March 31, 2008, Replidyne entered into a retention bonus agreement with each of Messrs. Smith and Morrisey. Pursuant to the terms of the retention bonus agreements, Replidyne paid each of Mr. Smith and Mr. Morrissey a cash bonus in the amount of $100,000 in October 2008 because such executives remained employed by Replidyne through September 30, 2008. The retention bonus agreements provided for an additional cash bonus to each of Mr. Smith and Mr. Morrissey in an amount of not less than $100,000 and not greater than $150,000, which final amounts were determined by Replidyne’s board of directors to be $135,000.

Pursuant to the terms of their employment agreements and retention bonus agreements, the Replidyne executive officers received the following severance payments in connection with the closing of the merger:


	Total Severance
	Payments and Change
	of Control Payments
	Pursuant to		Payments Pursuant
Name of Executive	Employment		to Retention Bonus
Officer	Agreements		Agreements		Total
Kenneth Collins	$	564,375	$	—	$	564,375
Mark Smith	$	317,400	$	135,000	$	452,400
Donald Morrissey	$	286,800	$	135,000	$	421,800


Item 2.01		Completion of Acquisition or Disposition of Assets

The information set forth in Item 1.01 under the section entitled “Background” of this Current Report on Form 8-K is incorporated herein by reference. The information regarding CSI-MN set forth in CSI-MN’s Registration Statement on Form 10 (Reg. No. 000-53478) filed with the Securities and Exchange Commission on December 17, 2008, CSI-MN’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008, Replidyne’s Registration Statement on Form S-4 (Reg. No. 333-155887) filed with the Securities and Exchange Commission on January 26, 2009, and Replidyne’s Annual Report of Form 10-K for the year ended December 31, 2008, is also incorporated herein by reference.


Item 2.03		Creation of Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

The information set forth in Item 1.01 above, under the titles “Material CSI-MN Agreements — Margin Loan” with respect to the UBS Bank loan and “Material CSI-MN Agreements — Loan and Security Agreement” with respect to the Silicon Valley Bank loan is incorporated herein by reference.


Item 2.04		Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement

The information set forth in Item 1.02 above, under the title “Termination of Replidyne Officers” is incorporated herein by reference.


Item 3.02		Unregistered Sales of Equity Securities

Concurrently with the execution of the Merger Agreement, the holders of approximately 68% of CSI-MN’s outstanding preferred stock, calculated on an as-converted to common stock basis, entered into an agreement with CSI-MN pursuant to which all outstanding shares of CSI-MN preferred stock were automatically converted into shares of CSI-MN common stock, effective as of immediately prior to the effective time of the merger. In consideration of the agreement of such stockholders, CSI-MN issued to the holders of CSI-MN preferred stock five-year warrants to purchase 3,499,877 shares of CSI-MN common stock (equivalent to a total of 2,264,264 shares of CSI common stock based on the conversion ratio set forth in the Merger Agreement) at an exercise price of $5.71 per share (equivalent to $8.83 per share based on the conversion ratio set forth in the Merger Agreement), pro rata to each such holder based on its percentage of the outstanding shares of CSI-MN preferred stock on an as-converted to common stock basis. Such warrants were issued immediately following the effectiveness of the conversion of all outstanding shares of CSI-MN preferred stock into CSI-MN common stock, but prior to the effective time of the merger. The warrants were issued by CSI-MN in reliance upon Section 4(2) of the Securities Act of 1933, as amended, and were assumed by CSI in the merger.

Also in connection with the merger, CSI assumed CSI-MN stock options to acquire an aggregate of 5,681,974 shares of CSI-MN common stock (equivalent to 3,676,208 shares of CSI common stock based on the conversion ratio set forth in the Merger Agreement) and CSI-MN warrants to acquire an aggregate of 4,836,051 shares of CSI-MN common stock (equivalent to 3,128,740 shares of CSI common stock based on the conversion ratio set forth in the Merger Agreement).

The information set forth in item 5.02 of this Current Report on Form 8-K under the heading “Equity Incentive Plan and Awards — Post-Merger Awards to New Officers and Directors” is incorporated herein by reference.


Item 3.03		Material Modification to Rights of Security Holders

Reverse Stock Split Amendment and Name Change Amendment

On February 24, 2009, the stockholders of Replidyne approved an amendment to Replidyne’s restated certificate of incorporation to effect a reverse stock split of the issued and outstanding shares of Replidyne’s common stock whereby a number of outstanding shares of Replidyne’s common stock between and including one and 50, such number consisting only of whole shares, would be combined into one share of Replidyne’s common stock, with this exact number (the “Split Ratio”) within the range to be determined by Replidyne’s board of directors, subject to its obligation under the Merger Agreement to agree with CSI-MN on such determination. That same day, following stockholder approval of the reverse stock split amendment, Replidyne’s board of directors acted to set the Split Ratio at one for ten so that every ten shares of Replidyne common stock outstanding immediately prior to the reverse stock split converted into one share of Replidyne common stock, and adopted an amendment to Replidyne’s restated certificate of incorporation to effect the reverse stock split in accordance with the Split Ratio (the “Reverse Stock Split Amendment”). Replidyne’s board of directors also adopted an amendment to Replidyne’s restated certificate of incorporation changing Replidyne’s name from Replidyne, Inc. to Cardiovascular Systems, Inc. (such change in name, the “Name Change Amendment”). The Reverse Stock Split Amendment and the Name Change Amendment both became effective on February 25, 2009 and the common stock of Replidyne (now known as CSI) began trading on the Nasdaq Global Market on a post-reverse-split basis on February 26, 2009 under the new symbol “CSII.” The amendment to Replidyne’s restated certificate of incorporation is attached as Exhibit 3.1 to this Current Report on Form 8-K and incorporated herein by reference.

Bylaw Amendments

On February 25, 2009, following the effective time of the merger, the board of directors of CSI approved certain amendments to CSI’s amended and restated bylaws (the “Bylaw Amendment”). The Bylaw Amendment modifies the manner by which business may properly be brought before an annual or special meeting of the Company’s stockholders and the manner and circumstances in which CSI will indemnify and advance expenses to its directors and officers in connection with claims brought against them in their capacity as directors and officers of the company. A summary of the principal amendments to CSI’s amended and restated bylaws is set forth below.

The Bylaw Amendment clarifies that, apart from submitting proposals and nominations in compliance with Rule 14a-8 under the Securities and Exchange Act of 1934 (the “Exchange Act”), the advance notice provisions of the Company’s Bylaws provide the exclusive means by which a stockholder may make nominations of directors or submit other business before an annual or special meeting of stockholders.

The Bylaw Amendment also modifies the information required to be included in the stockholder notice to require, in addition to the name, address and stock ownership of the stockholder giving the notice, any other information that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for the proposal or nomination pursuant to Section 14 of the Exchange Act and a brief description of the business to be brought before the meeting, information with respect to the stockholder or such beneficial owner on whose behalf the nomination or proposal is submitted regarding (i) any derivative positions related to any class or series of the Company’s stock, (ii) any proxy, contract, arrangement or understanding relating to the voting of any of the Company’s securities, (iii) any short positions in the Company’s securities, (iv) any separate or separable dividend rights, (iv) any proportionate interest in the Company’s securities held by a limited or general partnership in which such stockholder or beneficial owner is, or owns an interest in, a general partner, and (v) any performance-related fees such stockholder or beneficial owner is entitled to based on the value of the Company’s securities. If the notice relates to business other than a director nomination, the Bylaw Amendment further requires the notice to set forth any material interest of the stockholder or the beneficial owner on whose behalf the proposal is submitted in such business and a description of all agreements between such stockholder and the beneficial owner on whose behalf the proposal is submitted, or any other person. If the notice relates to a director nomination, the Bylaw Amendment further requires the notice to describe any compensation or

monetary arrangements or other material relationships during the previous three years between such stockholder and beneficial owner, or their affiliates, and each proposed nominee and such nominee’s affiliates, as well as any information that would be required to be disclosed pursuant to Rule 404 of Regulation S-K if the stockholder making the nomination or the beneficial owner on whose behalf the nomination is made were the registrant and the director nominee was a director of the Company. Finally, the Bylaw Amendment adds a requirement that any director nominee must submit a completed and signed questionnaire setting forth such nominee’s background and qualifications, an agreement of such nominee that such person is not and will not become a party to (i) any voting agreement with respect to the Company’s securities that has not been disclosed to the Company, (ii) any voting agreement that could limit such person’s ability to comply with such person’s fiduciary duties, or (iii) any compensatory arrangement with any party other than the Company with respect to service as a director of the Company that has not been disclosed to the Company, and a representation by such person that such person would be in compliance with and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality, stock ownership and trading policies and guidelines of the Company.

The Bylaw Amendment also modifies the indemnification provision set forth in Article 11 of the amended and restated bylaws. Under the revised provisions, CSI is not obligated to indemnify any officer or director in connection with any proceeding brought by or on behalf of the Company against such director or officer that is authorized by CSI’s board of directors, except to the extent set forth in the new expense advancement section of the amended and restated bylaws. The new expense advancement section provides that CSI will indemnify each of its directors and officers against all expenses actually and reasonably incurred by such individual in connection with the defense of any proceeding or claim, but only to the extent that the director or officer is successful on the merits or otherwise, including, without limitation, the dismissal of any action without prejudice, or if it is ultimately determined that the director or officer is otherwise entitled to be indemnified against expenses. If the director or officer is partially successful on the merits or otherwise in defense of any proceeding, such indemnification will be apportioned appropriately to reflect the degree of the director’s or officer’s success in the proceeding.

The foregoing summary of the Bylaw Amendment does not purport to be a complete description of the Bylaw Amendment and is qualified in its entirety by reference to the Bylaw Amendment, included as Exhibit 3.2 to this Current Report on Form 8-K and incorporated by reference as if fully set forth herein.

Stock Certificate

On February 24, 2009, Replidyne’s board of directors adopted a new form of stock certificate representing CSI’s common stock after the effective time of the reverse stock split and merger. The form of stock certificate is filed as Exhibit 4.1 to this Current Report on Form 8-K and is incorporated herein by reference.


Item 4.01		Changes in Registrant’s Certifying Accountant

(a) Previous Independent Registered Public Accounting Firm

Concurrent with the engagement of PricewaterhouseCoopers LLP described below, the CSI audit committee approved the dismissal of KPMG LLP (“KPMG”) as CSI’s principal accountant. KPMG’s audit reports on the financial statements of Replidyne, Inc. as of and for the years ended December 31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles, except that KPMG’s report on the financial statements of Replidyne, Inc. as of and for the year ended December 31, 2007 contained a separate paragraph stating that “as discussed in note 2 to the accompanying financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payments, effective January 1, 2006.” The audit report of KPMG on the effectiveness of internal control over financial reporting as of December 31, 2007 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During Replidyne, Inc.’s two fiscal years ended December 31, 2008 and the subsequent interim period through February 25, 2009, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreements in connection with its report, and there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K. CSI has provided KPMG with a copy of the foregoing statements and has requested and received from KPMG a letter addressed to the

Securities and Exchange Commission stating whether or not KPMG agrees with the above statements. A copy of the letter from KPMG is attached as Exhibit 16.1 to this Current Report on Form 8-K.

(b) New Independent Registered Public Accounting Firm

Prior to the merger, CSI-MN had engaged PricewaterhouseCoopers LLP as the principal accountant to audit CSI-MN’s financial statements. For accounting purposes, CSI-MN is deemed to have acquired Replidyne, Inc. pursuant to the transactions contemplated by the Merger Agreement, and the historical financial statements of CSI-MN are considered to be the historical financial statements of CSI after the merger. CSI engaged PricewaterhouseCoopers LLP as its new independent registered public accounting firm as of February 25, 2009. During the fiscal years ended December 31, 2007 and 2008 and through February 24, 2009, Replidyne, Inc. has not consulted with PricewaterhouseCoopers LLP regarding any of the matters described in item 304(a)(2)(i) or item 304(a)(2)(ii) of Regulation S-K.


Item 5.01		Change in Control of Registrant

The information set forth in Item 1.01 under the section entitled “Background” of this Current Report on Form 8-K is incorporated herein by reference. The information regarding CSI-MN set forth in CSI-MN’s Registration Statement on Form 10 (Reg. No. 000-53478) filed with the Securities and Exchange Commission on December 17, 2008, in CSI-MN’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008, and in Replidyne’s Registration Statement on Form S-4 (Reg. No. 333-155887) filed with the Securities and Exchange Commission on January 26, 2009, is also incorporated herein by reference.


Item 5.02		Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

Pursuant to the terms of the Merger Agreement, effective as of the effective time of the merger, Kenneth Collins resigned from Replidyne’s board of directors, Kirk Calhoun resigned from Replidyne’s board of directors and audit committee; Geoffrey Duyk, M.D., Ph.D. resigned from Replidyne’s board of directors, compensation committee and governance and nominating committee; and Dan Mitchell resigned from Replidyne’s board of directors and compensation committee and governance and nominating committee. Edward Brown also resigned from Replidyne’s board of directors, but was reappointed to the CSI board effective as of the effective time of the merger. Augustine Lawlor also remains a member of CSI’s board of directors following the merger.

In addition, pursuant to the terms of the Merger Agreement, effective as of the effective time of the merger, the following individuals were elected to CSI’s board of directors: David L. Martin, Brent G. Blackey, John H. Friedman, Geoffrey O. Hartzler, Roger J. Howe, Glen D. Nelson and Gary M. Petrucci. These individuals constituted all members of the CSI-MN board of directors except for Michael Kallok and Christy Wyskiel who both resigned from the CSI-MN board effective concurrent with the merger. Messrs. Brown, Lawlor and Petrucci are Class I directors, whose terms expire at the 2009 annual meeting of CSI’s stockholders, Messrs. Blackey, Friedman and Howe are Class II directors, whose terms expire at the 2010 annual meeting of CSI’s stockholders and Messrs. Nelson, Hartzler and Martin are Class III directors, whose terms expire at the 2011 annual meeting of CSI’s stockholders.

In addition, effective as of the effective time of the merger, the compensation committee of CSI’s board of directors is comprised of Mr. Friedman, as the chairperson, Messrs. Petrucci, and Lawlor; the audit committee of CSI’s board of directors is comprised of Mr. Blackey, as the chairperson, Messrs. Hartzler and Lawlor; and the nominating and corporate governance committee of CSI’s board of directors is comprised of Mr. Hartzler, as the chairperson, and Messrs. Nelson and Brown.

Finally, pursuant to the terms of the Merger Agreement, effective as of the effective time of the merger, the following Replidyne officers were terminated without cause from the following positions: Kenneth Collins, Replidyne’s president and chief executive officer; Mark Smith, Replidyne’s chief financial officer; and Donald Morrissey, Replidyne’s senior vice president of corporate development. In addition, pursuant to the terms of the Merger Agreement, effective as of the effective time of the merger, David L. Martin was appointed president and chief executive officer of CSI, Laurence L. Betterley was appointed chief financial officer, James E. Flaherty was appointed chief administrative officer and secretary, and Robert J. Thatcher was appointed executive vice president. These individuals constituted all of CSI-MN’s executive officers except for Michael Kallok who resigned as an executive officer of CSI-MN effective concurrent with the merger and entered into a consulting agreement with CSI to provide services following the merger.

The following is a brief biographical summary for each of CSI’s new directors and its new President and Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer and Executive Vice President:

David L. Martin, President, Chief Executive Officer and Director, Age 44. Mr. Martin has been CSI-MN’s President and Chief Executive Officer since February 2007, and a director since August 2006. Mr. Martin also served as CSI-MN’s Interim Chief Financial Officer from January 2008 to April 2008. Prior to joining CSI-MN, Mr. Martin was Chief Operating Officer of FoxHollow Technologies, Inc. from January 2004 to February 2006, Executive Vice President of Sales and Marketing of FoxHollow Technologies, Inc. from January 2003 to January 2004, Vice President of Global Sales and International Operations at CardioVention Inc. from October 2001 to May 2002, Vice President of Global Sales for RITA Medical Systems, Inc. from March 2000 to October 2001 and Director of U.S. Sales, Cardiac Surgery for Guidant Corporation from September 1999 to March 2000. Mr. Martin has also held sales and sales management positions for The Procter & Gamble Company and Boston Scientific Corporation. Mr. Martin currently serves as a director of AccessClosure, Inc. and Apieron Inc., two privately-held medical device companies.

Laurence L. Betterley, Chief Financial Officer, Age 54. Mr. Betterley joined CSI-MN in April 2008 as its Chief Financial Officer. Previously, Mr. Betterley was Chief Financial Officer at Cima NanoTech, Inc. from May 2007 to April 2008, Senior Vice President and Chief Financial Officer of PLATO Learning, Inc. from June 2004 to January 2007, Senior Vice President and Chief Financial Officer of Diametrics Medical, Inc. from 1996 to 2003, and Chief Financial Officer of Cray Research Inc. from 1994 to 1996.

James E. Flaherty, Chief Administrative Officer and Secretary, Age 55. Mr. Flaherty has been CSI-MN’s Chief Administrative Officer since January 14, 2008. Mr. Flaherty was CSI-MN’s Chief Financial Officer from March 2003 to January 14, 2008. As Chief Administrative Officer, Mr. Flaherty reports directly to CSI-MN’s Chief Executive Officer and has responsibility for information technology, facilities, legal matters, financial analysis of business development opportunities and business operations. Mr. Flaherty assisted with CSI-MN’s initial public offering process, including financial matters, and assisted with the transition of CSI-MN’s new Chief Financial Officer. As CSI-MN’s Chief Financial Officer, Mr. Flaherty had primary responsibility for the preparation of historical financial statements, but he no longer has any such responsibility. Prior to joining CSI-MN, Mr. Flaherty served as an independent financial consultant from 2001 to 2003 and Chief Financial Officer of Zomax Incorporated from 1997 to 2001. Mr. Flaherty served as Chief Financial Officer of Racotek, Inc. from 1990 to 1996, of Time Management Corporation from 1986 to 1990, and of Nugget Oil Corp. from 1980 to 1985. Mr. Flaherty was an accountant at Coopers & Lybrand from 1975 to 1980. On June 9, 2005, the Securities and Exchange Commission filed a civil injunctive action charging Zomax Incorporated with violations of federal securities law by filing a materially misstated Form 10-Q for the period ended June 30, 2000. The SEC further charged that in a conference call with analysts, certain of Zomax’s executive officers, including Mr. Flaherty, misrepresented or omitted to state material facts regarding Zomax’s prospects of meeting quarterly revenue and earnings targets, in violation of federal securities law. Without admitting or denying the SEC’s charges, Mr. Flaherty consented to the entry of a court order enjoining him from any violation of certain provisions of federal securities law. In addition, Mr. Flaherty agreed to disgorge $16,770 plus prejudgment interest and pay a $75,000 civil penalty.

Robert J. Thatcher, Executive Vice President, Age 54. Mr. Thatcher joined CSI-MN as Senior Vice President of Sales and Marketing in October 2005 and became CSI-MN’s Vice President of Operations in September 2006. Mr. Thatcher became CSI-MN’s Executive Vice President in August 2007. Previously, Mr. Thatcher was Senior Vice President of TriVirix Inc. from October 2003 to October 2005. Mr. Thatcher has more than 29 years of medical device experience in both large and start-up companies. Mr. Thatcher has held various sales management, marketing management and general management positions at Medtronic, Inc., Schneider USA, Inc. (a former division of Pfizer Inc.), Boston Scientific Corporation and several startup companies.

Brent G. Blackey, Director, Age 50. Mr. Blackey has been a member of CSI-MN’s board of directors since 2007. Since 2004, Mr. Blackey has served as the President and Chief Operating Officer for Holiday Companies. Between 2002 and 2004 Mr. Blackey was a Senior Partner at the accounting firm of Ernst & Young LLP. Prior to 2002, Mr. Blackey served most recently as a Senior Partner at the accounting firm of Arthur Andersen LLP. Mr. Blackey serves on the board of directors of Datalink Corporation, and also serves on the Board of Overseers for the University of Minnesota, Carlson School of Management.

John H. Friedman, Director, Age 55. Mr. Friedman has been a member of CSI-MN’s board of directors since 2006. Mr. Friedman is the Managing Partner of the Easton Capital Investment Group, a private equity firm. Prior to founding Easton Capital, Mr. Friedman was the founder and Managing General Partner of Security Pacific Capital Investors, a $200-million private equity fund geared towards expansion financings and recapitalizations, from 1989 to 1992. Prior to joining Security Pacific, Mr. Friedman was a Managing Director and Partner at E.M. Warburg, Pincus & Co., Inc. from 1981 to 1989. Mr. Friedman has also served as a Managing Director of Atrium Capital Corp., an investment firm. Mr. Friedman currently serves on the board of directors of Trellis Bioscience, Inc., Xoft, Inc., Sanarus Inc., Genetix Pharmaceuticals, Inc., PlaySpan Inc. and Experimed Bioscience, Inc., all of which are privately-held companies. Mr. Friedman is also Co-Chairman of the Cold Spring Harbor President’s Council.

Geoffrey O. Hartzler, M.D., Director, Age 62. Dr. Hartzler has been a member of CSI-MN’s board of directors since 2002. Dr. Hartzler commenced practice as a cardiologist in 1974, serving from 1980 to 1995 as a Consulting Cardiologist with the Mid America Heart Institute of St. Luke’s Hospital in Kansas City, Missouri. Dr. Hartzler has co-founded three medical product companies including Ventritex Inc. Most recently he served as Chairman of the Board of IntraLuminal Therapeutics, Inc. from 1997 to 2004 and Vice Chairman from 2004 to 2006. Dr. Hartzler has also served as a consultant or director to over a dozen business entities, some of which are medical device companies.

Roger J. Howe, Ph.D., Director, Age 66. Dr. Howe has been a member of CSI-MN’s board of directors since 2002. Over the past 22 years, Dr. Howe has founded four successful start-up ventures in the technology, information systems and medical products business sectors. Most recently, Dr. Howe served as Chairman of the Board and Chief Financial Officer of Reliant Technologies, Inc., a medical laser company, from 2001 to 2005. From 1996 to 2001, Dr. Howe served as Chief Executive Officer of Metrix Communications, Inc., a business-to-business software development company that he founded. Dr. Howe currently serves on the boards of directors of Stemedica Cell Technologies, Inc., BioPharma Scientific, Inc., and America’s Back & Neck Clinic, Inc., all of which are privately-held companies.

Glen D. Nelson, M.D., Director, Age 71. Dr. Nelson has been a member of CSI-MN’s board of directors since 2003 and CSI-MN’s Chairman since August 2007. Dr. Nelson was a member of the board of directors of Medtronic, Inc. from 1980 until 2002. Dr. Nelson joined Medtronic as Executive Vice President in 1986, and he was elected Vice Chairman in 1988, a position held until his retirement in 2002. Before joining Medtronic, Dr. Nelson practiced surgery from 1969 to 1986. Dr. Nelson was Chairman of the Board and Chief Executive Officer of American MedCenters, Inc. from 1984 to 1986. Dr. Nelson also was Chairman, President and Chief Executive Officer of the Park Nicollet Medical Center, a large multi-specialty group practice in Minneapolis, from 1975 to 1986. Dr. Nelson is on the board of directors of DexCom, Inc. and The Travelers Companies, Inc., both publicly-held companies, and also serves as a director for ten private companies.

Gary M. Petrucci, Director, Age 67. Mr. Petrucci has been a member of CSI-MN’s board of directors since 1992. Since August 2006, Mr. Petrucci has been Senior Vice President — Investments at UBS Financial Services, Inc. Previously, Mr. Petrucci was an Investment Executive with Piper Jaffray & Co. from 1968 until Piper Jaffray’s retail brokerage unit was sold to UBS Financial Services in August 2006. Mr. Petrucci served on the board of

directors of Piper Jaffray & Co. from 1981 to 1995. Mr. Petrucci achieved the Fred Sirianni Award 14 times since the award began 25 years ago honoring the top producing Investment Executive at Piper Jaffray. In January 2005, this award was renamed in his honor. Mr. Petrucci received the 2002 Outstanding Alumni award from St. Cloud State University. Mr. Petrucci is serving as a member on the boards of directors of America’s Back & Neck Clinic, Inc., National Urology Board, Stemedica Cell Technologies, Inc. and the University of Minnesota Landscape Arboretum.

Employment Agreement with David L. Martin

David L. Martin is employed as CSI’s president and chief executive officer under an Employment Agreement with CSI-MN dated December 19, 2006, which was assumed by CSI in connection with the closing of the merger. Mr. Martin’s employment agreement provides that his annual base salary for calendar 2007 would be $370,000 and that his base salary for subsequent years shall be determined by the board of directors, and is eligible to receive an annual incentive bonus equal to 25% of his base salary in 2007, and 50% of his base salary in 2008 and 2009, earned and payable according to the achievement of performance goals as shall be agreed between Mr. Martin and the board of directors. Mr. Martin’s current base salary is $395,000.

Under the terms of the employment agreement with Mr. Martin, CSI will pay Mr. Martin an amount equal to 12 months of his then current base salary and 12 months of CSI’s share of health insurance costs if Mr. Martin is terminated by CSI without cause, or if Mr. Martin terminates his employment for good reason, as defined in the agreement. “Good reason” is generally defined as the assignment of job responsibilities to Mr. Martin that are not comparable in status or responsibility to those job responsibilities set forth in the agreement, a reduction in Mr. Martin’s base salary without his consent, or CSI’s failure to provide Mr. Martin the benefits promised under his employment agreement. As a condition to receiving his severance benefits, Mr. Martin is required to execute a release of claims agreement in favor of CSI.

Employment Agreement with Laurence L. Betterley

Laurence L. Betterley is employed as CSI’s chief financial officer under an Employment Agreement with CSI-MN dated April 14, 2008, which was assumed by CSI in connection with the closing of the merger. Mr. Betterley’s employment agreement provides that his annual base salary shall initially be $225,000, and that his base salary for subsequent years shall be determined by the board of directors. Mr. Betterley’s employment agreement further provides that he is eligible to receive an annual bonus equivalent to up to 40% of his annual base salary, as determined by the board of directors in its sole discretion. Mr. Betterley’s current base salary is $250,000.

Under the terms of the employment agreement with Mr. Betterley, CSI will pay Mr. Betterley an amount equal to 12 months of his then current base salary and 12 months of CSI’s share of health insurance costs if Mr. Betterley is terminated by CSI without cause, or if Mr. Betterley terminates his employment for good reason, as defined in the agreement. “Good reason” is generally defined as the assignment of job responsibilities to Mr. Betterley that are not comparable in status or responsibility to those job responsibilities set forth in the agreement, a reduction in Mr. Betterley’s base salary without his consent, or CSI’s failure to provide Mr. Betterley the benefits promised under his employment agreement. As a condition to receiving his severance benefits, Mr. Betterley is required to execute a release of claims agreement in favor of CSI. Mr. Betterley must have been continuously employed by CSI for six months to be eligible to receive any severance benefits.

Employment Agreements with Other New CSI Executive Officers

All other new CSI executive officers are party to CSI-MN’s standard form of employment agreement. The current base salaries for these new CSI executive officers are as follows:


Name	Base Salary
James E. Flaherty	$	233,000
Robert J. Thatcher	$	250,000

Executive Officer Cash Incentive Compensation Plan

On February 25, 2009, CSI’s board of directors adopted CSI-MN’s executive officer cash incentive compensation plan applicable to the six-month period ended June 30, 2009.

This plan conditions the payment of incentive compensation to all participants upon CSI’s achievement of revenue and adjusted EBITDA financial goals. Target bonus amounts are split evenly between these two goals. None of CSI’s officers is subject to individual goals under this plan. No plan participant will receive a bonus unless CSI achieves certain minimum adjusted EBITDA goals. Target bonus levels as a percentage of base salary for the six-month period are 75% for the President and Chief Executive Officer and 50% for the other executive officers. Depending upon CSI’s performance against the goals, participants are eligible to earn 50% to 200% of their target bonus amount for adjusted EBITDA and 50% to 150% of their target bonus amount for revenue; however, in the event of extraordinary revenue performance above the goals set by the board, the participants would receive incentive payments greater than 150% of their targets for the revenue goal based upon a formula established by the board, with no maximum payout set under the plan. The plan criteria are the same for all of the executive officers. This plan is designed to reward the executive officers for achieving and surpassing the financial goals set by the compensation committee and board of directors.

Related Party Transactions Involving New CSI Executive Officers and Directors

Described below are any transactions or series of transactions occurring since the beginning of 2008 to which either Replidyne or CSI-MN was a party in which:

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the amounts involved exceeded or will exceed $120,000; and

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a person who has been newly appointed to serve as a director or executive officer of CSI, or any member of such person’s immediate family, had or will have a direct or indirect material interest.

Investors’ Rights Agreement

CSI-MN was party to an investors’ rights agreement, which provided that holders of its convertible preferred stock had the right to demand that it file a registration statement or request that its shares be covered by a registration statement that it was otherwise filing. Certain related parties of CSI-MN, and now CSI, were parties to this investor rights agreement. This agreement was terminated upon the consummation of the merger in accordance with the preferred stockholder conversion agreement described below.

Stockholders Agreement

CSI-MN was party to a stockholders agreement, which provided that holders of its convertible preferred stock had the right to elect up to two directors to its board of directors, to maintain a pro rata interest in CSI-MN through participation in offerings that occurred before CSI-MN become a public company, and to force other parties to the agreement to vote in favor of significant corporate transactions such as a consolidation, merger, sale of substantially all of the assets of CSI-MN or sale of more than 50% of CSI-MN’s voting capital stock. In addition, the stockholders agreement placed certain transfer restrictions upon CSI-MN stockholders that were parties to the agreement. Certain related parties of CSI-MN, and now CSI, were parties to this stockholders agreement. This stockholders agreement terminated upon the conversion of all CSI-MN preferred stock into CSI-MN common stock immediately prior to the effective time of the merger.

Preferred Stockholder Conversion Agreement

common stock basis. Pursuant to the terms of this agreement, immediately prior to the closing of the merger, CSI-MN issued to the holders of CSI-MN preferred stock five-year warrants to purchase 3,499,877 shares of CSI-MN common stock (equivalent to a total of 2,264,264 shares of CSI common stock based on the conversion ratio set forth in the Merger Agreement) at an exercise price of $5.71 per share (equivalent to $8.83 per share based on the conversion ratio set forth in the Merger Agreement), pro rata to each such holder based on its percentage of the outstanding shares of CSI-MN preferred stock on an as-converted to common stock basis. Due to their ownership of CSI-MN preferred stock, the following CSI executive officers and directors received a portion of those warrants: Robert Thatcher, Brent Blackey, and Gary Petrucci. Additionally, certain entities affiliated with John Friedman and Glen Nelson also received a portion of the warrants.

Indemnification of Directors and Officers

Immediately following the effective time of the merger, on February 25, 2009, CSI approved indemnification agreements with the new CSI directors and executive officers who were formerly directors and executive officers of CSI-MN. These agreements provide for the indemnification of and advancement of expenses for the directors and executive officers of CSI for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were directors or officers of CSI.

Other Transactions

CSI assumed CSI-MN’s loan and security agreement with Silicon Valley Bank, as described in Item 1.01 of this Current Report on Form 8-K. The agreement includes a $3.0 million term loan, a $5.0 million accounts receivable line of credit, and two term loans for an aggregate of $5.5 million that are guaranteed by certain of CSI’s affiliates. One of CSI’s directors and one entity affiliated with one of CSI’s directors agreed to act as guarantors of these term loans. Those guarantors are Glen Nelson, who is guaranteeing $1.0 million, and Easton Capital Investment Group, which is guaranteeing $2.0 million. CSI’s director John Friedman is the Managing Partner of Easton Capital Investment Group. In consideration for guaranteeing the investor guaranty line of credit, CSI-MN issued the guarantors warrants to purchase shares of its common stock at an exercise price of $6.00 per share in the following amounts: Easton Capital Investment Group, 166,667 shares, and Glen Nelson, 83,333 shares, which warrants were assumed by CSI in the merger and are exercisable for an aggregate of 296,539 shares of CSI common stock at an exercise price of $9.28 per share. These warrants are immediately exercisable and have terms of five years.

CSI-MN granted stock options to its executive officers and certain of its directors, which were assumed by CSI as of the effective time of the merger. See “Equity Incentive Plan and Awards — Outstanding CSI-MN Equity Incentive Awards” and “— Post-Merger Awards to New Officers and Directors” below for a summary of the outstanding awards.

Equity Incentive Plan and Awards

2007 Equity Incentive Plan

Immediately prior to the merger, the only plan being used by CSI-MN to grant equity incentive awards was the CSI-MN 2007 Equity Incentive Plan (the “2007 Plan”). On February 24, 2009, Replidyne’s stockholders approved the assumption of the 2007 Plan, and on February 25, 2009, the CSI board of directors amended and restated the 2007 Plan and adopted the forms of agreement under the 2007 Plan. As of February 25, 2009 there were 1,396,458 options and 601,856 restricted stock awards outstanding under the 2007 Plan.

CSI-MN’s board of directors adopted the 2007 Plan in October 2007 and approved certain amendments to the 2007 Plan in November 2007, and its stockholders approved the 2007 Plan in December 2007. The 2007 Plan became effective on the date of board approval. Incentive stock options may be granted pursuant to the 2007 Plan until October 2017 and other awards may be granted under the plan until the 2007 Plan is discontinued or terminated by the administrator.

Equity Awards. The 2007 Plan permits the granting of incentive stock options, nonqualified options, restricted stock awards, restricted stock units, performance share awards, performance unit awards and stock appreciation rights to employees, officers, consultants and directors.

Share Reserve. The aggregate number of shares of CSI common stock issuable pursuant to stock awards under the 2007 Plan is 2,509,969. The number of shares of CSI common stock reserved for issuance will automatically increase on the first day of each fiscal year, beginning on July 1, 2009, and ending on July 1, 2017, by the lesser of (i) 970,500 shares, (ii) 5% of the outstanding shares of common stock on such date or (iii) a lesser amount determined by the board of directors.

Under the 2007 Plan, no person may be granted equity awards intended to qualify as performance-based compensation covering more than 64,700 shares of CSI common stock during any calendar year pursuant to stock options, stock appreciation rights, restricted stock awards or restricted stock unit awards.

If any awards granted under the 2007 Plan expire or terminate prior to exercise or otherwise lapse, or if any awards are settled in cash, the shares subject to such portion of the award are available for subsequent grants of awards. Further, shares of stock used to pay the exercise price under any award or used to satisfy any tax withholding obligation attributable to any award, whether withheld by CSI or tendered by the participant, will continue to be reserved and available for awards granted under the 2007 Plan.

The total number of shares and the exercise price per share of common stock that may be issued pursuant to outstanding awards under the 2007 Plan are subject to adjustment by the board of directors upon the occurrence of stock dividends, stock splits or other recapitalizations, or because of mergers, consolidations, reorganizations or similar transactions in which CSI receive no consideration. CSI’s board of directors may also provide for the protection of plan participants in the event of a merger, liquidation, reorganization, divestiture (including a spin-off) or similar transaction.

Administration. The 2007 Plan may be administered by CSI’s board of directors or a committee appointed by the board. Any committee appointed by the board to administer the 2007 Plan shall consist of at least two “non-employee” directors (as defined in Rule 16b-3, or any successor provision, of the General Rules and Regulations under the Securities Exchange Act of 1934). The plan administrator has broad powers to administer and interpret the 2007 Plan, including the authority to (i) establish rules for the administration of the 2007 Plan, (ii) select the participants in the 2007 Plan, (iii) determine the types of awards to be granted and the number of shares covered by such awards, and (iv) set the terms and conditions of such awards. All determinations and interpretations of the plan administrator are binding on all interested parties.

CSI’s board of directors may terminate or amend the 2007 Plan, except that the terms of award agreements then outstanding may not be adversely affected without the consent of the participant. CSI’s board of directors may not amend the 2007 Plan to materially increase the total number of shares of CSI common stock available for issuance under the 2007 Plan, materially increase the benefits accruing to any individual, decrease the price at which options may be granted, or materially modify the requirements for eligibility to participate in the 2007 Plan without the approval of CSI stockholders if such approval is required to comply with the Code or other applicable laws or regulations.

Stock Options. Options granted under the 2007 Plan may be either “incentive” stock options within the meaning of Code Section 422 or “nonqualified” stock options that do not qualify for special tax treatment under Code Section 422. No incentive stock option may be granted with a per share exercise price less than the fair market value of a share of the underlying common stock on the date the incentive stock option is granted. Unless otherwise determined by the plan administrator, the per share exercise price for nonqualified stock options granted under the 2007 Plan also will not be less than the fair market value of a share of CSI common stock on the date the nonqualified stock option is granted.

The period during which an option may be exercised and whether the option will be exercisable immediately, in stages, or otherwise is set by the administrator. An incentive stock option generally may not be exercisable more than ten years from the date of grant.

Participants generally must pay for shares upon exercise of options with cash, certified check or CSI common stock valued at the stock’s then fair market value. Each incentive option granted under the 2007 Plan is nontransferable during the lifetime of the participant. A nonqualified stock option may, if permitted by the plan administrator, be transferred to certain family members, family limited partnerships and family trusts.

The plan administrator may, in its discretion, modify or impose additional restrictions on the term or exercisability of an option. The plan administrator may also determine the effect that a participant’s termination of employment with CSI or a subsidiary may have on the exercisability of such option. The grants of stock options under the 2007 Plan are subject to the plan administrator’s discretion.

Tax Limitations on Stock Options. ”Nonqualified” stock options granted under the 2007 Plan are not intended to and do not qualify for favorable tax treatment available to “incentive” stock options under Code Section 422. Generally, no income is taxable to the participant (and CSI is not entitled to any deduction) upon the grant of a nonqualified stock option. When a nonqualified stock option is exercised, the participant generally must recognize compensation taxable as ordinary income equal to the difference between the option price and the fair market value of the shares on the date of exercise. CSI normally will receive a deduction equal to the amount of compensation the participant is required to recognize as ordinary income and must comply with applicable tax withholding requirements.

“Incentive” stock options granted pursuant to the 2007 Plan are intended to qualify for favorable tax treatment to the participant under Code Section 422. Under Code Section 422, a participant realizes no taxable income when the incentive stock option is granted. If the participant has been an employee of CSI or any subsidiary at all times from the date of grant until three months before the date of exercise, the participant will realize no taxable income when the option is exercised. If the participant does not dispose of shares acquired upon exercise for a period of two years from the granting of the incentive stock option and one year after receipt of the shares, the participant may sell the shares and report any gain as capital gain. CSI will not be entitled to a tax deduction in connection with either the grant or exercise of an incentive stock option, but may be required to comply with applicable withholding requirements. If the participant should dispose of the shares prior to the expiration of the two-year or one-year periods described above, the participant will be deemed to have received compensation taxable as ordinary income in the year of the early sale in an amount equal to the lesser of (i) the difference between the fair market value of CSI common stock on the date of exercise and the option price of the shares, or (ii) the difference between the sale price of the shares and the option price of shares. In the event of such an early sale, CSI will be entitled to a tax deduction equal to the amount recognized by the participant as ordinary income. The foregoing discussion ignores the impact of the alternative minimum tax, which may particularly be applicable to the year in which an incentive stock option is exercised.

Stock Appreciation Rights. A stock appreciation right may be granted independent of or in tandem with a previously or contemporaneously granted stock option, as determined by the plan administrator. Generally, upon the exercise of a stock appreciation right, the participant will receive cash, shares of common stock or some combination of cash and shares having a value equal to the excess of (i) the fair market value of a specified number of shares of CSI common stock, over (ii) a specified exercise price. If the stock appreciation right is granted in tandem with a stock option, the exercise of the stock appreciation right will generally cancel a corresponding portion of the option, and, conversely, the exercise of the stock option will cancel a corresponding portion of the stock appreciation right. The plan administrator will determine the term of the stock appreciation right and how it will become exercisable. A stock appreciation right may not be transferred by a participant except by will or the laws of descent and distribution.

Restricted Stock Awards and Restricted Stock Unit Awards. The plan administrator is also authorized to grant awards of restricted stock and restricted stock units. Each restricted stock award granted under the 2007 Plan shall be for a number of shares as determined by the plan administrator, and the plan administrator, in its discretion, may also establish continued employment, achievement of performance criteria, vesting or other conditions that must be satisfied for the restrictions on the transferability of the shares and the risks of forfeiture to lapse. Each restricted stock unit represents the right to receive cash or shares of CSI common stock, or any combination thereof,

at a future date, subject to continued employment, achievement of performance criteria, vesting or other conditions as determined by the plan administrator.

If a restricted stock award or restricted stock unit award is intended to qualify as “performance-based compensation” under Code Section 162(m), the risks of forfeiture shall lapse based on the achievement of one or more performance objectives established in writing by the plan administrator in accordance with Code Section 162(m) and the applicable regulations. Such performance objectives shall consist of any one, or a combination of, (i) revenue, (ii) net income, (iii) earnings per share, (iv) return on equity, (v) return on assets, (vi) increase in revenue, (vii) increase in share price or earnings, (viii) return on investment, or (ix) increase in market share, in all cases including, if selected by the plan administrator, threshold, target and maximum levels.

Performance Share Awards and Performance Units Awards. The plan administrator is also authorized to grant performance share and performance unit awards. Performance share awards generally provide the participant with the opportunity to receive shares of CSI common stock and performance units generally provide recipients with the opportunity to receive cash awards, but only if certain performance criteria are achieved over specified performance periods. A performance share award or performance unit award may not be transferred by a participant except by will or the laws of descent and distribution.

Prior CSI-MN Equity Plans

In addition to the 2007 Plan, prior to the merger CSI-MN also adopted a 2003 Stock Option Plan and 1991 Stock Option Plan (collectively, the “Prior Equity Plans”). As a result of the merger, CSI assumed all outstanding option agreements under the Prior Equity Plans, but did not assume the Prior Equity Plans themselves.

2003 Stock Option Plan. The CSI-MN board of directors adopted the 2003 Stock Option Plan (the “2003 Plan”), in May 2003, and the CSI-MN shareholders approved the 2003 Plan in November 2003, in order to provide for the granting of stock options to CSI-MN employees, directors and consultants. The 2003 Plan permitted the granting of incentive stock options meeting the requirements of Section 422 of the Code, and also nonqualified options, which do not meet the requirements of Section 422. Under the 2003 Plan, 3,800,000 shares of CSI-MN common stock were reserved for issuance pursuant to options granted under the 2003 Plan and approved by the board of directors in February 2005 and August 2006 and shareholders in March 2005 and October 2006.

The 2003 Plan was administered by the CSI-MN board of directors. The 2003 Plan gave broad powers to the CSI-MN board of directors to administer and interpret the Plan, including the authority to select the individuals to be granted options and to prescribe the particular form and conditions of each option granted.

Incentive stock options were permitted to be granted pursuant to the 2003 Plan through May 20, 2013, ten years from the date the CSI-MN board of directors adopted the 2003 Plan. Nonqualified stock options could be granted pursuant to the 2003 Plan until the 2003 Plan was terminated by the CSI-MN board of directors. In the event of a sale of substantially all of CSI-MN’s assets or in the event of a merger, exchange, consolidation, or liquidation, the CSI-MN board of directors was authorized to terminate the 2003 Plan. As of February 25, 2009 there were 2,203,009 options outstanding under the 2003 Plan, and no further shares will be issued under the 2003 Plan.

1991 Stock Option Plan . The CSI-MN 1991 Stock Option Plan (the “1991 Plan”), was adopted by the CSI-MN board of directors in July 1991. Under the 1991 Plan, 750,000 shares of CSI-MN common stock were reserved for option grants. With the creation of the 2003 Plan, no additional options were granted under the 1991 Plan. As of February 25, 2009, there were options outstanding under the 1991 Plan to purchase an aggregate of 31,451 shares of common stock.

Outstanding CSI-MN Equity Incentive Awards

At the effective time of the merger, all options to purchase CSI-MN common stock and all CSI-MN restricted stock outstanding at the time of the merger were assumed by CSI. Options outstanding were issued pursuant to CSI-MN’s 1991 Stock Option Plan, 2003 Stock Option Plan and 2007 Equity Incentive Plan, and a small quantity of option agreements were issued outside of any plan. All restricted stock was issued pursuant to CSI-MN’s 2007 Equity Incentive Plan. At the effective time of the merger, each option became an option to acquire that number of shares of CSI common stock equal to the product obtained by multiplying the number of shares of CSI-MN common stock subject to such option by 0.647, rounded down to the nearest whole share of CSI common stock,

and each such option has a purchase price per share of CSI common stock equal to the quotient obtained by dividing the per share purchase price of CSI-MN common stock subject to such option by 0.647, rounded up to the nearest whole cent. At the effective time of the merger, each share of restricted stock was converted into the right to receive 0.647 shares of CSI common stock.

The following executive officers and directors of CSI were granted stock options to purchase shares of CSI-MN common stock prior to the merger. The number of shares of CSI common stock issuable pursuant to these option grants and the exercise price, as adjusted for the merger, is set forth opposite such executive officer’s and director’s name in the following table. The options will remain subject to the terms and conditions of the applicable CSI-MN plan pursuant to which they were granted and the stock option agreements between CSI-MN and each director and executive officer.


Name	Grant Date		CSI Option Shares		Exercise Price
David L. Martin(1)		7/17/06		71,170	$	8.83
		8/15/06		38,820	$	8.83
		2/15/07		349,380	$	8.83
		6/12/07		90,580	$	7.90
		12/12/07		242,625	$	12.15

James E. Flaherty(2)		11/16/04		4,852	$	9.28
		7/01/05		16,175	$	12.37
		11/08/05		7,764	$	12.37
		12/19/06		9,381	$	8.83
		4/18/07		25,233	$	8.83
		8/07/07		22,645	$	7.90
		12/12/07		32,350	$	12.15

Robert J. Thatcher(2)		10/17/05		64,700	$	12.37
		12/19/06		7,764	$	8.83
		4/18/07		29,762	$	8.83
		8/07/07		22,645	$	7.90
		12/12/07		32,350	$	12.15


Brent G. Blackey(3)		10/09/07		38,820	$	7.90
		10/09/07		6,470	$	7.90

John H. Friedman(4)		8/15/06		38,820	$	8.83
		10/09/07		4,321	$	7.90
		11/13/07		15,088	$	11.38

Geoffrey O. Hartzler(5)		12/01/04		12,940	$	9.28
		12/01/05		9,705	$	12.37
		12/19/06		12,940	$	8.83
		10/09/07		15,087	$	11.38
		10/09/07		4,322	$	7.90
		2/14/08		74,281	$	13.98


Name	Grant Date		CSI Option Shares		Exercise Price
Roger J. Howe(5)		12/01/04		12,940	$	9.28
		12/01/05		9,705	$	12.37
		12/19/06		12,940	$	8.83
		10/09/07		15,088	$	11.38
		10/09/07		4,321	$	7.90
		12/31/07		121,490	$	12.15

Glen D. Nelson(5)		12/01/04		6,470	$	9.28
		12/01/05		9,705	$	12.37
		12/19/06		12,940	$	8.83
		10/09/07		4.322	$	7.90
		11/13/07		15,087	$	11.38

Gary M. Petrucci(5)		12/01/04		12,940	$	9.28
		12/01/05		9,705	$	12.37
		12/19/06		19,410	$	8.83
		10/09/07		4,321	$	7.90
		11/13/07		24,793	$	11.38
		12/31/07		236,906	$	12.15


(1)		The July 2006 options vest at the rate of 3,235 shares per month starting on August 17, 2006. The August 2006 and June 2007 options vest at the rate of one-third per year starting on the first anniversary of the grant date. The February 2007 options vest at the rate of 9,705 shares per month starting March 15, 2007. The December 2007 options provide for vesting of 50% of the options on February 25, 2010 and 50% of the options on February 25, 2011.

(2)		All option awards vest at the rate of one-third per year starting on the first anniversary of the grant date, except for the grants made on December 12, 2007, which vest to the extent of 50% of the options on February 25, 2010 and 50% of the options on February 25, 2011.

(3)		The larger option award vests at the rate of one-third per year starting on the first anniversary of the grant date, and the smaller award vested immediately on the grant date.

(4)		All option awards vested immediately on the grant date, except for the grant made on August 15, 2006, which vests at the rate of one-third per year starting on the first anniversary of the grant date.

(5)		All option awards vested immediately on the grant date.

In addition, pursuant to the terms of his employment agreement, Mr. Betterley received 75,000 shares of CSI-MN restricted stock under the CSI-MN 2007 Equity Incentive Plan, which shares vest ratably in three annual installments, beginning on April 14, 2009. As a result of the merger, these shares were converted into 48,525 shares of CSI common stock, subject to the same terms and conditions of the restricted stock agreement between CSI-MN and Mr. Betterley.

Post-Merger Awards to New Officers and Directors

On March 2, 2009, CSI’s board of directors granted CSI’s new executive officers the following stock option awards under the 2007 Plan:


Name	Number of Option Shares
David L. Martin		32,350
Laurence L. Betterley		14,234
James E. Flaherty		11,646
Robert J. Thatcher		11,646

Each option award has an exercise price equal $8.75 per share, the closing price of CSI’s common stock on the date of grant, vests at the rate of one-half per year on the first and second anniversaries of the date of grant and expires on March 1, 2019.

On March 2, 2009, CSI’s board of directors awarded CSI’s directors the following restricted stock units under its 2007 Equity Incentive Plan:


Name	Number of Restricted Stock Units
Brent G. Blackey		5,714
Edward Brown		3,977
John H. Friedman		5,714
Geoffrey O. Hartzler		5,714
Roger J. Howe		5,714
Augustine Lawlor		3,977
Glen D. Nelson		5,714
Gary M. Petrucci		5,714

Each restricted stock unit represents the right to receive a payment from CSI equal in value to the market price per share of CSI common stock on the date of payment, and shall be payable in cash beginning six months following the termination of each director’s board membership.

Amendment to 2006 Employee Stock Purchase Plan

On February 24, 2009, Replidyne’s stockholders approved (i) an increase to the maximum number of shares of Replidyne common stock authorized for issuance under the Replidyne 2006 Employee Stock Purchase Plan (“ESPP”) by an additional 161,500 shares and (ii) an amendment to the “evergreen” provisions of the ESPP to provide that on July 1st of each year, beginning with July 1, 2009, the share reserve under the ESPP automatically will be increased by a number of shares equal to the lesser of (A) one percent (1.0%) of the total number of shares of Replidyne common stock outstanding on such date, or (B) 180,000 shares, unless the board of directors designates a smaller number of shares.

Payments to Former Replidyne Officers

CSI made payments to certain of Replidyne’s former officers pursuant to the terms of their employment agreements and certain retention bonus agreements at the time the merger closed. Certain of these payments were triggered as a result of the officers’ termination for cause at the time of the merger, and other payments were

triggered by the consummation of the merger. The information set forth in Item 1.02 of this Current Report on Form 8-K under the heading “Termination of Replidyne Officers” is incorporated herein by reference.

In addition, in connection with the merger closing, CSI paid Nebojsa Janjic, Replidyne’s former chief scientific officer, a bonus in the amount of $50,000 pursuant to the terms of the separation agreement between Dr. Janjic and Replidyne dated December 8, 2008.


Item 5.03		Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

Amendments to Articles of Incorporation and Bylaws

The information set forth in Item 3.03 of this Current Report on Form 8-K is incorporated herein by reference.

Change in Fiscal Year

For accounting purposes, CSI-MN is deemed to have acquired Replidyne pursuant to the transactions contemplated by the Merger Agreement, and the historical financial statements of CSI-MN are considered to be the historical financial statements of CSI after the merger. The CSI board of directors approved, effective February 25, 2009, a change in CSI’s fiscal year from December 31 to June 30 to correspond with the periods of the Company’s post-merger historical financial statements.

On February 24, 2009, Replidyne filed its Annual Report on Form 10-K for the year ended December 31, 2008, and on February 13, 2009, CSI-MN filed its Quarterly Report on Form 10-Q for the quarter ended December 31, 2008; therefore, no report covering a transition period will be filed by CSI as a result of this change in fiscal year.


Item 5.05		Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics.

Following the closing of the merger, on February 25, 2009, the CSI board of directors replaced Replidyne’s Code of Business Conduct and Ethics with CSI-MN’s former Code of Ethics and Business Conduct. The new code and old code address the same topics, but because CSI’s post-merger officers and employees are comprised entirely of former CSI-MN officers and employees, the board of directors believes it will be most efficient to adopt and implement the former CSI-MN code.

The new CSI Code of Ethics and Business Conduct is filed as Exhibit 14.1 to this Current Report on Form 8-K and is incorporated herein by reference.


Item 8.01		Other Events.

On February 25, 2009, CSI issued a press release announcing the completion of the merger. The press release is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.


Item 9.01		Financial Statements and Exhibits

(a) Financial Statements of Businesses Acquired.

The CSI-MN financial statements required by this Item are filed as Exhibit 99.2 and 99.3 to this Current Report on Form 8-K and are incorporated herein by reference.

(b) Pro Forma Financial Information.

The pro forma financial information required by this Item is filed as Exhibit 99.4 to this Current Report on Form 8-K and is incorporated herein by reference.

(d) Exhibits.


Exhibit Number		Description of Document

	3.1	Amendment to Restated Certificate of Incorporation.

	3.2	Amended and Restated Bylaws.

	4.1	Specimen Common Stock Certificate.

	4.2	Form of Cardiovascular Systems, Inc. common stock warrant issued to former preferred stockholders.

	14.1	Code of Ethics and Business Conduct.

	16.1	Letter from KPMG LLP to the Securities and Exchange Commission dated February 27, 2009.

	23.1	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm to Cardiovascular Systems, Inc.

	99.1	Press Release of Cardiovascular Systems, Inc. dated as of February 25, 2009.

	99.2	Cardiovascular Systems, Inc. Consolidated Financial Statements for the three months ended September 30, 2008 and twelve months ended June 30, 2008 and 2007.

	99.3	Cardiovascular Systems, Inc. Consolidated Financial Statements for the three and six months ended December 31, 2008 and 2007.

	99.4	Unaudited Pro Forma Condensed Combined Financial Statements.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: March 3, 2009


	CARDIOVASCULAR SYSTEMS, INC.
	By:	/s/ Laurence L. Betterley
		Laurence L. Betterley
		Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description of Document

	3.1	Amendment to Restated Certificate of Incorporation.

	3.2	Amended and Restated Bylaws.

	4.1	Specimen Common Stock Certificate.

	4.2	Form of Cardiovascular Systems, Inc. common stock warrant issued to former preferred stockholders.

	14.1	Code of Ethics and Business Conduct.

	16.1	Letter from KPMG LLP to the Securities and Exchange Commission dated February 27, 2009.

	23.1	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm to Cardiovascular Systems, Inc.

	99.1	Press Release of Cardiovascular Systems, Inc. dated as of February 25, 2009.

	99.2	Cardiovascular Systems, Inc. Consolidated Financial Statements for the three months ended September 30, 2008 and twelve months ended June 30, 2008 and 2007.

	99.3	Cardiovascular Systems, Inc. Consolidated Financial Statements for the three and six months ended December 31, 2008 and 2007.

	99.4	Unaudited Pro Forma Condensed Combined Financial Statements.

Exhibit 3.1

CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
REPLIDYNE, INC.

REPLIDYNE, INC. (the “ Corporation ”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “ DGCL ”), hereby certifies as follows:

FIRST: The name of the Corporation is Replidyne, Inc. A Certificate of Incorporation of the Corporation originally was filed by the Corporation with the Secretary of State of Delaware on December 6, 2000.

SECOND: This Certificate of Amendment amends the Restated Certificate of Incorporation of the Corporation and was duly adopted by the board of directors of the Corporation in accordance with the provisions of Sections 141 and 242 of the DGCL.

THIRD: The text of the Restated Certificate of Incorporation of the Corporation is hereby amended as follows:

1. Article I of the Restated Certificate of Incorporation of the Corporation is hereby amended and restated as follows:

“The name of this corporation is Cardiovascular Systems, Inc.”

2. Article IV of the Restated Certificate of Incorporation of the Corporation is hereby amended and restated as follows:

“A. Without regard to any other provision of this Restated Certificate of Incorporation, each one (1) share of Common Stock, either issued and outstanding or held by the corporation as treasury stock, immediately prior to the time this Certificate of Amendment becomes effective shall be and is hereby automatically reclassified and changed (without any further act) into one-tenth of a fully-paid and nonassessable share of Common Stock; provided, that no fractional shares shall be issued to any stockholder and no certificates or scrip for any such fractional shares shall be issued, each stockholder otherwise entitled to receive a fractional share shall receive the next lower whole number of shares of Common Stock, and the corporation shall pay in cash the dollar amount of such fractional shares (to the nearest whole cent), without interest, determined in each case by multiplying such fraction by the closing price of a share of Common Stock on the NASDAQ Global Market on the date immediately preceding the date on which this Certificate of Amendment becomes effective.

B. This corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the corporation is authorized to issue is one hundred and five million (105,000,000)

shares. One hundred million (100,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001).

C. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby expressly authorized to provide for the issue of all or any of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of Preferred Stock.

D. Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided, however , that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock).”

FOURTH: Thereafter pursuant to a resolution of the board of directors of the Corporation, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval, and was duly adopted at a special meeting of the stockholders in accordance with the provisions of Section 242 of the DGCL.

IN WITNESS WHEREOF , Replidyne, Inc . has caused this Certificate of Amendment to be signed by its duly authorized officer this 25th day of February, 2009.


	Replidyne, Inc.
	By:	/s/ Kenneth J. Collins
		Kenneth J. Collins
		President and Chief Executive Officer

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

CARDIOVASCULAR SYSTEMS, INC.

(A DELAWARE CORPORATION)

AMENDED AND RESTATED BYLAWS

CARDIOVASCULAR SYSTEMS, INC.

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.

Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

Section 3. Corporate Seal. The Board of Directors may adopt a corporate seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, “Corporate Seal-Delaware.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS’ MEETINGS

Section 4. Place Of Meetings. Meetings of the stockholders of the corporation may be held at such place, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law (“DGCL”).

Section 5. Annual Meetings.

(a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the corporation’s notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving the stockholder’s notice provided for in the following paragraph, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5; provided, however, that clause (iii) above shall be the exclusive means for a stockholder to make nominations and submit other business (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and included in the corporation’s notice of meeting of stockholders) before an annual meeting of stockholders.

(b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a) of these Bylaws, (i) the stockholder must have given timely notice thereof in proper form in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under DGCL, (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation’s voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation’s voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the ninetieth (90 ^th ) day nor earlier than the close of business on the one hundred twentieth (120 ^th ) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120 ^th ) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90 ^th ) day prior to such annual meeting or the tenth (10 ^th ) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder’s notice as described above. To be in proper form, such stockholder’s notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act and Rule 14a-4(d)

thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (ii) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K under the 1934 Act if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant; (B) as to any other business that the stockholder proposes to bring before the meeting, (i) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made, and (ii) a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner, (ii) (1) the class and number of shares of the corporation which are, directly or indirectly, owned beneficially and of record by such stockholder and such beneficial owner, (2) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part from the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the corporation or otherwise (a “Derivative Instrument”) directly or indirectly owned beneficially by such stockholder or such beneficial holder and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the corporation, (3) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder or such beneficial holder has a right to vote any shares of any security of the corporation, (4) any short interest in any security of the corporation (for purposes of these Bylaws a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (5) any rights to dividends on the shares of the corporation owned beneficially by such stockholder or such beneficial holder that are separated or separable from the underlying shares of the corporation, (6) any proportionate interest in shares of the corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder or such beneficial holder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and (7) any performance-related fees (other than an asset-based fee) that such stockholder or such beneficial holder is entitled to based on any increase or decrease in the value of shares of the corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such

stockholder’s or such beneficial holder’s immediate family sharing the same household (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than 10 days after the record date for the meeting to disclose such ownership as of the record date), (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation’s voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation’s voting shares to elect such nominee or nominees (an affirmative statement of such intent, a “Solicitation Notice”), and (iv) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the 1934 Act and the rules and regulations promulgated thereunder. In addition, such stockholder’s notice shall be accompanied by, with respect to each nominee for election or reelection to the Board of Directors, a completed and signed questionnaire, representation and agreement required by Section 5(g). The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.

(c) Notwithstanding anything in the third sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10 ^th ) day following the day on which such public announcement is first made by the corporation.

(d) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded.

(e) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders’ meeting, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to matters set forth in this Section 5; provided, however, that any references in these Bylaws to the 1934 Act or

the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 5. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the 1934 Act.

(f) For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act and the rules and regulations promulgated thereunder.

(g) To be eligible to be a stockholder-proposed nominee for election or reelection as a director of the corporation in accordance with Section 5 or 6, a person must deliver (in accordance with the time periods prescribed for delivery of notice under Sections 5 and 6, as applicable) to the Secretary at the principal executive offices of the corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the corporation or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the corporation, with such person’s fiduciary duties under applicable law, (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, (C) beneficially owns, or agrees to purchase within 90 days if elected as a director of the corporation, not less than one percent (1%) of the then outstanding shares of common stock of the corporation (“Qualifying Shares”), will not dispose of such minimum number of shares so long as such person is a director, and has disclosed therein whether all or any portion of the Qualifying Shares were purchased with any financial assistance provided by any other person and whether any other person has any interest in the Qualifying Shares, and (D) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the corporation.

Section 6. Special Meetings.

(a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption).

(b) The Board of Directors shall determine the time and place of such special meeting. Upon determination of the time and place of the meeting, the Secretary shall cause a notice of meeting to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. No business may be transacted at such special meeting otherwise than specified in the notice of meeting. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held.

(c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in this paragraph who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 5 of these Bylaws. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation’s notice of meeting, if the stockholder’s notice and other materials required by Section 5(b) of these Bylaws (including the completed and signed questionnaire, representation and agreement required by Section 5(g)) shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120 ^th ) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90 ^th ) day prior to such meeting or the tenth (10 ^th ) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder’s notice as described above.

(d) Notwithstanding the foregoing provisions of this Section 6, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to matters set forth in this Section 6; provided, however, that any references in these Bylaws to the 1934 Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 6. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the 1934 Act.

Section 7. Notice Of Meetings. Except as otherwise provided by law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at any such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. Notice of the time, place, if any, and purpose of any

meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person, by remote communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.

Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute or by applicable stock exchange or Nasdaq rules, or by the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting shall be the act of such class or classes or series.

Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.

Section 11. Joint Owners Of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.

Section 12. List Of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by law.

Section 13. Action Without Meeting. No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent or by electronic transmission.

Section 14. Organization.

(a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his or her absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting.

(b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

Section 15. Number And Term Of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation or Section 5(g) of these Bylaws. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.

Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation.

Section 17. Classes of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. At the first annual meeting of stockholders following the initial classification of the Board of Directors, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following such initial classification, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following such initial classification, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 18. Vacancies.

(a) Unless otherwise provided in the Certificate of Incorporation, and subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, provided, however , that whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director.

Section 19. Resignation. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified.

Section 20. Meetings.

(a) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors, either orally or in writing, by telephone, including a voice-messaging system or other system designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means. No further notice shall be required for regular meetings of the Board of Directors.

(b) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer or a majority of the authorized number of directors.

(c) Meetings by Electronic Communications Equipment. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.

(d) Notice of Special Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting. If notice is sent by US mail, it shall be sent by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing, or by electronic transmission, at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

(e) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present who did not receive notice shall sign a written waiver of notice or shall waive notice by electronic transmission. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.

Section 21. Quorum And Voting.

(a) Unless the Certificate of Incorporation requires a greater number, and except with respect to questions related to indemnification arising under Section 42 for which a quorum shall be one-third of the exact number of directors fixed from time to time, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.

(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws.

Section 22. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 23. Fees And Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.

Section 24. Committees.

(a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation.

(b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.

(c) Term. The Board of Directors, subject to any requirements of any outstanding series of Preferred Stock and the provisions of subsections (a) or (b) of this Section 24, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in

the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any Director who is a member of such committee, upon notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.

Section 25. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer (if a director), or, if a Chief Executive Officer is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary or other officer or director directed to do so by the President or other person directed to do so by the Board of Directors, shall act as secretary of the meeting.

ARTICLE V

OFFICERS

Section 26. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer and the Treasurer. The Board of Directors may also appoint one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.

Section 27. Tenure And Duties Of Officers.

(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.

(b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.

(c) Duties of Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless another officer has been appointed Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. To the extent that a Chief Executive Officer has been appointed, all references in these Bylaws to the President shall be deemed references to the Chief Executive Officer. The Chief Executive Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.

(d) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors or the Chief Executive Officer has been appointed and is present. Unless another officer has been appointed Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.

(e) Duties of Vice Presidents. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or, if the Chief Executive Officer has not been appointed or is absent, the President shall designate from time to time.

(f) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any

committee thereof requiring notice. The Secretary shall perform all other duties provided for in these Bylaws and other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary or other officer to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

(g) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

Section 28. Delegation Of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

Section 29. Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.

Section 30. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or by the Chief Executive Officer or by other superior officers upon whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION

Section 31. Execution Of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation.

All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.

Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

Section 32. Voting Of Securities Owned By The Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.

ARTICLE VII

SHARES OF STOCK

Section 33. Form And Execution Of Certificates. The shares of the corporation shall be represented by certificates, or shall be uncertificated, or a combination thereof. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock represented by certificate in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the

corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 34. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owner’s legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.

Section 35. Transfers.

(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and, in the case of stock represented by certificate, upon the surrender of a properly endorsed certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.

Section 36. Fixing Record Dates.

(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 37. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

Section 38. Execution Of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 33), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.

ARTICLE IX

DIVIDENDS

Section 39. Declaration Of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.

Section 40. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

FISCAL YEAR

Section 41. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

Section 42. Indemnification Of Directors, Officers, Employees And Other Agents.

(a) Directors and Officers. The corporation shall indemnify its current and former directors and officers to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d). Except as provided in paragraph (f) of this Section 42, the corporation shall not be obligated to indemnify any director or officer in connection with any proceeding brought by or on behalf of the corporation against such director or officer that is authorized by the corporation’s Board of Directors.

(b) Employees and Other Agents. The corporation shall have power to indemnify its employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person to such officers or other persons as the Board of Directors shall determine.

(c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses actually and reasonably incurred by any director or officer in connection with such proceeding; provided, however, that if the DGCL requires, an advancement of expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Section 42 or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 42, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by a majority vote of directors who were not parties to the proceeding, even if not a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or such directors so direct, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding, that such person had reasonable cause to believe that his conduct was unlawful.

(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Bylaw shall be deemed to be vested contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Such rights shall be deemed to have vested as of the effective date of this Bylaw. Any right to indemnification or advances granted by this Section 42 to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the

claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of, or advancement to, the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 42 or otherwise shall be on the corporation.

(e) Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL, or by any other applicable law.

(f) Indemnification for Expenses of Successful Party. Notwithstanding the limitations of any other provisions of the Bylaws, to the extent that a director or officer is successful on the merits or otherwise in defense of any proceeding, or in defense of any claim, issue or matter therein, including, without limitation, the dismissal of any action without prejudice, or if it is ultimately determined that the director or officer is otherwise entitled to be indemnified against expenses, the director and/or officer shall be indemnified against all expenses actually and reasonably incurred in connection therewith. If the director or officer is partially successful on the merits or otherwise in defense of any proceeding, such indemnification shall be apportioned appropriately to reflect the degree of success.

(g) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(h) Insurance. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 42.

(i) Amendments. Any repeal or modification of this Section 42 shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation.

(j) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Section 42 that shall not have been invalidated, or by any other applicable law. If this Section 42 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and officer to the full extent under any other applicable law.

(k) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply:

(1) The term “proceeding” shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.

(2) The term “expenses” shall be broadly construed and shall include, without limitation, court costs, attorneys’ fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding.

(3) The term the “corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 42 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

(4) References to a “director,” “officer,” “employee,” or “agent” of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.

(5) References to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee

benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this Section 42.

ARTICLE XII

NOTICES

Section 43. Notices.

(a) Notice To Stockholders. Written notice to stockholders of stockholder meetings shall be given as provided in Section 7 herein. Without limiting the manner by which notice may otherwise be given effectively to stockholders under any agreement or contract with such stockholder, and except as otherwise required by law, written notice to stockholders for purposes other than stockholder meetings may be sent by US mail or nationally recognized overnight courier, or by facsimile, telegraph or telex or by electronic mail or other electronic means.

(b) Notice To Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), as otherwise provided in these Bylaws, or by overnight delivery service, facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.

(c) Affidavit Of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.

(d) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.

(e) Notice To Person With Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

(f) Notice to Stockholders Sharing an Address. Except as otherwise prohibited under DGCL, any notice given under the provisions of DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the corporation within 60 days of having been given notice by the corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the corporation.

ARTICLE XIII

AMENDMENTS

Section 44. Subject to the limitations set forth in Section 42(i) of these Bylaws or the provisions of the Certificate of Incorporation, the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. Any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors shall require the approval of a majority of the authorized number of directors. The stockholders also shall have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class.

ARTICLE XIV

LOANS TO OFFICERS

Section 45. Loans To Officers. Except as otherwise prohibited by applicable law, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

COMMON STOCK NUMBER COMMON STOCK SHARES CARDIOVASCULAR SYSTEMS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE SIDE FOR CERTAIN DEFINITIONS CUSIP 141619 106 COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, OF CARDIOVASCULAR SYSTEMS, INC. transferable on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and Registrar. WITNESS the facsimile signatures of its duly authorized officers. Dated: James E. Flaherty David L. Martin Secretary Chief Executive Officer

CARDIOVASCULAR SYSTEMS, INC. A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM — as tenants in common TEN ENT — as tenants by the entireties JT TEN — as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. For value received hereby sell, assign and transfer unto Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated SIGNATURE(S) GUARANTEED By: UNIF GIFT MIN ACT— Custodian (Cust) (Minor) under Uniform Transfers to Minors Act (State) UNIF TRF MIN ACT — Custodian (until age ) (Cust) under Uniform Transfers (Minor) to Minors Act (State) NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE

Exhibit 4.2

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.



Date: February 25, 2009		Warrant No. W2009PM-[ ]

WARRANT
TO PURCHASE [NUMBER OF SHARES] SHARES OF COMMON STOCK OF
CARDIOVASCULAR SYSTEMS, INC.

FOR VALUE RECEIVED , [NAME] or registered assigns (the “Holder” ), is entitled to purchase from Cardiovascular Systems, Inc., a Minnesota corporation (the “Company” ), [NUMBER OF SHARES] ( [NUMBER OF SHARES]) fully paid and nonassessable shares of the Company’s Common Stock (such shares of Common Stock as may be acquired upon exercise hereof being hereinafter referred to as the “Warrant Shares” ), at an exercise price of $5.71 per share (the “Warrant Exercise Price” ), which Warrant is immediately exercisable. This Warrant shall expire on February 24, 2014.

This Warrant is subject to the following provisions, terms, and conditions:

1. The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise substantially in the form attached hereto, which notice shall be delivered to the Company accompanied by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and upon payment to the Company, by cash, certified check or bank draft, of the Warrant Exercise Price for each such Warrant Share subject to the exercise. The Company agrees that the Warrant Shares so purchased shall be and are deemed to be issued as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such Warrant Shares as aforesaid. Certificates for the Warrant Shares so purchased shall be delivered to the Holder within thirty (30) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of Warrant Shares, if any, with respect to which this Warrant has not been exercised shall also be delivered to the Holder within such time. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificates for Warrant Shares, except in accordance with the provisions and subject to the limitations of Section 4 below.

2. The Company covenants and agrees that all Warrant Shares that may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized and issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issuance thereof. The Company further covenants and agrees that until expiration of this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant.

3. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company.

4. The Holder, by acceptance hereof, represents and warrants that (a) it is acquiring this Warrant for its own account for investment purposes only and not with a view to its resale or distribution and (b) it has no present intention to resell or otherwise dispose of all or any part of this Warrant. Other than pursuant to registration under federal and applicable state securities laws or an exemption from such registration, the availability of which the Company shall determine in its reasonable discretion, neither this Warrant nor any Warrant Shares may be sold, pledged, assigned, or otherwise disposed of (whether voluntarily or involuntarily). The Company may condition such sale, pledge, assignment, or other disposition on the receipt from the party to whom this Warrant is to be so transferred or to whom Warrant Shares are to be issued or so transferred of any representations and agreements requested by the Company in order to permit such issuance or transfer to be made pursuant to exemptions from registration under federal and applicable state securities laws. Each certificate representing the Warrant (or any part thereof) and any Warrant Shares shall bear appropriate legends setting forth these restrictions on transferability. The Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or any Warrant Shares of the Holder’s intention to do so, describing briefly the manner of any proposed transfer. Within a reasonable period after receiving such written notice, the Company shall notify the Holder as to whether such transfer may be effected and of the conditions to any such transfer.

5. This Warrant shall be transferable only on the books of the Company by the Holder in person, or by duly authorized attorney, on surrender of the Warrant, properly assigned. Notwithstanding the foregoing, this Warrant shall also be assigned in accordance with Section 8 hereof.

6. Neither this Warrant nor any terms hereof may be changed, waived, discharged, or terminated orally but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought.

7. Net Exercise Rights .

(a) In addition to and without limiting the rights of the Holder of this Warrant with respect to other terms of this Warrant, the Holder of this Warrant shall have the right (the “Conversion Right”) to convert this Warrant or any portion thereof into Warrant Shares as provided in this Section 7 at any time or from time to time prior to its expiration, subject to the restrictions set forth in paragraph (c) below. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the Holder of this

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Warrant, without payment by the Holder of any exercise price or any cash or other consideration, that number of Converted Warrant Shares equal to the quotient obtained by dividing the Net Value (as hereinafter defined) of the Converted Warrant Shares by the fair market value (as defined in paragraph (d) below) of a single Warrant Share, determined in each case as of the close of business on the Conversion Date (as hereinafter defined). The “Net Value” of the Converted Warrant Shares shall be determined by subtracting the aggregate warrant purchase price of the Converted Warrant Shares from the aggregate fair market value of the Converted Warrant Shares. Notwithstanding anything in this Section 7 to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a Net Value below $100. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share.

(b) The Conversion Right may be exercised by the Holder of this Warrant by the surrender of this Warrant at the principal office of the Company together with a notice in the form attached hereto, specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in paragraph (a) above as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the “Conversion Date”), but not later than the expiration date of this Warrant. Certificates for the Converted Warrant Shares issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the Holder of this Warrant within 15 days following the Conversion Date.

(c) For purposes of this Section 7, the “fair market value” of a Warrant Share as of a particular date shall be its “market price”, calculated as of the Conversion Date, as follows:

(i) if the capital stock into which the Warrants are exercisable is traded on an exchange or is quoted on the Nasdaq Global Select Market or Nasdaq Global Market, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Conversion Date, or

(ii) if the capital stock into which the Warrants are exercisable is not traded on an exchange or on the Nasdaq Global Select Market or Nasdaq Global Market but is traded on Nasdaq Capital Market or other over-the-counter market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Conversion Date, or

(iii) if the capital stock into which the Warrants are exercisable is not traded on an exchange or on the Nasdaq Global Select Market, Nasdaq Global

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Market, Nasdaq Capital Market or other over-the counter market, then the price per share established by the Board of Directors of the Company.

8. Antidilution Provisions . The rights granted hereunder are subject to the following:

(a) Stock Dividends . In case the Company shall declare a dividend or make any other distribution upon the Common Stock of the Company payable in shares of Common Stock or other securities, upon exercise of this Warrant, the Holder shall be entitled to receive, for each share of Common Stock purchased pursuant to this Warrant, the number of shares of Common Stock or other securities, as the case may be, issued per share of Common Stock in payment of such dividend or distribution.

(b) Stock Splits and Reverse Splits . In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares purchasable pursuant to this Warrant immediately prior to such subdivision shall be proportionately increased, and conversely, in case at any time the Company shall combine its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such combination shall be proportionately reduced. Except as provided in this paragraph (b), no adjustment in the Warrant Exercise Price and no change in the number of Warrant Shares so purchasable shall be made pursuant to this Section 8 as a result of or by reason of any such subdivision or combination.

(c) Replidyne Merger . Upon the consummation of the transactions contemplated by that certain Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008, among the Company, Replidyne, Inc., a Delaware corporation (“ Replidyne ”), and Responder Merger Sub, Inc., a Minnesota corporation (the “ Merger Agreement ”), this Warrant shall be assumed by Replidyne and converted into a warrant to purchase shares of Common Stock of Replidyne, and the number of Warrant Shares and the Warrant Exercise Price shall each be adjusted, in accordance with the Merger Agreement. No other changes shall be made to the number of Warrant Shares issuable upon exercise of this Warrant or the Warrant Exercise Price solely as a result of or by reason of the consummation of the transactions contemplated by the Merger Agreement other than the adjustments, as set forth in the preceding sentence of this paragraph (c), to the number of Warrant Shares and the Warrant Exercise Price to be made in accordance with Section 5.5 of the Merger Agreement, after giving effect to the combination of Replidyne’s Common Stock immediately prior to the Effective Time (as defined in the Merger Agreement) of the transactions contemplated by the Merger Agreement as set forth in Section 1.5 thereof.

(d) Other Events . If any event occurs as to which, in the sole opinion of the Board of Directors of the Company, the other provisions of this Warrant are not strictly applicable or if strictly applicable would not fairly protect the rights of the holder of this Warrant in accordance with the essential intent and principles of such provisions, then the

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Board of Directors of the Company shall make such adjustment in the application of such provisions as may be necessary, in the sole judgment of the Board, in accordance with such essential intent and principles, to protect such rights as aforesaid.

9. Governing Law . This Warrant shall be construed and interpreted in accordance with the laws of the State of Minnesota without regard to its choice of law provisions.

10. Agreement to Convert . This Warrant is being issued to the Holder pursuant to that certain Agreement to Convert and Amendment to the Investor’s Rights Agreement between the Company and certain holders of the Company’s Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock and Series B Convertible Preferred Stock, dated November 3, 2008.

[Remainder of page intentionally left blank; signature page follows]

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IN WITNESS WHEREOF, the undersigned has executed this Warrant effective as of the date first written above.


	CARDIOVASCULAR SYSTEMS, INC.
	By:
		Laurence L. Betterley
		Chief Financial Officer

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To: CARDIOVASCULAR SYSTEMS, INC.

NOTICE OF EXERCISE OF WARRANT —
To Be Executed by the Registered Holder in
Order to Exercise the Warrant

Subscriber hereby irrevocably elects to exercise the attached Warrant to purchase for cash, of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of:



		(Print Name)

Please insert social security
or other identifying number
of registered holder of
certificate ( )		Address:




Dated:

		(Signature)*


*		The signature on the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity.

ASSIGNMENT FORM

To be signed only upon authorized transfer of Warrants.

FOR VALUE RECEIVED, Subscriber hereby sells, assigns, and transfers unto the right to purchase the securities of Cardiovascular Systems, Inc., to which the within Warrant relates and appoints , attorney, to transfer said right on the books of Cardiovascular Systems, Inc., with full power of substitution in the premises.


Dated:
		(Signature)

		Address:

Exhibit 14.1

CODE OF ETHICS
AND
BUSINESS CONDUCT

To Our Employees, Officers and Directors:

Ethical business practices provide a critical foundation for our success and protect our reputation in the industry and community. Integrity in the manner in which we manage and operate Cardiovascular Systems, Inc. (“CSI” or the “Company”) is a key element in our corporate culture. We place a high value on honesty, fair dealing and ethical business practice.

The following Code of Ethics and Business Conduct is designed to help you understand what CSI expects of its employees, officers and directors. It does not cover every ethical issue, but the basics are here to help your general understanding. For employees, compliance with the Code is a condition of employment. This Code supplements and does not replace or modify the Company’s other policies or procedures, including provisions of CSI’s current employee handbook(s) and other statements of policy or procedure issued from time to time.

Ethical behavior is everyone’s responsibility. You must show that responsibility by

	•		Knowing and complying with the requirements and expectations that apply to your job, which includes following this Code of Ethics and Business Conduct.

	•		Promptly reporting suspected violations of law or the Code.

	•		Cooperating with any investigation of a potential ethics or business conduct violation.

	•		Seeking assistance when you have questions about CSI’s code of ethics and business conduct or when faced with a challenging ethical situation.

	•		Never acting unethically, even if directed by another person to do so.

	•		Never retaliate against an individual because that individual has reported a suspected violation of the Code.

If a potential course of action seems questionable, please seek guidance from your supervisor or our Compliance Officer (currently Robert J. Thatcher, Executive Vice President). We encourage open communications regarding the possible violation of CSI’s ethical principles and business practices.

TABLE OF CONTENTS


Compliance with Laws and CSI Code of Conduct			1

Accuracy of Company Records			1

Securities Trading Policies			2

Contact with Government Officials			3

Conflicts of Interest			3

Political Contributions and Related Policies			4

Business Courtesies and Gratuities			5

Company Opportunities			5

Intellectual Property and Confidential Information			5

Protection and Proper Use of Company Assets			6

Fair Dealing with Competitors, Customers and Suppliers			6

Personal Behavior in the Workplace			7

Public Disclosure of Code and Waivers			7

Accountability for Adherence to the Code			7

Reporting Any Suspected Illegal or Unethical Behavior			7

Coordination with Other CSI Policies			9

Monitoring			9

Certificate of Compliance			10

Compliance with Laws and CSI Code of Conduct

All CSI officers, employees and directors are expected and directed to comply with all laws and CSI’s Code of Ethics and Business Conduct.

Each employee, officer and director has an obligation to behave according to ethical standards that comply with CSI’s policy, and the letter and spirit of applicable laws, rules and regulations. It is everyone’s responsibility to know and understand legal and policy requirements as they apply to his or her Company responsibilities.

Employees, officers and directors should promptly report all known or suspected violations of applicable law or CSI’s ethical principles to his or her supervisor or Robert J. Thatcher, our Compliance Officer. Or, as an alternative, he or she may contact Brent G. Blackey, our Chairman of the Audit Committee, by email at brent.blackey@holidaycompanies.com, or by phone at 952.832.8635, to report suspected violations or incidents that he or she believes do not meet CSI standards.

Accuracy of Company Records

Each officer and employee must help maintain the integrity of CSI’s financial and other records.

Management, directors, audit committee members, shareholders, creditors, governmental entities and others depend on CSI’s business records for reliable and accurate information. CSI’s books, records, accounts and financial statements must appropriately and accurately reflect CSI’s transactions and conform to applicable legal requirements and CSI’s system of internal controls. If and when CSI becomes obligated to file reports with the Securities and Exchange Commission (SEC), CSI is committed to full, fair, accurate, timely and understandable disclosure in all reports filed with the SEC and in other public communications, and each person subject to this Code is required to provide truthful, complete and timely information in support of this commitment.

There is no excuse for participating in the creation of or not reporting a deliberately false or misleading CSI record. In addition, an employee, officer or director must not destroy, alter, falsify or cover up documents with the intent to impede or obstruct any investigation of suspected wrongdoing.

Directors, officers and employees must not participate in any misstatement of CSI’s accounts, and they must avoid improper influence on the conduct of an audit. No circumstances justify the maintenance of “off-the-books”

accounts. All arrangements or requisition contracts under which funds are disbursed shall accurately state the purposes for which these funds are paid and shall not be misleading.

Business records and communications often become public and you are expected to avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of individuals or companies that could be misunderstood. This obligation applies in any communication, including, but not limited to e-mail, internal memoranda and formal reports. Records are expected to be retained or destroyed according to CSI’s record retention policies. In the event of litigation or governmental investigation you are expected to consult CSI’s legal counsel concerning the records you hold.

Securities Trading Policies

Never trade securities on the basis of confidential information acquired in the course of your CSI duties or while you are at the workplace.

If the Company becomes a publicly traded company, there will be times when employees, officers or directors will possess information about the Company, its subsidiaries or affiliates or about a company with which CSI does business that is not known to the investing public. Such insider information may relate to, among other things, strategies, plans of CSI, new products or processes, mergers, acquisitions or dispositions of businesses or securities, problems facing the Company, sales, profitability, negotiations relating to significant contracts or business relationships, significant litigation or financial information.

If any information is of the type that a reasonable investor would consider important in reaching an investment decision, the Company employee, officer or director who possesses such information must not buy or sell Company securities, nor provide the information to others, until such information becomes public. Use of material, non-public information in the above manner is not only illegal, but also unethical. Employees who directly or indirectly involve themselves in illegal insider trading will be subject to immediate termination by the Company, and an individual convicted of insider trading may face criminal penalties of up to ten years in prison and/or a $1,000,000 fine.

In connection with any public offering of its securities, the Company will adopt an insider trading policy and distribute it to all Company personnel. All employees, officers and directors will be obligated to read, become familiar with and comply with the Company’s insider trading policy.

An employee, officer or director who is unsure how the law applies in a given instance, should seek guidance before he or she trades. All questions should be referred to our Compliance Officer.

Contact with Government Officials

CSI complies with all applicable laws, rules and regulations relating to lobbying or attempting to influence government officials.

Bribery, kickbacks or other improper or illegal payments have no place in CSI’s business. In addition, information provided to governments must be accurate and interactions with government officials must be honest and ethical. All activities that might constitute lobbying or attempts to influence government officials must first be reviewed with and approved by legal counsel.

Before doing business with foreign, national, state or local government, an employee or officer must know the applicable rules. An employee who is in doubt, must not make the mistake of interpreting the rules by him or herself. Such an employee must discuss the matter with his or her supervisor or other management of the Company.

Conflicts of Interest

Each employee, officer and director must avoid any situation in which his or her personal interests conflict with or interfere with CSI’s interests.

Each employee and officer owes CSI a duty of loyalty. Employees and officers must make business decisions solely in the best interests of CSI. Conflicts may arise when an employee or officer receives improper personal benefits as a result of the person’s position with the Company or gains personal enrichment through access to confidential information. A conflict situation can also arise when an employee or officer takes actions or has interests that may make it difficult to perform his or her CSI work objectively and effectively. For that reason, all employees and officers must exercise great care not to allow their personal interests to potentially conflict with CSI’s interests. Each employee, officer and director shall act with honesty and integrity, avoiding actual or apparent conflicts of interest between personal and professional relationships.

CSI employees are generally free to engage in outside activities of their choice. It is important, however, that such activities do not adversely affect CSI’s business, involve misuse of CSI position or resources, divert for

personal gain any business opportunity from which CSI may profit, or constitute a potential source of discredit to the CSI name. The following is a non-exhaustive list of examples of prohibited conflicts of interest for employees and officers of CSI:

	•		Consulting with or employment in any capacity with a competitor, supplier or customer of CSI.

	•		Having a substantial equity, debt, or other financial interest in any competitor, supplier or customer.

	•		Having a financial interest in any transaction involving the purchase or sale by CSI of any product, material, equipment, services or property.

	•		Misusing CSI’s confidential or proprietary information, including the unauthorized disclosure or use of such information.

	•		Using materials, equipment or other assets of CSI for any unauthorized or undisclosed purpose.

	•		Receiving loans or guarantees of obligations from the Company without Board of Director authorization.

Directors also owe CSI a duty of loyalty. The duty of loyalty mandates that the best interests of the Company and its shareholders takes precedence over any interest possessed by a director not shared by the shareholders generally. In the event that a conflict (or the appearance of a conflict) arises or is anticipated, directors must bring the matter to the attention of the Chairman of the Audit Committee, or if there is no Audit Committee, to the Chairman of the Board.

Political Contributions and Related Policies

Generally CSI’s funds or resources may not be used to make a political contribution to any political candidate or political party.

Exceptions to this basic policy are allowed only where such contributions are permitted by law and permission is granted in advance by the Company’s Chief Executive Officer, Compliance Officer or Board of Directors. Company policy does not permit the use of any Company facilities or resources by employees for political campaigning, political fundraising or partisan political purposes. A decision by an employee to contribute any personal time, money or other resources to a political campaign or political activity must be totally voluntary.

Business Courtesies and Gratuities

CSI’s policy is not to offer or accept kickbacks or bribes, or gifts of substantial value.

CSI employees, officers and directors may only exchange non-monetary and modestly-valued gifts that promote goodwill with our business partners and do not improperly influence others. We will accept only approved and widely available discounts and do not encourage, accept or exchange gratuities or payments for providing services to others.

Business courtesies such as meals, transportation and entertainment provided to a vendor, supplier, customer or other business associations must be modest in amount and related to a legitimate business purpose (e.g., explanation or demonstration of CSI products, application of products, service capabilities, or training). Such courtesies must not violate the law, regulations, or reasonable customs of the market-place. If you have any question about whether any business courtesies, gratuities or gifts are appropriate, please contact your supervisor or other CSI management.

Company Opportunities

Do not use a Company opportunity for personal gain.

Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. Employees, officers and directors are prohibited (without the specific consent of the Board of Directors or an appropriate committee thereof) from (1) taking for themselves personally opportunities that are discovered through the use of company property, information or their position, (2) using company property, information or their position for personal gain, or (3) competing with the Company directly or indirectly.

Intellectual Property and Confidential Information

CSI invests substantial resources in developing proprietary intellectual property and confidential information.

Confidential information is information that is not generally known or readily available to others. It includes non-public information that might be of value to competitors if it were disclosed. It must not be shared with others outside CSI except pursuant to approved business relationships or when

required by law. Confidential information includes, but is not limited to, intellectual property and trade secrets, business plans and information, marketing and sales programs and information, customer and prospective customer information and lists, pricing information and policies, financial information, and any other information which the Company deems confidential.

Every CSI employee, officer and director is obligated to protect the Company’s confidential information as well as that of its customers, suppliers and third parties who disclose information to CSI in confidence. CSI employees, officers and directors must not accept confidential information from a third party, including competitors, unless specifically authorized to do so by an authorized supervisor or officer of the Company and following an appropriate grant of rights from such third party.

Protection and Proper Use of Company Assets

Our shareholders trust us to manage Company assets appropriately .

Collectively, employees, officers and directors have a responsibility for safeguarding and making proper and efficient use of the Company’s assets. Each of us has an obligation to prevent the Company’s property from loss, damage, misuse, theft, embezzlement or destruction. We seek to ensure that the Company equipment, supplies and other assets are used for legitimate business purposes unless otherwise specifically authorized, and to protect all tangible and intangible Company property.

Fair Dealing with Competitors, Customers and Suppliers

Respect the rights of competitors, customers and suppliers.

CSI’s success depends on building productive relationships with our customers and suppliers based on integrity, ethical behavior and mutual trust. In addition, customers have individual needs and expectations representing unique opportunities for mutual success.

The Company bases its supplier relationships on fundamental concepts of integrity, fairness, and mutual respect.

CSI strives to outperform its competition fairly and honestly. CSI seeks and develops competitive advantages through superior performance, not through unethical or illegal business practice. Each Company employee, officer and director should endeavor to deal fairly with the Company’s customers, suppliers and competitors. No one should take unfair advantage through

manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other intentional unfair dealing.

Personal Behavior in the Workplace

CSI is committed to providing equal opportunity in employment and will not tolerate illegal discrimination or harassment.

CSI strives to enhance and support the diversity of its employee group. All are expected to deal with each other in an atmosphere of trust and respect in a manner consistent with CSI’s core values. Please refer to applicable portions of our Employee Handbook for guidance related to personal behavior in the workplace.

Public Disclosure of Code and Waivers

The existence and content of this Code of Ethics and Business Conduct will be disclosed to shareholders and will be made available in the Company’s filings with the SEC or on the Company’s website. It is expected that waivers of this Code rarely, if ever, would be acceptable. Any waiver a provision of Code for executive officers or directors may granted only by the Board of Directors, with only the independent members voting, or an appropriate Board Committee consisting of independent directors, and such waiver must be promptly disclosed to shareholders.

Accountability for Adherence to the Code

Each employee, officer and director must accept responsibility for adherence to this Code. Violations of this Code may lead to serious sanctions including, for an employee, discipline up to and including immediate termination, in the sole discretion of the Company. The Company may, in addition, seek civil recourse against an employee, officer or director and/or refer alleged criminal misconduct to law enforcement agencies.

Reporting Any Suspected Illegal or Unethical Behavior

CSI maintains an open door policy and an anonymous telephone hotline for employees to raise concerns and to encourage the reporting of suspected violations of law or the Code of Ethics and Business Conduct without fear of retribution or retaliation.

If you have questions about an ethical situation, you are encouraged to talk with your supervisor or with our Compliance Officer about any behavior you believe may be illegal or unethical. You will be assured confidentiality, to the limit of the law. If you do not feel it is appropriate to discuss the issue

with these persons, CSI has established a hotline so that you can report concerns or potential violations anonymously (see below). Anonymous callers should supply detailed information to address the concern.

It is against the Company’s policy to retaliate against any employee, officer or director for good faith reporting of violation of this Code. If you feel you have been retaliated against for raising your good faith reporting, you should immediately contact your supervisor, our Compliance Officer or the Compliance Hotline.

COMPLIANCE HOTLINE

If you believe someone may be unintentionally or intentionally violating the law or the principles or standards included in the Code of Conduct document, report the known or suspected violations by contacting:

David L. Martin
Chief Executive Officer
651.259.1605
dmartin@csi360.com

Robert J. Thatcher
Executive Vice President
651.259.1630
rthatcher@csi360.com

If you would like to anonymously notify the board of directors of a suspected violation, contact the Chairman of the Audit Committee or the Company’s legal counsel in the following manner:

Brent G. Blackey
Chairman of the Audit Committee
952.832.8635
brent.blackey@holidaycompanies.com

Robert K. Ranum
Legal Counsel
Fredrikson & Byron, P.A.
612.492.7067
rranum@fredlaw.com

Each report of a known or suspected violation will be promptly and thoroughly investigated. If a violation has occurred, CSI will take appropriate actions to prevent similar violations.

Coordination with Other CSI Policies

The provisions of this Code of Conduct are in addition to, and do not modify, replace or supersede CSI’s other policies or procedures including, but not limited to, those policies and procedures set forth in any employee handbook, or CSI’s other statements of policy or procedure, whether written or oral.

Additionally, this Code of Conduct is not intended to be and does not constitute a contract of employment between CSI and its employees. If you are an employee and do not have an Employment Agreement with CSI, you are an employee at-will. This means that you have the option of resigning from your employment at any time, for any reason or no reason, with or without prior notice. Conversely, CSI has same option to terminate your employment at any time, for any reason or no reason, with or without prior notice.

Monitoring

CSI will periodically reaffirm its commitment to compliance with the Code of Ethics and Business Conduct.

CSI intends to conduct periodic training sessions regarding the Code. In addition, CSI will periodically distribute copies of the Code and the Certification of Compliance card to each employee, officer and director to remind such persons of the contents of the Code as well as to reestablish their commitment to compliance with it.

Please make sure you return your
Certificate of Compliance

CERTIFICATE OF COMPLIANCE

This Certificate must be read and signed by all employees, officers and directors.

I certify that I have received, read and understood CSI’s Code of Ethics and Business Conduct. I understand what types of conduct violate these policies. I agree to comply with the terms of the Code and understand that if I am an employee, violation of these terms may result in discipline up to and including immediate termination of employment in the discretion of CSI.



Employee, Officer or Director Signature



Date		Location



Printed Name

Return to:

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN 55112
Attn: Compliance Officer

Telephone: 651.259.1630

Exhibit 16.1

February 27, 2009

Securities and Exchange Commission
Washington, D.C. 20549

Ladies and Gentlemen:

We were previously principal accountants for Cardiovascular Systems, Inc. (formerly known as Replidyne, Inc.) and, under the date of February 23, 2009, we reported on the financial statements of Replidyne, Inc. as of and for the years ended December 31, 2008 and 2007. On February 25, 2009, we were dismissed. We have read Cardiovascular Systems, Inc.’s statements included under Item 4.01(a) of its Form 8-K dated February 25, 2009 and we agree with such statements, except that we are not in a position to agree or disagree with Cardiovascular Systems, Inc.’s statement in the first sentence.

Very truly yours,

/s/ KPMG LLP

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-135954) of Replidyne, Inc. of our report dated August 15, 2008, except as to Cardiovascular Systems, Inc.’s (“CSI-MN”) loan and security agreement and margin loan payable as described in paragraphs 1 through 4 in Note 4 for which the date is September 12, 2008 relating to the consolidated financial statements of CSI-MN, which appears in the Current Report on Form 8-K of Cardiovascular Systems, Inc. (“CSI-Delaware”) dated February 25, 2009.

/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 3, 2009

Exhibit 99.1

CARDIOVASCULAR SYSTEMS AND REPLIDYNE COMPLETE MERGER

Cardiovascular Systems, Inc. approved for trading on NASDAQ Global Market ^{^®}

St. Paul, Minn., Feb. 25, 2009 — Cardiovascular Systems, Inc. (Nasdaq: CSII), a medical device company focused on developing and commercializing interventional treatment systems for vascular disease, announced today that it has successfully closed the transactions contemplated by its previously announced Merger Agreement dated November 3, 2008. The transactions included the merger of Cardiovascular Systems, Inc., a Minnesota corporation (CSI), with a subsidiary of Replidyne, Inc. In connection with the merger, Replidyne changed its name to Cardiovascular Systems, Inc. and its shares have been approved for trading on the NASDAQ Global Market ^® under the symbol, “CSII.” Shareholders of both companies approved the transactions on February 24, 2009. Through this transaction, an additional $37.0 million in net assets, primarily cash, is available to CSI’s business. The company plans to use the proceeds to advance its medical products, including its Diamondback 360°™ Orbital Atherectomy System, and expand its sales and marketing organization.

“This is great news for our company and for the many Americans who are afflicted with peripheral arterial disease,” said David L. Martin, president and chief executive officer of Cardiovascular Systems, Inc. “Given current market conditions, this merger was our best path for raising capital and to become listed on a major U.S. stock market. With additional resources, we will expand our sales and marketing organization to drive revenue growth, and continue to invest in infrastructure and product development for future market expansion.”

The company’s total common shares outstanding are approximately 13.7 million, after giving effect to the 1-for-10 reverse stock split of Replidyne’s stock immediately prior to the merger and assuming the conversion of all of the outstanding shares of CSI upon the terms of the merger. Under terms of the Merger Agreement, the former CSI shareholders are entitled to receive approximately 83 percent of the combined company and Replidyne shareholders are expected to hold approximately 17 percent of the combined company, in each case on a fully diluted basis using the treasury stock method of accounting for options and warrants.

As expected, the combined company is headed by CSI’s Martin and the CSI executive team. The combined board of directors consists of nine members, including two directors from Replidyne, Edward Brown and Augustine Lawlor. Glen D. Nelson, M.D., is chairman of the board. Other directors are Brent Blackey; John Friedman; Geoffrey Hartzler, M.D.; Roger Howe, Ph.D.; David Martin; and Gary Petrucci.

For more information on Cardiovascular Systems, Inc., visit: www.csi360.com.

About Cardiovascular Systems, Inc.

Cardiovascular Systems, Inc., a medical device company based in St. Paul, Minn., develops and commercializes interventional treatment systems for vascular disease. The company’s goal is to provide physicians with the tools they need to help the 8 million to 12 million Americans suffering from peripheral arterial disease (PAD) — blockages in leg arteries — and the potential catastrophic risk of limb amputation. The company’s initial product, the Diamondback 360°™ Orbital Atherectomy System, is a minimally invasive catheter system for treating PAD. As of Dec. 31, 2008, more than 14,700 devices had been sold to approximately 400 hospitals since the September 2007 product launch.

(more)

Cardiovascular Systems, Inc.
Feb. 25, 2009
Page 2

Safe Harbor

This press release contains plans, intentions, objectives, estimates and expectations that constitute forward-looking statements about the company that involve significant risks and uncertainties. Examples of such statements include, but are not limited to, the expected cash that will be available to CSI’s business as a result of the closing of the merger, the expected ownership of the stockholders of Replidyne and CSI after the closing of the merger and the anticipated benefits of the transaction. Actual results could differ materially from those discussed in the forward-looking statements due to a number of factors, including the accuracy of the company’s estimates regarding expenses, future revenues and capital requirements, and the company’s ability to obtain and maintain intellectual property protection for product candidates. These and additional risks and uncertainties are described more fully in CSI’s registration statement on Form 10 filed with the Securities and Exchange Commission (SEC) on October 28, 2008 and Replidyne’s most recent Form 10-K filed with the SEC under the Securities Exchange Act of 1934. 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 . All forward-looking statements made in the press release are made as of the date hereof and the company assumes no obligation to update the forward-looking statements in the document.

Contacts:


For Cardiovascular Systems, Inc.		Padilla Speer Beardsley:
Investor Relations		Marian Briggs
(651) 259-2800		(612) 455-1742
investorrelations@csi360.com		mbriggs@psbpr.com

		Nancy A. Johnson
		(612) 455-1745
		njohnson@psbpr.com

# # #

Exhibit 99.2

Cardiovascular Systems, Inc.

Consolidated Financial Statements

Three months ended September 30, 2008 and twelve months ended June 30, 2008 and 2007

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Cardiovascular Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders’ (deficiency) equity and comprehensive (loss) income and cash flows present fairly, in all material respects, the financial position of Cardiovascular Systems, Inc. (the “Company”) at June 30, 2007 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation effective July 1, 2006.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred substantial operating losses, negative cash flows from operations, liquidity constraints due to investments in auction rate securities and has limited capital to fund future operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

August 15, 2008, except as to the Company’s loan and security agreement and margin loan payable as described in paragraphs 1 through 4 in Note 4 for which the date is September 12, 2008

Cardiovascular Systems, Inc.

Consolidated Balance Sheets


	June 30,						September 30,
	2007			2008			2008
							(Unaudited)
	(Dollars in thousands, except per share and share amounts)

ASSETS
Current assets
Cash and cash equivalents	$	7,908		$	7,595		$	14,727
Short-term investments		11,615			—			—
Accounts receivable, net		—			4,897			5,439
Inventories		1,050			3,776			3,930
Prepaid expenses and other current assets		255			1,936			818

Total current assets		20,828			18,204			24,914
Investments		—			21,733			21,390
Property and equipment, net		585			1,041			1,156
Patents, net		612			980			1,152

Total assets	$	22,025		$	41,958		$	48,612

LIABILITIES AND SHAREHOLDERS’ (DEFICIENCY) EQUITY
Current liabilities
Accounts payable	$	1,909		$	5,851		$	5,150
Accrued expenses		748			3,467			3,707
Deferred revenue		—			116			—
Current maturities of long-term debt		—			11,888			27,201

Total current liabilities		2,657			21,322			36,058

Long-term liabilities
Long-term debt		—			—			2,400
Redeemable convertible preferred stock warrants		3,094			3,986			4,047
Deferred rent		79			100			100

Total long-term liabilities		3,173			4,086			6,547

Total liabilities		5,830			25,408			42,605

Commitments and contingencies
Series A redeemable convertible preferred stock, no par value; authorized 5,400,000 shares, issued and outstanding 4,728,547 at June 30, 2007 and 4,737,561 at June 30, 2008 and September 30, 2008 (unaudited), respectively; aggregate liquidation value $29,034, $31,230 and $31,782 at June 30, 2007 and 2008, and September 30, 2008 (unaudited), respectively		40,193			51,213			51,213
Series A-1 redeemable convertible preferred stock, no par value; authorized 1,470,589 at June 30, 2007 and 2,188,425 shares at June 30, 2008 and September 30, 2008 (unaudited), respectively; issued and outstanding 977,046 at June 30, 2007 and 2,188,425 at June 30, 2008 and September 30, 2008 (unaudited), respectively; aggregate liquidation value $8,305, $19,862 and $20,243 at June 30, 2007 and 2008, and September 30, 2008 (unaudited), respectively		8,305			23,657			23,657
Series B redeemable convertible preferred stock, no par value; authorized 2,162,162 shares, issued and outstanding 2,162,150 at June 30, 2008 and September 30, 2008 (unaudited), aggregate liquidation value $20,871 and $21,280 at June 30, 2008 and September 30, 2008 (unaudited), respectively		—			23,372			23,372
Shareholders’ (deficiency) equity
Common stock, no par value; authorized 25,000,000 common shares at June 30, 2007 and 70,000,000 common shares and 5,000,000 undesignated shares at June 30, 2008 and September 30, 2008 (unaudited); issued and outstanding 6,267,454, 7,575,206, 7,731,450 at June 30, 2007 and 2008, and September 30, 2008 (unaudited), respectively		26,054			35,933			37,738
Common stock warrants		1,366			680			2,374
Accumulated other comprehensive (loss) income		(7	)		—			(343	)
Accumulated deficit		(59,716	)		(118,305	)		(132,004	)

Total shareholders’ (deficiency) equity		(32,303	)		(81,692	)		(92,235	)

Total liabilities and shareholders’ (deficiency) equity	$	22,025		$	41,958		$	48,612

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

Cardiovascular Systems, Inc.

Consolidated Statements of Operations


										Three Months Ended
	Year Ended June 30,									September 30,
	2006			2007			2008			2007			2008
										(Unaudited)			(Unaudited)
	(Dollars in thousands, except per share and share amounts)

Revenues	$	—		$	—		$	22,177		$	—		$	11,646
Cost of goods sold		—			—			8,927			539			3,881

Gross profit		—			—			13,250			(539	)		7,765

Expenses
Selling, general and administrative		1,735			6,691			35,326			3,552			16,424
Research and development		3,168			8,446			16,068			3,328			4,955

Total expenses		4,903			15,137			51,394			6,880			21,379

Loss from operations		(4,903	)		(15,137	)		(38,144	)		(7,419	)		(13,614	)
Other income (expense)
Interest expense		(48	)		(1,340	)		(923	)		(300	)		(227	)
Interest income		56			881			1,167			278			142
Impairment on investments		—			—			(1,267	)		—			—

Total other income (expense)		8			(459	)		(1,023	)		(22	)		(85	)

Net loss		(4,895	)		(15,596	)		(39,167	)		(7,441	)		(13,699	)
Accretion of redeemable convertible preferred stock		—			(16,835	)		(19,422	)		(4,853	)		—

Net loss available to common shareholders	$	(4,895	)	$	(32,431	)	$	(58,589	)	$	(12,294	)	$	(13,699	)

Loss per common share
Basic and diluted	$	(0.79	)	$	(5.22	)	$	(8.57	)	$	(1.95	)	$	(1.78	)

Weighted average common shares used in computation
Basic and diluted		6,183,715			6,214,820			6,835,126			6,291,512			7,692,248

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

Cardiovascular Systems, Inc.

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

Comprehensive (Loss) Income


												Accumulated
												Other
	Common Stock								Accumulated			Comprehensive						Comprehensive
	Shares			Amount		Warrants			Deficit			(Loss) Income			Total			(Loss) Income
	(Dollars in thousands, except per share and share amounts)

Balances at June 30, 2005		5,911,579			23,248		1,249			(22,390	)		—			2,107		$	—
Shares issued for cash, $8.00 per share, net of offering costs of $20		287,625			2,281											2,281
Stock options and warrants expensed for outside consulting services					49		31									80
Net loss										(4,895	)					(4,895	)	$	(4,895	)

Balances at June 30, 2006		6,199,204			25,578		1,280			(27,285	)		—			(427	)	$	(4,895	)

Exercise of stock options and warrants at $1.00 per share		68,250			86		(17	)								69
Value assigned to warrants issued in connection with Series A redeemable convertible preferred stock							103									103
Accretion of redeemable convertible preferred stock										(16,835	)					(16,835	)
Stock-based compensation					390											390
Unrealized loss on short-term investments													(7	)		(7	)	$	(7	)
Net loss										(15,596	)					(15,596	)		(15,596	)

Balances at June 30, 2007		6,267,454			26,054		1,366			(59,716	)		(7	)		(32,303	)	$	(15,603	)

Issuance of restricted stock awards		840,138			1,152											1,152
Forfeiture of restricted stock awards		(27,834	)													—
Exercise of stock options and warrants at $1.00 — $8.00 per share		495,448			2,382		(570	)								1,812
Expiration of warrants					116		(116	)								—
Accretion of redeemable convertible preferred stock										(19,422	)					(19,422	)
Stock-based compensation					6,229											6,229
Unrealized gain on investments													7			7		$	7
Net loss										(39,167	)					(39,167	)		(39,167	)

Balances at June 30, 2008		7,575,206		$	35,933	$	680		$	(118,305	)	$	—		$	(81,692	)	$	(39,160	)

Issuance of restricted stock awards		161,823			1,296											1,296
Forfeiture of restricted stock awards		(25,029	)
Exercise of stock options and warrants at $5.00 — $5.71 per share		19,450			133		(120	)								13
Issuance of common stock warrants							1,814									1,814
Stock-based compensation					376											376
Unrealized loss on investments													(343	)		(343	)	$	(343	)
Net loss										(13,699	)					(13,699	)		(13,699	)

Balances at September 30, 2008 (unaudited)		7,731,450		$	37,738	$	2,374		$	(132,004	)	$	(343	)	$	(92,235	)	$	(14,042	)

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

Cardiovascular Systems, Inc.

Consolidated Statements Cash Flows


										Three Months Ended
	Year Ended June 30,									September 30,
	2006			2007			2008			2007			2008
										(Unaudited)			(Unaudited)
	(Dollars in thousands, except per share and share amounts)

Cash flows from operating activities
Net loss	$	(4,895	)	$	(15,596	)	$	(39,167	)	$	(7,441	)	$	(13,699	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization of property and equipment		73			153			264			47			86
Provision for doubtful accounts		—			—			164			14			28
Amortization of patents		45			45			29			—			9
Change in carrying value of the convertible preferred stock warrants		—			1,327			916			300			(14	)
Amortization of debt discount		—			—			—			—			79
Stock-based compensation		—			390			7,381			350			1,672
Expense for stock, options and warrants granted for outside consulting services		80			—			—			—			—
Disposal of property and equipment		(3	)		—			—			—			—
Amortization of discount on investments		—			(293	)		(52	)		(52	)		—
Impairment on investments		—			—			1,267			—			—
Changes in assets and liabilities
Accounts receivable		—			—			(5,061	)		(1,395	)		(570	)
Inventories		(438	)		(322	)		(2,726	)		(1,522	)		(154	)
Prepaid expenses and other current assets		(96	)		(113	)		(1,323	)		13			1,118
Accounts payable		30			1,709			3,631			(430	)		(701	)
Accrued expenses and deferred rent		216			424			2,693			632			240
Deferred revenue		—			—			116			1,428			(116	)

Net cash used in operations		(4,988	)		(12,276	)		(31,868	)		(8,056	)		(12,022	)

Cash flows from investing activities
Expenditures for property and equipment		(235	)		(465	)		(721	)		(207	)		(201	)
Proceeds from sale of property and equipment		7			—			1			—			—
Purchases of investments		—			(23,169	)		(31,314	)		(12,700	)		—
Sales of investments		—			11,840			19,988			5,874			—
Costs incurred in connection with patents		—			(58	)		(397	)		—			(181	)

Net cash used in investing activities		(228	)		(11,852	)		(12,443	)		(7,033	)		(382	)

Cash flows from financing activities
Net proceeds from the sale of common stock		2,281			—			—			—			—
Proceeds from sale of redeemable convertible preferred stock		—			30,294			30,296			10,296			—
Payment of offering costs		—			(1,776	)		(51	)		(10	)		—
Issuance of common stock warrants		—			103			—			—			1,814
Issuance of convertible preferred stock warrants		—			1,767			—			—			75
Exercise of stock options and warrants		—			69			1,865			160			13
Proceeds from long-term debt		—			—			16,398			—			17,712
Payment on long-term debt		—			—			(4,510	)		—			(78	)
Proceeds from convertible promissory notes		3,059			25			—			—			—
Payable to shareholder, common stock repurchase		(350	)		—			—			—			—

Net cash provided by financing activities		4,990			30,482			43,998			10,446			19,536

Net (decrease) increase in cash and cash equivalents		(226	)		6,354			(313	)		(4,643	)		7,132
Cash and cash equivalents
Beginning of period		1,780			1,554			7,908			7,908			7,595

End of period	$	1,554		$	7,908		$	7,595		$	3,265		$	14,727

Noncash investing and financing activities
Conversion of convertible promissory notes and accrued interest into Series A redeemable convertible preferred stock	$	—		$	(3,145	)	$	—		$	—		$	—
Capitalized financing costs included in accounts payable		—			—			311			—			—
Capitalized financing costs included in accrued expenses		—			—			47			—			—
Accretion of redeemable convertible preferred stock		—			16,835			19,422			4,853			—
Net unrealized (loss) gain on investments		—			(7	)		7			6			(343	)

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


1.	Summary of Significant Accounting Policies

Company Description

Cardiovascular Systems, Inc. (the “Company”) was incorporated on February 28, 1989, to develop, manufacture and market 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° orbital atherectomy system in treating peripheral arterial disease. On August 30, 2007, the U.S. Food and Drug Administration, or FDA, granted the Company 510(k) clearance to market the Diamondback 360° for the treatment of peripheral arterial disease. The Company commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007. During the quarter ended March 31, 2008, the Company began its full commercial launch of the Diamondback 360°.

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

Principles of Consolidation

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

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. 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 contained herein. 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.

Cash and Cash Equivalents

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

Investments

The Company classifies all investments as “available-for-sale.” Investments are recorded at fair value and unrealized gains and losses are recorded as a separate component of shareholders’ deficiency until realized. Realized gains and losses are accounted for on the specific identification method. The Company has historically placed its investments primarily in auction rate securities, U.S. government securities and commercial paper. These investments, a portion of which had original maturities beyond one year, were classified as short-term based on their liquid nature. The securities which had stated maturities beyond one year had certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to sell them through a Dutch auction process that occurred at pre-determined intervals of less than one year. For the years ended June 30, 2007 and 2008, and three months ended September 30, 2008 (unaudited), the amount of gross realized gains and losses related to sales of investments were insignificant.

The Company’s 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 (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 the Company’s auction rate securities is supported by student loan assets that are guaranteed by the federal government under the FFELP.

The Company’s auction rate securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals, primarily every 28 days, through auctions. The recent conditions in the global credit markets have prevented the Company from liquidating its holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed by the issuer or they mature.

In February 2008, the Company was informed that there was insufficient demand for auction rate securities, resulting in failed auctions for $23.0 million of the Company’s auction rate securities held at June 30, 2008. Currently, these affected securities 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. As a result, at June 30, 2008 and September 30, 2008 (unaudited), the Company has classified the fair value of the auction rate securities as a long-term asset. Interest rates on all failed auction rate securities were reset to a temporary predetermined “penalty” or “maximum” rate. These maximum rates are generally limited to a maximum amount payable over a 12 month period equal to a rate based on the trailing 12-month average of 90-day treasury bills, plus 120 basis points. These maximum allowable rates range from 2.7% to 4.0% of par value per year. 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. The Company expects to receive the principal associated with its auction rate securities upon the earlier of a successful auction, their redemption by the issuer or their maturity. On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc., the entity through which it originally purchased the auction rate securities, for up to $12.0 million, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was secured by the $23.0 million par value of the Company’s auction rate securities. The maximum borrowing amount was not set forth in the written agreement for the loan and may have been adjusted from time to time by UBS Financial Services at its discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services but were not included in the written loan agreement and were therefore subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceeded $12.0 million or 75% of

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

UBS Financial Service’s estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements and the outstanding balance on the loan was $11.9 million.

On August 21, 2008, the Company replaced this loan with a margin loan from UBS Bank USA, which increased maximum borrowings available to $23.0 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 at its discretion The margin loan has a floating interest rate equal to 30-day LIBOR, plus 1.0%. 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 $50.0 million. 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 August 21, 2008, the margin requirements include maximum borrowings, including interest, of $23.0 million. If these margin requirements are not maintained, UBS Bank may require the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. The Company has maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at September 30, 2008 (unaudited) was $22.9 million.

In accordance with EITF 03-01 and FSP FAS 115-1 and 124-1, “The Meaning of Other Than-Temporary Impairment and Its Application to Certain Investments,” the Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (1) the length of time a security is in an unrealized loss position, (2) the extent to which fair value is less than cost, (3) the financial condition and near term prospects of the issuer, and (4) the Company’s intent and ability to hold the security for a period of time sufficient to allow for any unanticipated recovery in fair value.

The Company recorded an other-than-temporary impairment loss of $1.3 million relating to its auction rate securities in its statement of operations for the year ended June 30, 2008 and recorded an unrealized loss of $0.3 million relating to its auction rate securities in other comprehensive income (loss) for the three months ended September 30, 2008 (unaudited). The Company determined the fair value of its auction rate securities and quantified the other-than-temporary impairment loss and the unrealized loss with the assistance of ValueKnowledge LLC, an independent third party valuation firm, which utilized various valuation methods and considered, among other factors, estimates of present value of the auction rate securities based upon expected cash flows, the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value, the likelihood of a return of liquidity to the market for these securities and the potential to sell the securities in secondary markets.

At June 30, 2008, the Company concluded that no weight should be given to the value indicated by the secondary markets for student loan-backed auction rate securities similar to those the Company holds because these markets have very low transaction volumes and consist primarily of private transactions with minimal disclosure, transactions may not be representative of the actions of typically-motivated buyers and sellers and the Company does not currently intend to sell in the secondary markets. However, the Company did consider the secondary markets for certain mortgage-backed securities to estimate the market yields attributable to the Company’s auction rate securities, but determined that these secondary markets do not provide a sufficient basis of comparison for the auction rate securities that the Company holds and, accordingly, attributed no weight to the values of these mortgage-backed securities indicated by the secondary markets.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

At June 30, 2008, the Company attributed a weight of 66.7% to estimates of present value of the auction rate securities based upon expected cash flows and a weight of 33.3% to the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value or willingness of third parties to provide financing in the market against the par value of those securities. The attribution of these weights required the exercise of valuation judgment. A measure of liquidity is available from borrowing, which led to the 33.3% weight attributed to the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value or the willingness of third parties to provide financing in the market against the par value of those securities. However, borrowing does not eliminate exposure to the risk of holding the securities, so the weight of 66.7% attributed to the present value of the auction rate securities based upon expected cash flows reflects the expectation that the securities are likely to be held for an uncertain period. The Company focused on these methodologies because no certainty exists regarding how the auction rate securities will be eventually converted to cash and these methodologies represent the most likely possible outcomes. To derive estimates of the present value of the auction rate securities based upon expected cash flows, the Company used the securities’ expected annual interest payments, ranging from 2.7% to 4.0% of par value, representing estimated maximum annual rates under the governing documents of the auction rate securities; annual market interest rates, ranging from 4.5% to 5.8%, based on observed traded, state sponsored, taxable certificates rated AAA or lower and issued between June 15 and June 30, 2008; and a range of expected terms to liquidity.

At June 30, 2008, the Company’s weighting of the valuation methods indicates an implied term to liquidity of approximately 3.5 years. The implied term to liquidity of approximately 3.5 years is a result of considering a range in possible timing of the various scenarios that would allow a holder of the auction rate securities to convert the auction rate securities to cash ranging from zero to ten years, with the highest probability assigned to the range of zero to five years. Several sources were consulted but no individual source of information was relied upon to arrive at the Company’s estimate of the range of possible timing to convert the auction rate securities to cash or the implied term to liquidity of approximately 3.5 years. The primary reason for the fair value being less than cost related to a lack of liquidity of the securities, rather than the financial condition and near term prospects of the issuer.

At September 30, 2008, the Company concluded that no weight should be given to the value indicated by the secondary markets for student loan backed auction rate securities similar to those the Company holds because these markets have very low transaction volumes and consist primarily of private transactions with minimal disclosure and transactions may not be representative of the actions of typically-motivated buyers and sellers and the Company does not currently intend to sell in the secondary markets. However, the Company did consider the secondary markets for certain mortgage-backed securities to estimate the market yields attributable to the Company’s auction rate securities, but determined that these secondary markets do not provide a sufficient basis of comparison for the auction rate securities that the Company holds and, accordingly, attributed no weight to the values of these mortgage-backed securities indicated by the secondary markets.

At September 30, 2008, the Company concluded that no weight should be given to the likelihood and potential timing of issuers of the auction rate securities exercising their redemption rights at par value based on low issuer call activity, so the Company attributed a weight of 100.0% to estimates of present value of the auction rate securities based upon expected cash flows. The attribution of weights to the valuation factors required the exercise of valuation judgment. The selection of a weight of 100.0% attributed to the present value of the auction rate securities based upon expected cash flows reflects the expectation, in absence of the Auction Rate Securities Rights Prospectus discussed below, that no certainty exists regarding how the auction rate securities will be eventually converted to cash and this methodology represents the possible outcome. To derive estimates of the present value of the auction rate securities based upon expected cash flows, the Company used the securities’ expected annual interest payments, ranging from 2.1% to 5.4% of par value, representing estimated maximum annual rates under the

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

governing documents of the auction rate securities; annual market interest rates, ranging from 3.9% to 5.4%, based on observed traded, state sponsored, taxable certificates rated AAA or lower and issued between September 29 and September 30, 2008; certain mortgage-backed securities and indices; and a range of expected terms to liquidity.

The Company’s weighting of the valuation methods as of September 30, 2008 indicates an implied term to liquidity of approximately five years in absence of the Auction Rate Securities Rights Prospectus discussed below. The implied term to liquidity of approximately five years is a result of considering a range in possible timing of the various scenarios that would allow a holder of the auction rate securities to convert the auction rate securities to cash ranging from zero to ten years, with the highest probability assigned to five years. UBS issued a comprehensive settlement, which was confirmed by an Auction Rate Securities Rights Prospectus issued by UBS on October 7, 2008, in which there is a possibility of redemption by UBS at par value for the auction rate securities held by the Company between June 30, 2010 and July 2, 2012. Under the comprehensive settlement, UBS has committed to purchase a total of $8.3 billion of auction rate securities at par value from most private clients during the two-year period beginning January 1, 2009. Private clients and charities holding less than $1.0 million in household assets at UBS were able to avail themselves of this relief beginning October 31, 2008. From mid-September 2008, UBS began to provide loans at no cost to its clients for the par value of their auction rate security holdings. In addition, UBS has also committed to provide liquidity solutions to institutional investors and has agreed to purchase all or any of a remaining $10.3 billion in auction rate securities at par value from its institutional clients beginning June 10, 2010. These auction rate security rights are not transferable, tradable or marginable. The Company has not considered the liquidity potentially generated by UBS’s comprehensive settlement or the UBS loan in the Company’s valuation of the 19 auction rate certificates held by the Company because the settlement rights were not enforceable at September 30, 2008. The repurchase arrangement and lending arrangement may represent separate contracts, securities or other assets that have not been considered in the valuation of the auction rate securities.

The Company’s auction rate securities 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. These auction rate securities continue to be AAA rated auction rate securities subsequent to the failed auctions that began in February 2008.

In addition to the valuation procedures described above, the Company considered (i) its current inability to hold these securities for a period of time sufficient to allow for an unanticipated recovery in fair value based on The Company’s current liquidity, history of operating losses, and management’s estimates of required cash for continued product development and sales and marketing expenses, and (ii) failed auctions and the anticipation of continued failed auctions for all of the Company’s auction rate securities.

Based on the factors described above, the Company recorded the entire amount of impairment loss identified for the year ended June 30, 2008 of $1.3 million as other-than-temporary and recorded the decrease in fair value of $0.3 million as an unrealized loss for the three months ended September 30, 2008 (unaudited). The Company did not identify or record any additional realized or unrealized gains or losses for the year ended June 30, 2008 or the three months ended September 30, 2008 (unaudited). The Company will continue to monitor and evaluate the value of its investments each reporting period for further possible impairment or unrealized loss. Although it does not currently intend to do so, the Company may consider selling its auction rate securities in the secondary markets in the future, which may require a sale at a substantial discount to the stated principal value of these securities.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

The amortized cost and fair value of available-for-sale investments are as follows:


	June 30, 2008
					Net
	Amortized		Aggregate		Unrealized
	Cost(1)		Fair Value		Losses

Auction rate securities (original maturities greater than ten years)	$	21,733	$	21,733	$	—

Total Investments	$	21,733	$	21,733	$	—


	September 30, 2008
					Net
	Amortized		Aggregate		Unrealized
	Cost(1)		Fair Value		Losses
	(Unaudited)

Auction rate securities (original maturities greater than ten years)	$	21,733	$	21,390	$	(343	)

Total Investments	$	21,733	$	21,390	$	(343	)


(1)		Amortized cost at June 30, 2008 and September 30, 2008 includes unamortized premiums, discounts and other cost basis adjustments, as well as other-than-temporary impairment losses.

Accounts Receivable and Allowance for Doubtful Accounts

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


	Amount

Balance at June 30, 2007	$	—
Provision for doubtful accounts		164

Balance at June 30, 2008		164
Provision for doubtful accounts		28

Balance at September 30, 2008 (unaudited)	$	192

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.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

Property and Equipment

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

Operating Lease

The Company leases office space under an operating lease. The lease arrangement contains a rent escalation clause for which the lease expense is recognized on a straight-line basis over the terms of the lease. Rent expense that is recognized but not yet paid is included in deferred rent on the consolidated balance sheets.

Patents

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

Long-Lived Assets

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

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables . Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment of all components has occurred or delivery of all components has occurred if the terms specify that title and risk of loss pass when products reach their destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. The Company has no additional post-shipment or other contractual obligations or performance requirements and does not provide any credits or other pricing adjustments affecting revenue recognition once those criteria have been met. The customer has no right of return on any component once these criteria have been met. Payment terms are generally set at 30 days.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

order. For these initial orders, the Company shipped and billed only for the single-use catheters and guidewires. In addition, the Company sent an older version of its control unit as a loaner unit with the customer’s expectation that the Company would deliver and bill for a new control unit once it becomes available. As the Company had not delivered each of the individual components to all customers, the Company had deferred the revenue for the entire amount billed for single-use catheters and guidewires shipped to the customers that had not received the new control unit. Those billings totaled $116 at June 30, 2008, which amount had been deferred until the new control units were delivered during the three months ended September 30, 2008 (unaudited). After the initial order, customers are not required to purchase any additional disposable products from the Company. Once the Company had delivered the new control unit to a customer, the Company recognized revenue that was previously deferred and revenue for subsequent reorders of single-use catheters, guidewires and additional new control units when the criteria of SAB No. 104 are met.

The legal title and risk of loss of each of Diamondback 360° components, consisting of disposable catheters, disposable guidewires, and a control unit, are transferred to the customer based on the shipping terms. Many initial shipments to customers included a loaner control unit, which the Company provided, until the new control unit received clearance from the FDA and was subsequently available for sale. The loaner control units were Company-owned property and the Company maintained legal title to these units.

Costs related to products delivered are recognized when the legal title and risk of loss of individual components are transferred to the customer based on the shipping terms. At June 30 and September 30, 2008 (unaudited), the legal title and risk of loss of each disposable component had transferred to the customer and the Company has no future economic benefit in these disposables. As a result, the cost of goods sold related to these disposable units has been recorded during the year ended June 30, 2008 and three months ended September 30, 2008 (unaudited).

Warranty Costs

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


	Amount

Balance at June 30, 2007	$	—
Provision		137
Claims		(125	)

Balance at June 30, 2008		12
Provision		122
Claims		(102	)

Balance at September 30, 2008 (unaudited)	$	32

Income Taxes

Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

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

Research and Development Expenses

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

Concentration of Credit Risk

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

Fair Value of Financial Instruments (unaudited)

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

SFAS 157 classifies these inputs into the following hierarchy:

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

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

Level 3 Inputs — unobservable inputs

As of September 30, 2008, those assets and liabilities that are measured at fair value on a recurring basis consisted of the Company’s auction rate securities it classifies as available-for-sale. The Company believes that the carrying amounts of its other financial instruments, including accounts payable and accrued liabilities approximate their fair value due to the short-term maturities of these instruments.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

The following table sets forth the fair value of the Company’s auction rate securities that were measured on a recurring basis as of September 30, 2008. Assets are measured on a recurring basis if they are remeasured at least annually:


	Level 3

Balance at June 30, 2008	$	21,733
Total unrealized losses included in other comprehensive income (loss)		(343	)

Balance at September 30, 2008 (unaudited)	$	21,390

Use of Estimates

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

Stock-Based Compensation

Effective July 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) SFAS No. 123(R), Share-Based Payment, as interpreted by SAB No. 107, using the prospective application method, to account for stock-based compensation expense associated with the issuance of stock options to employees and directors on or after July 1, 2006. The unvested compensation costs at July 1, 2006, which relate to grants of options that occurred prior to the date of adoption of SFAS No. 123(R), will continue to be accounted for under Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees . SFAS No. 123(R) requires the Company to recognize stock-based compensation expense in an amount equal to the fair value of share-based payments computed at the date of grant. The fair value of all employee and director stock option awards is expensed in the consolidated statements of operations over the related vesting period of the options. The Company calculated the fair value on the date of grant using a Black-Scholes model.

For all options granted prior to July 1, 2006, in accordance with the provisions of APB No. 25, compensation costs for stock options granted to employees were measured at the excess, if any, of the value of the Company’s stock at the date of the grant over the amount an employee would have to pay to acquire the stock.

As a result of adopting SFAS No. 123(R) on July 1, 2006, net loss for the years ended June 30, 2007 and 2008 and the three months ended September 30, 2007 and 2008 (unaudited) were $390, $7,646, $350 and $1,672, respectively, higher than if the Company had continued to account for stock-based compensation consistent with prior years. This expense is included in cost of goods sold, selling, general and administrative and research and development expenses. Note 6 to the consolidated financial statements contains the significant assumptions used in determining the underlying fair value of options.

Preferred Stock

The Company records the current estimated fair value of its redeemable convertible preferred stock based on the fair market value of that stock as determined by management and the Board of Directors. In accordance with Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks,” and EITF Abstracts, Topic D-98, Classification and Measurement of Redeemable Securities, the Company records changes in the current fair value of its redeemable convertible preferred stock in the consolidated statements of

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

changes in shareholders’ (deficiency) equity and comprehensive (loss) income and consolidated statements of operations as accretion of redeemable convertible preferred stock.

Preferred Stock Warrants

Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and its related interpretations. Under SFAS No. 150, the freestanding warrant that is related to the Company’s redeemable convertible preferred stock is classified as a liability on the consolidated balance sheets as of June 30, 2007 and 2008, and September 30, 2008 (unaudited). The warrant is subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of interest (expense) income. Fair value on the grant date is measured using the Black-Scholes option pricing model and similar underlying assumptions consistent with the issuance of stock option awards. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants or the completion of a liquidity event, including the completion of an initial public offering with gross cash proceeds to the Company of at least $40,000 (“Qualified IPO”), at which time all preferred stock warrants will be converted into warrants to purchase common stock and, accordingly, the liability will be reclassified to equity.

Comprehensive (Loss) Income

Comprehensive (loss) income for the Company includes net loss and unrealized (loss) gain on investments that are charged or credited to comprehensive (loss) income. These amounts are presented in the consolidated statements of changes in shareholders’ (deficiency) equity and comprehensive (loss) income.

Recent Accounting Pronouncements

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . This standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 was adopted on July 1, 2008 and did not have a material impact on the Company’s financial position or consolidated results of operations during the three months ended September 30, 2008 (unaudited).

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations , and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 . The revised standards continue the movement toward the greater use of fair values in financial reporting. SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

acquisition date and in subsequent periods including the accounting for contingent consideration. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008 with SFAS 141(R) to be applied prospectively while SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. The Company is currently evaluating the impact of these statements, but expects that the adoption of SFAS No. 141(R) will have a material impact on how the Company will identify, negotiate, and value any future acquisitions and a material impact on how an acquisition will affect its consolidated financial statements, and that SFAS No. 160 will not have a material impact on its financial position or consolidated results of operations.


2.	Going Concern

The Company’s consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has cash and cash equivalents of $7.6 million and $14.7 million at June 30, 2008 and September 30, 2008 (unaudited), respectively. During the year ended June 30, 2008 and the three months ended September 30, 2008 (unaudited), net cash used in operations amounted to $31.9 million and $12.0 million, respectively. As of June 30, 2008 and September 30, 2008 (unaudited), the Company had an accumulated deficit of $118.3 million and $132.0 million, respectively. The Company has incurred negative cash flows and losses since inception. In addition, in February 2008, the Company was 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 the Company’s auction rate securities held at June 30, 2008 and September 30, 2008 (unaudited). These securities are currently not liquid, as the Company has an inability to sell the securities due to continued failed auctions.

On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc., the entity through which it originally purchased the auction rate securities, for up to $12.0 million, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was secured by the $23.0 million par value of the Company’s auction rate securities. The maximum borrowing amount was not set forth in the written agreement for the loan and may have been adjusted from time to time by UBS Financial Services at its discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services but were not included in the written loan agreement and were therefore subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceeded $12.0 million or 75% of UBS Financial Service’s estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements. See Note 4 for a description of the replacement of this loan and the additional loan and security agreement entered into with Silicon Valley Bank.

Based on current operating levels, combined with limited capital resources, financing the Company’s operations will require that the Company raise additional equity or debt capital prior to or during the quarter ending September 30, 2009. If the Company fails to raise sufficient equity or debt capital, management would implement cost reduction measures, including workforce reductions, as well as reductions in overhead costs and capital expenditures. There can be no assurance that these sources will provide sufficient cash flows to enable the Company to continue as a going concern. The Company currently has no commitments for additional financing and

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

may experience difficulty in obtaining additional financing on favorable terms, if at all. All of these factors raise substantial doubt about the Company’s ability to continue as a going concern.


3.	Selected Consolidated Financial Statement Information


	June 30,						September 30,
	2007			2008			2008
							(Unaudited)

Accounts Receivable
Accounts receivable	$	—		$	5,061		$	5,631
Less: Allowance for doubtful accounts		—			(164	)		(192	)

	$	—		$	4,897		$	5,439

Inventories
Raw materials	$	513		$	2,338		$	2,471
Work in process		134			117			232
Finished goods		403			1,321			1,227

	$	1,050		$	3,776		$	3,930

Property and equipment
Equipment	$	804		$	1,360		$	1,554
Furniture		85			169			169
Leasehold improvements		14			90			97

		903			1,619			1,820
Less: Accumulated depreciation and amortization		(318	)		(578	)		(664	)

	$	585		$	1,041		$	1,156

Patents
Patents	$	990		$	1,279		$	1,460
Less: Accumulated amortization		(378	)		(299	)		(308	)

	$	612		$	980		$	1,152

As of June 30, 2008, future estimated amortization of patents and patent licenses will be:


2009	$	37
2010		37
2011		36
2012		35
2013		35
Thereafter		800

	$	980

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

As of September 30, 2008 (unaudited), future estimated amortization of patents and patent licenses will be:


Nine months ending June 30, 2009	$	28
2010		37
2011		36
2012		35
2013		35
Thereafter		981

	$	1,152

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


	June 30,				September 30,
	2007		2008		2008
					(Unaudited)

Accrued expenses
Salaries and bonus	$	612	$	1,229	$	898
Commissions		—		1,493		1,840
Accrued vacation		124		554		708
Other		12		191		261

	$	748	$	3,467	$	3,707


4.	Debt

Loan and Security Agreement with Silicon Valley Bank

On September 12, 2008, the Company entered into a loan and security agreement with Silicon Valley Bank with maximum available borrowings of $13.5 million. The agreement includes a $3.0 million term loan, a $5.0 million accounts receivable line of credit, and two term loans for an aggregate of $5.5 million that are guaranteed by certain of the Company’s affiliates. The terms of each of these loans is as follows:


	•	The $3.0 million term loan has a fixed interest rate of 10.5% and a final payment amount equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with repayment terms that include interest only payments during the first six months followed by 30 equal principal and interest payments. This term loan also includes an acceleration provision that requires the Company to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. As part of the term loan agreement, the Company granted Silicon Valley Bank a warrant to purchase 13,000 shares of Series B redeemable convertible preferred stock at an exercise price of $9.25 per share. This warrant was assigned a value of $75 for accounting purposes, is immediately exercisable, and expires ten years after issuance. The balance outstanding on the term loan at September 30, 2008 (unaudited) was $3.0 million.


	•	The accounts receivable line of credit has a two year maturity and a floating interest rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on 80% of eligible domestic receivables, which is defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and government receivables. The Company’s accounts receivable receipts will be

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


		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 September 30, 2008 (unaudited).


	•	One of the guaranteed term loans is for $3.0 million and the other guaranteed term loan is for $2.5 million, each with a one year maturity. Each of the guaranteed term loans has a floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0% (effective rate of 7.0% at September 30, 2008). Interest on borrowings is due monthly and the principal balance is due at maturity. One of the Company’s directors and shareholders and two entities who hold the Company’s preferred shares and are also affiliated with two of the Company’s directors agreed to act as guarantors of these term loans. In consideration for guarantees, the Company issued the guarantors warrants to purchase an aggregate of 458,333 shares of the Company’s common stock at an exercise price of $6.00 per share. The balance outstanding on the guaranteed term loans at September 30, 2008 (unaudited) was $5.5 million (excluding debt discount of $1.8 million).

The guaranteed term loans and common stock warrants were allocated using the relative fair value method. Under this method, the Company estimated the fair value of the term loans without the guarantees and calculated the fair value of the common stock warrants using the Black-Scholes method. The relative fair value of the loans and warrants were applied to the loan proceeds of $5.5 million, resulting in an assigned value of $3.7 million for the loans and $1.8 million for the warrants. The assigned value of the warrants of $1.8 million is treated as a debt discount and amortized over the one year maturity of the loan.

Borrowings from Silicon Valley Bank are collateralized by all of the Company’s assets, other than the Company’s auction rate securities and intellectual property, and the investor guarantees. The borrowings are subject to prepayment penalties and financial covenants, including the Company maintaining a minimum liquidity ratio and the Company’s achievement of minimum monthly net revenue goals. Any non-compliance by the Company under the terms of the Company’s debt arrangements could result in an event of default under the Silicon Valley Bank loan, which, if not cured, could result in the acceleration of this debt.

Loan Payable

On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc. for up to $12.0 million, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was secured by the $23.0 million par value of the Company’s auction rate securities. The maximum borrowing amount was not set forth in the written agreement for the loan and may have been adjusted from time to time by UBS Financial Services in its sole discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services but were not included in the written loan agreement and were therefore subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceed $12.0 million or 75% of UBS Financial Service’s estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

require the Company 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 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 August 21, 2008, the margin requirements include maximum borrowings, including interest, of $23.0 million. If these margin requirements are not maintained, UBS Bank may require the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. The Company has maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at September 30, 2008 (unaudited) was $22.9 million.

As of September 30, 2008 (unaudited), debt maturities were as follows:


Nine months ending June 30, 2009	$	21,853
2010		6,248
2011		1,200
2012		300

Total	$	29,601
Less: Current Maturities		(27,201	)

Long-term debt	$	2,400

Additional Financing

In conjunction with the proceeds received through the signing of the loan and security agreement with Silicon Valley Bank and new margin loan from UBS Bank USA, the Company reassessed its need for additional equity or debt capital. Based on current operating levels, combined with limited capital resources and proceeds received from the loan and security agreement with Silicon Valley Bank and new margin loan from UBS Bank USA, financing the Company’s operations will require that the Company raise additional equity or debt capital prior to or during the quarter ending September 30, 2009. See Note 2 for additional discussion of the assessment of the Company’s ability to continue as a going concern.

Convertible Promissory Notes

At various dates in fiscal 2006 and 2007, the Company obtained $3,084 in financing from the issuance of convertible promissory notes (the “Notes”) that accrued interest at a rate of 8% per annum. Under the terms of the Notes, interest and principal were due on February 28, 2009, unless earlier prepaid or converted into Series A redeemable convertible preferred stock. The interest and principal of the notes convert at the per share price of any future offerings. On July 19, 2006, all Notes and accrued interest were converted into the Series A redeemable convertible preferred stock (Note 10).


5.	Common Stock Warrants

In fiscal 2007, the Company issued warrants to purchase 131,349 shares of common stock at $5.71 per share to agents in connection with the Series A redeemable convertible preferred stock offering. The warrants expire seven years after issuance and are exercisable immediately. The warrants were assigned a value of $99 for accounting purposes. In fiscal 2006 and 2007, the Company also issued warrants to purchase 6,400 and 6,000 shares of common

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

stock to consultants resulting in expense for services of $31 and $4, respectively. The warrants granted to consultants in 2007 were 50% immediately exercisable and 50% exercisable one year from the date of issuance. During September 2008 (unaudited), the Company issued the guarantors of the Silicon Valley Bank guaranteed term loans warrants to purchase an aggregate of 458,333 shares of the Company’s common stock at an exercise price of $6.00 per share. The warrants issued in September 2008 were assigned a value of $1.8 million for accounting purposes, are immediately exercisable, and expire five years after issuance. The following summarizes common stock warrant activity:


	Warrants			Price Range
	Outstanding			per Share

Warrants outstanding at June 30, 2005		259,925		$	1.00 - $6.00
Warrants issued		6,400		$	8.00
Warrants expired		(3,600	)	$	5.00

Warrants outstanding at June 30, 2006		262,725		$	1.00 - $8.00
Warrants issued		137,349		$	5.71
Warrants exercised		(3,250	)	$	1.00

Warrants outstanding at June 30, 2007		396,824		$	1.00 - $8.00
Warrants exercised		(117,948	)	$	1.00 - $8.00
Warrants expired		(34,602	)	$	5.00

Warrants outstanding at June 30, 2008		244,274		$	1.00 - $8.00
Warrants issued		458,333		$	6.00
Warrants exercised		(10,450	)	$	5.00
Warrants expired		(6,000	)	$	5.00

Warrants outstanding at September 30, 2008 (unaudited)		686,157		$	1.00 - $8.00

Warrants have exercise prices ranging from $1.00 to $8.00 and are immediately exercisable, unless noted above. The following assumptions were utilized in determining the fair value of warrants issued under the Black-Scholes model:


					Three Months Ended
	Year Ended June 30,				September 30,
	2006			2007	2008
					(Unaudited)

Weighted average fair value of warrants granted	$	4.90		$0.69 - $0.76	$	6.17
Risk-free interest rates		4.34	%	4.70% - 5.02%		3.01	%
Expected life		5 years		5 - 7 years		5 years
Expected volatility		70.0	%	44.9% - 45.1%		46.7	%
Expected dividends		None		None		None


6.	Stock Options and Restricted Stock Awards

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

options and nonqualified options. A total of 750,000 shares 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 3,800,000 shares of the Company’s 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 allows for the granting of up to 3,000,000 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 2007 Plan also includes a renewal provision whereby the number of shares shall automatically be increased on the first day of each fiscal year beginning July 1, 2008, and ending July 1, 2017, by the lesser of (i) 1,500,000 shares, (ii) 5% of the outstanding common shares on such date, or (iii) a lesser amount determined by the Board of Directors.

For the year ended June 30, 2008, the Company had granted the following amount of stock options and restricted stock awards:


	Number of
Grant Type	Shares

Service based stock options (2007 Plan)		1,383,364
Performance based stock options (2007 Plan)		775,000
Service based stock options (2003 Plan)		663,583

Total		2,821,947	(1)

Restricted stock awards (2007 Plan)		840,138


(1)		Excludes 70,000 shares of service based stock options granted outside of the plans.

The Company had granted the following amount of stock options and restricted stock awards through September 30, 2008 (unaudited):


	Number of
Grant Type	Shares

Service based stock options (2007 Plan)		1,383,364
Performance based stock options (2007 Plan)		775,000
Service based stock options (2003 Plan)		663,583

Total		2,821,947	(1)

Restricted stock awards (2007 Plan)		1,001,961


(1)		Excludes 70,000 shares of service based stock options granted outside of the plans.

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

activity, the FDA process, the status of the Company’s commercial launch, the Company’s mergers and acquisitions and public offering processes, revenues, the valuations of comparable public companies, the Company’s cash and working capital amounts, and additional objective and subjective factors relating to the Company’s business. The Company’s management and board of directors set the exercise prices for option grants based upon their best estimate of the fair market value of the common stock at the time they made such grants, taking into account all information available at those times. In some cases, management and the board of directors made retrospective assessments of the valuation of the common stock at later dates and determined that the fair market value of the common stock at the times the grants were made was different than the exercise prices established for those grants. In cases in which the fair market was higher than the exercise price, the Company recognized stock-based compensation expense for the excess of the fair market value of the common stock over the exercise price.

Stock option activity is as follows:


							Weighted
	Shares Available			Number of			Average
	for Grant(a)			Options(b)			Exercise Price

Options outstanding at June 30, 2005		995,750			1,552,861			3.12
Options granted		(484,500	)		484,500			7.53
Options forfeited or expired		113,500			(213,500	)		2.96

Options outstanding at June 30, 2006		624,750			1,823,861			3.93
Shares reserved		2,500,000			—
Options granted		(2,622,850	)		2,622,850			5.64
Options exercised		—			(65,000	)		1.00
Options forfeited or expired		79,850			(94,850	)		1.04

Options outstanding at June 30, 2007		581,750			4,286,861			4.96
Shares reserved		3,000,000			—
Options granted(c)		(2,821,947	)		2,891,947			7.21
Options exercised		—			(377,500	)		3.28
Options forfeited or expired		81,833			(923,167	)		2.30

Options outstanding at June 30, 2008		841,636			5,878,141			6.59
Shares reserved		379,397			—
Options exercised		—			(9,000	)		5.39
Options forfeited or expired		—			(27,666	)		5.04

Options outstanding at September 30, 2008 (unaudited)		1,221,033			5,841,475			6.60


(a)		Excludes the effect of options granted, exercised, forfeited or expired related to activity from options granted outside the stock option plans described above; excludes the effect of restricted stock awards granted or forfeited under the 2007 Plan.

(b)		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.

(c)		Excludes 70,000 options granted outside of the plans.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

The following table summarizes information about stock options granted during the years ended June 30, 2007 and 2008 and three months ended September 30, 2008 (unaudited):


					Estimated
	Number of Shares				Fair Value of
Grant Date	Subject to Options		Exercise Price		Common Stock

July 1, 2006		132,000	$	5.71	$	2.43
July 17, 2006		230,000	$	5.71	$	2.43
August 15, 2006		239,500	$	5.71	$	2.43
October 3, 2006		375,000	$	5.71	$	2.58
December 19, 2006		446,100	$	5.71	$	2.79
February 14, 2007		46,000	$	5.71	$	3.58
February 15, 2007		540,000	$	5.71	$	3.58
April 18, 2007		299,250	$	5.71	$	4.63
June 12, 2007		315,000	$	5.11	$	5.95
August 7, 2007		402,500	$	5.11	$	5.95
October 9, 2007		331,083	$	5.11	$	7.36
November 13, 2007		154,917	$	7.36	$	7.90
December 12, 2007		775,000	$	7.86	$	8.44
December 31, 2007		1,056,234	$	7.86	$	8.44
February 14, 2008		172,213	$	9.04	$	9.36

Options outstanding and exercisable at June 30, 2008, were as follows:


	Options Outstanding						Options Exercisable
			Remaining						Remaining
			Weighted		Weighted				Weighted		Weighted
	Number of		Average		Average		Number of		Average		Average
	Outstanding		Contractual		Exercise		Exercisable		Contractual		Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Life (Years)		Price

$5.00		94,000		0.31	$	5.00		94,000		0.31	$	5.00
$5.11		972,583		9.11	$	5.11		162,083		9.06	$	5.11
$5.71		2,122,083		5.08	$	5.71		875,466		5.18	$	5.71
$6.00		185,500		1.19	$	6.00		185,500		1.19	$	6.00
$7.36		154,917		9.38	$	7.36		154,917		9.38	$	7.36
$7.86		1,831,234		6.60	$	7.86		1,056,234		4.50	$	7.86
$8.00		297,000		2.32	$	8.00		226,332		2.33	$	8.00
$9.04		172,213		4.63	$	9.04		172,213		4.63	$	9.04
$12.00		48,611		7.76	$	12.00		48,611		7.76	$	12.00

		5,878,141		6.00	$	6.59		2,975,356		4.76	$	6.99

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

Options issued to employees and directors that are vested or expected to vest at June 30, 2008, were as follows:

Remaining

Weighted

Average

Weighted

Aggregate

Number of

Contractual

Average

Intrinsic

Shares

Life (Years)

Exercise Price

Value

Options vested or expected to vest

5,584,234

6.00

6.59

20,369

Options outstanding and exercisable at September 30, 2008 (unaudited), were as follows:


	Options Outstanding						Options Exercisable
			Remaining						Remaining
			Weighted		Weighted				Weighted		Weighted
	Number of		Average		Average		Number of		Average		Average
	Outstanding		Contractual		Exercise		Exercisable		Contractual		Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Life (Years)		Price

$5.00		64,000		0.14	$	5.00		64,000		0.14	$	5.00
$5.11		972,583		8.85	$	5.11		290,915		8.83	$	5.11
$5.71		2,115,417		4.81	$	5.71		1,130,132		4.48	$	5.71
$6.00		185,500		0.94	$	6.00		185,500		0.94	$	6.00
$7.36		154,917		9.13	$	7.36		154,917		9.13	$	7.36
$7.86		1,831,234		6.35	$	7.86		1,056,234		4.25	$	7.86
$8.00		297,000		2.07	$	8.00		234,666		2.07	$	8.00
$9.04		172,213		4.38	$	9.04		172,213		4.38	$	9.04
$12.00		48,611		7.50	$	12.00		48,611		7.50	$	12.00

		5,841,475		5.78	$	6.60		3,337,188		4.59	$	6.84

Options issued to employees and directors that are vested or expected to vest at September 30, 2008 (unaudited), were as follows:

Remaining

Weighted

Average

Aggregate

Number of

Contractual

Exercise

Intrinsic

Shares

Life (Years)

Price

Value

Options vested or expected to vest

5,549,401

5.78

6.60

20,357

Effective July 1, 2006, the Company adopted SFAS No. 123(R) using the prospective application method. Under this method, as of July 1, 2006, the Company has applied the provisions of this statement to new and modified awards. The adoption of this pronouncement had no effect on net loss in fiscal 2006.

An additional requirement of SFAS No. 123(R) is that estimated pre-vesting forfeitures be considered in determining stock-based compensation expense. As previously permitted, the Company recorded forfeitures when they occurred for pro forma presentation purposes. As of June 30, 2007 and 2008 and September 30, 2008 (unaudited), the Company estimated its forfeiture rate at 5.0% per annum. As of June 30, 2007 and 2008 and September 30, 2008 (unaudited), the total compensation cost for nonvested awards not yet recognized in the consolidated statements of operations was $2,367, $6,316, and $4,821, respectively, net of the effect of estimated forfeitures. These amounts are expected to be recognized over a weighted-average period of 2.72, 2.17, and 3.04 years, respectively.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ vesting periods. The following assumptions were used in determining the fair value of stock options granted under the Black-Scholes model:


	Year Ended June 30,
	2006	2007	2008

Weighted average fair value of options granted	$1.16	$1.07	$3.74
Risk-free interest rates	3.71% - 4.77%	4.56% - 5.18%	2.45% - 4.63%
Expected life	4 years	3.5 - 6 years	3.5 - 6 years
Expected volatility	None	43.8% - 45.1%	43.1% - 46.4%
Expected dividends	None	None	None

The risk-free interest rate for periods within the five and ten year contractual life of the options is based on the U.S. Treasury yield curve in effect at the grant date and the expected option life of 3.5 to 6 years. Expected volatility is based on the historical volatility of the stock of companies within the Company’s peer group. Generally, the 3.5 to 6 year expected life of stock options granted to employees represents the weighted average of the result of the “simplified” method applied to “plain vanilla” options granted during the period, as provided within SAB No. 110.

The aggregate intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award. The aggregate intrinsic value for outstanding options at June 30, 2006, 2007 and 2008 and September 30, 2007 and 2008 (unaudited) was $1,301, $5,181, $21,441, $11,475, and $21,428, respectively. The aggregate intrinsic value for exercisable options at June 30, 2006, 2007 and 2008 and September 30, 2007 and 2008 (unaudited) was $1,301, $4,417 $9,692, $6,869 and $11,459, respectively. The total aggregate intrinsic value of options exercised during the years ended June 30, 2006 and 2007 was negligible while the aggregate intrinsic value of options exercised during the year ended June 30, 2008 and three months ended September 30, 2008 (unaudited) was $1,435 and $43, respectively. Shares supporting option exercises are sourced from new share issuances.

On December 12, 2007, the Company granted 775,000 performance based incentive stock options to certain executives. The options shall become exercisable in full on the third anniversary of the date of grant provided that the Company has completed its initial public offering of common stock or a change of control transaction before December 31, 2008 and shall terminate on the tenth anniversary of the date of the grant. For this purpose “change of control transaction” shall be defined as an acquisition of the Company through the sale of substantially all of the Company’s assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization or similar transaction. The Company has not recorded any stock-based compensation expense related to performance based incentive stock options for the year ended June 30, 2008 or three months ended September 30, 2008 (unaudited) as it was not probable that the performance based criteria would be achieved.

As of June 30, 2008 and September 30, 2008 (unaudited), the Company had granted 840,138 and 1,001,961 restricted stock awards, respectively. The fair value of each restricted stock award was equal to the fair market value of the Company’s common stock at the date of grant. Vesting of restricted stock awards range from one to three years. The estimated fair value of restricted stock awards, including the effect of estimated forfeitures, is recognized

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

on a straight-line basis over the restricted stock’s vesting period. Restricted stock award activity for the three months ended September 30, 2008 (unaudited) is as follows:


				Weighted
	Number of			Average Fair
	Shares			Value

Restricted stock awards outstanding at June 30, 2007		—		$	—
Restricted stock awards granted		840,138			9.49
Restricted stock awards forfeited		(27,834	)		9.29

Restricted stock awards outstanding at June 30, 2008		812,304			9.50
Restricted stock awards granted		161,823			10.22
Restricted stock awards forfeited		(25,029	)		10.09

Restricted stock awards outstanding at September 30, 2008 (unaudited)		949,098		$	9.60

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


	Stock		Restricted
	Options		Stock Awards		Total

Cost of goods sold	$	91	$	141	$	232
Selling, general and administrative		5,957		895		6,852
Research and development		181		116		297

Total	$	6,229	$	1,152	$	7,381

The following amounts were recognized as stock-based compensation expense in the consolidated statements of operations for the three months ended September 30, 2008 (unaudited):


	Stock		Restricted
	Options		Stock Awards		Total

Cost of goods sold	$	38	$	138	$	176
Selling, general and administrative		297		1,087		1,384
Research and development		41		71		112

Total	$	376	$	1,296	$	1,672

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


7.	Income Taxes

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


	June 30,
	2007			2008

Deferred tax assets
Stock-based compensation	$	76		$	2,423
Accrued expenses		54			181
Inventories		226			409
Deferred rent		24			40
Deferred revenue		—			46
Accounts receivable		—			66
Research and development credit carryforwards		—			1,798
Net operating loss carryforwards		16,524			25,825

Total deferred tax assets		16,904			30,788
Deferred tax liabilities
Accelerated depreciation and amortization		(15	)		(20	)

Total deferred tax liabilities		(15	)		(20	)

Valuation allowance		(16,889	)		(30,768	)

Net deferred tax assets	$	—		$	—

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

At June 30, 2008, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $69,000 which will expire at various dates through fiscal 2028.

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

In addition, the amount of unrecognized tax benefits as of July 1, 2007, June 30, 2008 and September 30, 2008 (unaudited) was zero. There have been no material changes in unrecognized tax benefits since July 1, 2007, and the Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

tax expense for all periods presented. The Company did not have an accrual for the payment of interest and penalties related to unrecognized tax benefits as of June 30, 2008 or September 30, 2008 (unaudited).

The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is potentially subject to income tax examinations by tax authorities for the tax years ended June 30, 2006, 2007 and 2008. The Company is not currently under examination by any taxing jurisdiction.


8.	Commitment and Contingencies

Operating Lease

The Company leases manufacturing and office space and equipment under various lease agreements which expire at various dates through November 2012. Rental expenses were $201, $341 and $572 for the years ended June 30, 2006, 2007 and 2008, respectively and $132 and $161 for the three months ended September 30, 2007 and 2008 (unaudited), respectively.

Future minimum lease payments under the agreements as of June 30, 2008 are as follows:


2009	$	464
2010		471
2011		475
2012		476
2013		202

	$	2,088

Future minimum lease payments under the agreements as of September 30, 2008 (unaudited) are as follows:


Nine months ended June 30, 2009	$	350
2010		471
2011		475
2012		476
2013		202

	$	1,974

Related Party Transaction

On December 12, 2007, the Company entered into an agreement with Reliant Pictures Corporation, or RPC, to participate in a documentary film to be produced by RPC. Portions of the film will focus on the Company’s technologies, and RPC will provide separate filmed sections for the Company’s corporate use. In connection with that agreement, the Company contributed $150 in December 2007 and an additional $100 in January 2008 towards the production of the documentary. One of the Company’s directors holds more than 10% of the equity of RPC and is a director of RPC. Another director of the Company is a shareholder of RPC.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


9.	Employee Benefits

The Company offers a 401(k) plan to its employees. Eligible employees may authorize up to $16 of their annual compensation as a contribution to the plan, subject to Internal Revenue Service limitations. The plan also allows eligible employees over 50 years old to contribute an additional $5 subject to Internal Revenue Service limitations. All employees must be at least 21 years of age to participate in the plan. The Company did not provide any employer matching contributions for the years ended June 30, 2006, 2007 and 2008 or for the three months ended September 30, 2008 (unaudited).


10.	Redeemable Convertible Preferred Stock and Convertible Preferred Stock Warrants

During the period from July 2006 to October 2006, the Company completed the sale of 4,728,547 shares of Series A redeemable convertible preferred stock, no par value, at a purchase price of $5.71 per share for a total of $27,000. In addition, Series A convertible preferred stock warrants were issued to purchase 671,453 shares of Series A redeemable convertible preferred stock in connection with the sale of the Series A redeemable convertible preferred stock. The Series A convertible preferred stock warrants have a purchase price of $5.71 per share with a five-year term and were assigned an initial value of $1,767 for accounting purposes using the Black-Scholes model. The change in value of the Series A convertible preferred stock warrants due to accretion as a result of remeasurement was $916, $300, and ($14) as of June 30, 2008 and September 30, 2007 and 2008 (unaudited), respectively, and is included in interest expense on the consolidated statements of operations. The Series A redeemable convertible preferred stock offering included the conversion of $3,145 of convertible promissory notes and accrued interest previously sold by the Company at various dates in fiscal 2006 and 2007 (Note 4).

In connection with the Series A redeemable convertible preferred stock offering, the Company incurred offering costs of $1,742 and issued warrants to purchase 131,349 shares of common stock at a purchase price of $5.71 with a term of seven years. The warrants were assigned a value of $99 for accounting purposes (Note 5).

As of June 30, 2007, the Company had sold 977,046 shares of Series A-1 redeemable convertible preferred stock, no par value, at a purchase price of $8.50 per share for total proceeds of $8,271, net of offering costs of $34. During the period from July 2007 to September 2007, the Company sold an additional 1,211,379 shares of Series A-1 redeemable convertible preferred stock for total proceeds of $10,282, net of offering costs of $14.

On December 17, 2007, the Company completed the sale of 2,162,150 shares of Series B redeemable convertible preferred stock at a price of $9.25 per share for total proceeds of $19,963, net of offering costs of $37.

In connection with the preparation of the Company’s financial statements as of June 30, 2007 and 2008, and September 30, 2008 (unaudited), the Company’s management and Board of Directors established what it believes to be a fair market value of the Company’s Series A, Series A-1, and Series B redeemable convertible preferred stock. This determination was based on concurrent significant stock transactions with third parties and a variety of factors, including the Company’s business milestones achieved and future financial projections, the Company’s position in the industry relative to its competitors, external factors impacting the value of the Company in its marketplace, the stock volatility of comparable companies in its industry, general economic trends and the application of various valuation methodologies.

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

The rights, privileges and preferences of the Series A, Series A-1, and Series B redeemable convertible preferred stock (collectively, the “Preferred Stock”) are as follows:

Dividends

The holders of Preferred Stock are entitled to receive cash dividends at the rate of 8% of the original purchase price. All dividends shall accrue, whether or not earned or declared, and whether or not the Company has legally available funds. All such dividends shall be cumulative and shall be payable only (i) when and as declared by the Board of Directors, (ii) upon liquidation or dissolution of the Company and (iii) upon redemption of the Preferred Stock by the Company. As of June 30, 2008 and September 30, 2007 and 2008 (unaudited), $6,362, $2,714, and $7,703, respectively, of dividends had accumulated but had not yet been declared by the Company’s Board of Directors, or paid by the Company as of such respective dates. The holders of the Preferred Stock have the right to participate in dividends with the common shareholders on an as converted basis.

Conversion

The holders of the Preferred Stock shall have the right to convert, at their option, their shares into common stock on a share for share basis (subject to adjustments for events of dilution). Each preferred share shall be automatically converted into unregistered shares of the Company’s common stock without any Company action, thereby providing conversion of all preferred shares, upon the approval of a majority of the preferred shareholders or upon the completion of an underwritten public offering of the Company’s shares, pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, of which the aggregate proceeds to the Company exceed $40,000 (a “Qualified Public Offering”). Upon conversion, each share of the preferred stock shall be converted into one share of common stock (subject to adjustment as defined in the preferred stock sale agreement), dividends will no longer accumulate, and previously accumulated, undeclared and unpaid dividends will not be payable by the Company.

In the event the holders of the Preferred Stock elect to convert their preferred shares into shares of common stock, and those holders request that the Company register those shares of common stock, the Company is obligated to use its best efforts to effect a registration of the Company’s common shares. In the event that the common shares are not registered, the Company is not subject to financial penalties.

Redemption

The Company shall not have the right to call or redeem at any time any shares of Preferred Stock. Holders of Preferred Stock shall have the right to require the Company to redeem in cash, 30% of the original amount on the fifth year anniversary of the Purchase Agreement, 30% after the sixth year and 40% after the seventh year. The price the Company shall pay for the redeemed shares shall be the greater of (i) the price per share paid for the Preferred Stock, plus all accrued and unpaid dividends; or (ii) the fair market value of the Preferred Stock at the time of redemption as determined by a professional appraiser.

Liquidation

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

investment earned by the preferred stock holders. At June 30, 2008 and September 30, 2007 and 2008 (unaudited), the liquidation value of the Series A redeemable convertible preferred stock was $31,230, $29,586, and $31,782, respectively, and Series A-1 redeemable convertible preferred stock were $19,862, $18,730, and $20,243, respectively. At June 30, 2008 and September 30, 2008 (unaudited), the liquidation value of the Series B redeemable convertible preferred stock was $20,871 and $21,280, respectively.

Voting Rights

The holders of Preferred Stock have the right to vote on all actions to be taken by the Company based on such number of votes per share as shall equal the number of shares of common stock into which each share of redeemable convertible preferred stock is then convertible. The holders of Preferred Stock also have the right to designate, and have designated, two individuals to the Company’s Board of Directors.

Registration Rights

Pursuant to the terms of an investor rights agreement dated July 19, 2006, entered into with certain holders of the preferred stock and the holder of a warrant to purchase shares of the Company’s common stock if, at any time after the earlier of four years after the date of the agreement or six months after the Company’s IPO, the Company receives a written request from the holders of a majority of the registrable securities then outstanding, the Company has agreed to file up to three registration statements on Form S-3.


11.	Legal Matters

Shturman Legal Proceedings

The Company is party to two legal proceedings relating to a dispute with Dr. Leonid Shturman, the Company’s founder, and Shturman Medical Systems, Inc., or SMS, a company owned by Dr. Shturman. On or about November 2006, the Company discovered that Dr. Shturman had sought patent protection in the United Kingdom and with the World Intellectual Property Organization as the sole inventor for technology relating to the use of counterbalance weights with rotational atherectomy devices, or the counterbalance technology, which the Company believes should have been assigned to it.

On August 16, 2007, the Company served and filed a Demand for Arbitration against SMS alleging that SMS should have assigned the counterbalance technology to the Company, and SMS’s failure to assign the technology violated the assignment provision of the Stock Purchase Agreement. On September 28, 2007, SMS filed a Statement of Answer and Motion to Dismiss alleging the Stock Purchase Agreement had expired, thus ending Dr. Shturman’s obligation to assign atherectomy technology. Following a trial, the arbitrator ruled on May 5, 2008 that the technology in question was developed pursuant to the Stock Purchase Agreement and working relationship agreements between the parties, and that SMS breached the agreements by failing to transfer the technology to the Company in 2002. The panel ordered SMS to transfer to the Company its interest in the technology and SMS did so. The Hennepin County District Court affirmed the arbitrator’s award.

Also on August 16, 2007, the Company filed a complaint in the U.S. District Court in Minnesota against Dr. Shturman for a breach of his employment agreement. Specifically, under the employment agreement, Dr. Shturman was obligated to assign any inventions for the diagnosis or treatment of coronary or periphery vessels that were disclosed to patent attorneys or otherwise documented by Dr. Shturman during the employment term. The Company alleged that the counterbalance technology was disclosed and/or documented during the term of his employment agreement and the Company was seeking judgment against Dr. Shturman for breach of the employment agreement and a declaratory judgment that Dr. Shturman must assign his interest in the counterbalance

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

technology to the Company. On October 31, 2007, Dr. Shturman filed an answer and counterclaim against the Company and other co- defendants asserting conversion, theft and unjust enrichment for the alleged illegal removal and transport to the United States of two drive shaft winding devices purportedly developed by Shturman Cardiology Systems, Russia, as well as raising certain affirmative defenses. The Company filed its answer on November 16, 2007. Dr. Shturman filed a motion to stay this lawsuit on the basis that it should be stayed pending the resolution of alleged proceedings in the U.S. Patent and Trademark Office. On July 7, 2008 the motion was heard by the court, but the court did not rule on Dr. Shturman’s motion at that time. Instead, the court ordered a settlement conference with the court, which occurred on September 4 and 5, 2008.

On September 4 and 5, 2008, the Company settled all of its claims against Dr. Shturman. In settlement of the Company’s claim against him, Dr. Shturman agreed that he is not the author or owner of the counterbalance technology, as defined in the May 5, 2008 award of the arbitrator. However, as part of the settlement, Dr. Shturman has the right to argue that the counterbalance technology, as defined in the award of the arbitrator, is separate and distinct from the inventions or know-how contained in any current or future patent applications made by him, and the Company has the right to argue that such patent applications do incorporate the counterbalance technology, as defined by the arbitrator in the award. In settlement of Dr. Shturman’s counterclaim against the Company, the parties entered into a settlement that is conditioned upon the Company’s agreement to pay Dr. Shturman $50 by November 14, 2008, and in connection with Dr. Shturman’s desire to sell 22,000 shares of the Company’s common stock held by him by November 14, 2008 at a fixed price, the Company agreed to refer to Dr. Shturman the names of parties that may be interested in purchasing such shares in private transactions. As of November 19, 2008, the Company had referred to Dr. Shturman names of parties that are interested in purchasing these shares and had also paid Dr. Shturman $50. In addition, the Company and Dr. Shturman have executed a settlement agreement, and pending a stipulation of dismissal with prejudice to be filed by Dr. Shturman’s counsel, the Company anticipates that Dr. Shturman’s counterclaim against the Company will be dismissed.

The Company is defending this litigation vigorously and believes that Dr. Shturman’s counterclaims and affirmative defenses are without merit and the outcome of this case will not have a material adverse effect on the Company’s business, operations, cash flows or financial condition. The Company recognized the $50 expense related to the settlement of this matter but believes additional expense and an adverse outcome of this claim are not probable and cannot be reasonably estimated.

ev3 Legal Proceedings

On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and FoxHollow Technologies, Inc., together referred to as the Plaintiffs, filed a complaint in the Ramsey County District Court for the State of Minnesota against the Company and two former employees of FoxHollow currently employed by the Company, as well as against unknown former employees of Plaintiffs currently employed by the Company referred to in the complaint as John Does 1-10. On July 2, 2008, the Plaintiffs in this lawsuit served and filed a Second Amended Complaint. In this amended pleading, Plaintiffs now assert claims against the Company as well as ten of its employees, all of whom were formerly employed by one or more of the Plaintiffs. The Second Amended Complaint also continues to refer to “John Doe 1-10” defendants, who are not identified by name.

The Second Amended Complaint includes seven counts, which allege as follows:


	•	Individual defendants violated provisions in their employment agreements with their former employer FoxHollow, barring them from misusing FoxHollow Confidential Information.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


	•	Individual defendants violated a provision in their FoxHollow employment agreements barring them, for a period of one year following their departure from FoxHollow, from soliciting or encouraging employees of FoxHollow to join the Company.

	•	Individual defendants breached a duty of loyalty owed to FoxHollow.

	•	The Company and individual defendants misappropriated trade secrets of one or more of the Plaintiffs.

	•	All defendants engaged in unfair competition.

	•	The Company tortiously interfered with the contracts between FoxHollow and individual defendants by allegedly procuring breaches of the non-solicitation/encouragement provision in those agreements, and an individual defendant tortiously interfered with the contracts between certain individual defendants and FoxHollow by allegedly procuring breaches of the confidential information provision in those agreements.

	•	All defendants conspired to gain an unfair competitive and economic advantage for the Company to the detriment of the Plaintiffs.

In the Second Amended Complaint, 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 action is presently in the discovery phase. The Company has responded to interrogatories and document requests served by the Plaintiffs and has also served written discovery requests directed to the Plaintiffs. Two depositions were taken before July 31, 2008 and it is expected that numerous witness depositions will be taken in the coming months.

In July 2008, the Company and the individual defendants filed motions to dismiss the action. These motions were based on the argument that the Plaintiffs are required to resolve the claims at issue in arbitration in accordance with arbitration provisions in the employment agreements between at least eight of the individual defendants and FoxHollow.

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 and cannot be reasonably estimated.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)


12.	Earnings Per Share

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


										Three Months Ended
	Year Ended June 30,									September 30,
	2006			2007			2008			2007			2008
										(Unaudited)			(Unaudited)

Numerator
Net loss available in basic calculation	$	4,895		$	15,596		$	39,167		$	7,441		$	13,699
Plus: Accretion of redeemable convertible preferred stock(a)		—			16,835			19,422			4,853			—

Loss available to common stock- holders plus assumed conversions	$	4,895		$	32,431		$	58,589		$	12,294		$	13,699

Denominator
Weighted average common shares — basic		6,183,715			6,214,820			6,835,126			6,291,512			7,692,248
Effect of dilutive stock options and warrants(b)(c)		—			—			—			—			—

Weighted average common shares outstanding — diluted		6,183,715			6,214,820			6,835,126			6,291,512			7,692,248

Loss per common share — basic and diluted	$	(0.79	)	$	(5.22	)	$	(8.57	)	$	(1.95	)	$	(1.78	)


(a)		The calculation for accretion of redeemable convertible preferred stock marks the redeemable convertible preferred stock to fair value, which equals or exceeds the amount of any undeclared dividends on the redeemable convertible preferred stock.

(b)		At June 30, 2006, 2007 and 2008, 262,725, 1,068,277 and 906,713 warrants, respectively, and at September 30, 2007 and 2008 (unaudited), 1,068,277 and 1,361,596 warrants, respectively, were outstanding. The effect of the shares that would be issued upon exercise of these warrants has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.

(c)		At June 30, 2006, 2007 and 2008, 1,823,861, 4,286,861 and 5,878,141 stock options, respectively, and at September 30, 2007 and 2008 (unaudited), 4,599,361 and 5,841,475 stock options, respectively, were outstanding. The effect of the shares that would be issued upon exercise of these options has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.


13.	Authorized Shares

On December 6, 2007, the shareholders of the Company approved the increase of authorized shares of common stock to 70,000,000 shares and undesignated shares of 5,000,000.


14.	Initial Public Offering Costs (unaudited)

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share amounts)

previously capitalized offering costs of approximately $1.7 million were included in selling, general and administrative during the three months ended September 30, 2008.


15.	Subsequent Events (unaudited)

Reverse Merger Agreement

On November 3, 2008 the Company entered into a definitive merger agreement with Replidyne, Inc. in an all-stock transaction. Under terms of the agreement, Replidyne will issue new shares of its common stock to Company shareholders whereby former Company shareholders are expected to own 83% of the combined company and Replidyne stockholders are expected to own 17% of the combined company on a fully diluted basis using the treasury stock method, subject to adjustments as described in the merger agreement, and assuming that Replidyne’s net assets at closing are between $37 million and $40 million, as calculated in accordance with the terms of the merger agreement. The merger is subject to shareholder approval, and is expected to be consummated in the first quarter of calendar 2009.

Stock Options Amended

On December 15, 2008, the Company amended the vesting provisions of 775,000 performance based incentive stock options that had been granted to certain executives on December 12, 2007. Previously, the stock options were exercisable in full on the third anniversary of the date of grant provided the Company completed its initial public offering of common stock or a change in control transaction before December 31, 2008. The vesting provisions were updated to provide that exercisability of the options are conditioned upon the closing of the Company’s proposed merger with Replidyne, Inc. and the options shall vest to the extent of 50% of the total shares on the first anniversary of the merger and the remaining 50% on the second anniversary of the merger.

Exhibit 99.3

Cardiovascular Systems, Inc.

Consolidated Financial Statements

Three and six months ended December 31, 2008 and 2007

Cardiovascular Systems, Inc.

Consolidated Balance Sheets

(Dollars in Thousands, except per share and share amounts)

(Unaudited)


	December 31,			June 30,
	2008			2008
ASSETS
Current assets
Cash and cash equivalents	$	6,370		$	7,595
Accounts receivable, net		7,351			4,897
Inventories		3,072			3,776
Prepaid expenses and other current assets		1,757			1,936

Total current assets		18,550			18,204
Auction rate securities put option		2,700			—
Investments, trading		19,500			—
Investments, available-for-sale		—			21,733
Property and equipment, net		1,291			1,041
Patents, net		1,163			980

Total assets	$	43,204		$	41,958

LIABILITIES AND SHAREHOLDERS’ (DEFICIENCY) EQUITY
Current liabilities
Current maturities of long-term debt	$	27,821		$	11,888
Accounts payable		4,188			5,851
Accrued expenses		5,242			3,467
Deferred revenue		—			116

Total current liabilities		37,251			21,322

Long-term liabilities
Long-term debt, net of current maturities		2,100			—
Redeemable convertible preferred stock warrants		4,226			3,986
Deferred rent		100			100

Total long-term liabilities		6,426			4,086

Total liabilities		43,677			25,408

Commitments and contingencies
Series A redeemable convertible preferred stock, no par value; authorized 5,400,000 shares, issued and outstanding 4,737,561 at December 31, 2008 and June 30, 2008; aggregate liquidation value $32,334 and $31,230 at December 31, 2008 and June 30, 2008, respectively		52,776			51,213
Series A-1 redeemable convertible preferred stock, no par value; authorized 2,188,425 shares at December 31, 2008 and June 30, 2008; issued and outstanding 2,188,425 at December 31, 2008 and June 30, 2008; aggregate liquidation value $20,623 and $19,862 at December 31, 2008 and June 30, 2008, respectively		24,379			23,657
Series B redeemable convertible preferred stock, no par value; authorized 2,162,162 shares, issued and outstanding 2,162,150 at December 31, 2008 and June 30, 2008; aggregate liquidation value $21,689 and $20,871 at December 31, 2008 and June 30, 2008, respectively		24,084			23,372
Shareholders’ (deficiency) equity
Common stock, no par value; authorized 70,000,000 common shares and 5,000,000 undesignated shares at December 31, 2008 and June 30, 2008; issued and outstanding 7,815,413 and 7,575,206 at December 31, 2008 and June 30, 2008, respectively		39,869			35,933
Common stock warrants		2,152			680
Accumulated deficit		(143,733	)		(118,305	)

Total shareholders’ (deficiency) equity		(101,712	)		(81,692	)

Total liabilities and shareholders’ (deficiency) equity	$	43,204		$	41,958

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

Cardiovascular Systems, Inc.

Consolidated Statements of Operations

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

(Unaudited)


	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Revenues	$	14,004		$	4,631		$	25,650		$	4,631
Cost of goods sold		4,153			2,193			8,034			2,732

Gross profit		9,851			2,438			17,616			1,899

Expenses
Selling, general and administrative		14,949			9,629			31,373			13,181
Research and development		3,469			2,996			8,424			6,324

Total expenses		18,418			12,625			39,797			19,505

Loss from operations		(8,567	)		(10,187	)		(22,181	)		(17,606	)
Other (expense) income
Interest expense		(799	)		—			(1,026	)		(216	)
Interest income		2,867			419			3,009			613
Impairment on investments		(2,233	)		—			(2,233	)		—

Total other (expense) income		(165	)		419			(250	)		397

Net loss		(8,732	)		(9,768	)		(22,431	)		(17,209	)
Accretion of redeemable convertible preferred stock		(2,997	)		(353	)		(2,997	)		(5,206	)

Net loss available to common shareholders	$	(11,729	)	$	(10,121	)	$	(25,428	)	$	(22,415	)

Loss per common share:
Basic and diluted	$	(1.51	)	$	(1.56	)	$	(3.29	)	$	(3.50	)

Weighted average common shares used in computation:
Basic and diluted		7,756,147			6,508,541			7,724,197			6,400,027

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

Cardiovascular Systems, Inc.

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

Comprehensive (Loss) Income

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

(Unaudited)


													Accumulated
													Other
	Common Stock									Accumulated			Comprehensive						Comprehensive
	Shares			Amount			Warrants			Deficit			(Loss) Income			Total			(Loss) Income
Balances at June 30, 2007		6,267,454			26,054			1,366			(59,716	)		(7	)		(32,303	)	$	(15,603	)

Issuance of restricted stock awards		840,138			1,152												1,152
Forfeiture of restricted stock awards		(27,834	)														—
Exercise of stock options and warrants at $1.00 — $8.00 per share		495,448			2,382			(570	)								1,812
Expiration of warrants					116			(116	)								—
Accretion of redeemable convertible preferred stock											(19,422	)					(19,422	)
Stock-based compensation					6,229												6,229
Unrealized gain on investments														7			7		$	7

Net loss											(39,167	)					(39,167	)		(39,167	)

Balances at June 30, 2008		7,575,206		$	35,933		$	680		$	(118,305	)	$	—		$	(81,692	)	$	(39,161	)

Issuance of restricted stock awards		219,682			2,724												2,724
Forfeiture of restricted stock awards		(76,650	)		(260	)											(260	)
Exercise of stock options and warrants at $5.00-$5.71 per share		97,175			640			(266	)								374
Issuance of common stock warrants								1,814									1,814
Expiration of Warrants					76			(76	)
Accretion of redeemable convertible preferred stock											(2,997	)					(2,997	)
Stock-based compensation					756												756
Net loss											(22,431	)					(22,431	)		(22,431	)

Balances at December 31, 2008		7,815,413		$	39,869		$	2,152		$	(143,733	)	$	—		$	(101,712	)	$	(22,431	)

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

Consolidated Statements Cash Flows
(Dollars in thousands, except per share and share amounts)
(Unaudited)


	Six Months Ended
	December 31,
	2008			2007
Cash flows from operating activities
Net loss	$	(22,431	)	$	(17,209	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization of property and equipment		178			104
Provision for doubtful accounts		85			58
Amortization of patents		18			28
Change in carrying value of the convertible preferred stock warrants		165			216
Amortization of debt discount		551			—
Stock-based compensation		3,220			4,946
Amortization of discount on investments		—			(45	)
Impairment on investments		2,233			—
Gain on auction rate securities put option		(2,700	)		—
Changes in assets and liabilities
Accounts receivable		(2,539	)		(2,052	)
Inventories		704			(1,978	)
Prepaid expenses and other current assets		149			(1,066	)
Accounts payable		(1,680	)		236
Accrued expenses and deferred rent		1,822			310
Deferred revenue		(116	)		1,132

Net cash used in operations		(20,341	)		(15,320	)

Cash flows from investing activities
Expenditures for property and equipment		(428	)		(438	)
Purchases of investments		—			(27,319	)
Sales of investments		—			10,774
Costs incurred in connection with patents		(201	)		(138	)

Net cash used in investing activities		(629	)		(17,121	)

Cash flows from financing activities
Proceeds from sale of redeemable convertible preferred stock		—			30,296
Payment of offering costs		—			(34	)
Issuance of common stock warrants		1,814			—
Issuance of convertible preferred stock warrants		75			—
Exercise of stock options and warrants		374			1,359
Proceeds from long-term debt		17,893			—
Payments on long-term debt		(411	)		—

Net cash provided by financing activities		19,745			31,621

Net decrease in cash and cash equivalents		(1,225	)		(820	)
Cash and cash equivalents
Beginning of period		7,595			7,908

End of period	$	6,370		$	7,088

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

1. Business Overview

Company Description

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

The Company, Replidyne, Inc., and Responder Merger Sub, Inc., a Minnesota corporation and wholly owned subsidiary of Replidyne, have entered into an Agreement and Plan of Merger dated as of November 3, 2008. Pursuant to the merger agreement, on the terms and conditions set forth therein, Responder Merger Sub, Inc. will be merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Replidyne. See Note 12 for further information.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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 Company’s Form 10 filed with the SEC on December 17, 2008. 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.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

Concentration of Credit Risk

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

Fair Value of Financial Instruments

SFAS 157 classifies these inputs into the following hierarchy:

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

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

Level 3 Inputs — unobservable inputs

The following table sets forth the fair value of the Company’s auction rate securities that were measured on a recurring basis as of December 31, 2008. Assets are measured on a recurring basis if they are remeasured at least annually:


	Level 3
							Auction Rate
	Available-for-			Trading			Securities Put
	Sale Securities			Securities			Option

Balance at June 30, 2008	$	21,733		$	—		$	—
Transfer to trading securities		(21,733	)		21,733			—
Unrealized loss on investments not previously recognized in earnings		—			(343	)		—
Gain on auction rate securities put option		—			—			2,700
Impairment on investments		—			(1,890	)		—

Balance at December 31, 2008	$	—		$	19,500		$	2,700

As of December 31, 2008, the Company believes that the carrying amounts of its other financial instruments, including accounts payable and accrued liabilities approximate their fair value due to the short-term maturities of these instruments.

Use of Estimates

Revenue Recognition

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

have been met. The customer has no right of return on any component once these criteria have been met. Payment terms are generally set at 30 days.

The Company derives its revenue through the sale of the Diamondback 360°, which includes single-use catheters, guidewires and control units used in the atherectomy procedure. Initial orders from all new customers require the customer to purchase the entire Diamondback 360° system, which includes multiple single-use catheters and guidewires and one control unit. Due to delays in the final FDA clearance of a new control unit and early production constraints of the new control unit, the Company was not able to deliver all components of the initial order for some transactions. For these initial orders, the Company shipped and billed only for the single-use catheters and guidewires. In addition, the Company sent an older version of its control unit as a loaner unit with the customer’s expectation that the Company would deliver and bill for a new control unit once it became available. As the Company had not delivered each of the individual components to all customers, the Company had deferred the revenue for the entire amount billed for single-use catheters and guidewires shipped to the customers that had not received the new control unit. Those billings totaled $116 at June 30, 2008, which amount had been deferred until the new control units were delivered during the six months ended December 31, 2008. After the initial order, customers are not required to purchase any additional disposable products from the Company. Once the Company had delivered the new control unit to a customer, the Company recognized revenue that was previously deferred and revenue for subsequent reorders of single-use catheters, guidewires and additional new control units when the criteria of SAB No. 104 are met.

The legal title and risk of loss of each of Diamondback 360° components, consisting of disposable catheters, disposable guidewires, and a control unit, along with supplemental products, are transferred to the customer based on the shipping terms. Many initial shipments to customers included a loaner control unit, which the Company provided, until the new control unit received clearance from the FDA and was subsequently available for sale. The loaner control units were Company-owned property and the Company maintained legal title to these units.

Costs related to products delivered are recognized when the legal title and risk of loss of individual components are transferred to the customer based on the shipping terms. At December 31, 2008 and June 30, 2008, the legal title and risk of loss of each disposable component had transferred to the customer and the Company has no future economic benefit in these disposables. As a result, the cost of goods sold related to these disposable units has been recorded during the three and six months ended December 31, 2008 and December 31, 2007.

Recent Accounting Pronouncements

In October 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the Company adopted for financial assets and liabilities on July 1, 2008, in situations where the market is not active. The Company has considered the guidance provided by FSP SFAS No. 157-3 in its determination of estimated fair values as of December 31, 2008.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

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

3. Going Concern

The Company’s consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had cash and cash equivalents of $6,370 at December 31, 2008. During the six months ended December 31, 2008, net cash used in operations amounted to $20,341. As of December 31, 2008, the Company had an accumulated deficit of $143,733. The Company has incurred negative cash flows and losses since inception. In addition, in February 2008, the Company was notified that recent conditions in the global credit markets have caused insufficient demand for auction rate securities, resulting in failed auctions for $23,000 of the Company’s auction rate securities held at December 31, 2008. These securities are currently not liquid, as the Company has an inability to sell the securities due to continued failed auctions.

On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc., the entity through which it originally purchased the auction rate securities, for up to $12,000, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was secured by the $23,000 par value of the Company’s auction rate securities. The maximum borrowing amount was not set forth in the written agreement for the loan and may have been adjusted from time to time by UBS Financial Services at its discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services but were not included in the written loan agreement and were therefore subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceeded $12,000 or 75% of UBS Financial Service’s estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements. See Note 5 for a description of the replacement of this loan and the additional loan and security agreement entered into with Silicon Valley Bank.

Based on current operating levels, combined with limited capital resources, financing the Company’s operations will require that the Company either complete the merger with Replidyne or raise additional equity or debt capital prior to or during the quarter ending September 30, 2009. If the merger is not consummated or the Company fails to raise sufficient equity or debt capital, management would implement cost reduction measures, including workforce reductions, as well as reductions in overhead costs and capital expenditures. There can be no assurance that these sources will provide sufficient cash flows to enable the Company to continue as a going concern. Apart from the merger agreement with Replidyne, the Company currently has no commitments for additional financing and may experience difficulty in obtaining additional financing on favorable terms, if at all. All of these factors raise substantial doubt about the Company’s ability to continue as a going concern.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

4. Selected Consolidated Financial Statement Information

Inventories

At December 31, 2008, and June 30, 2008, respectively, inventories were comprised of the following:


	December 31,		June 30,
	2008		2008
Inventories
Raw materials	$	1,551	$	2,338
Work in process		174		117
Finished goods		1,347		1,321

	$	3,072	$	3,776

Investments

The Company’s investments consist solely of auction rate securities (ARS). ARS were previously classified as short-term based on their liquid nature. ARS had certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to sell them through a Dutch auction process that occurred at pre-determined intervals of less than one year.

The Company’s ARS are AAA rated and issued primarily by state agencies and backed by student loans substantially guaranteed by the Federal Family Education Loan Program (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 the Company’s ARS are supported by student loan assets that are guaranteed by the federal government under the FFELP.

The Company’s ARS are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals, primarily every 28 days, through auctions. Conditions in the global credit markets have prevented the Company from liquidating its holdings of ARS because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed by the issuer or they mature.

In February 2008, the Company was informed that there was insufficient demand for ARS, resulting in failed auctions for $23,000 of the Company’s ARS held at June 30, 2008. Currently, these affected securities 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. As a result, at December 31, 2008 and at June 30, 2008, the Company has classified the fair value of the ARS as a long-term asset. Interest rates on all failed ARS were reset to a temporary predetermined “penalty” or “maximum” rate. These maximum rates are generally limited to a maximum amount payable over a 12 month period equal to a rate based on the trailing 12-month average of 90-day treasury bills, plus 120 basis points. These maximum allowable rates range from 2.7% to 4.0% of par value per year.

The Company has collected all interest due on its ARS and has no reason to believe that it will not collect all interest due in the future. The Company expects to receive the principal associated with its ARS upon the earlier of a successful auction, their redemption by the issuer or their maturity. All ARS held by the Company continue to be AAA rated subsequent to the failed auctions that began in February 2008.

At December 31, 2008, the Company concluded that no weight should be given to the value indicated by the secondary markets for student loan backed ARS similar to those the Company holds because these markets have very low transaction volumes and consist primarily of private transactions with minimal disclosure and transactions may not be representative of the actions of typically-motivated buyers and sellers and the Company does not currently intend to sell in the secondary markets. However, the Company did consider the secondary markets for certain mortgage-backed securities to estimate the market yields attributable to the Company’s ARS, but determined that these secondary markets do not provide a sufficient basis of comparison for the ARS that the Company holds and, accordingly, attributed no weight to the values of these mortgage-backed securities indicated by the secondary markets.

At December 31, 2008, the Company concluded that no weight should be given to the likelihood and potential timing of issuers of the ARS exercising their redemption rights at par value based on low issuer call activity, so the Company attributed a weight of 100.0% to estimates of present value of the ARS based upon expected cash flows. The attribution of weights to the valuation factors required the exercise of valuation judgment. The selection of a weight of 100.0% attributed to the present value of the ARS based upon expected cash flows reflects the expectation that no certainty exists regarding how the ARS will be eventually converted to cash and this methodology represents the fair value today of a future conversion of the ARS to cash. To derive estimates of the present value of the ARS based upon expected cash flows, the Company used the securities’ expected annual interest payments, ranging from 1.3% to 5.3% of par value, representing estimated maximum annual rates under the governing documents of the ARS; annual market interest rates, ranging from 5.2% to 6.4%, based on observed traded, state sponsored, taxable certificates rated AAA or lower and issued between December 1 and December 30, 2008; certain mortgage-backed securities and indices; and a range of expected terms to liquidity.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

The Company’s weighting of the valuation methods as of December 31, 2008 indicates an implied term to liquidity of approximately five years. The implied term to liquidity of approximately five years is a result of considering a range in possible timing of the various scenarios that would allow a holder of the ARS to convert the ARS to cash ranging from zero to ten years, with the highest probability assigned to five years. From mid-September 2008, UBS began to provide loans at no net cost to its clients for the par value of their ARS holdings. In addition, UBS has also committed to provide liquidity solutions to institutional investors and has agreed to purchase all or any of a remaining $10.3 billion in ARS at par value from its institutional clients beginning June 30, 2010. The value of these rights were not included in the fair value of the Company’s ARS but rather recognized as a free standing asset separate from the ARS.

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.

The Rights represent a firm agreement in accordance with SFAS 133, which defines a firm agreement as an agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction, and b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the Rights results in a put option and should be recognized as a free standing asset separate from the ARS. Upon acceptance of the offer from UBS, the Company recorded $2,700 as the fair value of the put option asset with a corresponding credit to interest income. The Company considered the expected time until the Rights are exercised, carrying costs of the Rights, and the expected credit risk attributes of the Rights and UBS in their valuation of the put option. The put option does not meet the definition of a derivative instrument under SFAS 133. Therefore, the Company has elected to measure the put option at fair value under SFAS 159, which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the ARS. As a result, unrealized gains and losses will be included in earnings in future periods. The Company expects that future changes in the fair value of the put option will approximate fair value movements in the related ARS or reflect changes in the credit risk of UBS.

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 shareholders’ deficiency section of the balance sheet. Realized gains and losses were accounted for on the specific identification method.

In connection with the Company’s acceptance of the UBS offer in November 2008, resulting in the Company’s right to require UBS to purchase ARS at par value beginning on June 30, 2010, the Company transferred the ARS from investments available-for-sale to trading securities in accordance with SFAS 115. The transfer to trading securities reflects management’s intent to exercise its put option during the period June 30, 2010 to July 3, 2012. Prior to the Company’s agreement with UBS, the Company’s intent was to hold the ARS until the market recovered. At the time of transfer, the unrealized loss on the Company’s ARS was $343. This unrealized loss was included in accumulated other comprehensive (loss) income. Upon transfer to trading securities, the Company immediately recognized a loss of $343, included in impairment on investments, for the amount of the unrealized loss not previously recognized in earnings.

In addition to the valuation procedures described above, the Company considered (i) its current inability to hold these securities for a period of time sufficient to allow for an unanticipated recovery in fair value based on the Company’s current liquidity, history of operating losses, and management’s estimates of required cash for continued product development and sales and marketing expenses, and (ii) failed auctions and the anticipation of continued failed auctions for all of the Company’s ARS.

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

Based on the factors described above, the Company recorded an impairment loss for the three and six months ended December 31, 2008 of $2,233, which includes $343 of an unrealized loss not previously recognized in earnings. The Company continues to monitor the market for ARS and consider its impact (if any) on the fair market value of investments. If the market conditions deteriorate further, the Company may be required to record additional unrealized losses in earnings, offset by corresponding increases in the put option.

5. Debt

Loan and Security Agreement with Silicon Valley Bank

On September 12, 2008, the Company entered into a loan and security agreement with Silicon Valley Bank with maximum available borrowings of $13,500. The agreement includes a $3,000 term loan, a $5,000 accounts receivable line of credit, and two term loans for an aggregate of $5,500 that are guaranteed by certain of the Company’s affiliates. The terms of each of these loans is as follows:

	•		The $3,000 term loan has a fixed interest rate of 10.5% and a final payment amount equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with repayment terms that include interest only payments during the first six months followed by 30 equal principal and interest payments. This term loan also includes an acceleration provision that requires the Company to pay the entire outstanding balance, plus a penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and continuance of an event of default. As part of the term loan agreement, the Company granted Silicon Valley Bank a warrant to purchase 13,000 shares of Series B redeemable convertible preferred stock at an exercise price of $9.25 per share. This warrant was assigned a value of $75 for accounting purposes, is immediately exercisable, and expires ten years after issuance. The balance outstanding on the term loan at December 31, 2008 was $3,000.

	•		The accounts receivable line of credit has a two year maturity and a floating interest rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on borrowings is due monthly and the principal balance is due at maturity. Borrowings on the line of credit are based on 80% of eligible domestic receivables, which is defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and government receivables. The Company’s accounts receivable receipts are deposited into a lockbox account in the name of Silicon Valley Bank. The accounts receivable line of credit is subject to non-use fees, annual fees, cancellation fees, and maintaining a minimum liquidity ratio. There was no balance outstanding on the line of credit at December 31, 2008.

	•		One of the guaranteed term loans is for $3,000 and the other guaranteed term loan is for $2,500, each with a one year maturity. Each of the guaranteed term loans has a floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0% (effective rate of 7.0% at December 31, 2008). Interest on borrowings is due monthly and the principal balance is due at maturity. One of the Company’s directors and shareholders and two entities who hold the Company’s preferred shares and are also affiliated with two of the Company’s directors agreed to act as guarantors of these term loans. In consideration for guarantees, the Company issued the guarantors warrants to purchase an aggregate of 458,333 shares of the Company’s common stock at an exercise price of $6.00 per share. The balance outstanding on the guaranteed term loans at December 31, 2008 was $5,500 (excluding debt discount of $1,338).

The guaranteed term loans and common stock warrants were allocated using the relative fair value method. Under this method, the Company estimated the fair value of the term loans without the guarantees and calculated the fair value of the common stock warrants using the Black-Scholes method. The relative fair value of the loans and warrants were applied to the loan proceeds of $5,500, resulting in an assigned value of $3,690 for the loans and $1,810 for the warrants. The assigned value of the warrants of $1,810 is treated as a debt discount and amortized over the one year maturity of the loan.

Loan Payable

On March 28, 2008, the Company obtained a margin loan from UBS Financial Services, Inc. for up to $12,000, with a floating interest rate equal to 30-day LIBOR, plus 0.25%. The loan was secured by the $23,000 par value of the Company’s auction rate securities. The maximum borrowing amount was not set forth in the written agreement for the loan and may have

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

been adjusted from time to time by UBS Financial Services in its sole discretion. The loan was due on demand and UBS Financial Services may have required the Company to repay it in full from any loan or financing arrangement or a public equity offering. The margin requirements were determined by UBS Financial Services but were not included in the written loan agreement and were therefore subject to change. As of June 30, 2008, the margin requirements provided that UBS Financial Services would require a margin call on this loan if at any time the outstanding borrowings, including interest, exceed $12,000 or 75% of UBS Financial Service’s estimate of the fair value of the Company’s auction rate securities. If these margin requirements were not maintained, UBS Financial Services may have required the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. As of June 30, 2008, the Company maintained these margin requirements.

On August 21, 2008, the Company replaced this loan with a margin loan from UBS Bank USA, which increased maximum borrowings available to $23,000. 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 at its discretion. The margin loan has a floating interest rate equal to 30-day LIBOR, plus 1.0%; 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 August 21, 2008, the margin requirements include maximum borrowings, including interest, of $23,000. If these margin requirements are not maintained, UBS Bank may require the Company to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. The Company has maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at December 31, 2008 was $22,759 and is included in maturities during the six months ending June 30, 2009.

As of December 31, 2008, debt maturities (including debt discount) were as follows:


Six months ending June 30, 2009	$	22,114
2010		6,307
2011		1,200
2012		300

Total	$	29,921
Less: Current Maturities		(27,821	)

Long-term debt	$	2,100

6. Common Stock Warrants

During the six months ended December 31, 2008, the Company issued the guarantors of the Silicon Valley Bank guaranteed term loans warrants to purchase an aggregate of 458,333 shares of the Company’s common stock at an exercise price of $6.00 per share. The warrants were assigned a value of $1,810 for accounting purposes, are immediately exercisable, and expire five years after issuance. The following summarizes common stock warrant activity for the six months ended December 31, 2008:


	Warrants			Price Range
	Outstanding			per Share
Warrants outstanding at June 30, 2008		244,274		$	1.00 - $8.00
Warrants issued		458,333		$	6.00
Warrants exercised		(25,175	)	$	5.00
Warrants expired		(13,300	)	$	5.00-8.00

Warrants outstanding at December 31, 2008		664,132		$	1.00 - $8.00

Warrants have exercise prices ranging from $1.00 to $8.00 and are fully exercisable. The following assumptions were utilized in determining the fair value of warrants issued under the Black-Scholes model:


	Six Months Ended
	December 31,
	2008
Weighted average fair value of warrants granted	$	6.17
Risk-free interest rates		3.01	%
Expected life	5 years
Expected volatility		46.7	%
Expected dividends	None

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

7. Stock Options and Restricted Stock Awards

The Company has a 1991 Stock Option Plan (the “1991 Plan”), a 2003 Stock Option Plan (the “2003 Plan”), and a 2007 Equity Incentive Plan (the “2007 Plan”) (collectively the “Plans”) 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. The 1991 Plan and 2003 Plan permitted the granting of incentive stock options and nonqualified options. A total of 750,000 shares 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 3,800,000 shares of the Company’s 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 3,000,000 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 2007 Plan also includes a renewal provision whereby the number of shares shall automatically be increased on the first day of each fiscal year beginning July 1, 2008, and ending July 1, 2017, by the lesser of (i) 1,500,000 shares, (ii) 5% of the outstanding common shares on such date, or (iii) a lesser amount determined by the Board of Directors. As of July 1, 2008, the number of shares reserved under the 2007 Plan was increased by 379,397 shares, and in December 2008 the Board of Directors approved an additional increase of 500,000 shares, which has been submitted for approval at the Company’s shareholder meeting to be held on February 24, 2009.

The Company had granted the following amount of stock options and restricted stock awards through December 31, 2008:


	Number of
Grant Type	Shares
Service based stock options (2007 Plan)		1,383,364
Performance based stock options (2007 Plan)		775,000
Service based stock options (2003 Plan)		663,583

Total		2,821,947	(1)

Restricted stock awards (2007 Plan)		1,059,820


(1)		Excludes 70,000 shares of service based stock options granted outside of the plans.

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

Stock option activity for the six months ended December 31, 2008 is as follows:


						Weighted
	Shares Available		Number of			Average
	for Grant(a)		Options(b)			Exercise Price
Options outstanding at June 30, 2008		841,636		5,878,141			6.59
Shares reserved		379,397		—
Options exercised		—		(72,000	)		5.05
Options forfeited or expired		—		(70,667	)		6.00

Options outstanding at December 31, 2008		1,221,033		5,735,474			6.61

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)


(a)		Excludes the effect of options granted, exercised, forfeited or expired related to activity from options granted outside the stock option plans described above; excludes the effect of restricted stock awards granted or forfeited under the 2007 Plan.

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


		2008
Weighted average fair value of options granted		$3.74
Risk-free interest rates		2.45% - 4.63%
Expected life		3.5 - 6 years
Expected volatility		43.1% - 46.4%
Expected dividends		None

The risk-free interest rate for periods within the five and ten year contractual life of the options is based on the U.S. Treasury yield curve in effect at the grant date and the expected option life of 3.5 to 6 years. Expected volatility is based on the historical volatility of the stock of companies within the Company’s peer group. Generally, the 3.5 to 6 year expected life of stock options granted to employees represented the weighted average of the result of the “simplified” method applied to “plain vanilla” options granted during the period, as provided within SAB No. 110.

On December 12, 2007, the Company granted 775,000 performance based incentive stock options to certain executives. The options originally were to become exercisable in full on the third anniversary of the date of grant provided that the Company has completed its initial public offering of common stock or a change of control transaction before December 31, 2008 and shall terminate on the tenth anniversary of the date of the grant. For this purpose, “change of control transaction” was defined as an acquisition of the Company through the sale of substantially all of the Company’s assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization or similar transaction. On December 12, 2008, the Company amended the vesting terms of these options to delete the aforementioned vesting terms and to provide instead that the exercisability of the options shall be conditioned upon the closing of the Company’s proposed merger with Replidyne Inc. and that the options shall vest to the extent of 50% of the total shares subject to the first anniversary of the merger and for the remaining 50% on the second anniversary of the merger. The Company has not recorded any stock-based compensation expense related to performance based incentive stock options for the six months ended December 31, 2008 or 2007 as it was not probable that the performance based criteria would be achieved.

As of December 31, 2008, the Company had granted 1,059,820 restricted stock awards. The fair value of each restricted stock award was equal to the fair market value of the Company’s common stock at the date of grant. Vesting of restricted stock awards range from one to three years. The estimated fair value of restricted stock awards, including the effect of estimated forfeitures, is recognized on a straight-line basis over the restricted stock’s vesting period. Restricted stock award activity for the six months ended December 31, 2008 is as follows:


				Weighted
	Number of			Average Fair
	Shares			Value
Restricted stock awards outstanding at June 30, 2008		812,304			9.50
Restricted stock awards granted		219,682			10.32
Restricted stock awards forfeited		(76,650	)		10.36

Restricted stock awards outstanding at December 31, 2008		955,336		$	9.67

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

8. Redeemable Convertible Preferred Stock and Convertible Preferred Stock Warrants

The Company issued 4,728,547 shares of Series A redeemable convertible preferred stock during fiscal 2007, no par value, at a purchase price of $5.71 per share for a total of $27,000. In addition, Series A convertible preferred stock warrants were issued to purchase 671,453 shares of Series A redeemable convertible preferred stock in connection with the sale of the Series A redeemable convertible preferred stock. The Series A convertible preferred stock warrants have a purchase price of $5.71 per share with a five-year term and were assigned an initial value of $1,767 for accounting purposes using the Black-Scholes model. The change in value of the Series A convertible preferred stock warrants due to accretion as a result of remeasurement was $179 and $(84) for the three months ended December 31, 2008 and 2007 respectively, and $165 and $216 for the six months ended December 31, 2008 and 2007 respectively, and is included in interest expense (income) on the consolidated statements of operations.

In connection with the preparation of the Company’s financial statements as of December 31, 2008 and June 30, 2008, the Company’s management and Board of Directors established what it believes to be a fair market value of the Company’s Series A, Series A-1, and Series B redeemable convertible preferred stock. This determination was based on concurrent significant stock transactions with third parties and a variety of factors, including the Company’s business milestones achieved and future financial projections, the Company’s position in the industry relative to its competitors, external factors impacting the value of the Company in its marketplace, the stock volatility of comparable companies in its industry, general economic trends and the application of various valuation methodologies.

The rights, privileges and preferences of the Series A, Series A-1, and Series B redeemable convertible preferred stock (collectively, the “Preferred Stock”) are as follows:

Dividends

The holders of Preferred Stock are entitled to receive cash dividends at the rate of 8% of the original purchase price. All dividends shall accrue, whether or not earned or declared, and whether or not the Company has legally available funds. All such dividends shall be cumulative and shall be payable only (i) when and as declared by the Board of Directors, (ii) upon liquidation or dissolution of the Company and (iii) upon redemption of the Preferred Stock by the Company. As of December 31, 2008, $9,044 of dividends had accumulated but had not yet been declared by the Company’s Board of Directors, or paid by the Company as of such respective dates. The holders of the Preferred Stock have the right to participate in dividends with the common shareholders on an as converted basis.

Conversion

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

Redemption

Liquidation

In the event of any liquidation or winding up of the Company, the holders of preferred stock are entitled to receive an amount equal to (i) the price paid for the preferred shares, plus (ii) all dividends accrued and unpaid before any payments shall be made to holders of stock junior to the preferred stock. The remaining net assets of the Company, if any, would be distributed to the holders of preferred and common stock based on their ownership amounts assuming the conversion of the preferred stock. The amount is limited based on the overall return on investment earned by the preferred stock holders. At December 31, 2008, the liquidation value of the Series A redeemable convertible preferred stock was $32,334, Series A-1 redeemable convertible preferred stock was $20,623, and Series B redeemable convertible preferred stock was $21,689.

Voting Rights

Registration Rights

9. Commitment and Contingencies

Shturman Legal Proceedings

The Company was party to two legal proceedings relating to a dispute with Dr. Leonid Shturman, the Company’s founder, and Shturman Medical Systems, Inc., or SMS, a company owned by Dr. Shturman. On or about November 2006, the Company discovered that Dr. Shturman had sought patent protection in the United Kingdom and with the World Intellectual Property Organization as the sole inventor for technology relating to the use of counterbalance weights with rotational atherectomy devices, or the counterbalance technology, which the Company believes should have been assigned to it.

One of the legal proceedings concluded on May 5, 2008, resulting in the transfer of the counterbalance technology to the Company by SMS. In the other proceeding, the Company settled all of its claims against Dr. Shturman relating to a breach of Dr. Shturman’s breach of his employment agreement with the Company. Dr. Shturman had also filed a counterclaim against the Company asserting conversion, theft and unjust enrichment for the alleged illegal removal and transport to the United States of two drive shaft winding devices purportedly developed by Shturman Cardiology Systems, Russia. In settlement of these counterclaims, the Company agreed to pay Dr. Shturman $50 in cash and refer to Dr. Shturman names of parties that may be interested in purchasing up to 12,000 shares of Company common stock held by him at a fixed price. Due to market and other conditions, the Company was unable to refer any names to Dr. Shturman. Accordingly, a subsequent settlement agreement was reached between the parties whereby Dr. Shturman agreed to dismiss the counterclaim in exchange for the Company paying Dr. Shturman $50 and assisting Dr. Shturman with selling 22,000 shares of Company common stock at a revised fixed price on or before November 14, 2008 and all parties providing mutual releases. All parties executed the settlement agreement and mutual releases, and the Company paid Dr. Shturman $50 in cash and assisted Dr. Shturman with selling 22,000 shares of Company common stock at the revised fixed price, but due to Dr. Shturman’s allegation that the

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

notarization of certain of the signatures was deficient, Dr. Shturman expressed his desire to keep the funds and void the releases. Dr. Shturman sent a letter to the U.S. District Court in Minnesota on January 14, 2009 requesting that the releases be voided. On January 22, 2009, the court denied Dr. Shturman’s request to void the releases. As of the date of this quarterly filing, the parties are in the process of re-executing the settlement agreement and mutual releases to address the alleged deficiencies in the notarization. The Company recognized the $50 expense related to the settlement of this matter but believes additional expense and an adverse outcome of this claim are not probable and cannot be reasonably estimated.

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, includes seven counts, which allege as follows:

	•		Individual defendants violated provisions in their employment agreements with their former employer FoxHollow, barring them from misusing FoxHollow confidential information.

	•		Individual defendants violated a provision in their FoxHollow employment agreements barring them, for a period of one year following their departure from FoxHollow, from soliciting or encouraging employees of FoxHollow to join the Company.

	•		Individual defendants breached a duty of loyalty owed to FoxHollow.

	•		The Company and individual defendants misappropriated trade secrets of one or more of the Plaintiffs.

	•		All defendants engaged in unfair competition.

	•		The Company tortiously interfered with the contracts between FoxHollow and individual defendants by allegedly procuring breaches of the non-solicitation/encouragement provision in those agreements, and an individual defendant tortiously interfered with the contracts between certain individual defendants and FoxHollow by allegedly procuring breaches of the confidential information provision in those agreements.

	•		All defendants conspired to gain an unfair competitive and economic advantage for the Company to the detriment of the Plaintiffs.

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

CARDIOVASCULAR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)

10. Earnings Per Share

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


	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Numerator
Net loss available in basic calculation	$	8,732		$	9,768		$	22,431		$	17,209
Plus: Accretion of redeemable convertible preferred stock(a)		2,997			353			2,997			5,206

Loss available to common shareholders	$	11,729		$	10,121		$	25,428		$	22,415


Denominator
Weighted average common shares — basic		7,756,147			6,508,541			7,724,197			6,400,027
Effect of dilutive stock options and warrants(b)(c)		—			—			—			—

Weighted average common shares outstanding — diluted		7,756,147			6,508,541			7,724,197			6,400,027

Loss per common share — basic and diluted	$	(1.51	)	$	(1.56	)	$	(3.29	)	$	(3.50	)


(a)		The calculation for accretion of redeemable convertible preferred stock marks the redeemable convertible preferred stock to fair value, which equals or exceeds the amount of any undeclared dividends on the redeemable convertible preferred stock.

(b)		At December 31, 2008 and 2007, 1,339,571 and 1,032,113 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 December 31, 2008 and 2007, 5,735,474 and 5,986,595 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.

11. Initial Public Offering Costs

The Company withdrew the registration statement for its initial public offering in conjunction with the announcement of the execution of the merger agreement with Replidyne, Inc., as described in Note 12. Therefore, previously capitalized offering costs of approximately $1,700 were included in selling, general and administrative during the six months ended December 31, 2008.

12. Reverse Merger Agreement

Immediately prior to the effective time of the merger, each share of the Company’s preferred stock outstanding at such time will be converted into shares of the Company’s common stock at the conversion ratio determined pursuant to the Company’s articles of incorporation. At the effective time of the merger, each share of the Company’s common stock outstanding immediately prior to the effective time of the merger (excluding certain shares to be canceled pursuant to the merger agreement, and shares held by stockholders who have exercised and perfected dissenters’ rights) will be converted into the right to receive between 6.460 and 6.797 shares of Replidyne common stock, assuming that the net assets of Replidyne are between $35,000 and $37,000 as calculated in accordance with the terms of the merger agreement and that the number of shares of Replidyne and the Company’s common stock outstanding on a fully diluted basis using the treasury stock method of accounting for options and warrants immediately prior to the effective time of the merger has not changed from the number of such shares as of October 31, 2008, subject to adjustment to account for the effect of a reverse stock split of Replidyne common stock to be implemented prior to the consummation of the merger. As a result of the merger, holders of the Company’s stock, options and warrants are expected to own or have the right to acquire in the aggregate between 83.0% and 83.7% of the combined company and the holders of Replidyne stock, options and warrants are expected to own or have the right to acquire in the aggregate between 16.3% and 17.0% of the combined company. At the effective time of the merger, Replidyne will change its corporate name to “Cardiovascular Systems, Inc.” as required by the merger agreement. The merger is subject to shareholder approval at meetings of the Company’s shareholders and Replidyne’s stockholders scheduled to be held on February 24, 2009 and other closing conditions and is expected to be consummated shortly thereafter.

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Introduction

On February 25, 2009, Replidyne, Inc., a Delaware corporation (“Replidyne”), completed its business combination with Cardiovascular Systems, Inc., a Minnesota corporation (“CSI-MN”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 3, 2008, by and among Replidyne, Responder Merger Sub, Inc., a wholly-owned subsidiary of Replidyne (“Merger Sub”), and CSI-MN (the “merger agreement”). Pursuant to the merger agreement, Merger Sub merged with and into CSI-MN, with CSI-MN continuing after the merger as the surviving corporation and a wholly owned subsidiary of Replidyne (the “merger”). At the effective time of the merger, Replidyne changed its name to Cardiovascular Systems, Inc. ( “CSI”) and CSI-MN changed its name to CSI Minnesota, Inc. Following the merger of Merger Sub with CSI-MN, CSI-MN merged with and into CSI, with CSI continuing after the merger as the surviving corporation (the “subsidiary merger”). These unaudited pro forma condensed combined financial statements have been prepared to give effect to the merger as if it occurred on December 31, 2008, but do not give effect to the subsidiary merger.

The net assets of Replidyne at the closing of the merger were $37.0 million, as calculated in accordance with the terms of the merger agreement, and CSI-MN security holders now own or have the right to acquire approximately 83.0% of the combined company on a fully-diluted basis using the treasury method of accounting for options and warrants. Further, former CSI-MN directors constitute a majority of the combined company’s board of directors and all members of the executive management of the combined company are from CSI-MN. Therefore, CSI-MN is be deemed to be the acquiring company for accounting purposes and the merger transaction will be accounted for as a reverse merger and a recapitalization. The financial statements of the combined entity will reflect the historical results of CSI-MN before the merger and will not include the historical financial results of Replidyne before the completion of the merger. Stockholders’ equity and earnings per share of the combined entity will be retroactively restated to reflect the number of shares of common stock received by CSI-MN security holders in the merger, after giving effect to the difference between the par values of the capital stock of CSI-MN and Replidyne, with the offset to additional paid-in capital.

These unaudited pro forma condensed combined financial statements have been prepared to give effect to the merger as a reverse acquisition of assets and a recapitalization. For accounting purposes, CSI-MN is considered to have acquired Replidyne in the merger, and it is assumed that Replidyne does not meet the definition of a business in accordance with the Statements of Financial Accounting Standards No. 141, Business Combinations, and Emerging Issues Task Force (EITF) No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business, because as of December 31, 2008, Replidyne had reduced its employee headcount to three employees that are not engaged in development or commercialization efforts and did not transition to the combined company, had returned its license to develop faropenem medoxomil to Asubio Pharma Co., Ltd. and had suspended development of REP3123 and its other anti-infective programs based on its bacterial DNA replication inhibition technology, and was engaged in a process to sell or otherwise dispose of its remaining research and development programs, including REP3123 and its bacterial DNA replication inhibition technology. As such, at the time the transaction was consummated, Replidyne’s sole business activity was liquidation through the merger. Under EITF 98-3, the total estimated purchase price, calculated as described in Note 2 to these unaudited pro forma condensed combined financial statements, is allocated to the assets acquired and liabilities assumed in connection with the transaction, based on their estimated fair values. As a result, the cost of the merger will be measured at the estimated fair value of the net assets acquired, and no goodwill will be recognized. While the accounting treatment of the transaction is an acquisition of assets and assumption of certain liabilities by CSI-MN, the manner in which such transaction was consummated was a merger between Replidyne and CSI-MN whereby CSI-MN stockholders control the combined entity. Accordingly, consistent with guidance relating to such transactions, CSI-MN (the legal acquiree, but the accounting acquirer) is considered to be the continuing reporting entity that acquires the registrant, Replidyne (the legal acquirer, but the accounting acquiree), and therefore the transaction is considered to be a reverse merger.

For purposes of these unaudited pro forma condensed combined financial statements, Replidyne and CSI-MN have made allocations of the estimated purchase price to the assets acquired and liabilities assumed based on preliminary estimates of their fair value as of December 31, 2008, as described in Note 2 to these unaudited pro forma condensed combined financial statements. Replidyne and CSI-MN have estimated that the fair value of Replidyne’s cash and cash equivalents, short-term investments, prepaid expenses and other current assets, and accounts payable and accrued expenses approximate carrying values due to their short-term maturities and expected realization and payment. A final determination of these estimated fair values will be based on the actual net assets of Replidyne that existed as of the date of completion of the merger. The actual amounts recorded related to the merger may differ materially from the information presented in these unaudited pro forma condensed combined financial statements as a result of:

	•		net cash used in Replidyne’s operations between the pro forma balance sheet date of December 31, 2008 and the closing of the merger;

	•		the actual completion of the merger on February 25, 2009;

	•		Replidyne’s net assets of $37.0 million as calculated pursuant to the merger agreement, which partially determined the actual number of shares of Replidyne’s common stock issued pursuant to the merger; and

	•		other changes in Replidyne’s net assets that occurred prior to completion of the merger, which could cause material differences in the information presented below.

The unaudited pro forma condensed combined balance sheet as of December 31, 2008 gives effect to the merger as if it occurred on December 31, 2008 and combines the historical balance sheets of Replidyne and CSI-MN as of December 31, 2008 and includes the effect of the issuance of warrants to purchase 3.5 million shares of CSI-MN common stock (equivalent to a total of 2.3 million shares of CSI-MN common stock based on the conversion ratio set forth in the merger agreement) to CSI-MN preferred stockholders in connection with the conversion of preferred stock to common stock immediately prior to the effective time of the merger. The CSI-MN balance sheet information was derived from its unaudited consolidated balance sheet included in its Form 10-Q for the quarterly period ended December 31, 2008. The Replidyne balance sheet information was derived from its audited consolidated balance sheet included in its Form 10-K for the annual period ended December 31, 2008. The estimated purchase price of the Replidyne acquisition in these unaudited pro forma condensed combined financial statements was based on the estimated fair value of the net assets to be received by CSI-MN assuming the merger had closed on December 31, 2008.

The final purchase price allocation may change significantly from preliminary estimates. The actual purchase price allocation upon consummation of the merger will be based on the fair value of Replidyne’s assets and liabilities as determined at the time of the consummation of the merger on February 25, 2009. Replidyne continued to use its cash and other liquid assets to finance the closing of its operations. Please see the notes to these unaudited pro forma combined condensed financial statements for further discussion.

The unaudited pro forma condensed combined statements of operations for the six months ended December 31, 2008 and the year ended June 30, 2008 are presented as if the merger was consummated on July 1, 2007, and combine the historical results of Replidyne and CSI-MN for the six months ended December 31, 2008 and the year ended June 30, 2008, respectively. The historical results of CSI-MN were derived from its unaudited consolidated statement of operations included in its Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008 and its audited consolidated statement of operations for the year ended June 30, 2008. The historical results of Replidyne were derived from its audited statement of operations included in its Annual Report on Form 10-K for the year ended December 31, 2008, and its unaudited statement of operations for the six months ended June 30, 2007 and 2008 included in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008.

The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Replidyne and CSI-MN been a combined company during the specified periods. Further, the unaudited pro forma condensed combined financial statements do not reflect any adjustments to remove the operating results of Replidyne. As noted above, Replidyne did not have any substantive operations at the time of the consummation of the merger. The unaudited pro forma condensed combined financial statements have been prepared using CSI-MN’s June 30 year-end, as the combined company has June 30 year end following closing of the merger. The pro forma adjustments are based on the preliminary information available at the time of the preparation of the Form 8-K to which these financial statements are an exhibit. The unaudited pro forma condensed combined financial statements, including the notes hereto, are qualified in their entirety to, and should be read in conjunction with, the historical consolidated financial statements included in CSI-MN’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008 and CSI-MN’s historical consolidated financial statements for the year ended June 30, 2008 and the historical financial statements of Replidyne included in its Annual Report on Form 10-K for the year ended December 31, 2008 and in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008.

Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2008


	Historical						Pro Forma
	Replidyne			CSI-MN			Adjustments				Combined
				(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	33,738		$	6,370		$	—			$	40,108
Short-term investments		11,750			—			—				11,750
Accounts receivable, net		—			7,351			—				7,351
Inventories		—			3,072			—				3,072
Prepaid expenses and other current assets		773			1,757			—				2,530

Total current assets		46,261			18,550			—				64,811
Investments		—			22,200			—				22,200
Property and Equipment, net		542			1,291			(342	)	E		1,491
Patents, net		—			1,163			—				1,163
Other assets		36			—			—				36

Total assets	$	46,839		$	43,204		$	(342	)		$	89,701


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	4,698		$	9,430		$	6,200		G	$	20,728
								400		I
Current maturities of long-term debt		—			27,821			—				27,821

Total current liabilities		4,698			37,251			6,600				48,549

Long-term debt		—			2,100			—				2,100
Redeemable convertible preferred stock warrants		—			4,226			(4,226	)	A		—
Deferred rent		—			100			—				100

Total liabilities		4,698			43,677			2,374				50,749
Redeemable convertible preferred stock		—			101,239			(101,239	)	A		—
Stockholders’ equity (deficit):
Common stock		27			39,869			101,239		A		137
								42,114		D
								(183,112	)	J
Treasury stock		(1	)		—			1		D		—
Additional paid-in capital		192,240			—			(192,240	)	D		182,770
								(342	)	E
								183,112		J
Common stock warrants		—			2,152			4,226		A		14,107
								7,729		C
Accumulated other comprehensive income (loss)		288			—			(288	)	D		—
Accumulated deficit		(150,413	)		(143,733	)		(7,729	)	C		(158,062	)
								150,413		D
								(6,200	)	G
								(400	)	I

Total stockholders’ equity (deficit)		42,141			(101,712	)		97,223				38,952

Total liabilities and stockholders’ equity (deficit)	$	46,839		$	43,204		$	(342	)		$	89,701

See accompanying notes to the unaudited pro forma condensed combined financial statements

Unaudited Pro Forma Condensed Combined Statement of Operations


	For the Six months ended December 31, 2008
	Historical						Pro Forma
	Replidyne			CSI-MN			Adjustments				Combined
	(In thousands, except share and per share data)
Revenues	$	—		$	25,660		$	—			$	25,650
Cost of goods sold		—			8,034			—				8,034

Gross margin		—			17,616			—				17,616
Operating expenses:
Selling, general and administrative		8,890			31,373			(778	)	F		39,485
Research and development		5,380			8,424			(60	)	F		13,744

Total operating expenses		14,270			39,797			(838	)			53,229

Loss from operations		(14,270	)		(22,181	)		838				(35,613	)
Interest expense		—			(1,026	)		166		H		(860	)
Interest and investment income		853			3,009			—				3,862
Impairment on investments		—			(2,233	)		—				(2,233	)
Other		(19	)		—			—				(19	)

Net loss		(13,436	)		(22,431	)		1,004				(34,863	)
Less: Accretion of redeemable convertible preferred stock		—			(2,997	)		2,997		H		—

Net loss attributable to common stockholders	$	(13,436	)	$	(25,428	)	$	4,001			$	(34,863	)

Basic and diluted net loss per share attributable to common stockholders	$	(0.50	)	$	(3.29	)					$	(2.55	)

Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders		27,100,000			7,724,197			3,227,883		B		13,662,080
								(24,390,000	)	B

See accompanying notes to the unaudited pro forma condensed combined financial statements

Unaudited Pro Forma Condensed Combined Statement of Operations — (Continued)


	For the Year Ended June 30, 2008
	Historical									Pro Forma
	Replidyne			CSI-MN			Adjustments					Combined
	(In thousands, except share and per share data)
Revenues	$	—		$	22,177		$	—				$	22,177
Cost of goods sold		—			8,927			—					8,927

Gross margin		—			13,250			—					13,250
Operating expenses:
Selling, general and administrative		12,824			35,326			(340	)		F		47,810
Research and development		47,564			16,068			(1,022	)		F		62,610

Total operating expenses		60,388			51,394			(1,362	)				110,420

Loss from operations		(60,388	)		(38,144	)		1,362					(97,170	)
Interest expense		—			(923	)		916			H		(7	)
Interest and investment income		3,534			1,167			—					4,701
Impairment of investments		—			(1,267	)		—					(1,267	)
Other		(81	)		—			—					(81	)

Net loss		(56,935	)		(39,167	)		2,278					(93,824	)
Less: Accretion of redeemable convertible preferred stock		—			(19,422	)		19,422			H		—

Net loss attributable to common stockholders	$	(56,935	)	$	(58,589	)	$	21,700				$	(93,824	)

Basic and diluted net loss per share attributable to common stockholders	$	(2.10	)	$	(8.57	)						$	(7.17	)

Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders		27,103,000			6,835,126			3,541,725			B		13,087,151
								(24,392,700	)		B

See accompanying notes to the unaudited pro forma condensed combined financial statements

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. Basis of Presentation

On November 3, 2008, Replidyne and CSI-MN entered into an Agreement and Plan of Merger and Reorganization, under which, on February 25, 2009, Responder Merger Sub, Inc., a wholly owned subsidiary formed by Replidyne in connection with the merger, merged with and into CSI-MN and CSI-MN became a wholly owned subsidiary of Replidyne and the surviving corporation of the merger. Upon completion of the merger, Replidyne changed its name to Cardiovascular Systems, Inc. and assumed CSI-MN’s fiscal year end of June 30. Pursuant to the terms of the merger agreement, Replidyne issued to the stockholders of CSI-MN shares of Replidyne common stock and assumed all of the stock options, restricted stock awards, and stock warrants of CSI-MN outstanding as of the merger closing date, such that CSI-MN stockholders, including holders of common stock and redeemable convertible preferred stock, option and restricted stock holders and warrant holders own or have the right to acquire approximately 83.0% of the combined company on a pro forma fully diluted basis, calculated using the treasury stock method of accounting for options and warrants, and Replidyne stockholders and option and warrant holders own or have the right to acquire approximately 17.0% of the combined company on a pro forma fully diluted basis, calculated using the treasury stock method of accounting for options and warrants.

Because CSI-MN security holders own or have the right to acquire approximately 83.0% of the voting stock of the combined company after the transaction and the management of CSI-MN is the management of the combined company, CSI-MN is deemed to be the acquiring company for accounting purposes and the transaction will be accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States. Accordingly, the assets and liabilities of Replidyne will be recorded as of the merger closing date at their estimated fair values.

2. Purchase of Net Assets In Accordance with EITF No. 98-3

The estimated purchase price and the allocation of the estimated purchase price discussed below have been determined in accordance with EITF No. 98-3, and are preliminary in nature. The final allocation of the purchase price will be based on Replidyne’s assets and liabilities on the closing date. Under EITF No. 98-3, the total estimated purchase price is allocated to the Replidyne tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of the consummation of the transaction.

The unaudited pro forma condensed combined financial statements include an estimate for contractual compensation liabilities owed to Replidyne employees as a result of the change of control obligations and other severance agreement payments that became due as a result of the merger. An estimate of costs related to Replidyne’s remaining lease obligation (net of estimated subleases) is also included in the unaudited pro forma condensed combined financial statements.

The preliminary allocation of the estimated purchase price is in part based upon preliminary management estimates, as described below, and CSI-MN and Replidyne’s estimates and assumptions are subject to change upon final amounts as of the consummation of the merger.

Cash and cash equivalents, short-term investments, property and equipment, and other tangible assets and liabilities : The tangible assets and liabilities were valued at their respective carrying amounts, except for adjustments to certain property and equipment, and cessation-related liabilities, as CSI-MN and Replidyne believed that these amounts approximated their then current fair values.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) — (Continued)

Pre-acquisition contingencies: CSI-MN and Replidyne did not identify any pre-acquisition contingencies where a liability was probable and the amount of the liability could be reasonably estimated.

The final determination of the purchase price allocation will be based on the fair values of the assets acquired and liabilities assumed as of the date the merger was consummated. The preliminary allocation of the estimated purchase price assuming the merger had closed on December 31, 2008 is as follows (in thousands):


	Amount
Preliminary estimated purchase price allocation:
Cash and cash equivalents	$	33,738
Short-term investments		11,750
Prepaid expenses and other current assets		773
Property and Equipment, Net		200
Other Assets		36
Accounts payable and accrued expenses		(11,298	)

Total estimated purchase price	$	35,199

The final purchase price allocation may change significantly from preliminary estimates. The actual purchase price allocation upon consummation of the merger will be based on the fair values of Replidyne’s assets and liabilities as determined at the time of consummation. Further, Replidyne continued to use its cash and other liquid assets to finance the closing of its operations. CSI-MN and Replidyne will re-evaluate the determination of the purchase price now that the merger has been consummated.

3. Pro Forma Adjustments

Pro forma adjustments are necessary to reflect the estimated purchase price and to adjust amounts related to Replidyne’s tangible and identifiable intangible assets and liabilities to a preliminary estimate of their fair values.

The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows (dollar amounts in thousands, except per share amounts):

(A) To reflect the conversion of all shares of CSI-MN preferred stock and preferred stock warrants to CSI-MN common stock and common stock warrants immediately prior to the effective time of the merger.

(B) To reflect the one-for-ten reverse stock split of Replidyne common stock effected immediately prior to the effective time of the merger and the issuance of new shares of Replidyne common stock at the effective time of the merger. A share conversion factor of 0.647 was determined using the treasury method of accounting, as specified in the merger agreement, for CSI-MN options and warrants, and giving effect to other outstanding equity securities, based on the net assets of Replidyne equaling $37,000, as calculated in accordance with the terms of the merger agreement. The assumed conversion factor was multiplied by the CSI-MN common stock outstanding immediately prior to the effective time of the merger (including common stock issued upon the conversion of preferred stock) to calculate the amount of new shares to be issued by Replidyne. The calculations are summarized as follows:


Six months ended December 31, 2008	Shares
Shares of CSI-MN common stock outstanding at December 31, 2008		7,724,196
Shares of CSI-MN common stock to be issued upon the conversion of CSI-MN preferred stock		9,203,284
Sub-total		16,927,481
Conversion factor		0.647


Six months ended December 31, 2008	Shares
Sub-total		10,952,080
Less: shares of CSI-MN common stock outstanding at December 31, 2008		(7,724,197	)

Adjustment		3,227,883

Shares of Replidyne common stock outstanding at December 31, 2008		27,100,000
Reverse Split Factor		0.9
Adjustment		(24,390,000	)


Year Ended June 30, 2008	Shares
Shares of CSI-MN common stock outstanding at June 30, 2008		6,835,126
Shares of CSI-MN common stock to be issued upon the conversion of CSI-MN preferred stock		9,203,284
Sub-total		16,038,410
Conversion factor		0.647

Sub-total		10,376,851

Less: shares of CSI-MN common stock outstanding at June 30, 2008		(6,835,126	)

Adjustment		3,541,725

Shares of Replidyne common stock outstanding at June 30, 2008		27,103,000
Reverse Split Factor		0.9
Adjustment		(24,392,700	)

(C) To reflect the issuance of 3.5 million CSI-MN common stock warrants (equivalent to a total of 2.3 million common stock warrants based on the conversion ratio set forth in the merger agreement) at $5.71 per share (equivalent to $8.83 per share based on the conversion ratio set forth in the merger agreement) to CSI-MN preferred stock holders in connection with the conversion of preferred stock to common stock. The warrants were determined to have an estimated value of $7,729 for accounting purposes using the Black Scholes method, are exercisable upon issuance, and expire five years after issuance.

(D) To reflect the elimination of Replidyne’s treasury stock, additional paid-in capital, accumulated other comprehensive income, and accumulated deficit. The adjustment to common stock of $42,114 is calculated as follows:


Total book value of Replidyne’s assets	$	46,839
Less: book value of Replidyne’s liabilities		(4,698	)
Less: par value of Replidyne common stock outstanding on December 31, 2008		(27	)

Value of shares issued by Replidyne to stockholders of CSI-MN, valued at the estimated fair value of the net assets of Replidyne	$	42,114

(E) To adjust Replidyne’s carrying value of property and equipment. For accounting purposes, CSI-MN is considered to be acquiring the net assets of Replidyne in this transaction, including tangible net assets such as property and equipment and other assets.

(F) To reflect the elimination of Replidyne’s historical depreciation and amortization expense associated with the reduction in the carrying value of property and equipment to fair value and as a result of the allocation process, and to reflect the elimination of asset impairment charges recorded by Replidyne. Had the merger been consummated on July 1, 2007, the related property and equipment would have been eliminated.

(G) To record estimated transaction costs for CSI-MN and Replidyne.

(H) To reverse accretion of redeemable convertible preferred stock and adjustment to fair value of redeemable convertible preferred stock warrants.

(I) To reflect additional estimated fair value (including estimated subleases) of the lease obligation for Replidyne’s facility, which was abandoned upon consummation of the merger.

(J) To adjust common stock to equal par value.

4. Non-recurring Expenses

Replidyne continued to incur certain non-recurring expenses in connection with the transaction. These expenses, which are reflected in the accompanying unaudited pro forma condensed combined balance sheet as of December 31, 2008, but are not reflected in the unaudited pro forma condensed combined statements of operations for the six months ended December 31, 2008 and for the year ended June 30, 2008, were estimated as of December 31, 2008 to be as follows (in thousands):


Financial advisors’ fee	$	4,000
Legal, accounting, and processing costs		800
Transaction bonuses		400

Total fees	$	5,200

CSI-MN incurred certain non-recurring transaction-related costs in connection with the merger. These estimated expenses of $1,000 are reflected in the unaudited pro forma condensed combined balance sheet as of December 31, 2008, but are not reflected in the unaudited pro forma condensed combined statements of operations for the six months ended December 31, 2008 and for the year ended June 30, 2008.

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