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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M4nHktrfTLZYX4bHEYY1yShdm6vE9ty2/LzNugOyMuVZaOdrTyG0xeZ9kct2BRMV S0I6q8AAW6TMnCJ1lv+ICg== 0000950134-04-016775.txt : 20041108 0000950134-04-016775.hdr.sgml : 20041108 20041108173311 ACCESSION NUMBER: 0000950134-04-016775 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABG MEDICAL INC CENTRAL INDEX KEY: 0001122425 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-117580 FILM NUMBER: 041126856 BUSINESS ADDRESS: STREET 1: 13005 58TH AVE N CITY: PLYMOUTH STATE: MN ZIP: 55442 S-1/A 1 c86262a3sv1za.htm FORM S-1 AMENDMENT NO.3 sv1za

As filed with the Securities and Exchange Commission on November 8, 2004

Registration No. 333-117580

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 3

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

CABG Medical, Inc.

(Exact name of registrant as specified in its charter)


Minnesota	3841	41-1958628
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial classification code number)	(I.R.S. employer identification number)

14505 — 21st Avenue North, Suite 212

Minneapolis, MN 55447

(763) 258-8005

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Manny Villafaña

Chairman and Chief Executive Officer

CABG Medical, Inc.

14505 — 21st Avenue North, Suite 212

Minneapolis, MN 55447

(763) 258-8005

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Robert K. Ranum, Esq. Fredrikson & Byron, P.A. 4000 Pillsbury Center 200 South Sixth Street Minneapolis, MN 55402 (612) 492-7000 (612) 492-7077 (fax)		Girard P. Miller, Esq. Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 (612) 371-3211 (612) 371-3207 (fax)

Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

CALCULATION OF REGISTRATION FEE





	Proposed Maximum Aggregate
Title of Each Class of Securities to be Registered	Offering Price(1)	Amount of Registration Fee(2)


Common stock, no par value per share	$37,950,000	$4,808.27

(1) Estimated solely for purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2) Previously paid in connection with the original filing of the registration statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer and sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 8, 2004

PROSPECTUS

(CABG LOGO)

5,500,000 Shares

CABG Medical, Inc.

Common Stock

This is the initial public offering of 5,500,000 shares of common stock of CABG Medical, Inc.

We expect the public offering price to be between $5.00 and $6.00 per share. Currently, no public market exists for the shares. After pricing the offering, we expect the common stock will be quoted on the Nasdaq National Market under the symbol “CABG.”

Investing in our common stock is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page 7.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	Per Share	Total

Public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to CABG Medical, Inc.	$	$

The underwriters may also purchase up to an additional 825,000 shares from us at the public offering price, less the underwriting discount, within 45 days from the date of this prospectus to cover over-allotments.

The underwriters expect to deliver the shares on or about , 2004.


Feltl and Company	Ladenburg Thalmann & Co. Inc.

The date of this prospectus is , 2004.

TABLE OF CONTENTS


Prospectus Summary		1
The Offering		6
Summary Financial Information		7
Risk Factors		8
Special Note Regarding Forward-Looking Statements		20
Use of Proceeds		21
Dividend Policy		21
Capitalization		22
Dilution		23
Selected Financial Data		24
Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Our Business		31
Management		46
Related Party Transactions		51
Principal Stockholders		53
Description of Capital Stock		54
Shares Eligible for Future Sale		55
Underwriting		57
Legal Matters		60
Experts		60
Where You Can Find More Information		60
Index to Financial Statements		F-1
Form of Underwriting Agreement
Consent of KPMG LLP, Independent Registered Public Accounting Firm

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock.

Our Business

We are a developmental stage medical technology company seeking to improve the treatment of coronary heart disease, or CHD, by advancing conventional bypass surgery. We have designed our first product, the Holly Graft System, by leveraging our understanding of flow dynamics, material sciences and drug combinations to create an artificial coronary graft system. The Holly Graft System has not yet received regulatory approval for sale anywhere in the world and will not be commercially available for several years, if ever. We have eight full-time employees and are led by a team of experienced medical technology industry executives and recognized experts in cardiac surgery and cardiovascular research. We intend to add employees following this offering. Manny Villafaña, our Chairman and Chief Executive Officer, has previously introduced innovative cardiac surgery products such as pacemakers and heart valves throughout the world and founded companies such as Cardiac Pacemakers, Inc. (now Guidant Corporation), St. Jude Medical, Inc. and ATS Medical, Inc.

Today’s coronary bypass procedure typically requires two surgeries: one to harvest either or both of the principal superficial veins in the leg, or saphenous veins, or radial arteries from the arms, and a second to implant the harvested vessels as grafts. The harvesting of vessels increases the risk of infection, pain, swelling caused by a buildup of watery fluid in the cellular tissue, or edema, and other adverse complications, while adding time, cost and complexity to the bypass procedure. Unsightly scarring of legs or arms remains a lifelong legacy of vessel harvesting.

According to the study: “Endoscopic Versus Open Saphenous Vein Harvest: A Comparison of Postoperative Wound Complications” published in 2002 by the Annals of Thoracic Surgery, approximately twenty percent of such patients experience some type of complication as a result of a traditional saphenous vein harvesting. Patients who are obese, diabetic or both are particularly at risk for such complications. While surgical techniques such as endoscopic vein harvesting can reduce the number of complications to approximately four percent, these techniques do not eliminate the need for harvesting vessels, nor do they eliminate resulting complications. A significant portion of patients suffering such complications require rehospitalization, the costs of which typically must be absorbed by the hospitals and payors. In addition, the saphenous vein harvesting approach assumes the availability of suitable vessels from the patient, which is often not the case, particularly in the elderly or in patients suffering from diabetes, obesity or other forms of cardiovascular disease.

Our technology is intended to obviate the need for vessel harvesting surgery. The American Heart Association, or AHA, reports that in the United States alone during 2001, over 300,000 patients had bypass surgery largely requiring saphenous vein grafts, or SVGs. We estimate the market for the rest of the world to be roughly equal in size to that of the United States. Over the last several years, the total number of patients undergoing bypass surgery has decreased as a result of new, less invasive therapies such as pharmacotherapy, angioplasty and stenting. Any future decline in the total number of patients undergoing bypass surgery could decrease our potential market both prior to and after commercialization.

Our Solution

Numerous efforts to develop an artificial coronary graft using materials that mimic the natural structure of the coronary artery have been attempted, including porcine conduit, tissue engineered grafts and grafts made from synthetic materials. Thus far, none have been approved by the United States Food and Drug Administration, or FDA. We believe previous artificial grafts were primarily focused on ascertaining the appropriate tissue or materials on which to base the graft, rather than the mechanics of blood flow and the corresponding influence on graft patency (openness). We have reviewed the previous

artificial graft work and believe continuous high blood flow and pressure, coupled with drug combinations, are the critical elements necessary to adequately limit or obviate clotting and tissue formation in an artificial graft system, each of which can adversely impact vessel patency.

We expect that our Holly Graft System will provide cardiac surgeons with a new technology that will be differentiated and innovative in the worldwide market for coronary artery bypass grafting, or CABG, procedures. Based on the animal tests we have performed to date, we believe the Holly Graft System should be at least as effective as the traditional SVG procedure in restoring blood circulation in coronary arteries without the negative side effects of saphenous vein harvesting. In terms of maintaining graft patency, our system delivers critical continuous high blood flow from the aorta to the target vessel, thereby diminishing the greater susceptibility of clotting and tissue formation associated with low flow situations. Typically, harvested vessels are low flow due to the termination of flow at the target vessel.

The Holly Graft System is able to maintain continuous high flow and pressure because of the following characteristics:

• Larger Diameter: Our graft consists of a 6 mm diameter conduit compared to the typical 2-3 mm harvested conduit. The increase in size allows for increased flow.

• Healthier Conduits: The Holly Graft System provides surgeons with a plaque free, consistent and reliable source of conduit for grafts, which are free from disease. Patients suffering from CHD commonly have a build up of fatty deposits inside the arterial walls, or atherosclerosis, or other conditions causing marginal quality vessels (particularly those individuals with obese and diabetic conditions) that immediately threaten the patency of harvested SVGs and other vessels.

• Flow Limiter: The Holly Graft System utilizes a flow limiter which maintains pressure within the graft and creates pressure to feed the target coronary artery through the system’s vessel connectors.

• Drug Combinations: The vessel connectors used in the Holly Graft System are coated with the same drug combination that is used on certain prominent drug-eluting stents. In our animal trials, these drug combinations prevented the buildup of tissue proximate to the grafting site, which can result in post-operative obstructions or closures of vessels, or occlusions, in the same manner in which the combination prevents the recurrence of a blockage, or restenosis, in stenting procedures. Accordingly, we believe that these drug combinations will limit the risk of an interruption of the Holly Graft System. Obtaining a license to such a drug combination is critical to the commercialization of the Holly Graft System.

We have obtained two United States patents, applied for four additional United States patents on various aspects of the Holly Graft System, and are seeking licenses for other aspects, and have filed foreign applications in the European Union, Japan, China, Australia, Brazil, Canada, Argentina and Hong Kong. See the next heading, “Our Regulatory and Commercialization Plan” below and “Risk Factors — Risks Relating to Intellectual Property.”

In addition to the technical characteristics of the Holly Graft System, which we believe will make them at least as effective as SVGs, we believe that our system may progress through the regulatory process and obtain meaningful commercial acceptability due to the following:

• Physician Preference: Assuming our clinical studies prove that the Holly Graft System is as effective as SVGs, we believe many cardiac surgeons will readily accept and utilize the Holly Graft System in order to reduce operating time and avoid the patient discomfort, scarring and frequent complications associated with the surgery to remove the saphenous vein. Although endoscopic harvesting procedures can reduce the complication rate associated with saphenous vein harvesting, the training required to learn the technique is significant and proficiency is generally not obtained until a physician performs the procedure on numerous patients. To the best of our knowledge, no statistics on the usage of endoscopic procedures are available, but due to the above-mentioned factors, we believe that the preponderance of saphenous vein harvesting is performed by the traditional “open procedure” and that the majority of endoscopic procedures are performed at large heart centers that perform a significant number of bypass procedures each year. Additionally, endoscopic procedures still (i) require a second surgery; (ii) result in scarring; and (iii) only reduce the incidence of, but do not eliminate complications associated with saphenous vein harvesting.

• Ease of Use: We believe that the procedure involving the Holly Graft System is relatively easy to complete as compared to the SVG procedure. In addition, we anticipate that physician training for surgery employing our system will be relatively simple. The Holly Graft System is equally straight forward to use in both on-pump and beating-heart surgery (where no heart-lung machine is employed).

• Physician and Hospital Economics: Bypass procedures involving SVGs consist of a delicate surgery requiring 12-20 minutes per connection of a harvested graft to an affected artery in the heart, or anastomosis. While no human procedures have been performed to date, a bypass procedure utilizing the Holly Graft System is expected to require 2-3 minutes per vessel connecter. As a result, we believe that physicians and hospitals utilizing the Holly Graft System could perform additional bypass procedures.

• Patient Preference: If our human clinical studies demonstrate graft effectiveness at least comparable to SVGs, we believe patients may request that their doctors use the Holly Graft System rather than harvest vessels from other parts of their body. Aside from cosmetic considerations, patients generally report that the pain and discomfort from the graft site can be considerably worse than that of the primary surgery.

Despite these advantages, cardiac surgeons may not accept the Holly Graft System as easily or quickly as we anticipate. Many surgeons may be reluctant to change from the proven and accepted SVG procedure to the Holly Graft System without extensive testing and empirical evidence that the Holly Graft System performs as well or better than the SVG.

Our Regulatory and Commercialization Plan

We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia in the fourth quarter of 2004. This first human implant will not provide sufficient data to conclude that the Holly Graft System will function as intended in human patients. Rather, we will be able to accurately evaluate the performance of the Holly Graft System in humans only after extensive testing in large numbers of patients over a period of years. See “Our Business — Clinical Status.” We also intend to initiate human clinical trials in Europe in 2005. Based on the results of our preclinical animal testing and assuming our initial human implants and clinical trials to be conducted in international venues are successful, in 2005 we plan to file an application for an Investigational Device Exemption, or IDE, with the FDA seeking to initiate human clinical trials for the Holly Graft System in the United States. The Holly Graft System is a Class III Device which will require Pre-Market Acceptance, or PMA, by the FDA. Based on our analysis of the FDA’s review of relatively similar medical devices, we anticipate the primary endpoints of our pivotal FDA clinical trial will be a six-month angiographic follow-up to assess

patency and a twelve-month clinical follow-up. We anticipate that these trials will commence in 2005 and the earliest they will end is the fourth quarter of 2007. If we have completed enrollment and obtained sufficient clinical data, we anticipate filing our application for PMA in 2007. We will seek to introduce the Holly Graft System into the United States market for commercialization in 2008. Our ability to achieve these goals by the dates indicated is subject to various risks described below under the heading “Risk Factors” including our need to obtain regulatory approval in the United States and in foreign jurisdictions, and our expected need to obtain one or more licenses from Angiotech Pharmaceuticals, Inc., or Angiotech, with respect to the use of paclitaxel in polymer coatings for implantable medical devices. We are currently discussing such licenses, while contemporaneously investigating alternative coatings and processes that we believe will be effective alternatives to Angiotech’s technologies should we be unable to obtain any necessary licenses from Angiotech. We may also choose to employ alternative coatings and processes should they prove to be superior to Angiotech’s technologies. We may not be able to successfully negotiate such license agreements with Angiotech until we receive regulatory approval to commercialize the Holly Graft System, if ever. As detailed above, we do not expect to obtain FDA approval until 2008. Our success depends on the development and commercialization of the Holly Graft System.

As is typical in the medical technology industry, we plan to seek regulatory approvals to market the Holly Graft System in certain international markets before seeking FDA approval in the United States. We will likely market our product in international markets with a network of experienced cardiovascular surgery representatives. In the United States, we anticipate that the Holly Graft System will be marketed using a combination of a direct sales force and independent representatives. We are collaborating with qualified partners in such areas as drugs, polymers, coating technologies, the manufacture of graft material and the production of alloy components.

Development Stage Company

We have a limited operating history, have not yet commercialized any products and therefore have not yet generated any product revenues. To date, we have focused on the development of the Holly Graft System. We have not been profitable in any quarter since inception and we do not know whether or when we will be able to generate revenues or become profitable. For the year ended December 31, 2003 and the nine months ended October 2, 2004, our net loss was approximately $1,542,000 and $2,211,000, respectively, and we had an accumulated deficit of $5,330,000 at October 2, 2004.

Company Information

We were incorporated under the laws of Minnesota in December 1999. Our executive offices are located at 14505 21st Avenue North, Suite 212, Minneapolis, Minnesota 55447. Our telephone number is (763) 258-8005. Our web site is www.cabgmedical.com. The information contained on our website is not a part of this prospectus. We have included our website address in this document as an inactive textual reference only.

In this prospectus, unless otherwise stated or the context otherwise requires, reference to “CABG Medical,” “we,” “us,” “our” and similar references refer to CABG Medical, Inc.

Assumptions Used In This Prospectus

Our fiscal year ends on December 31 of each year. Fiscal 1999 consisted of three weeks from and after our inception on December 3, 1999. Our fiscal quarters are based on thirteen-week periods that end on a Saturday.

Unless we indicate otherwise, all of the information in this prospectus assumes that the underwriters do not exercise their option to purchase up to 825,000 additional shares of our common stock within 45 days from the date of this prospectus to cover over-allotments.

We have United States federal trademark applications pending for the following marks: “Holly Graft^TM” and “CABG Medical^TM”. We have also filed trademark applications on the “Holly Graft” and “CABG Medical” trademarks in Canada and the European Community. We also have registered the Internet domain name: www.cabgmedical.com through a service agreement with the domain registrar Network Solutions. The information contained in our website is not part of this prospectus. We have included our website address in this document as an inactive textual reference only. This prospectus also refers to trademarks owned by companies other than CABG Medical, Inc.

THE OFFERING


Common stock offered by us		5,500,000 shares

Common stock outstanding after the offering(1)		15,822,975 shares

Use of proceeds		We estimate that our net proceeds from this offering will be approximately $26.7 million at an assumed initial public offering price of $5.50 per share, which is the mid-point of our filing range, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We intend to use these net proceeds to fund our research and development activities, including clinical studies, for pre-commercialization education and awareness programs, to build our sales and marketing capabilities and for general corporate purposes, including working capital needs, facilities expansion and potential acquisitions. See “Use of Proceeds.”

Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed Nasdaq National Market symbol		CABG


(1)	The number of shares of our common stock to be outstanding after this offering is based on 10,322,975 shares outstanding as of October 29, 2004, and excludes:


	•	1,297,500 shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options under our 2000 Long-Term Incentive Plan at a weighted average exercise price of $1.45 per share;

	•	150,000 shares of restricted common stock to be issued immediately following this offering to the following individuals who have agreed to become directors of the company immediately following this offering which will be issued under our 2000 Long-Term Incentive Plan: A. Jay Graf, Robert E. Munzenrider, and Arch C. Smith. See the full discussion regarding our Board of Directors in the “Management” section of this document;

	•	After the issuance of the 150,000 shares of restricted common stock described above; and an additional 4,056,000 shares of common stock that are reserved for future issuance under our 2000 Long-Term Incentive Plan at the market value of our common stock at the date of grant.

	•	550,000 shares of common stock issuable upon exercise of warrants to be issued to the underwriters in connection with this offering that will remain outstanding after this offering at an exercise price equal to 125% of the initial public offering price.

Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option.

SUMMARY FINANCIAL INFORMATION

The following tables summarize our financial information. You should read this information together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

The net loss per share information is computed using the weighted average number of common shares outstanding.



		Period from												Nine Months Ended
		December 3, 1999
		(Date of Inception)			Year Ended December 31,
		to December 31,												September 27,			October 2,
		2003			2001			2002			2003			2003			2004


														(Unaudited)

		(In thousands, except share and per share data)
Statements of Operations Data:
Revenue		$	—		$	—		$	—		$	—		$	—		$	—
Expenses:
	Research and development		2,507			659			559			1,153			732			1,640
	Marketing, general and administrative		732			118			151			405			237			596

Total costs and expenses			3,239			777			710			1,558			969			2,236
Interest income			120			59			22			16			10			25

Net loss		$	(3,119	)	$	(718	)	$	(688	)	$	(1,542	)	$	(959	)	$	(2,211	)

Basic and diluted net loss per share					$	(0.09	)	$	(0.08	)	$	(0.17	)	$	(0.10	)	$	(0.23	)

Weighted average shares outstanding — basic and diluted						8,152,521			8,490,000			8,967,308			9,282,654			9,810,264



	October 2, 2004

			As
	Actual		Adjusted(1)(2)(3)


	(Unaudited)

	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	1,426	$	28,103
Working capital		2,203		28,880
Total assets		3,504		30,181
Total liabilities		735		735
Total stockholders’ equity		2,769		29,446

(1) As adjusted amounts give effect to the issuance and sale of shares of our common stock at an assumed initial public offering price of $5.50 per share, the mid-point of our filing range, and the receipt and application of the estimated net proceeds of approximately $26.7 million from this offering, after deducting the underwriting discount and estimated offering expenses payable by us. See “Use of Proceeds” and “Capitalization.”

(2) Includes the impact of 50,000 options that vest upon consummation of the offering. Such options will have no effect on total stockholders’ equity but, assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), upon vesting of these options common stock would increase by $24,000, deferred compensation would decrease by $118,000 and we would be required to record a total expense of $142,000.

(3) Includes the impact of 100,000 options that vest on the completion of the first implantation of the Holly Graft System in the United States. Assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), we would be required to increase deferred compensation to $285,000, which would be equal to the intrinsic value of the options.

RISK FACTORS

This offering is highly speculative and involves a high degree of risk. You should consider carefully the risks and uncertainties described below and the other information in this prospectus, including the financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks or uncertainties actually occur, our business, prospects, financial condition and operating results would likely suffer, possibly materially. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Relating to Our Business


	We are a development stage company with a limited operating history and have incurred losses since inception. If we do not generate significant revenues, we will not be able to achieve profitability.

We have had losses and negative operating cash flows since our inception. Although we have been successful in raising funds in the past, there is no assurance that any such financing can be obtained in the future on terms acceptable to us. The accompanying financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts of liabilities that may result from the outcome of this uncertainty.

We have operated as a development stage enterprise since our inception by devoting substantially all of our effort to financial planning, raising capital and research and development for our Holly Graft System. Accordingly, our financial statements have been prepared in accordance with the accounting and reporting principles prescribed by Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises, issued by the Financial Accounting Standards Board (FASB).

We have no current source of product revenue. We have a limited operating history and have not yet commercialized any products. To date, we have focused primarily on the development of the Holly Graft System. We began operations in December 1999, and we have not been profitable in any quarter since inception. As of October 2, 2004, we had an accumulated deficit of approximately $5.3 million. We expect to increase our spending significantly as we continue to expand our infrastructure, development programs and commercialization activities. As a result, we will need to generate significant revenues to pay these costs and achieve profitability and/or raise additional capital in a reasonable period of time. We do not know whether or when or if we will become profitable because of the significant uncertainties with respect to our ability to generate revenues from the sale of our products.


	Our future is entirely dependent upon the success of our Holly Graft System which is still under development. If we are unable to commercialize the Holly Graft System, or we experience significant delays in doing so, our business will be materially harmed.

Our time and financial resources since our inception have largely been devoted to the development of the Holly Graft System. Our ability to generate revenues will depend solely on the successful development and commercialization of the Holly Graft System. To date, we have conducted approximately 100 animal tests, of which four have been performed with the version of the Holly Graft System that we intend to implant in humans and which version has, in our view, addressed the problems of hyperplasia, clotting and vessel wall injury that are associated with substantially all preclinical coronary medical devices. The commercial success of the Holly Graft System will depend on several factors, including the following:

• Successful completion of preclinical and clinical trials;

• Receipt of marketing approvals from foreign health regulatory authorities and the FDA;

• Establishing commercial manufacturing arrangements with third-party manufacturers;

• Launching commercial sales of the Holly Graft System at prices that exceed our costs;

• Acceptance of the Holly Graft System in the medical community and with third-party payors;

• Protection from competition provided by acquiring and maintaining patent protection on our technology; and

• Obtaining, on acceptable terms, licenses or other rights to key technologies incorporated in the Holly Graft System.

In order to commercialize the Holly Graft System in the United States, we will be obligated to obtain PMA from the FDA. The process of obtaining PMA is complex, expensive and time-consuming. Under the PMA process, we must first obtain an IDE before we can begin the substantial clinical testing on humans that is required to determine the safety and efficacy of our product. We plan to apply to the FDA for an IDE during the second quarter of 2005 and expect that after we begin testing in humans in the United States an additional two years or more will be required to obtain PMA. We may not file our application for an IDE with the FDA within our anticipated time frame, and there is no assurance that we will be able to obtain an IDE from the FDA. Even if we obtain an IDE, there is no assurance that our clinical trials in humans will be successful or sufficient to obtain PMA. We anticipate that clinical trials will commence in 2005 and the earliest they will end is the fourth quarter of 2007. If we have completed enrollment and obtained sufficient clinical data, we anticipate filing our application for PMA in 2007. We will seek to introduce the Holly Graft System into the United States market for commercialization in 2008. The FDA may not accept our filings, may request additional information from us, including data from additional clinical trials, and, ultimately, may not grant PMA for the Holly Graft System. In addition, in order to commercialize the Holly Graft System outside the United States, we will have to comply with regulatory requirements in each such foreign jurisdiction. We may experience delays or other difficulties in obtaining such regulatory approvals. Such delays, difficulties or other factors may prevent us from commercializing our Holly Graft System as planned. If we are not successful in commercializing the Holly Graft System, or are significantly delayed in doing so, our business will be materially harmed and we may need to curtail or cease operations.


	*Any adverse results in our first human implants or our human clinical trials could have a material adverse effect on our business.*

We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia, in the fourth quarter of 2004. We expect our human clinical trials to begin in earnest in Europe in 2005. The Holly Graft System is also being tested in animals on an on-going basis. Our ability to continue operations will depend on the success of these testing efforts and the performance of the Holly Graft System in human patients. We cannot be certain the Holly Graft System will perform as expected in connection with the initial implants or any clinical tests in humans or as it has in connection with limited animal testing. Our initial implant in Australia and any related implant efforts in Australia will be conducted on a statistically insignificant number of human patients and are not intended to evaluate the effectiveness of the Holly Graft System for clinical trial purposes. Because the number of tests performed in humans outside the United States will be relatively small, there is no assurance that these human implants or clinical trials will identify problems that may be evident from a larger base of tests or after a longer period of observation of the patients, including those that might arise in post-marketing studies required after PMA. We will be able to accurately evaluate the performance of the Holly Graft in humans only after extensive testing in large numbers of patients over a period of years. Problems in connection with our Australian human implants or initial human clinical trials may prevent or delay obtaining necessary government and hospital regulatory approvals and threaten our ability to commercialize the Holly Graft System and continue operations. See “Our Business — Clinical Status.”


	*Failure to obtain market acceptance of the Holly Graft System could cause us to discontinue operations.*

The treatment of coronary artery bypass operations is now dominated by the use of SVGs. Even if the Holly Graft System proves to be as effective as the SVG for coronary bypass operations, and if all regulatory approvals are obtained, the success of the Holly Graft System will depend upon the acceptance by cardiovascular clinicians, including industry opinion leaders, that the artificial coronary graft is at least equivalent to the SVG procedure. We will be subject to intense scrutiny before cardiovascular clinicians

will be comfortable in changing from the historical and tested SVG procedure to our artificial coronary graft. We believe that recommendations by physicians will be essential for the development and successful marketing of the Holly Graft System, and there can be no assurance that any such recommendations will be obtained. We will also face competition from the use of the internal mammary artery as a source of conduit and endoscopic vessel harvesting as a less-invasive mechanism of extracting conduit.

We have not yet determined pricing for the Holly Graft System, and our pricing policies could adversely impact market acceptance of the Holly Graft System as compared to competing products and treatments. We also cannot know whether the reimbursement strategy we intend to employ will be accepted by third party payors. Problems in obtaining such reimbursement would adversely impact market acceptance of the Holly Graft System. Any of the foregoing factors, or other currently unforeseen factors, could limit or detract from market acceptance of the Holly Graft System. Insufficient market acceptance of the Holly Graft System would result in lost revenue, harm our business, financial condition, and could significantly hinder our ability to continue operations.


	We will likely need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unfavorable terms could adversely affect our development programs and other operations.

We currently believe that our available cash, cash equivalents and marketable securities, together with our net proceeds from this offering, will be sufficient to fund our anticipated levels of operations through at least the end of 2006. However, our future capital requirements will depend on many factors, including:

• The scope (and associated costs) and results of our pre-clinical and clinical trials;

• The timing of, and the costs involved in, obtaining regulatory approvals;

• The cost of manufacturing activities;

• The cost of commercialization activities, including product marketing and building a domestic direct sales force and an international distribution network;

• The costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;

• The costs involved in defending against any patent infringement actions brought against us by third parties;

• Our ability to establish and maintain additional collaborative arrangements;

• Advancement of other product candidates by us into development; and

• Potential acquisition or in-licensing of other products or technologies.

Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail or cease one or more of our development, licensing or acquisition programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products which we would otherwise pursue on our own. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience ownership and/or share price dilution and the terms of any new equity securities may have preferences over our common stock.


	If we fail to develop an effective direct sales force and network of cardiovascular surgery representatives to introduce and sell the Holly Graft System to surgeons, our financial results may suffer and the price of our shares may decline.

We plan to market our product in the United States using a combination of a direct sales force with additional independent representatives and outside the United States with a network of experienced

cardiovascular surgery representatives. Qualified direct sales personnel with experience in the cardiovascular products market are in high demand and there is no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified, independent, cardiovascular surgery representatives both within and outside the United States are in high demand and we may not be able to build an effective network for the distribution of our product through such representatives. Such representatives may be subject to contracts with manufacturers of competing products or contracts that prevent them from entering into an agreement to sell our product. We have no assurance that we will be able to enter into contracts with representatives on terms acceptable or reasonable to us.


	*We will be subject to intense competition and risk of obsolescence.*

Companies with significantly greater financial, technical, research, marketing, sales and distribution and other resources are working on products similar to our artificial coronary graft as well as other competing products or therapies, including stenting, angioplasty and pharmacological therapies. There can be no assurance that our competitors or future competitors will not succeed in developing or marketing technologies and products that demonstrate better safety or effectiveness, clinical results, ease of use or lower cost than our Holly Graft System or that such competitors will not succeed in obtaining regulatory approval for introducing or commercializing any such products prior to us. Any of the above competitive developments could have a material adverse effect on our business, financial condition and results of operations. There is no assurance that products or technologies introduced subsequent to the commercialization of the Holly Graft System will not render the Holly Graft System obsolete. See also “Our Business — Competition.”


	Our Holly Graft System may not be commercially viable if we fail to obtain an adequate level of reimbursement by Medicare and other third party payors. The markets for our Holly Graft System may also be limited by the indications for which its use may be reimbursed.

The availability and levels of reimbursement by governmental and other third party payors affect the market for products such as our Holly Graft System and others products we may develop. These third party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of the Holly Graft System to other available therapies. If reimbursement for the Holly Graft System is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, our business could be materially harmed.

Because most persons afflicted with CHD are elderly, we expect that coverage for the Holly Graft System in the United States will be primarily through the Medicare program. Limitations on coverage could be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of the Holly Graft System. Our business also could be adversely affected if physicians are not reimbursed by Medicare for the cost of the procedure in which they implant the Holly Graft System on a basis satisfactory to the administering physicians. If the local contractors that administer the Medicare program are slow to reimburse physicians, the physicians may pay us more slowly, which would adversely affect our working capital requirements.

We also will need to obtain approvals for payment for the Holly Graft System from private insurers, including managed care organizations. We expect that private insurers will consider the efficacy, cost-effectiveness and safety of the Holly Graft System in determining whether to approve reimbursement for it and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not receive approval for reimbursement of the Holly Graft System from private insurers on a satisfactory basis.

Our business could also be adversely affected if the Medicare program or other reimbursing bodies or payors limit the indications for which the Holly Graft System will be reimbursed to a smaller set of indications than we believe it is effective in treating.

We expect to experience pricing pressures in connection with the sale of the Holly Graft System and our future products due to the trend toward programs aimed at reducing healthcare costs, the increasing influence of health maintenance organizations and additional legislative proposals. Such pressures could have a material adverse effect on our business, financial condition and results of operations.


	*We may face product liability claims which could place a substantial burden on us.*

Even if we are able to develop and market our Holly Graft System, we could face future product liability claims. The medical products industry is subject to substantial litigation, and we could face future exposure to product liability claims. In addition, we may face product liability claims in connection with the clinical trial of our products. We will seek to obtain general insurance coverage for product liability claims, but there is no assurance that such insurance coverage will be available on commercially reasonable terms, if at all. A product liability claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on our future business, financial condition and results of operations.


	*We depend on a limited number of suppliers and may be unable to manufacture the Holly Graft System if shipments from these suppliers are delayed or interrupted.*

We depend on vendors to provide components of our Holly Graft System at appropriate quality and reliability levels and in compliance with regulatory requirements. In addition, all components of our Holly Graft System are only available from a limited number of suppliers. We have no agreements with our suppliers that assure us of continued availability of components or prevent price increases. While we recognize this issue and have identified alternate suppliers for such components, if supplies from our primary vendors were delayed or interrupted for any reason, we might not be able to manufacture our Holly Graft System in a timely fashion or in sufficient quantities or under acceptable terms. Such delay, shortage or quality issues could result in lost revenue and harm our business, financial condition and results of operations.


	*If we are unable to develop relationships with collaborative partners, we may have difficulty creating a sufficient market for our Holly Graft System.*

We believe that our success in penetrating our target markets depends in part on our ability to develop and then maintain collaborative relationships with key companies as well as with key academic researchers. There may be risks in relying on collaborative relationships such as:

• Our partners may develop or sell technologies or components that are competitive with our Holly Graft System;

• Our collaborators may preclude us from entering into additional future arrangements;

• Our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;

• Some of our agreements may terminate prematurely due to disagreements between us and our partners;

• Our partners may not devote sufficient resources to the development and sale of our products;

• Our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;

• Our collaborations may be unsuccessful; or

• We may not be able to negotiate future collaborative agreements on acceptable terms.


	*We may not be able to attract or retain employees with the skills needed to support our anticipated growth.*

We will be required to hire skilled employees at all levels of our operations in a market where such qualified employees are in high demand. We may not be able to attract or retain employees with the skills needed to support our anticipated growth. The inability to hire needed employees on a timely basis could limit our ability to grow, cause delays, and have a material adverse effect on our ability to meet the schedules of our business plan.


	*Should we lose the services of certain key personnel, we may not be able to successfully commercialize the Holly Graft System.*

We are dependent on Manny Villafaña, our Chairman and Chief Executive Officer, and John Babitt, our President, Chief Operating Officer and Chief Financial Officer. The loss of services of Mr. Villafaña or Mr. Babitt would impair our ability to commercialize our products or to develop new products and would have a material adverse effect on our business, financial condition and results of operations. As soon as practicable following this offering, we intend to obtain key person life insurance on Mr. Villafaña in an amount we deem appropriate.


	*We have limited manufacturing experience and will depend on third parties to manufacture components of our products.*

We have not yet completed the development and testing of our first product and as a result have no experience in manufacturing products for commercial distribution. We currently plan to outsource certain production aspects to contract manufacturers. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving product yields, controlling and anticipating product costs, quality control and assurance, component supply and shortages of qualified personnel. We cannot assure you that the third-party contract manufacturers with whom we are developing relationships will have the ability to produce the quantities of our products needed for development or commercial sales or will be willing to do so at prices that allow our product to compete successfully in the market. In addition, we cannot assure you that even if we are able to contract with third-party manufacturers for the production of our products that these manufacturers will not experience manufacturing difficulties. Any difficulties in locating and hiring third-party manufacturers, or in the ability of third-party manufacturers to supply products at the times and in the quantities we need, could have a material adverse effect on our business.


	*New product development in the medical device industry is both costly and labor intensive with very low success rates for successful commercialization.*

Our long-term success is dependent in part on the design, development and commercialization of the Holly Graft System and other new products in the medical device industry. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could result in lost revenue and therefore could have a material adverse effect on our financial condition and results of operations.


	*The number of patients undergoing bypass procedures may continue to decline, resulting in a reduction of our market potential.*

Over the past several years, the total number of patients undergoing bypass surgery has decreased as a result of new, less invasive therapies such as pharmacotherapy, angioplasty and stenting. There can be no assurance that the number of patients will not continue to decline as further medical advances are introduced. Any future decline in the total number of patients undergoing bypass surgery could result in

lost revenue and therefore could have a material adverse effect on our business, financial condition and results of operations.


	*There is a risk that the Holly Graft System may be subject to a market withdrawal or product recall.*

Complex medical devices, such as our Holly Graft System, can experience performance problems in the field that require review and possible corrective action by the manufacturer. There can be no assurance that component failures, manufacturing errors, design defects that could result in an unsafe condition or injury to the patient, or product recalls relating to competing products or products utilizing the same component(s) used in the Holly Graft System will not occur. If any such failures or defects or other factors were deemed serious, we could be required to withdraw or recall our products, which could result in significant costs. There can be no assurance that market withdrawals or product recalls will not occur in the future. Any future product problems could result in product claims, liability, market withdrawals or recalls of products, which could have a material adverse effect on our business, financial condition and results of operations.


	*Our financial results for future periods may be adversely affected by changes required by financial and accounting regulatory agencies.*

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

For example, we currently are not required to record stock-based compensation charges if the employee’s stock option exercise price is equal to or exceeds the fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and have begun to record the fair value of stock options as an expense. Although the standards have not been finalized and the timing of a final statement has not been established, the FASB has announced its support for recording expense for the fair value of stock options granted. If we were required to change our accounting policy in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” and retroactively restate prior periods as if we had adopted these standards for all periods presented, operating expenses would have increased by approximately $22,000 for 2001, $23,000 for 2002, $44,000 for 2003 and $67,000 for the nine months ended October 2, 2004.


	*Our financial results for future periods will be affected by the attainment of milestones.*

We have granted employee stock options that vest with the attainment of performance milestones. On the completion of this offering, options to purchase 50,000 shares of common stock with an exercise price of $2.65 per share will vest and we will record approximately $142,000 in compensation expense. On the completion of the first human clinical implantation of the Holly Graft System under a United States IDE, options to purchase 100,000 shares of our common stock with an exercise price of $2.65 will vest, which would require an expense of $285,000 to be recorded if such options vested at the assumed initial public offering price of $5.50 per share, the mid-point of our filing range.


	If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements could be impaired and any failure to maintain our internal controls and provide accurate financial statements would cause our stock price to decrease substantially.

We are in the process of instituting changes to our internal procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, when and as such requirements become applicable to us. Implementing these changes may require new information technologies systems, the auditing of our internal controls, and compliance training for our directors, officers and personnel. Such efforts would require a potentially significant expense. If we fail to maintain the adequacy of our internal controls as such standards are modified, supplemented or amended from time to time, we may not be able to provide accurate financial statements and comply with the Sarbanes-Oxley Act of 2002. Any failure to maintain the adequacy of our internal controls and provide accurate financial statements would cause the trading price of our common stock to decrease substantially.


	*We may encounter difficulties in managing our growth and expanding our operations successfully.*

If we advance our Holly Graft System through clinical trials, we will need to expand our development and regulatory capabilities and develop manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. If our operations expand, we expect that we will need to manage additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and any growth will require us to make appropriate changes and upgrades (as necessary) to our operational, financial and management controls, reporting systems and procedures where we may operate. Any inability to manage growth could delay the execution or disrupt our operations.

Regulatory Risks


	*Because we are subject to intense government regulation, we may not be able to obtain or maintain regulatory approval.*

Our products, product development activities and manufacturing processes will be subject to extensive and rigorous regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the introduction of medical devices as well as manufacturing, labeling and record keeping procedures for such products. The process of obtaining marketing clearance for new medical products from the FDA can be costly and time consuming, and there can be no assurance that such clearance will be granted for our future products on a timely basis, if at all. Even if regulatory clearance to market a product is obtained from the FDA, this clearance may entail limitations on the indicated uses of the product. Marketing clearance can also be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance.

The FDA will require us to file PMA applications with regard to the Holly Graft System. The process of obtaining PMA is expensive, uncertain and lengthy, frequently requiring several years from the date of submission, if approval is obtained at all. In fact, we will not be able to utilize the human data from our implants of the Holly Graft System in humans in Australia in our FDA submission, but, if the initial implants in Australia result in a material adverse event, such an event would be required to be reported to the FDA and would be evaluated by the FDA. Further, such data will only be of marginal utility in connection with any other regulatory submissions we make in other jurisdictions. Significant delay or cost in obtaining, or failure to obtain, FDA clearance to market our products would have a material adverse effect on our business, financial condition and results of operations.

We are, and will be, dependent on external laboratories, medical institutions, and individual physicians to conduct our clinical testing to comply with both good clinical practices and good laboratory practices established by the FDA. The data obtained from clinical testing is subject to varying interpretations that could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for device approval during the period of development and by the requirements for regulatory review.

The FDA and various other authorities will inspect our facilities from time to time to determine whether we are in compliance with regulations relating to medical device manufacturing, including regulations concerning design, manufacturing, testing, quality control, product labeling, distribution, promotion, and record keeping practices.

A determination that we are in violation of FDA regulations relating to the PMA process, including clinical testing, or, regulations relating to device manufacture or distribution, could lead to the imposition of civil penalties, including fines, additional testing, product recalls, product seizures, changes in labeling or design or, in extreme cases, criminal sanctions. Even if regulatory approvals to market a product are obtained from the FDA, such approvals may contain limitations on the indicated uses of our products. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial approval. Under certain circumstances, the FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that the future interpretations made by the FDA or other regulatory bodies with possible retroactive effect will not adversely affect us.

Our revenues will initially be dependent upon sales of our products outside the United States. Foreign regulatory bodies have established varying regulations governing reimbursement, product approvals, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We will rely heavily upon independent foreign distributors to comply with such foreign regulatory requirements. Our inability or failure or the failure of such foreign distributors to comply with varying foreign regulation or the imposition of new regulations could restrict our sale of products internationally and would thereby have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Intellectual Property


	*If we fail to obtain a license to necessary drug coating technology, we may be forced to discontinue operations.*

We are aware of patents and pending patent applications relating to the use of the generic drug paclitaxel or derivatives thereof to prevent or treat disease in the heart or coronary vessels that are owned by Angiotech (the “Angiotech Patent Holdings”). Certain of the Angiotech Patent Holdings relate to the use of paclitaxel in polymer coatings for implantable medical devices. We used a compound including paclitaxel as a coating of the Holly Graft System in preclinical animal testing and we intend to use the same coating in the Holly Graft System in our first human cases in Australia and expect to continue to use this compound in subsequent clinical tests. We are proceeding with these studies to gather information required for FDA approval of the Holly Graft System. We believe that these studies are and will be conducted in a manner which does not infringe any United States patents, as provided under federal law providing that it is not an infringement of a United States patent to use the patented invention for uses related to the development and submission of information to the FDA. Assuming we obtain favorable results from our clinical studies and appropriate regulatory approvals, we expect we will need a license from Angiotech to use the same coating in the Holly Graft Systems that we plan to sell commercially worldwide. We have had discussions with Angiotech’s management regarding our interest in obtaining a license to the Angiotech Patent Holdings, and these discussions are ongoing. We plan to continue our efforts toward obtaining a license from Angiotech. We may not, however, be able to obtain a license to the Angiotech Patent Holdings on commercially reasonable terms until we receive regulatory approval to commercialize the Holly Graft System or may not be able to obtain such license agreements in any event. We do not expect to obtain FDA approval until 2008. If we are required to, but cannot obtain a license on commercially reasonable terms or modify the Holly Graft System to avoid infringement, such outcome could require us to cease operations or sell only in jurisdictions where the Angiotech Patent Holdings do not apply. Such a result would have a material adverse effect on our business, financial condition and results of operations.

We believe the drug compound is a critical factor in preventing an abnormal increase in the number of cells in or around the graft connections with consequent enlargement of the tissue, or hyperplasia. Modification of the Holly Graft System to avoid infringement will likely require additional clinical testing in connection with regulatory approval by the FDA or foreign governing bodies and could require that we revise any filings made to such agencies. Such additional clinical testing and revision of filings could cause a material delay in obtaining regulatory approval. Any such delay could have a material adverse effect on our business, financial condition and results of operations. We have initiated efforts to evaluate alternative drugs and related technologies. To determine whether these alternatives will be as effective as the paclitaxel coating we have used in preclinical testing, we will need to conduct significant additional testing which will be time consuming and expensive and could delay the commercialization of the Holly Graft System. There can be no assurance that the alternative coatings we have identified will be as effective as the drug coating used in our preclinical testing and to be used in our clinical testing, that we will have the resources to perform the significant clinical testing that will be necessary to obtain regulatory approval to use an alternative, or that we will be able to test such alternative coatings without experiencing material delays in our clinical testing and the regulatory approval process. If we are required to, but cannot obtain a license from Angiotech and we are unable to obtain regulatory approval for an acceptable alternative, we may be forced to cease operations.


	*We may not be able to protect our intellectual property rights adequately.*

Our ability to compete is dependent upon our ability to protect our intellectual property rights. We have two issued United States patents and four United States patents pending and have filed foreign patent applications in the European Union, Japan, China, Australia, Brazil, Canada, Argentina and Hong Kong. The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No assurance can be given that any patents based on pending patent applications or any future patent applications we make will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents or patents to which we have licensed rights will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by us. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of our products, or design around any patents issued to or licensed by us, or that may be issued in the future to us. Since patent applications filed in the United States prior to November 29, 2000 are maintained in secrecy until the patents issue and patent applications filed on or after November 29, 2000 are not published until 18 months after the application’s priority date, we can neither be certain that others did not first file applications for inventions covered by our pending patent applications, nor that we will not infringe any patents that may be issued to others on such applications.

We rely upon trade secret protection for certain aspects of our proprietary technology. It is our policy to have each employee and consultant enter into a confidentiality agreement containing provisions prohibiting the disclosure of confidential information to anyone outside our company and requiring disclosure to us of ideas, developments, discoveries or inventions conceived during employment or service as a consultant, and assignment to us of proprietary rights to such matters related to our business and technology. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information, or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and proprietary know-how.


	*We could be harmed by litigation involving patents and other intellectual property rights.*

None of our patents or other intellectual property rights have been challenged to date. In the future, however, our patents could be challenged and/or we could be accused of infringing the intellectual property rights of others, including the Angiotech Patent Holdings as described above in the risk factor entitled “We may not be able to obtain a license to necessary drug coating technology.” No assurance can be provided that any future infringement claims by third parties or claims for indemnification by our

customers or end users of our products resulting from infringement claims will not be asserted, or that assertions of infringement, if proven to be true, will not materially harm our business.

In the event of any adverse ruling in any intellectual property litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us. Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would be costly and may divert the efforts and attention of our management and technical personnel.

Risks Related to This Offering


	You should read the entire prospectus carefully and should not consider any particular statement contained in this prospectus or in published news reports without carefully considering the risks and other information contained in this prospectus.

None of our directors, officers or employees or the underwriters of this offering, has confirmed, endorsed or adopted any statements that were not made by us for use by, or distribution to, prospective purchasers in this offering. Accordingly, prospective investors should not rely on any statements that were not made by us in the press and should read this entire prospectus.


	*We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.*

We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the “Use of Proceeds” section of this prospectus. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply these funds effectively could have a material adverse effect on our business. Pending their use, we may invest the net proceeds from this offering in short to medium-term investment grade, interest-bearing securities and there can be no assurance regarding the performance of these investments.


	*If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.*

Purchasers of common stock in this offering will pay a price per share that substantially exceeds the per share price paid by our existing stockholders and by persons who exercise currently outstanding options to acquire our common stock. Accordingly, assuming an initial public offering price of $5.50 per share, the mid-point of our filing range, you will experience immediate and substantial dilution of $3.64 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately 79.4% of the aggregate price paid by all purchasers of our stock but will own only approximately 34.8% of our common stock outstanding after this offering. If all stock options outstanding as of October 29, 2004 were exercised you would experience additional dilution of $0.03 per share, or $3.67 per share in total.


	*An active trading market for our common stock may not develop.*

Prior to this offering, there has been no public market for our common stock. Although we are seeking approval for listing of our common stock on the Nasdaq National Market, an active trading market for our shares may never develop or be sustained following this offering. Further, we cannot be certain that the market price of our common stock will not decline below the initial public offering price or below the amount required by Nasdaq to maintain a listing on its National Market. Should we fail to meet the minimum standards established by Nasdaq for its National Market, we could be de-listed meaning shareholders might be subject to limited liquidity. The initial public offering price for our

common stock will be determined through negotiations with the underwriters. This initial public offering price may be higher than the market price of our common stock after the offering and investors may therefore be unable to sell their common stock at or above the initial public offering price.


	*Our stock price will be volatile, meaning purchasers of our common stock could incur substantial losses.*

Our stock price is likely to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

• Results of our clinical trials or those of our competitors;

• The regulatory status of the Holly Graft System and our other potential products;

• Failure of any of the Holly Graft System, if approved, to achieve commercial success;

• Developments concerning our collaborators;

• Regulatory developments in the United States and foreign countries;

• Developments or disputes concerning patents or other proprietary rights;

• Our ability to manufacture products to commercial standards;

• Public concern over our medical devices;

• Litigation;

• Problems associated with products that use similar drugs, components or materials as the Holly Graft System;

• The strength of our balance sheet;

• The departure of key personnel;

• Future sales of our common stock;

• Variations in our financial results or those of companies that are perceived to be similar to us;

• Changes in the structure of healthcare payment systems;

• Investors’ perceptions of us;

• General economic, industry and market conditions; or

• Our ability to obtain licenses to key technologies such as drug coating technologies.


	*If there are substantial sales of our common stock, our stock price could decline.*

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. All of the shares being sold in this offering will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Substantially all of the remaining shares to be outstanding upon completion of this offering will be eligible for sale pursuant to Rule 144 upon the expiration of lock-up agreements executed in contemplation of this offering. See “Shares Eligible For Future Sale” and “Underwriting — Lock-Up Agreements.”

Within 180 days of this offering, we intend to register approximately 6,000,000 shares of common stock that are authorized for issuance under our stock plans. As of October 29, 2004, 1,297,500 shares authorized for issuance under such stock plans were subject to outstanding options. Once we register the

shares authorized for issuance under our stock plans, options granted and exercised can be freely sold in the public market, subject to our repurchase rights, the lock-up agreements referred to above and the restrictions imposed on our affiliates under Rule 144.


	*Adverse effect of undesignated stock and anti-takeover provisions.*

Our authorized capital includes 6,000,000 shares of undesignated stock. Our Board of Directors has the power to issue any or all of the shares of undesignated stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking shareholder approval. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporations Act, or MBCA, regarding “control share acquisitions” and “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated stock and the anti-takeover provisions of the MBCA, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the company not approved by our Board of Directors. As a result, our shareholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price, voting and other rights of the holders of common stock may also be affected. See “Description of Capital Stock.”


	*We are controlled by management. As a result, our management could make decisions that conflict with the interests of other shareholders.*

Our Chairman and Chief Executive Officer will own approximately 37.9% of our outstanding Common Stock after this offering and will for the foreseeable future be in a position to significantly control our affairs, including the election of directors.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Other risks, uncertainties and factors, including those discussed under “Risk Factors,” could cause our actual results to differ materially from those projected in any forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update or revise any forward-looking statements, or to so update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

USE OF PROCEEDS

We estimate that the net proceeds from our sale of 5,500,000 shares of common stock in this offering will be approximately $26.7 million, or approximately $30.8 million if the underwriters exercise their over-allotment option in full. This estimate is based upon an assumed initial public offering price of $5.50 per share, the mid-point of our filing range, less estimated underwriting discounts and commissions and offering expenses payable by us.

We intend to use these net proceeds approximately as follows:

• 20% to fund our clinical trials;

• 15% to fund our investigation of drug combination and coating technologies;

• 35% to develop our sales and marketing capabilities, promote pre- and post-commercialization physician education and awareness, and create product marketing programs, an international distribution network and a domestic sales team; and

• 30% for general corporate purposes, including working capital needs, facilities expansion and potential acquisitions.

While we do not currently contemplate the need to expand our facility, our anticipated future rapid expansion will likely require additional manufacturing and office space.

Our potential use of proceeds for acquisitions may include the acquisition or licensing of rights to potential new drug combinations or coating technologies. Although we expect to periodically evaluate acquisition and licensing opportunities, we currently have no commitments or agreements with respect to any specific acquisition or license.

Pending the uses described above, we intend to invest the net proceeds of this offering in short- to medium-term, investment-grade, interest-bearing securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain our cash for the development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.

Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.

CAPITALIZATION

The following table sets forth our capitalization as of October 2, 2004 on an actual, and as adjusted basis. The “Actual” column reflects our capitalization as of October 2, 2004 on a historical basis, without any adjustments to reflect subsequent or anticipated events. The “As Adjusted” column reflects our capitalization as of October 2, 2004 with adjustments to reflect the receipt by us of the estimated net proceeds from the sale of 5,500,000 shares of common stock by us in the offering at an assumed initial public offering price of $5.50 per share and the application of the net proceeds therefrom.

None of the columns shown below reflect the following:

• 1,297,500 shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options under our 2000 Long-Term Incentive Plan at a weighted average exercise price of $1.45 per share.

• 150,000 shares of restricted common stock to be issued from our 2000 Long-Term Incentive Plan immediately following this offering to our new independent directors, A. Jay Graf, Robert E. Munzenrider, and Arch C. Smith. See the full discussion regarding our Board of Directors in the “Management” section of this document.

• After the issuance of the 150,000 shares of restricted common stock described above; and an additional 4,056,000 shares of common stock available as of the date of this prospectus for future issuance under our 2000 Long-Term Incentive Plan at the market value of our common stock at the date of grant.

• 550,000 shares of common stock issuable upon exercise of warrants to be issued to the underwriters in connection with this offering that will remain outstanding after this offering at an exercise price equal to % of the initial public offering price.



			October 2, 2004

						As
			Actual			Adjusted(1)(2)


			(In thousands, except share
			and per share data)
Long-term debt				—			—
Stockholders’ equity:
	Common stock, no par value; 54,000,000 shares authorized; 10,322,975 shares issued and outstanding (actual); and 15,822,975 shares issued and outstanding (pro forma)			8,451			35,203
	Deferred compensation			(352	)		(285	)
	Deficit accumulated during development stage			(5,330	)		(5,472	)

		Total stockholders’ equity		2,769			29,446

		Total capitalization	$	2,769		$	29,446

(1) Includes the impact of 50,000 options that vest upon consummation of the offering. Such options will have no effect on total stockholders’ equity but, assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), upon vesting of these options common stock would increase by $24,000, deferred compensation would decrease by $118,000 and we would be required to record a total expense of $142,000.

(2) Includes the impact of 100,000 options that vest on the completion of the first implantation of the Holly Graft System in the United States. Assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), we would be required to increase deferred compensation to $285,000, which would be equal to the intrinsic value of the options.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the amount of our common stockholders’ equity, less intangible assets, divided by the number of shares of our common stock outstanding. As of October 2, 2004, we had a net tangible book value of approximately $2.8 million, or $0.27 per share of common stock. Assuming the sale by us of 5,500,000 shares of common stock offered in this offering at an assumed initial public offering price of $5.50 per share, the mid-point of our filing range, and after deducting the underwriting discount and estimated offering expenses, our as adjusted pro forma net tangible book value as of October 2, 2004, would have been $29.4 million, or $1.86 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $1.59 per share of common stock to our existing stockholders and an immediate dilution of $3.64 per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:


Assumed initial public offering price per share			$	5.50
Net tangible book value per share as of October 2, 2004	$	0.27
Increase in net tangible book value per share attributable to new investors	$	1.59

Pro forma net tangible book value per share after the offering			$	1.86

Dilution per share to new investors			$	3.64

The following table sets forth on a pro forma as adjusted basis, as of October 2, 2004, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of common stock and by the new investors, before deducting the underwriting discount and estimated offering expenses payable by us.



		Shares Purchased					Total Consideration					Average
												Consideration
		Number(2)(3)		Percent(1)			Amount		Percent			Per Share

Existing stockholders			10,322,975		65.2	%	$	7,827,161		20.6	%	$	0.76
New investors			5,500,000		34.8	%		30,250,000		79.4	%	$	5.50

	Total		15,822,975		100.0	%	$	38,077,161		100.0	%	$	2.41

(1) If the underwriters exercise their over-allotment option in full, our existing stockholders would own 62.0% and our new investors would own 38.0% of the total number of shares of our common stock outstanding after this offering.

(2) The foregoing discussion and tables are based upon the number of shares issued and outstanding on October 2, 2004 and assume no exercise of options outstanding as of that date. As of that date, there were 1,297,500 shares of our common stock issuable upon exercise of options outstanding at a weighted average exercise price of $1.45 per share. Assuming the exercise in full of all our outstanding options, pro forma net tangible book value at October 2, 2004 would be $1.83 per share, representing dilution per share to new investors of $3.67 or an immediate decrease in pro forma net tangible book value of $0.03 per share. Also, if all options outstanding are exercised in full new investors would have contributed 75.7% of the aggregate capital but would own only 32.1% of our common stock outstanding after the offering and exercise of all outstanding options.

(3) Excludes 550,000 shares of common stock issuable upon exercise of warrants issued to the underwriters in connection with this offering that will remain outstanding after this offering at an exercise price equal to % of the initial public offering price. Also excludes a total of 150,000 shares of restricted common stock to be issued immediately following this offering to the following individuals who have agreed to become directors of the company immediately following this offering: A. Jay Graf, Robert E. Munzenrider, and Arch C. Smith. See the full discussion regarding our Board of Directors in the “Management” section of this document.

SELECTED FINANCIAL DATA

You should read the following selected financial information together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the statements of operations data for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 from our audited financial statements which are included in this prospectus. We have derived the statements of operations data for the nine months ended September 27, 2003 and October 2, 2004 and the balance sheet data as of October 2, 2004 from our unaudited financial statements included in this prospectus. Our unaudited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of those statements. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period. The net loss per share information is computed using the weighted average number of common shares outstanding.

Selected Financial Data


		Period from
		December 3,															Nine Months Ended
		1999 (date of
		inception) to			Year Ended December 31,
		December 31,															September 27,			October 2,
		2003			2000			2001			2002			2003			2003			2004


																	(Unaudited)

		(In thousands, except share and per share data)
Statements of Operations Data:
Revenue		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Expenses:
	Research and development		2,507			136			659			559			1,153			732			1,640
	Marketing, general and administrative		732			58			118			151			405			237			596

Total costs and expenses			3,239			194			777			710			1,558			969			2,236
Interest income			120			23			59			22			16			10			25

Net loss		$	(3,119	)	$	(171	)	$	(718	)	$	(688	)	$	(1,542	)	$	(959	)	$	(2,211	)

Loss per common share — basic and diluted					$	(0.02	)	$	(0.09	)	$	(0.08	)	$	(0.17	)	$	(0.10	)	$	(0.23	)

Weighted average shares outstanding — basic and diluted						6,851,926			8,152,521			8,490,000			8,967,308			9,282,654			9,810,264



	December 31,
													October 2,
	2000			2001			2002			2003			2004

													(Unaudited)
	(In thousands)
Balance Sheet Data:
Total current assets	$	2,239		$	1,622		$	950		$	1,767		$	2,938
Total assets		2,273			1,692			1,007			1,841			3,504
Total current liabilities		6			30			37			158			735
Total liabilities		12			33			37			158			735
Deficit accumulated during the development stage		(171	)		(889	)		(1,577	)		(3,119	)		(5,330	)
Total stockholders’ equity		2,260			1,658			970			1,683			2,769

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a medical technology company engaged in the development of our first product candidate, the Holly Graft System, an artificial graft for coronary artery bypass surgery. We have conducted a limited number of preclinical animal tests of the Holly Graft System and expect to complete the first human implant of the Holly Graft System in the fourth quarter of 2004. We expect to continue our implant efforts in Australia and to commence human clinical trials in Europe in 2005. To date we have not recognized any product revenue associated with the Holly Graft System. As a result we continue to be accounted for as a development-stage company and expect to be accounted for as a development-stage company for the foreseeable future. We have had no other income since inception other than interest on short-term investments.

We commenced operations in December 1999. Since our inception, we have generated significant losses. As of October 2, 2004, we had an accumulated deficit of $5.3 million. We expect to continue to spend significant amounts on the development of the Holly Graft System and our other programs. We expect to incur significant commercialization costs when we begin to introduce the Holly Graft System on a worldwide basis. Additionally, we plan to continue to evaluate and negotiate the licenses to rights for potential new drugs, polymers and coating technologies that would fit within our growth strategy. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.

Most of our expenditures to date have been for research and development activities and general and administrative expenses. Research and development expenses represent costs incurred for product acquisition, clinical trials and activities relating to regulatory filings and manufacturing development efforts. We expense all of our research and development costs as they are incurred.

Our research and development expenses incurred through October 2, 2004 were expenses related primarily to the development of the Holly Graft System. We expect to incur additional research and development expenses relating to the Holly Graft System prior to its commercial launch in the United States and selected markets outside the United States. These additional expenses are subject to the risks and uncertainties associated with clinical trials and the FDA and foreign regulatory review and approval process. As a result, these additional expenses could exceed our estimated amounts, possibly materially.

Marketing, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with building a commercial infrastructure to market and sell the Holly Graft System. We anticipate that general and administrative expenses will increase as a result of the expected expansion of our operations, facilities and other activities associated with the planned expansion of our business, together with the additional costs associated with operating as a public company. We expect marketing, general and administrative expenses to increase as we build our sales force and marketing capabilities to support placing the Holly Graft System in worldwide markets.

Through October 2, 2004, we had not generated revenues. At December 31, 2003, we had federal and state income tax net operating loss carryforwards of approximately $2.9 million. The operating loss carryforwards will expire beginning in 2019. At December 31, 2003, we had federal and state research credit carryforwards of approximately $85,000. The research credit carryforwards will expire beginning in

2019. Under the Tax Reform Act of 1986, the utilization of these net operating loss and research credit carryforwards may be limited as a result of significant changes in ownership.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies relating to stock-based compensation charges are most critical to aid you in fully understanding and evaluating our reported financial results.


	*Stock-Based Compensation*

We account for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services.”

We account for stock-based compensation to employees under the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and disclosed the effect of the differences which would result had we applied the fair-value-based method of accounting, on a pro forma basis, as required by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” In future accounting periods, the determination of valuation variables such as volatility and interest rates could effect our expense computation.

The determination of the fair value of our common stock involves considerable judgement. In making this determination, we evaluated, among other things, our common stock transactions, current market conditions, and operational milestones.

The aggregate intrinsic value as of October 2, 2004 of all outstanding options is $5,251,000, based on a stock price of $5.50, the mid-point of our filing range in the initial filing of the registration statement relating to this offering. All options granted prior to July 22, 2004, the date of the initial filing with the SEC of our registration statement relating to this offering, were granted with an exercise price that approximated the fair value of our common stock based on common stock offerings conducted with unrelated third parties and accredited investors in arms-length transactions in August 2003, March 2004 and July 2004. The total employee/non-employee option grants during the twelve-month period prior to October 2, 2004 was 254,000 with an average exercise price of $3.55.

Subsequent to July 22, 2004, we valued all option grants at $5.00, the low end of the filing range set forth in the initial filing on July 22, 2004 of the registration statement relating to this offering. For these stock option grants, we believe that the $5.00 price approximates or is greater than the fair value of our common stock. Since July 22, 2004 we have issued options for 50,000 shares with a four-year vesting schedule.

The filing range set forth in the initial filing of our registration statement on July 22, 2004 and subsequent amendments reflects the assumption that human evaluation of our technology will be initiated

prior to the closing of this offering and that the initiation of such testing will increase the value of our common stock. All options granted prior to July 22, 2004 were deemed to have a lower fair value because at the date of grant of such options the human evaluation of our technology was still at least several months from initiation. Even though we believe options granted following July 22, 2004 had a fair value approximating or less than $5.00, we accounted for such options at $5.00 in order to prevent a future charge to earnings for in-the-money stock option grants.

Results of Operations


	*Nine Months Ended September 27, 2003 Compared to Nine Months Ended October 2, 2004*

Research and Development. Research and development expenses increased 124% from $732,000 for the nine months ended September 27, 2003 to $1,640,000 for the nine months ended October 2, 2004. The $908,000 increase was principally related to an increase in preclinical animal testing and the purchasing of related components/parts to conduct such testing. During 2004 we changed the platform of the Holly Graft System to incorporate drug eluting technology to prevent graft failure. We increased our level of activity for evaluation of the drug eluting Holly Graft System in preclinical animal models, which resulted in an increase of approximately $181,000 for the nine months ended October 2, 2004 compared to the same period in 2003. The analytical, chemistry and characterization testing for the drug eluting component resulted in an increase of approximately $243,000 for the nine months ended October 2, 2004 compared to the same period in 2003. Additionally, we incurred higher compensation expense as the number of research and development employees increased from three as of September 27, 2003 to four as of October 2, 2004. The additional employees were hired in the positions of product research to advance the development of the Holly Graft System. During the nine months ended October 2, 2004 we issued and vested stock options with a value of $195,000 to members of our Scientific Advisory Board. The stock options were recorded as research and development expense. No stock options were granted to non-employees prior to September 2003.

Marketing, General and Administrative. Marketing, general and administrative expenses increased 151% from $237,000 for the nine months ended September 27, 2003 to $596,000 for the nine months ended October 2, 2004. The $359,000 increase can be primarily attributed to the following factors:

• $150,000 increase due to the addition of John L. Babitt as our president in August 2003, as well as the addition of a part time administrative employee and an increase in salary for one existing employee

• $71,000 increase in compensation for our chairman and chief executive officer; and

• $54,000 increase related to audit fees for the company

Interest Income. Interest income increased 150% from $10,000 for the nine months ended September 27, 2003 to $25,000 for the nine months ended October 2, 2004. The $15,000 increase was due to higher cash balances in 2004 as a result of a common stock offering.


	*Year 2003 Compared to Year 2002*

Research and Development. Research and development expenses increased 106% from $559,000 in 2002 to $1,153,000 in 2003. The $594,000 increase was principally related to an increase of preclinical testing and the purchasing of related components/materials to conduct such testing. During 2003, the Company initiated the first large scale animal testing program for the Holly Graft System. The proceeds from the May 2003 offering provided funding to complete more comprehensive animal testing of the Holly Graft System and increase the number of employees from two to four. The additional employees were hired in the second half of 2003 in the positions of regulatory and product manufacturing to advance the development of the Holly Graft System. For the year ended December 31, 2003 research and development costs were approximately 74% of total expenses.

Clinical and regulatory expense, a component of research and development expense, totaled approximately $95,000 for the year ended December 31, 2003. This amount is forecasted to increase in

2004 as we anticipate (i) the initiation of the Holly Graft System into human clinical trials and (ii) conducting a formal preclinical study in accordance with Good Laboratory Practice, or GLP, in connection with our submission to the FDA to proceed with human clinical trials in the United States.

Marketing, General and Administrative. Marketing, general and administrative expenses increased 168% from $151,000 in 2002 to $405,000 in 2003. The increase of $254,000 was related to an increase in compensation expense related to the addition of one individual to our management team and compensation increases for existing employees. For the year ended December 31, 2003 marketing, general and administrative expenses were approximately 26% of total expenses.

Interest Income. Interest income decreased from $22,000 in 2002 to $16,000 in 2003. The decrease was related to a lower cash balance in 2003 and a lower rate of return on investments.


	*Year 2002 Compared to Fiscal Year 2001*

Research and Development. Research and development expenses were consistent in 2001 and 2002 and related primarily to the development of prototypes, purchase of applicable materials and limited preclinical testing. Non-cash research and development of $100,000 during 2001 relates to the contribution of equity to the University of Minnesota who had provided clinical research for the company.

Marketing, General and Administrative. Marketing, general and administrative expenses increased 28% from $118,000 in 2001 to $151,000 in 2002. The $33,000 increase was related to additional employee compensation expense.

Interest Income. Interest income decreased 63% from $59,000 in 2001 to $22,000 in 2002. The $37,000 decrease was a result of lower cash balances coupled with a lower rate of return on investments.

Liquidity and Capital Resources

From inception, we financed our operations primarily through private sales of common stock, yielding net proceeds of $7.8 million. To date, we have not borrowed or financed our operations through significant equipment leases, financing loans or other debt instruments. As of October 2, 2004, we had $1,426,000 in cash and cash equivalents and $2,203,000 of working capital.

Cash Flows from Operating Activities. Net cash used in operations was $585,000 in 2001, $672,000 in 2002, and $1,420,000 in 2003. Net cash used in operations was $894,000 and $1,429,000 for the nine months ended September 27, 2003 and October 2, 2004, respectively. For all periods, cash used in operations was attributable primarily to net losses after adjustment for non-cash charges related to depreciation and other changes in operating assets and liabilities.

Cash from Investing Activities. Net cash used in investing activities was $46,000 in 2001, $161,000 in 2002, and $1,363,000 in 2003. The increase in cash used in investing activities in 2002 and 2003 was the net purchase of investments from the proceeds of our stock offerings. Net cash used in investing activities was $1,857,000 for the nine months ended September 27, 2003 as a result of the net purchase of investments. Net cash used in investing activities was $80,000 for the nine months ended October 2, 2004 as a result of the purchase of property and equipment.

Cash Flows from Financing Activities. Net cash provided by financing activities was $14,000 in 2001, $2,250,000 in 2003, $2,250,000 and $2,689,000 for the nine months ended September 27, 2003 and October 2, 2004, respectively. For these periods, financing cash flows reflected the proceeds from the issuance of common stock and employee exercises of stock options.

Contractual Obligations and Commitments. The following table sets forth certain information concerning our obligations and commitments to make future payments as of December 31, 2003.



	Payments Due by Period


	(In thousands)
	Less Than
	One Year		1-3 Years		4-5 Years		After 5 Years		Total

Operating leases	$	84	$	196	$	-	$	—	$	280
Purchase obligations		402		489		—		—		891
Consulting agreements		225		450		275		—		950

Total	$	711	$	1,135	$	275	$	—	$	2,121

In January 2004, we entered into a supply agreement that requires us to purchase a minimum of approximately $191,000 of materials from 2004 to 2006. These amounts are reflected in the table above as a component of the item “purchase obligations.”

In May 2004, we entered into a supply agreement with a supplier that requires us to support development costs of $700,000 during the first twelve months of the agreement, which amount is reflected in the table above as a component of the item “purchase obligations.” Furthermore, if products result from the supply agreement we would be required to pay a royalty on the revenue derived from sales of licensed products. We have the ability to terminate the license agreement with 90 days’ notification.

On April 1, 2003, we entered into a consulting agreement with Manny Villafaña. The agreement provides for future annual compensation of $225,000 through April 1, 2008. Pursuant to the terms of this agreement, Mr. Villafaña receives $16,667 per month, reimbursement for all ordinary and necessary expenses, and is eligible to receive discretionary bonuses and employee benefits. For the year ended December 31, 2003, we paid $150,000 in connection with this consulting agreement. For the nine months ended October 2, 2004, we paid $162,500, in connection with the consulting agreement.

We expect to increase capital expenditures consistent with our anticipated growth in manufacturing, infrastructure and personnel.

We believe that the net proceeds from this offering, together with our current cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through at least the end of 2006. If existing cash and cash generated from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. Before the end of 2006, the sale of additional equity or convertible debt securities will be required and such sale could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities would have rights senior to those associated with our common stock, and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of or cease our planned product development and sales and marketing efforts.


	*Off-Balance Sheet Arrangements*

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is confined to our cash equivalents and short-term investments. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, and asset-backed securities, with the effective duration of the portfolio less than nine months and no individual investment with an effective duration in excess of three years, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

We have granted employee stock options that vest with the attainment of performance milestones. On the completion of this offering, options to purchase 50,000 shares of common stock with an exercise price of $2.65 per share will vest and we will record approximately $142,000 in compensation expense. On the completion of the first human clinical implant under a United States IDE, 100,000 options to purchase our common stock with an exercise price of $2.65 will vest, which would require expense of $285,000 to be recorded if such options vested and the fair value of our common stock is at the assumed initial public offering price of $5.50 per share, the midpoint of our initial filing range.

Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150. This statement establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable convertible preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the interim period commencing July 1, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The FASB has indefinitely deferred implementation of some provisions of SFAS 150. The adoption of SFAS 150 did not have a material effect on our financial position or results of operations.

In November 2002, the FASB issued Financial Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations.

Quarterly Results of Operations



																																Nine Months Ended
		Year Ended December 31, 2002															Year Ended December 31, 2003															October 2, 2004

		Q1			Q2			Q3			Q4			Total			Q1			Q2			Q3			Q4			Total			Q1			Q2			Q3			Total


		(In thousands)
Revenue		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Expenses:
	Research and development		103			148			158			150			559			142			187			403			421			1,153			519			473			648			1,640
	Marketing, general and administrative		42			34			36			39			151			43			60			134			168			405			165			236			195			596

	Total expenses		145			182			194			189			710			185			247			537			589			1,558			684			709			843			2,236
Interest income			7			6			5			4			22			2			3			5			6			16			5			7			13			25

	Net loss	$	(138	)	$	(176	)	$	(189	)	$	(185	)	$	(688	)	$	(183	)	$	(244	)	$	(532	)	$	(583	)	$	(1,542	)	$	(679	)	$	(702	)	$	(830	)	$	(2,211	)

OUR BUSINESS

Overview

We are a development stage medical technology company seeking to improve the treatment of coronary heart disease, or CHD, by advancing conventional bypass surgery. We have designed our first product, the Holly Graft System, by leveraging our understanding of flow dynamics, material sciences and drug combinations to create an artificial coronary graft system. The Holly Graft System has not yet received regulatory approval for sale anywhere in the world and will not be commercially available for several years, if ever. We have eight full-time employees and are led by a team of experienced medical technology industry executives and recognized experts in cardiac surgery and cardiovascular research. We intend to add employees following this offering. Manny Villafaña, our Chairman and Chief Executive Officer, has previously introduced innovative cardiac surgery products such as pacemakers and heart valves throughout the world and founded companies such as Cardiac Pacemakers, Inc. (now Guidant Corporation), St. Jude Medical, Inc. and ATS Medical, Inc.

We were incorporated on December 3, 1999, in accordance with the laws and regulations of the State of Minnesota. In May 2000, we recruited a Scientific Advisory Board and management team to commence formal operations. In January 2001, we initiated a pilot study to test the feasibility of the Holly Graft System. In January 2003 we commenced a formal, preclinical, animal evaluation of the Holly Graft System.

Issues Surrounding Conventional Bypass Procedures


	*Medical Issues*

Conventional bypass surgery is the most common surgical intervention for severe coronary artery disease and is generally deemed most effective by the cardiovascular community for coronary occlusions involving more than one vessel. This surgery is particularly invasive because a midsternal incision must be made and the chest wall must be cracked in order for cardiac surgeons to successfully access the heart. One of the most problematic aspects of bypass surgery involves the “second surgery” that is often required to harvest saphenous veins from the legs or radial arteries from the arms as graft material that is harvested from one individual for use in the same individual for the bypass. Patients undergoing bypass surgery often experience one or more of the following complications as a result of this second surgery:

• Pain and Discomfort;

• Infection;

• Edema; and

• Difficulty in regaining mobility in an acceptable period of time.

According to the study: “Endoscopic Versus Open Saphenous Vein Harvest: A Comparison of Postoperative Wound Complications” published in 2002 by the Annals of Thoracic Surgery, approximately twenty percent of such patients experience some type of complication as a result of a traditional saphenous vein harvesting. Patients who are obese, diabetic or both are particularly at risk for such complications. While surgical techniques such as endoscopic vein harvesting can reduce the number of complications to approximately four percent, these techniques do not eliminate the need for a second surgery, nor do they eliminate resulting complications. A significant portion of patients suffering such complications require rehospitalization, the costs of which typically must be absorbed by the hospitals and payors. In addition, the saphenous vein harvesting approach assumes the availability of suitable vessels from the patient, which is often not the case, particularly in the elderly or in patients suffering from diabetes, obesity or other forms of cardiovascular disease.

While bypass surgery using one or both of the internal mammary arteries for the bypass conduit has become more common as a result of clinical data showing improved performance relative to SVGs, it has not obviated the need for vessel harvesting in most bypass surgeries. The majority of bypass procedures

require two or more bypasses and a patient’s second mammary artery is often not a viable option due to the location of the occlusion in the second bypass. Accordingly, in multi-vessel bypass surgeries it is either preferable or necessary that at least one SVG be employed. A study published in the April 21, 2004 Journal of the American Medical Association reviewed 197 bypass patients receiving a total of 622 grafts, or an average of 3.2 grafts per patient. Without identifying the particular artery or vein used as a graft, this study stated that 250 of the grafts (40%) were arterial grafts and 372 of the grafts (60%) were venous grafts. We believe this study is representative of the broader bypass market in which surgeons often use saphenous veins or radial arteries in combination with one or both of the internal mammary arteries (typically only one is utilized). Nevertheless, increasing use of the internal mammary arteries in bypass procedures may adversely affect the demand for the Holly Graft System.


	*Cosmetic Concerns*

As indicated in the photo below, harvesting saphenous veins from the legs typically involves an incision running from below the ankle to above the knee. Harvesting radial arteries from the arm involves a similar incision from the wrist to above the elbow. An alternative approach to traditional open harvesting is endoscopic harvesting. Such a procedure typically results in smaller incisions, less scarring and fewer complications. However, because most patients cannot rely solely on the mammary arteries as the conduit in their bypass procedures, they must undergo a “second surgery” and suffer some level of scarring and other potential complications of the harvesting procedure.

Example of incision required in harvesting saphenous vein

(PICTURE)


	*Clinical Considerations*

Physicians are often frustrated by the difficult procedure and the complications associated with traditional bypass surgery. Since conventional bypass surgery utilizes harvested vessels with only a 2-3 mm diameter, the intricate placement of 12-20 sutures requires approximately 10-20 minutes to complete per anastomosis (each bypass using a harvested vessel requires two anastomoses, meaning, a triple bypass would have six anastomoses). The delicate nature of the procedure is often exacerbated by the poor quality of available vessels, particularly in the elderly, the obese and in individuals suffering from diabetes. Another major source of frustration is that 50-60% of all grafts tend to lose patency within five to seven years, requiring additional procedures for a patient that is often more frail. Based on our research and knowledge of flow dynamics, we believe this degradation in patency results in part from connecting a conventional vein or artery graft from a high flow area (such as the aorta) to a low flow region (such as the coronary artery). Small diameter vessels and low flow can be contributory factors to clotting and tissue formation, each of which can result in occlusion.

Conventional Double Bypass Surgery

(labels depict the bypass of only one of the two occlusions)

(PICTURE OF HEART)

Addressing the Issues with the Holly Graft System


	*Patency Issues*

Due to the complications and lack of alternatives associated with traditional bypass surgery, numerous efforts to develop an artificial coronary graft using materials that mimic the natural structure of the coronary artery have been attempted, including porcine conduit, tissue engineered grafts and grafts made from synthetic materials. Thus far, none have been approved by the FDA. We believe previous artificial grafts were primarily focused on ascertaining the appropriate tissue or materials on which to base the graft, rather than the mechanics of blood flow and the corresponding influence on graft patency. We have reviewed the previous artificial graft work and believe continuous high blood flow and pressure, coupled with drug combinations, are the critical elements necessary to adequately limit or obviate clotting and tissue formation in an artificial graft system, each of which can adversely impact vessel patency.

We expect that our Holly Graft System will provide cardiac surgeons with a new technology that will be differentiated and innovative in the worldwide market for CABG procedures. To date, we have conducted approximately 100 animal tests, of which four have been performed with the version of the Holly Graft System that we intend to implant in humans and which version has, in our view, addressed the problems of hyperplasia, clotting and vessel wall injury that are associated with substantially all preclinical coronary medical devices. Based on these tests, we believe the Holly Graft System should be at least as effective as the traditional SVG procedure in restoring blood circulation in coronary arteries

without the negative side effects of saphenous vein harvesting. In terms of maintaining graft patency, our system delivers critical continuous high blood flow from the aorta to the target vessel, thereby diminishing the greater susceptibility of clotting and tissue formation associated with low flow situations. Typically, harvested vessels are low flow due to the termination of flow at the target vessel.

The Holly Graft System is able to maintain continuous high flow because of the following characteristics:

• Larger Diameter: Our graft consists of a 6 mm diameter conduit compared to the typical 2-3 mm harvested conduit. The increase in size allows for increased flow.

• Healthier Conduits: The Holly Graft System provides surgeons with a plaque free, consistent and reliable source of conduit for grafts, which are free from disease. Patients suffering from CHD commonly have atherosclerosis or other conditions causing marginal quality vessels (particularly those individuals with obese and diabetic conditions) that immediately threaten the patency of harvested SVGs.

• Flow Limiter: The Holly Graft System utilizes a flow limiter which maintains pressure within the graft and creates pressure to feed the target coronary artery through the vessel connector.

• Drug Combinations: The vessel connectors used in the Holly Graft System are coated with the same drug combination that is used on certain prominent drug-eluting stents. In our animal trials, these drug combinations prevented the buildup of tissue proximate to the grafting site, which can result in post-operative occlusions, in the same manner in which the combination prevents restenosis in stenting procedures. Accordingly, we believe that these drug combinations will limit the risk of an interruption of the Holly Graft System. Obtaining and maintaining a license to such a drug combination is critical to the commercialization of the Holly Graft System.


	*Medical Complications and Cosmetic Issues*

If our clinical results demonstrate equivalent or superior results to SVGs, we believe that our Holly Graft System could reduce or eliminate the need for the second harvesting surgery. By doing so, patients could avoid the aforementioned medical complications and cosmetic implications that are commonplace with vessel harvesting.


	*Clinical Considerations*

We believe the CABG procedure utilizing the Holly Graft System will be particularly attractive to physicians due to its ease of use, involving the following steps:

• Aortic Anastomosis. The surgeon sutures the ePTFE to the aorta, which provides a high flow source of blood for the target coronary artery.

• Venous Anastomosis. The surgeon sutures the ePTFE with a flow limiting restricter to the venus flow of the heart/circulatory system, typically the superior vena cava.

• Vessel Connectors Attached. The vessel connector is assembled on both sides of the ePTFE to provide a continuous flow through the entire graft. Note that multiple vessel connectors can be attached to the same graft, thus enabling the surgeon to treat multiple target vessels with attachments to the base Holly Graft System.

• Arteriotomy. A slight incision is made in the target vessel and the vessel connector is inserted into the artery. Two sutures are placed around the vessel connector to secure the device on the heart. The Holly Graft System has been designed to allow surgeons to implant the devices in both on-pump and off-pump procedures.

Although the Holly Graft System is designed to be easy for cardiac surgeons to use, there can be no assurance that cardiac surgeons will adopt the Holly Graft System as quickly or as easily as we anticipate. Many surgeons may be reluctant to change from the proven and accepted SVG procedure to the Holly

Graft System without extensive testing and empirical evidence that the Holly Graft System performs as well or better than the SVG.


	*The Holly Graft Procedure*

As depicted in the picture below, the Holly Graft System is an artificial coronary artery graft designed to treat blockages in single or multiple coronary arteries from a single graft attached at one aperture to the aorta. Blood will flow into the Holly Graft System at the aorta, where the blood pressure is relatively high, and out of the Holly Graft System at the superior vena cava, where the blood pressure is relatively low. In between, blood will flow to one or more coronary arteries through vessel connections established by surgeons. We have designed the Holly Graft System to create a high volume of blood flow through the main conduit to provide a reliable source of supply for each of the coronary arteries to which a connection is made. To maintain appropriate pressure in the system to feed the coronary arteries, the above-mentioned flow limiter is incorporated at the outflow end to restrict the flow of blood into the vena cava.

The Holly Graft System

(HEART PICTURE 2)


Implanted Vessel Connector				HOLLY GRAFT^TMVessel Connector


	*Factors Influencing Commercial Acceptability*

We believe that our system may progress through the regulatory process and obtain meaningful commercial acceptability due to the following:

• Approved Materials: Materials used in the Holly Graft System and the drug combination we currently utilize have been approved by the FDA for other applications, potentially easing the safety testing the FDA deems necessary in the approval process. For instance, our ePTFE graft material is commonly used as a peripheral vascular graft conduit and the titanium used in our vessel connector is approved by the FDA as an implantable alloy. We are currently utilizing the same drug, paclitaxel, that is currently used in the coated stent marketed by Boston Scientific Corporation, or BSX. Drug coated stents have been rapidly adopted by the medical community. On July 2, 16 and August 5, 2004, BSX announced a voluntary recall of certain stent systems which were related to characteristics in the delivery catheters and not paclitaxel. Based on BSX’s public disclosures regarding the recall, the recall does not indicate any problems related to the use of paclitaxel or any product risk associated with the Holly Graft System.

• Physician Preference: Assuming our clinical studies prove that the Holly Graft System is as effective as SVGs, we believe many cardiac surgeons will readily accept and utilize the Holly Graft System in order to reduce operating time and avoid the patient discomfort, scarring and frequent complications associated with the surgery to harvest the saphenous vein. Although endoscopic harvesting procedures can reduce the complication rate associated with saphenous vein harvesting, the training required to learn the technique is significant and proficiency is generally not obtained until a physician performs the procedure on numerous patients. To the best of our knowledge, no statistics on the usage of endoscopic procedures are available, but due to the above-mentioned factors, we believe that the preponderance of saphenous vein harvesting is performed by the traditional “open procedure” and that the majority of endoscopic procedures are performed at large heart centers that perform a significant number of bypass procedures each year. Additionally, endoscopic procedures still (i) require a second surgery; (ii) result in scarring; and (iii) only reduce the incidence of, but do not eliminate complications associated with, saphenous vein harvesting.

• Ease of Use: We believe that the procedure involving the Holly Graft System is relatively easy to complete as compared to the SVG procedure. In addition, we anticipate that physician training for surgery employing our system will be relatively simple. The Holly Graft System is equally straight forward to use in both on-pump and beating-heart surgery (where no heart-lung machine is employed).

• Physician and Hospital Economics: Bypass procedures involving SVGs consist of a delicate surgery requiring 12-20 minutes per anastomosis. While no human procedures have been performed to date, a bypass procedure utilizing the Holly Graft System is expected to require 2-3 minutes per vessel connecter. As a result, we believe that physicians and hospitals utilizing the Holly Graft System could perform additional bypass procedures.

• Patient Preference: If our human clinical studies demonstrate graft effectiveness at least comparable to SVGs, we believe patients may request that their doctors use the Holly Graft System rather than harvest vessels from other parts of their body. Aside from cosmetic considerations, patients generally report that the pain and discomfort from the graft site can be considerably worse than that of the primary surgery.

The Market and Current Treatments

The AHA reports that in the United States alone during 2001, over 300,000 patients had bypass surgery, with most requiring SVGs. We estimate the market for the rest of the world to be roughly equal in size to that of the United States. We believe, however, it would be premature to attempt to determine the market opportunity for the Holly Graft System at this time.

The number of bypass procedures performed each year, while declining over the last few years as a result of new, less invasive therapies such as pharmacotherapy, angioplasty and stenting, significantly exceeds the number of pacemaker and heart valve implants and is only slightly less than the number of percutaneous transluminal coronary angioplasty, or PTCA, procedures. As indicated in the table below, in 2001, bypass procedures outnumbered valve and pacemaker procedures, combined:

(CHART)

Notes to table:



(1)		Data obtained from AHA “Heart Disease and Stroke Statistics — 2004 Update.”

Business Strategy

Our mission is to develop and commercialize technologies to treat diseases of the heart, with an initial focus on the Holly Graft System for use in CABG. The key elements of our strategy in support of this mission are to:

• Coordinate Clinical Studies to Maximize Commercial Potential of the Holly Graft System. We are devoting most of our current efforts to initiating the clinical trial and obtaining regulatory clearances for the Holly Graft System. We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia, in the fourth quarter of 2004. We expect to initiate our human clinical trials in Europe during the second quarter of 2005, and the United States during 2005.

• Establish Cardiac Surgery Sales and Marketing Capabilities. We are in the process of establishing our international sales and marketing distribution network. Our management team has successfully implemented similar strategies for innovative cardiac surgery products, such as certain types of pacemakers and heart valves, throughout the world.

• Educate Physicians and Patients about our Holly Graft System Procedure. We believe education of physicians and patients about technology alternatives to traditional SVG and our procedure will be critical to our success. We intend to develop physician training and education programs, which will emphasize the clinical efficacy and ease of use of our Holly Graft System. We also intend to increase our use of patient-oriented marketing materials for use by physicians to inform patients of the availability and potential benefits of our Holly Graft System.

• Focus on New Product Technology and Product Enhancements. We intend to focus on new products and technologies, as well as on improvements to our Holly Graft System. We believe that our expertise in the design and development of technologies for minimally invasive, off pump technologies will continue to evolve and represent an opportunity for us.

Clinical Status

We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia, in the fourth quarter of 2004. This first human implant will not provide sufficient data to conclude that the Holly Graft System will function as intended in human patients. Rather, we will be able to accurately evaluate the performance of the Holly Graft System in humans only after extensive testing in large numbers of patients over a period of years. We expect to continue our implant efforts in Australia and plan to rely on a provision under Australian law intended to allow individual named patients with serious and, in many instances, critical conditions compassionate access to potentially life-saving products not otherwise available in Australia or approved by Australian authorities. This provision, referred to as the Special Access Scheme, or SAS, is administered by Australia’s Therapeutic Goods Administration, and leaves to the treating physician and the patient the decision to use the product without approval from the Therapeutic Goods Administration. In compliance with the SAS, leading cardiothoracic surgeons in Australia have identified coronary artery disease patients for whom no other treatment options are available and the Holly Graft System would be suitable. The Company is working closely with cardiothoracic surgeons who have requested the Holly Graft System for treatment of their patients pursuant to the SAS. Our first Australian human implants will be conducted on a statistically insignificant number of human patients and are not intended to evaluate the effectiveness of the Holly Graft System for clinical trial purposes. Based on the results of our preclinical animal testing and our human implants in Australia, and assuming our initial human clinical trials to be conducted in international venues beginning in 2005 are successful, in 2005 we plan to file an application for an IDE with the FDA seeking to initiate human clinical trials for the Holly Graft System in the United States. The Holly Graft System is a Class III Device which will require PMA by the FDA. Based on our analysis of the FDA’s review of relatively similar medical devices, we anticipate the primary endpoints of our pivotal FDA clinical trial will be a six-month angiographic follow-up to assess patency and a twelve-month clinical follow-up. We anticipate that these trials will commence in 2005 and the earliest they will end is the fourth quarter of 2007. We will seek to introduce the Holly Graft System into the United States market for commercialization in 2008.

Our ability to achieve these goals by the dates indicated is subject to various risks described above under the heading “Risk Factors” including our need to obtain regulatory approval in the United States and in foreign jurisdictions, and our expected need to obtain one or more licenses from Angiotech with respect to the use of paclitaxel in polymer coatings for implantable medical devices. We are currently discussing such licenses, while contemporaneously investigating alternative coatings and processes that we believe will be effective alternatives to Angiotech’s technologies. We may not be able to successfully negotiate such license agreements with Angiotech until we receive regulatory approval to commercialize the Holly Graft System or may not be able to obtain such license agreements in any event. As detailed above, we do not expect to obtain FDA approval until 2008. Our success depends on the development and commercialization of the Holly Graft System.

Research and Development Efforts

We have devoted four years to the development of the Holly Graft System. In that time we have made significant progress on the design and testing of each core component. During our preclinical evaluation of the Holly Graft System, we believe we have addressed issues that are commonly encountered in developing cardiovascular devices such as injury to the vessel wall, hyperplasia and blood clot formation. However, there can be no assurance that such solutions will be effective in human beings or that we will be able to solve other problems as they arise.

Our current research and development efforts have been primarily focused on commercializing the Holly Graft System. To that end, we are continuing to evaluate the evolving field of device coatings, including polymers and drugs or biological agents to enhance the effectiveness of the Holly Graft System. We are in the early stages of evaluating two possible drug compounds summarized as follows:

• Compound A — We have entered into a supply agreement with a large pharmaceutical company for the evaluation of a FDA-approved oncology drug for use as the active component to mitigate the formation of new tissue on or in the Holly Graft System.

• Compound B — We have performed in vitro evaluation of an unapproved drug for use as the active component to mitigate the formation of new tissue growth on/in the Holly Graft System. We expect to begin porcine studies using Compound B by the fourth quarter of 2004.

Additionally, we continue to evaluate new and evolving technologies to bind and release drugs on the Holly Graft System. We are currently evaluating an unapproved drug binding and eluting technology that could be used as a possible substitute for the polymer technologies we are currently testing.

The above mentioned technologies provide us with drug-coating alternatives that have the potential to reduce our reliance on any one drug, technology or supplier.

Our long term research and development initiatives are consistent with trends we believe exist in the cardiac surgery industry and will focus on less invasive procedures and improving patient outcomes. We plan to leverage our internal research team and our Scientific Advisory Board to make enhancements to the Holly Graft System that would concentrate on incorporating minimally invasive surgical methods, anastomotic/ connector technology and possibly robotic surgery. All of the aforementioned efforts, if successful, are intended to advance the Holly Graft System by making the procedure more tolerable for patients, reducing surgical trauma and reducing patients’ length of stay in the hospital.

Sales and Marketing

We plan to seek regulatory approvals to market the Holly Graft System in international markets before obtaining FDA approval in the United States. Our international marketing strategy will combine the substantial cardiovascular experience of our management team with a network of experienced cardiovascular surgery representatives to sell our product in international markets. We believe that our distribution partners will provide a rapid and cost efficient means of increasing market penetration and commercial acceptance of the Holly Graft System in key international markets. We believe we will be able to attract experienced cardiac surgery sales organizations and people familiar with local markets and customs to serve as our representatives.

We do not currently have any distributors, but we anticipate that we will be able to add distributors in each foreign jurisdiction as soon as we obtain regulatory approval to sell our products in such jurisdiction. We anticipate that each of our independent distributors will have the exclusive right to sell the Holly Graft System within a defined territory. We anticipate that most of our distributor agreements will establish quotas for sales of the Holly Graft System in the distributor’s territory. We also anticipate that under most of the distributor agreements, we may, at our option, terminate the agreement upon the departure of certain key employees of the distributor, if our company experiences a change in control, or if key performance criteria are not met. We intend to sell the Holly Graft System to each distributor F.O.B. Minneapolis, Minnesota. We anticipate that sales to international distributors will be denominated in United States dollars.

Once we obtain regulatory approval, which process could take several years to complete, if ever, we intend to market our products in the United States through a direct sales organization. We will focus our sales and marketing efforts on developing awareness of our Holly Graft System in the approximately 900 United States open heart centers. Our sales, marketing and customer service personnel will provide professional sales, marketing and promotional support to our independent distributors.

Currently, we operate in one medical industry segment, the sale of artificial grafts for coronary bypass surgery.

Manufacturing

We presently assemble the Holly Graft System in a controlled clean room environment at our facility in a suburb of Minneapolis, Minnesota. Our manufacturing operation currently consists of assembling, inspecting, testing and packaging all of the components into a finished product, and then sterilizing the product prior to shipment for use in our animal studies and we intend to use the same manufacturing operation prior to shipment for use in human implants. As of the date of this memorandum, no shipments of our product have been made.

We have an agreement with SurModics, Inc. regarding the use of its polymer coating technology. Our agreement with SurModics grants us a license under the company’s patent rights, know-how and trademarks relating to such coating technology. This right includes our right to appoint third party distributors of finished products and, subject to the consent of the licensing company, to contract with third party manufacturers for the application of the coating technology. Under the terms of this agreement, we may also elect to have SurModics provide us with technical support regarding the process of coating products. We have not determined whether we will develop these capabilities internally or contract these steps out to third parties. In addition, SurModics has also agreed to supply us with reasonable quantities of chemicals, or reagents, used in the coating technology. We may terminate this agreement without cause upon 90 days’ prior written notice, and, upon termination, we shall have no further rights other than to sell any existing inventory for a period of 18 months thereafter. SurModics may terminate this agreement on 90 days’ prior written notice for a material breach or default by us that is not cured within the 90 days. We have also entered into a clinical coating agreement with SurModics which provides that SurModics will coat certain components in up to 1,000 of our Holly Graft Systems with a drug combination for use in human clinical trials. This agreement terminates on December 31, 2005.

We are continuing to discuss obtaining any necessary licenses from Angiotech with respect to the use of paclitaxel in polymer coatings for implantable medical devices. We are also pursuing licenses and supply agreements to other drug combinations that could be effective options to Angiotech’s technologies should we be unable to obtain the licenses from Angiotech, or should the other drug combinations be superior to Angiotech’s technologies. We may not be able to successfully negotiate such license agreements with Angiotech until we receive regulatory approval to commercialize the Holly Graft System, if ever. We do not expect to obtain FDA approval until 2008. Securing a license from Angiotech or for an alternative to Angiotech’s technologies may prove to be critical to the commercialization of our Holly Graft System, and there is no assurance such a license will be obtained.

Competition

The cardiac surgery medical device market is highly competitive. Companies with significantly greater financial, technical, research, marketing, sales and distribution and other resources, including Medtronic, Inc., Guidant Corporation, St. Jude Medical, Inc., Thoratec Corporation and Edwards Lifesciences Corporation, are working on products similar to our artificial coronary graft as well as other competing products or therapies, including stenting, angioplasty and pharmacological therapies.

We currently face direct competition from CardioTech International, Inc., a company that is in human clinical trials evaluating an artificial coronary bypass graft. There can be no assurance that our competitors or future competitors will not succeed in developing or marketing technologies and products that demonstrate better safety or effectiveness, clinical results, ease of use or lower cost than our Holly Graft System or that such competitors will not succeed in obtaining regulatory approval for, introducing or commercializing any such products prior to us. Any of the above competitive developments could have a material adverse effect on our business, financial condition and results of operations. There is no assurance that products or technologies introduced subsequent to the commercialization of the Holly Graft System will not render the Holly Graft System obsolete.

Patents and Proprietary Technology

Our policy is to protect our proprietary position by obtaining United States and foreign patents to protect technology, inventions and improvements important to the development of our business. To date we have obtained two United States patents, applied for four additional United States patents on various aspects of the Holly Graft System, and have filed foreign applications in the European Union, Japan, China, Australia, Brazil, Canada, Argentina and Hong Kong. Our United States patents have expiration dates of January 26, 2020. Any foreign patents corresponding to our United States patents may have terms or expiration dates that vary from the corresponding United States patent, depending on factors such as the payment of annuities, working requirements applicable to particular countries, and other national laws and requirements. Additionally, we have obtained non-exclusive licenses from several of our suppliers for critical components of the Holly Graft System. We cannot be certain that our patents will not be challenged or circumvented by competitors.

We also rely on trade secrets and technical know-how in the manufacture and marketing of the Holly Graft System. We typically require our employees, consultants and contractors to execute confidentiality agreements with respect to our proprietary information.

We have United States federal trademark applications pending for the following marks: “Holly Graft” and “CABG Medical.” In each of these applications, the relevant goods at issue are “Medical apparatus, namely devices for use in coronary artery bypass graft surgery procedures.” We have also filed trademark applications in Canada and the European Community on the “Holly Graft” and “CABG Medical” trademarks. We also have registered the Internet domain name: www.cabgmedical.com.

Certain of the intellectual property that makes up the Holly Graft System was created as the result of research completed by ATS Medical, Inc. in the early to mid 1990s. ATS Medical transferred this intellectual property to our Chairman, Manny Villafaña, who later transferred the intellectual property to

us via a Technology Transfer Agreement. See “Related Party Transactions” for a more complete discussion of these transactions.

We are continuing to discuss any necessary licenses from Angiotech with respect to the use of paclitaxel in polymer coatings for implantable medical devices. We may not be able to successfully negotiate such license agreements until we receive regulatory approval to commercialize the Holly Graft System, if ever. We do not expect to obtain FDA approval until 2008. We are also pursuing licenses to other drug combinations that could be effective options to Angiotech’s technologies should we be unable to obtain the licenses from Angiotech, or should the other drug combinations be superior to Angiotech’s technology.

Among the Angiotech Patent Holdings is European Patent No. EP0706376B1 (the ’376 patent) that was granted in May 1997. An opposition proceeding against the ’376 patent was brought in the European Patent Office by several parties in March 1998. A decision by the Opposition Division of the European Patent Office in August 2000 revoked the ’376 patent based upon the unpatentability of certain claims thereof. Angiotech subsequently appealed the ruling, and the review process of the claims contained in the ’376 patent is ongoing.

The Angiotech Patent Holdings further include European Patent No. EP0711158B1 (the ’158 patent), which was granted in October 2003. The ’158 patent is also currently being opposed in the European Patent Office.

We are therefore monitoring the standing of the Angiotech Patent Holdings throughout the world, as rulings against the Angiotech Patent Holdings in any jurisdiction may effectively limit the scope of patent coverage that Angiotech can validly assert against unlicensed users of the technologies referred to in the Angiotech Patent Holdings. We are unable to predict whether any legal proceedings against the Angiotech Patent Holdings will be successful or how such proceedings may affect our need for license under the Angiotech Patent Holdings in order to commercialize the Holly Graft System using a paclitaxel coating.

Government Regulation

Our Holly Graft System is regulated in the United States as a medical device by the FDA under the Federal Food, Drug and Cosmetic Act, or FD&C Act. Under the FD&C Act, medical devices are required to be safe and effective and the FDA is given the authority to regulate the research, testing, manufacturing, labeling, storage, record keeping, advertising and distribution of medical devices. The FDA classifies our Holly Graft System as a Class III device, which is subject to the highest level of controls. Noncompliance with applicable regulations can result in suspension of production, withdrawal of prior approvals, fines, injunctions, recall of products, civil penalties and criminal prosecution. As of the date of this memorandum we have not submitted our IDE to the FDA. We anticipate submitting our IDE during the second quarter of 2005. We anticipate that these trials will commence in 2005 and the earliest they will end is the fourth quarter of 2007. If we have completed enrollment and obtained sufficient clinical data, we anticipate filing our application for PMA in 2007. We will seek to introduce the Holly Graft System into the United States market for commercialization in 2008.

We also are subject to FDA regulations concerning manufacturing processes and reporting obligations. These regulations require that manufacturing steps be performed according to FDA standards and in accordance with documentation, control and testing standards. The FDA monitors compliance with its good manufacturing practices regulations by conducting periodic inspections. We are required to provide information to the FDA on adverse incidents as well as maintain a detailed record keeping system in accordance with FDA guidelines. We expect that our manufacturing facility will be subject to domestic and international regulatory inspection and review.

The advertising of our product also is subject to both FDA and Federal Trade Commission regulations. In addition, we will be subject to the Anti-kickback Statute and regulations promulgated by the United States Department of Health and Human Services and the Centers for Medicare and Medicaid Services, or CMS, if we sell the Holly Graft System to Medicare or Medicaid patients.

Regulation of implantable cardiac surgery medical devices varies widely in foreign countries. Foreign countries vary from having no regulations to having a pre-market notice or pre-market acceptance process. The European Union has adopted rules which require that medical products receive the right to affix the CE mark, an international symbol that denotes conformity with European standards for safety and allows certified devices to be marketed in all European Union countries. As part of the CE compliance, manufacturers are required to comply with the ISO 9000 series of standards for quality operations.

Third Party Reimbursement

In the United States, healthcare providers that purchase medical devices, such as our product, generally rely on third-party payors, including Medicare, Medicaid, private health insurance carriers and managed care organizations, to reimburse all or part of the cost and fees associated with the procedures performed using these devices. The commercial success of the Holly Graft System will depend on the ability of health care providers to obtain adequate reimbursement from third-party payors for the surgical procedures in which our products are used. Third-party payors are increasingly challenging the pricing of medical products and procedures. Even if a procedure is eligible for reimbursement, the level of reimbursement may not be adequate. In addition, third-party payors may deny reimbursement if they determine that the device used in the treatment was not cost-effective or was used for a non-approved indication.

Based on statistics obtained from the AHA, the treatment of coronary atherosclerosis in the United States results in a total cost of approximately $35.1 billion. Furthermore, the average mean charge for a bypass procedure is approximately $61,000. We believe that areas for procedure cost savings and facility economics should be attainable from the utilization of the Holly Graft System based on reductions of operating room time due to the ease of use of our device and the elimination of infections and complications resulting from harvesting vessels from a patient’s legs and arms.

We believe that we will pursue reimbursement with a drug coated stent as a predicate device for our vessel connector, which is also a coronary device with a drug combination. Additionally, we believe that we will pursue reimbursement for the graft component of our device under existing codes for ePTFE vascular graft. There is no assurance that we will be able to achieve reimbursement through this approach.

In international markets, market acceptance of the Holly Graft System will depend in part upon the availability of reimbursement from healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country. The main types of healthcare payment systems in international markets are government sponsored healthcare and private insurance. Countries with governmental sponsored healthcare, such as the United Kingdom, have a centralized, nationalized healthcare system. New devices are brought into the system through negotiations between departments at individual hospitals at the time of budgeting. In Japan, France and Germany, the government sets an upper limit of reimbursement for various medical products. In most foreign countries, there are also private insurance systems that may offer payments for alternative devices.

We will pursue reimbursement for our Holly Graft System internationally through our independent distributors. While the healthcare financing issues in these countries are substantial, we hope to be able to sell the Holly Graft System to private clinics and nationalized hospitals in each of the countries served by our distributors.

Product Liability and Insurance

Cardiovascular device companies are subject to an inherent risk of product liability and other liability claims in the event that the use of their products results in personal injury. An artificial coronary bypass graft is a life-sustaining device, and the failure of any such graft could result in injury to or disability or death of the patient. We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia in the fourth quarter of 2004. Any product liability claim could subject us to costly litigation, damages and adverse publicity.

As we initiate human clinical trials, we will attempt to procure product liability insurance policy with an annual coverage limit of $1 million in the aggregate. We are responsible for any uninsured claims or claims which exceed the insurance policy limits. Product liability insurance is expensive for mechanical medical devices. If insurance becomes completely unavailable, we must either develop a self-insurance program or sell without insurance. The development of a self-insurance program would require significant capital.

Employees

As of October 29, 2004, we had eight full-time employees and one part-time employee, of whom four are engaged in research and development (including clinical and regulatory affairs), two in production (including document control) and three in marketing, sales and administrative activities.

Facilities

We lease approximately 7,400 square feet of space in a suburb of Minneapolis, Minnesota. The lease expires in January 2007. We believe that these facilities are adequate to meet our current and reasonably foreseeable requirements. We believe that we can obtain additional space, if required, on commercially reasonable terms.

Legal Proceedings

We are currently not a party to any legal proceedings.

MANAGEMENT

Executive Officers and Directors


Name	Age		Position

Manny Villafaña(1)(2)		64	Chairman & Chief Executive Officer
John L. Babitt, CPA(3)		34	Director, President, Chief Operating Officer & Chief Financial Officer
A. Jay Graf(1)(2)(3)(4)		56	Director
Robert E. Munzenrider(3)(4)		59	Director
Arch C. Smith(1)(2)(3)(4)		49	Director

(1) Member of Compensation Committee

(2) Member of Governance/ Nominating Committee

(3) Has agreed to become a Director immediately upon completion of this offering

(4) Member of Audit Committee

Manny Villafaña is the founder, CEO and Chairman of the Board of CABG Medical, Inc. Mr. Villafaña has more than 37 years experience in the medical industry. He founded ATS Medical, Inc. to develop, manufacture and market a next-generation pyrolytic carbon bileaflet mechanical heart valve and has served as Chief Executive Officer, Chairman of the Board and a Director from the ATS’s inception in 1987 through May 2004. From 1983 to 1987, Mr. Villafaña served as Chairman of GV Medical, Inc. a company co-founded by Mr. Villafaña to develop, manufacture and market the LASTAC System, a laser transluminal angioplasty catheter system. From 1976 to 1982, Mr. Villafaña served as President and Chairman of St. Jude Medical, Inc. a company founded by Mr. Villafaña to develop, manufacture and market a pyrolytic carbon bileaflet mechanical heart valve. From 1972 to 1976, he served as President and Chairman of Cardiac Pacemakers, Inc. (now a division of Guidant Corporation), a company founded by Mr. Villafaña to develop, manufacture and market a new generation of lithium powered pacemakers.

John L. Babitt, CPA, joined our company in August 2003, as President, Chief Operating Officer and Chief Financial Officer. Mr. Babitt joined our company from Bioheart, Inc. where he served as Chief Financial Officer and Vice President of Finance from 2000 to August 2003. Mr. Babitt was responsible for structuring strategic investor transactions and procuring contract manufacturing operations for Bioheart’s biologic and medical device activities. Prior to Bioheart, Mr. Babitt was with Ernst & Young LLP where his most recent position was Senior Manager in the Mergers & Acquisitions (“M&A”) Group. His primary responsibility in such capacity involved the supervision of the acquisition/financing of businesses by financial and strategic buyers in the technology and healthcare industries. Mr. Babitt holds a Bachelor of Arts degree specializing in accounting and a Masters of Business Administration with a concentration in finance from the University of Miami. Mr. Babitt is a Certified Public Accountant. Mr. Babitt has agreed to join our Board of Directors immediately following this offering.

A. Jay Graf retired effective June 2004 as a Group Chairman, Office of the President, for Guidant Corporation. Prior to this assignment, Mr. Graf served as President of Guidant’s Cardiac Rhythm Management Division, a position he held since Guidant was formed in 1994. Prior to the formation of Guidant Corporation Mr. Graf was President of Cardiac Pacemakers, Inc., the business of which is now part of Guidant Corporation’s Cardiac Rhythm Management group. Mr. Graf graduated from Boston University with a Bachelor of Science degree in economics and earned a Master of Business Administration degree in finance from Indiana University. Mr. Graf serves on the board of directors for American Medical Systems, Inc., and the National Association of Manufacturers. He is also a member of the Board of Overseers for the University of Minnesota, Carlson School of Management. Mr. Graf has agreed to join our Board of Directors immediately following this offering.

Robert E. Munzenrider is a retired financial and operating executive. From 2000 to 2002, Mr. Munzenrider was President of Harmon AutoGlass, a subsidiary of Apogee Enterprises, Inc. In 1999, he served as Vice President and Chief Financial Officer of the Glass Services Segment of Apogee Enterprises. He also served as Executive Vice President and Chief Financial Officer of Eliance Corp., an e-commerce service provider, during part of 1999. From 1998 to 1999, Mr. Munzenrider served as Vice President and Chief Financial Officer of St. Jude Medical, Inc. Mr. Munzenrider serves on the board of directors for ATS Medical, Inc. and Viad Corp. He is also a Trustee on the University of Montana Foundation. Mr. Munzenrider has agreed to join our Board of Directors immediately following this offering.

Arch C. Smith is currently an active private investor focusing on medical technologies. From 1984 to 2003, Mr. Smith worked for Piper Jaffray, a Minneapolis-based investment bank. Mr. Smith contributed in roles of increasing responsibility and most recently as a senior healthcare analyst and Managing Director for equity research, specializing in medical technology companies. Mr. Smith initially covered large capitalization stocks in the cardiovascular device arena, but later shifted the focus of his practice to small capitalization medical technology companies where he was responsible for identifying many of the new and emerging technologies that have changed the way healthcare is delivered today. Mr. Smith serves on the board of the Minneapolis Heart Institute Foundation and is a graduate of Bowdoin College and the Tuck School of Business at Dartmouth. Mr. Smith has agreed to join our Board of Directors immediately following this offering.

Board Committees

Audit Committee. At the closing of this offering, we expect that our audit committee will be composed of Messrs. Graf, Munzenrider and Smith. We anticipate that Mr. Munzenrider will chair the committee. Our audit committee will assist our Board of Directors in its oversight of:

• The integrity of our financial statements;

• Our independent registered public accounting firm’s qualifications and independence; and

• The performance of our independent auditors.

The audit committee will have the sole and direct responsibility for appointing, evaluating and retaining our independent registered public accounting firm and for overseeing their work. All audit services to be provided to us and all non-audit services, other than de minimis non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee.

Compensation Committee. At the closing of this offering, we expect that our compensation committee will be composed of Messrs. Graf, Smith and Villafaña. We anticipate that Mr. Graf will chair the committee. The purpose of our compensation committee is to discharge the responsibilities of our Board of Directors relating to compensation of our executive officers. Specific responsibilities of our compensation committee will include:

• Reviewing and recommending approval of compensation of our executive officers;

• Administering our stock incentive and employee stock purchase plans; and

• Reviewing and making recommendations to our Board with respect to incentive compensation and equity plans.

Governance/ Nominating Committee. At the closing of this offering, we expect that our governance/nominating committee will be composed of Messrs. Graf, Smith and Villafaña. We anticipate that Mr. Villafaña will chair the committee. Our governance/ nominating committee will:

• Identify and recommend nominees for election to our Board of Directors;

• Develop and recommend to our Board our corporate governance principles; and

• Oversee the evaluation of our Board and management.


	*Compensation Committee Interlocks and Insider Participation*

We did not have a compensation committee in 2003. However, Messrs. Villafaña and Babitt, both officers of the company, participated in the deliberations regarding executive compensation during such fiscal year. None of our executive officers has served as a member of the compensation committee, or other committee serving an equivalent function, of any other entity, one of whose executive officers served as a member of our compensation committee.

Election of Directors

Our Bylaws state that our Board shall consist of one or more directors and we currently have one director, Manny Villafaña. At each annual meeting, the shareholders shall set the number of directors; between annual meetings, the number of directors may be increased by the Board of Directors. Immediately following this offering, the board will increase the number of directors to five by electing John L. Babitt, A. Jay Graf, Robert E. Munzenrider and Arch C. Smith to the Board.

Director Compensation

Each member of our Board of Directors who is not a company employee receives a one-time grant of 50,000 shares of restricted common stock. Such stock vests ratably over a four-year period and has an exercise price equal to the fair market value of our common stock on the date of the grant. Each member of our board of directors who is not a company employee also receives a meeting fee of $1,000 for each full Board meeting attended and $500 for each committee meeting attended. The chair of our audit committee receives annual compensation equal to $10,000. In addition, we reimburse each member of our Board of Directors who is not a company employee for reasonable travel and other expenses in connection with attending meetings of the Board of Directors.

Scientific Advisory Board

We have established a scientific advisory board made up of leading experts in the field of cardiac surgery and coronary heart disease. Members of our scientific advisory board consult with us regularly on matters relating to:

• Our research and development programs;

• The design and implementation of our clinical trials;

• Market opportunities from a clinical perspective;

• New technologies relevant to our research and development programs; and

• Scientific and technical issues relevant to our business.

Our scientific advisory board has no authority to act on behalf of the company and therefore serves only in an advisory role. As compensation for serving on our advisory board, Dr. Richard Gray received a grant of 150,000 shares of our common stock, while Dr. Stuart Jamieson and Dr. Clifton Lewis each received an option to purchase 50,000 shares of our common stock. We anticipate using restricted stock as compensation for future advisory board members. There are no other compensation agreements with our advisory board members and any future compensation will be determined by our Board of Directors.

The current members of our scientific advisory board are:


Name		Professional Affiliation

Richard Gray, M.D.		Cardiologist, California Pacific Medical Center, San Francisco, California
Stuart W. Jamieson, M.D.		Professor and Head, Thoracic & Cardiovascular Surgery, University of California San Diego President, California Heart & Lung Institute
Clifton Lewis, M.D.		Cardiac Surgeon, Sarasota Memorial Hospital, Sarasota, Florida

Executive Compensation

The following table sets forth the compensation paid or accrued during the years ended December 31, 2002 and 2003 for executive compensation in excess of $100,000. We refer to these officers collectively as our named executive officers.

Summary Compensation Table

Long Term

Annual Compensation

Compensation

Securities

Other Annual

Underlying

All Other

Name and Principal Position

Year

Salary ($)

Bonus ($)

Compensation

Options

Compensation

Manny Villafaña

2003

—

150,000

—

Chief Executive Officer

Stock Options Granted in 2003

The following table provides information regarding stock options granted during 2003 to the named executive officers. We have not granted any stock appreciation rights.

Amounts in the following table represent potential realizable gains that could be achieved for the options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are calculated based on the requirements of the Securities and Exchange Commission and do not represent an estimate or projection of our future common stock prices. These amounts represent certain assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises depend on the future performance of the common stock and overall stock market conditions. The amounts reflected in the following table may not necessarily be achieved.

Potential Realizable Value at

Number of

% of Total

Assumed Annual Rates of

Securities

Options

Stock Price Appreciation for

Underlying

Granted to

Exercise or

Option Term(1)

Options

Employees in

Base Price

Expiration

Name

Granted

Fiscal Year

($/Sh)(2)

Date

5%($)

10%($)

Manny Villafaña

—

John L. Babitt

275,000

(3)

73%

2.65

9/1/13

1,830,942

3,161,864

(1) The dollar amounts under these columns are the result of calculations at rates set by the Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, in the price of the underlying common stock. The potential realizable values are calculated using an assumed initial public offering price of $5.50 per share, the mid-point of our filing range, and assuming that the market price appreciates from this price at the indicated rate for the entire term of each option and that each option is exercised and sold on the last day of its term at the assumed appreciated price.

(2) Exercise price is equal to the fair market value on the date of grant.

(3) All options were granted on September 1, 2003. An option for 100,000 shares is exercisable to the extent of 25% of the shares on each of the first four anniversary dates of the date of grant; an option for 50,000 shares is exercisable upon successful completion of $15,000,000 in equity placement, or upon a corporate merger or change of control, or on September 1, 2012; an option for 25,000 shares is exercisable upon the first human implant or on September 1, 2006; and an option for 100,000 shares is exercisable upon the first clinical implant under a United States IDE or on September 1, 2012.


	*Aggregated Option Exercises in 2003 and Year-End Option Values*

The following table provides information about the number of shares issued upon option exercises by our named executive officers as of October 29, 2004, and the value realized by our named executive officers. The table also provides information about the number and value of options held by our named executive officers at October 29, 2004.



					Number of Unexercised
					Securities Underlying				Value of Unexercised
	Shares				Options at				In-the-Money Options
	Acquired				December 31, 2003				at December 31, 2003(1)
	on
Name	Exercise		Value Realized		Exercisable		Unexercisable		Exercisable		Unexercisable

Manny Villafaña		—		—		0		0	$	0	$	0
John L. Babitt		—		—		0		275,000	$	0	$	921,250

(1) There was no public trading market for our common stock as of September 2, 2004. Accordingly, as permitted by the rules of the Securities and Exchange Commission, we have calculated the value of unexercised in-the-money options assuming an initial public offering price of $5.50 per share, the mid-point of our filing range, less the aggregate exercise price.

Equity Compensation Plans


	*Long-Term Incentive Plan*

In 2000, we adopted our 2000 Long-Term Incentive Plan (the “Plan”). The Plan permits the granting of awards to our employees in the form of restricted stock, stock appreciation rights, other stock-based awards and incentive or nonqualified stock options. Stock options granted under the Plan may be “incentive stock options” meeting the requirements of Section 422 of the IRS Code of 1986 as amended (the “Code”) or nonqualified options which do not meet the requirements of Section 422. As of the date of this offering, there are 6,000,000 shares of Common Stock reserved under the Plan, of which options to purchase 1,297,500 shares are outstanding under the Plan with a weighted average exercise price of $1.45 per share. Options to purchase 496,500 shares have been exercised.

Employment Agreements

We have entered into a consulting agreement with Mr. Villafaña and an employment agreement with Mr. Babitt providing for an annual salary, stock options and such benefits in the future as may be approved by the Board of Directors. These agreements also contain change of control provisions pursuant to which, upon a merger in which more than 50% of our voting stock is acquired by a third party, an acquisition of more than 20% of our voting stock by anyone other than Mr. Villafaña, the sale of substantially all of our assets, a liquidation, or a change in the control of our board, Mr. Villafaña and Mr. Babitt will receive severance payments equal to their monthly salary for 36 and 24 months, respectively.

Limitation of Liability and Indemnification of Directors and Officers

Section 302A.521 of the Minnesota Business Corporation Act provides that unless prohibited or limited by a corporation’s articles of incorporation or bylaws, a corporation must indemnify its current and

former officers, directors, employees and agents against expenses (including attorneys’ fees), judgments, penalties, fines and amounts paid in settlement which, in each case, were incurred in connection with actions, suits or proceedings in which such person is a party by reason of the fact that he or she was an officer, director, employee or agent of the corporation, if such person i) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions, ii) acted in good faith, iii) received no improper personal benefit and statutory procedure has been followed in the case of any conflict of interest by a director, iv) in the case of any criminal proceedings, had no reasonable cause to believe the conduct was unlawful, and v) in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, committee member, employee or agent, reasonably believed that the conduct was in the best interests of the corporation, or, in the case of performance by a director, officer, employee or agent of the corporation as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the corporation. Section 302A.521 requires the corporation to advance, in certain circumstances and upon written request, reasonable expenses prior to final disposition. Section 302A.521 also permits a corporation to purchase and maintain insurance on behalf of its officers, directors, employees and agents against any liability which may be asserted against, or incurred by, such persons in their capacities as officers, directors, employees and agents of the corporation, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of such section.

Our articles of incorporation limit personal liability for breach of the fiduciary duty of our directors to the fullest extent provided by the Minnesota Business Corporation Act. Our articles of incorporation eliminate the personal liability of directors for damages occasioned by breach of fiduciary duty, except for liability based on i) the director’s duty of loyalty to us, ii) acts or omissions not made in good faith, iii) acts or omissions involving intentional misconduct, iv) payments of improper dividends, v) violations of state securities laws and vi) acts occurring prior to the date such provision establishing limited personal liability was added to our articles. Any amendment to or repeal of such provision shall not adversely affect any right or protection of a director of ours for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. Our restated bylaws provide that each director and officer, past or present, and each person who serves or may have served at our request as a director, officer, employee or agent of another corporation or employee benefit plan and their respective heirs, administrators and executors, will be indemnified by us to such extent as permitted by Minnesota Statutes, Section 302A.521, as now enacted or hereafter amended.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

RELATED PARTY TRANSACTIONS

We also describe below certain other transactions with our directors, executive officers and stockholders.

On December 3, 1999, we issued 2,000,000 shares of our common stock to Mr. Villafaña in satisfaction of our obligation to Mr. Villafaña regarding $50,000 of expenses he incurred on our behalf. On October 16, 2000, as part of a charity event, Mr. Villafaña gifted 1,000 shares of his stock. On March 17, 2003, Mr. Villafaña received 3,998,000 shares in connection with a three-for-one stock split, bringing his total number of shares to 5,997,000, or 58.1% of our outstanding shares prior to this offering.

Pursuant to a June 5, 1996 Technology Transfer Agreement, ATS Medical, Inc. transferred to Manny Villafaña, then an officer and shareholder of ATS, all right, title and interest owned by ATS in a synthetic

vascular graft device incorporating a manifold connection to the native artery, with respect to which ATS had performed preliminary design work. In exchange for this transfer, the Technology Transfer Agreement obligates Mr. Villafaña, or any person or entity to whom Mr. Villafaña assigns the technology, to pay to ATS a royalty on net sales of any product resulting from the transferred technology for the life of any United States patent covering any such product, or if no patent is issued, for a period 17 years from June 5, 1996.

On June 3, 2004, together with ATS and Mr. Villafaña, we amended the June 5, 1996 Technology Transfer Agreement to provide for reduced royalty rates on sales of products prior to obtaining regulatory approvals and depending on the jurisdiction in which the product is sold. The amendment provides that the royalty is payable only with respect to products covered by the claims of our two issued patents. In the amendment, ATS acknowledged its consent to Mr. Villafaña’s assignment to us of his rights and obligations under the June 5, 1996 Technology Transfer Agreement. The June 3, 2004 amendment will become null and void in the event of a change of control or sale of our company. In such event, the terms of the June 5, 1996 Technology Transfer Agreement will again apply to us and we will lose the benefit of the reduced royalty rates under the amendment. In order to confirm his assignment of technology to us, Mr. Villafaña entered into a Technology Transfer Agreement dated July 15, 2004 pursuant to which he assigned to us all of his right, title and interest in any technology related to our product and the various patents we have filed as well as any developments and improvements in such technology that Mr. Villafaña may conceive, develop or make after July 15, 2004. As consideration for such transfer by Mr. Villafaña, we agreed to assume his entire obligation to make royalty payments under the agreement with ATS.

Mr. Villafaña is a significant shareholder of ATS and served on ATS’s board of directors until May 10, 2004. Mr. Villafaña has also served as a consultant to ATS and continues to receive payment from ATS under the terms of a non-compete agreement.

On April 1, 2003 we entered into a consulting agreement with Mr. Villafaña. The agreement provides for future annual compensation of $225,000 through April 1, 2008. For the year ended December 31, 2003, we paid $150,000 in connection with the consulting agreement. For the nine months ended October 2, 2004 we paid $162,000 in connection with the consulting agreement.

PRINCIPAL STOCKHOLDERS

The following tables set forth as of October 29, 2004, and as adjusted to reflect the sale of the shares offered hereby, certain information regarding beneficial ownership of our common stock by:

• Each person known to us to be the beneficial owner of more than 5% of our common stock;

• Each named executive officer;

• Each of our directors; and

• All of our executive officers and directors as a group.

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. As of October 29, 2004, we had 11,391,725 shares of common stock on a fully-diluted basis. Unless otherwise indicated, each person named or included in the group has sole voting and investment power with respect to the shares of common stock set forth opposite the shareholder’s name. Shares not outstanding but deemed beneficially owned by virtue of the individual’s right to acquire them as of October 29, 2004, or within 60 days of such date, are treated as outstanding when determining the percent of the class owned by such individual and when determining the percent owned by the group. The percentages in the “Shares Beneficially Owned After the Offering” column assume that the underwriters do not exercise their over-allotment option to purchase up to 825,000 additional shares. Unless otherwise noted below, the address of each beneficial owner listed on the tables is c/o CABG Medical, Inc. 14505 21st Avenue North, Suite 212 Minneapolis, Minnesota 55447. We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. We have based our calculation of the percentage of beneficial ownership on 10,322,975 shares of common stock outstanding on October 29, 2004 and shares of common stock outstanding upon the closing of this offering.



	Shares of
	Common Stock					Shares
	Beneficially Owned					Beneficially Owned
	Prior to the Offering					After the Offering

Name of Beneficial Owner	Number		Percent			Number		Percent

Manny Villafaña		5,997,000		58.1	%		5,997,000		37.9	%
John L. Babitt(1)		75,000		*			75,000		*

All executive officers and directors as a group (2 persons)(1)		6,072,000		58.4	%		6,072,000		38.2	%

* Less than one percent.

(1) Includes 75,000 shares that may be acquired upon exercise of currently exercisable options immediately following this offering.

DESCRIPTION OF CAPITAL STOCK

General

Pursuant to our Articles of Incorporation, we have 60,000,000 shares of authorized capital stock, which consists of 54,000,000 shares of common stock and 6,000,000 shares of undesignated stock. As of October 29, 2004, 10,322,975 shares of common stock were outstanding.

Common Stock

Holders of common stock are entitled to receive such dividends as are declared by the Board of Directors, out of funds legally available for the payment of dividends. We expect to retain any earnings to finance development of our business. Accordingly, we do not anticipate payment of any dividends on our common stock for the foreseeable future.

In the event of any liquidation, dissolution or winding up, the holders of each share of common stock are entitled to share equally in any balance of our assets available for distribution.

Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. There is no cumulative voting for election of directors, which means that a majority of the stockholders may elect all of the members of the Board of Directors. Holders of common stock have no preemptive rights to subscribe for or to purchase any additional shares of common stock or other obligations convertible into shares of common stock or preferred stock which we may, hereafter, issue.

All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock are not liable for further calls or assessments.

Undesignated Shares

Our Articles of Incorporation authorize the Board of Directors to establish more than one class or series of shares. In establishing a class or series, the Board is authorized to set the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights, and certain other rights and preferences. Although there is no current intention to do so, the Board of Directors may issue shares of a class or series of preferred stock with rights which could adversely affect the voting power of the holders of common stock. In addition, our Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest.

Anti-Takeover Provisions

Certain provisions of Minnesota law described below could have an anti-takeover effect. These provisions are intended to provide management flexibility and to enhance the likelihood of continuity and stability in the composition of our Board of Directors and in the policies formulated by our Board and to discourage an unsolicited takeover of the company, if the Board determines that such a takeover is not in the best interests of the company and our stockholders. However, these provisions could have the effect of discouraging certain attempts to acquire us which could deprive our stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

Section 302A.671 of the Minnesota Business Corporation Act applies, with certain exceptions, to any acquisition of our voting stock (from a person other than the company and other than in connection with certain mergers and exchanges to which the company is a party) resulting in the acquiring person owning 20% or more of our voting stock then outstanding. Section 302A.671 requires approval of any such acquisitions by a majority vote of our stockholders prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then fair market value by the company within 30 days after the acquiring person has failed to give a timely information statement to us or the date the stockholders voted not to grant voting rights to the acquiring person’s shares.

Section 302A.673 of the Minnesota Business Corporation Act generally prohibits us or any of our subsidiaries from entering into any transaction with a stockholder under which the stockholder purchases 10% or more of our voting shares (an “interested stockholder”) within four years following the date the person became an interested stockholder, unless the transaction is approved by a committee of all of the disinterested members of our Board of Directors serving before the interested stockholder acquires the shares.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is Wells Fargo Bank, N.A. Its address is P.O. Box 64854, St. Paul, Minnesota 55164.

Listing

We have applied to have our common stock approved for listing, subject to official notice of issuance, on the Nasdaq National Market under the symbol “CABG.” We have not applied to list our common stock on any other exchange or quotation system.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect market prices prevailing from time to time. Upon completion of this offering, we will have outstanding an aggregate of 15,822,975 shares of common stock. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our “affiliates,” as that term is defined in Rule 144 of the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.

Sales of Restricted Shares

The 10,322,975 shares of common stock held by 87 existing stockholders as of October 29, 2004 are “restricted securities” within the meaning of Rule 144 and will be subject to the volume, manner of sale and other limitations under Rule 144. Of these shares, 2,493,000 shares qualify as unrestricted shares under Rule 144(k). Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of our common stock.

Our directors, officers and principal stockholders have entered into lock-up agreements in connection with the offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Feltl and Company and Ladenburg Thalmann & Co. Inc., which consent may be withheld in their sole discretion. Such shareholders may make gifts of our common stock within the restricted period provided the recipient agrees in advance to be bound by the lock-up restrictions. Messrs. Villafaña and Babitt have agreed to such restrictions for a period of one year. Taking into account the lock-up agreements, and assuming Feltl & Company and Ladenburg Thalmann & Co. Inc. do not release any stockholders from these agreements, the number of restricted shares that will be available for sale in the public market under the provisions of Rule 144, 144(k) and 701 will be as follows:

• Beginning on the effective date of this prospectus, only the shares sold in the offering will be immediately available for sale in the public market; and

• Beginning 180 days after the effective date, approximately 3,355,293 shares of our restricted shares will be eligible for sale subject to the volume, manner of sale and other limitations under Rule 144.

• Beginning 365 days after the effective date, approximately 6,967,682 shares of our restricted shares will be eligible for sale subject to the volume, manner of sale and other limitations under Rule 144.

• Beginning 180 days after the effective date, approximately 2,493,000 shares of our restricted shares will be eligible for sale as unrestricted shares under Rule 144(k).

In general, under Rule 144, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

• One percent of the number of shares of common stock then outstanding, which will equal approximately 158,229 shares immediately after the offering; or

• The average weekly trading volume of the common stock during the four calendar weeks preceding the sale.

Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701 permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell such shares in reliance upon Rule 144 but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell such shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144.

Stock Options

We intend to file a registration statement under the Securities Act covering the shares of common stock reserved for issuance upon exercise of outstanding options. The registration statement is expected to be filed 180 days after the closing of this offering and become effective as soon as practicable after filing. Accordingly, shares registered under the registration statement will be available for sale in the open market after the effective date of the registration statement, except with respect to Rule 144 volume limitations that apply to our affiliates. See “Risk Factors — If there are substantial sales of our common stock, our stock price could decline.”

UNDERWRITING

Under the terms and subject to the conditions in an underwriting agreement dated , 2004, we have agreed to sell to the underwriters named below, for whom Feltl and Company and Ladenburg Thalmann & Co. Inc. are acting as the representatives, the following respective numbers of shares of common stock:


		Number of
Underwriters		Shares

Feltl and Company
Ladenburg Thalmann & Co. Inc.

	Total		5,500,000

Subject to the terms and conditions of the underwriting agreement, the underwriters have agreed to purchase from us 5,500,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriting agreement provides that the underwriters’ obligations to purchase our shares are subject to approval of legal matters by counsel and to the satisfaction of other conditions. The underwriters are obligated to purchase all of the shares (other than those covered by the over-allotment option described below) if they purchase any shares. The underwriting agreement also provides that, if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or this offering may be terminated.

Commissions and Expenses

The underwriters propose to offer the shares to the public at the public offering price set forth on the cover of this prospectus. The underwriters may offer the shares to securities dealers at the price to the public less a concession not in excess of $ per share. Securities dealers may reallow a concession not in excess of $ per share to other dealers. After the shares are released for sale to the public, the underwriters may vary the offering price and other selling terms from time to time. The underwriters will also receive a nonaccountable expense allowance equal to 1% of the public offering price set forth on the cover of this prospectus for the sale of all the shares sold (excluding shares sold pursuant to the overallotment option, if any).

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.


	No Exercise	Full Exercise

Per Share	$	$
Total	$	$

In addition to the underwriting discounts and commissions described in the table above, we have agreed to sell to the representatives a warrant, as described below, as additional underwriting compensation. We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $850,000.

Warrant

As further compensation to the underwriters in connection with this offering, we have agreed to sell to the representatives, for nominal consideration, the warrant, or Underwriters’ Warrant, to purchase up to a total of 550,000 shares of our common stock. The Underwriters’ Warrant is not exercisable during the first year after the date of this prospectus and thereafter is exercisable at a price per share equal to 125% of the offering price set forth on the cover of this prospectus for a period of four years. The Underwriters’ Warrant contains customary antidilution provisions that are designed to maintain the economic value of the warrant in the event we issue a stock dividend, subdivide or combine outstanding shares of stock or engage in a reclassification of shares or a consolidation or merger with another company. The

Underwriters’ Warrant also grants the holder the right to participate in any registration of our common stock with the Securities and Exchange Commission that we might undertake and to demand that we register the warrant and the shares underlying the warrant. The Underwriters’ Warrant also includes a “cashless” exercise provision entitling the holder to convert the Underwriters’ Warrant into shares of our common stock. The Underwriters’ Warrant may not be sold during the offering, or sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Underwriters’ Warrant for a period of one year from the date of this prospectus, except to officers or partners of the underwriters and members of the selling group and/or their officers or partners, provided that any portion of the Underwriters’ Warrant so transferred shall remain subject to the above restrictions for the remainder of the restriction period.

Over-Allotment Option

We have granted to the underwriters an option, exercisable not later than 45 days after the date of this prospectus, to purchase up to an aggregate of 825,000 additional shares of common stock at the public offering price set forth on the cover page of this prospectus less the underwriting discounts and commissions. The underwriters may exercise this option in whole or in part only to cover over-allotments, if any, made in connection with the sale of shares offered hereby.

Lock-Up and Related Agreements

Except as noted below, our directors, executive officers and principal stockholder have agreed with the representatives that for a period of 180 days following the date of this prospectus, they will not offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any of our shares of common stock or any securities convertible into or exchangeable for shares of common stock. Such shareholders may make gifts of our common stock within the restricted period provided the recipient agrees in advance to be bound by the lock-up restrictions. Messrs. Villafaña and Babitt have agreed to such restrictions for a period of one year. The representatives may, in their sole discretion, at any time without prior notice, release all or any portion of the shares from the restrictions in any such agreement. We have entered into an agreement with the representatives, stating that we will not issue additional shares (with the exception of shares issued pursuant to the over-allotment option) of our common stock prior to the end of the 180-day period following the date of this prospectus, other than with respect to our issuing shares pursuant to employee benefit plans, qualified option plans or other employee compensation plans already in existence, or pursuant to currently outstanding options, warrants or other rights to acquire shares of our common stock. There are no agreements between the representatives and any of our directors, executive officers or principal stockholder releasing them from these lock-up agreements, or with us pertaining to our issuance of additional shares, prior to the expiration of the 180-day period.

Indemnification

We have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, and to contribute to payments the underwriters may be required to make in respect of any such liabilities.

Stabilization, Short Positions and Penalty Bids

The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934:

• Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short

position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.

• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum.

• Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over- allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

• Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Offering Price Determination

Prior to this offering, there has been no public market for our common stock. The initial public offering price has been negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives considered:

• Prevailing market conditions;

• Our product development history;

• Our capital structure;

• Estimates of our business potential and earnings prospects;

• An overall assessment of our management; and

• The consideration of these factors in relation to market valuation of companies in related businesses.

We intend to apply to have our common stock approved for quotation on the Nasdaq National Market under the symbol “CABG.”

Discretionary Accounts

The representatives have advised us that they do not intend to confirm sales of the shares to discretionary accounts.

LEGAL MATTERS

Our General Counsel is Fredrikson & Byron, P.A., Minneapolis, Minnesota. Our Intellectual Property Counsel is Haugen Law Firm PLLP, Minneapolis, Minnesota.

The validity of the Shares being offered hereby is being passed upon for us by Fredrikson & Byron, P.A. We have received certain advice from our legal counsel in connection with the matters described herein. Such legal advice is solely for our benefit and not for any stockholder or prospective investor. Purchasers of the Shares offered hereby are not entitled to rely on any such advice and should not consider any such counsel to represent them or their interests. Certain legal matters relating to the offering will be passed upon for the underwriters by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. Prospective investors should consult with their own legal and other counsel.

EXPERTS

The financial statements of CABG Medical, Inc. as of December 31, 2002 and 2003, and for each of the years ended December 31, 2001, 2002 and 2003, and for the period from December 3, 1999 (date of inception) to December 31, 2003, have been included herein and in the Registration Statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock we are offering to sell. This prospectus, which constitutes part of the registration statement, does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. When we complete this offering, we will also be required to file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. We anticipate making these documents publicly available, free of charge, on our website at www.cabgmedical.com as soon as reasonably practicable after filing such documents with the Securities and Exchange Commission.

You can read the registration statement and our future filings with the Securities and Exchange Commission, over the Internet at the Securities and Exchange Commission’s web site at http://www.sec.gov. You may also read and copy any document that we file with the Securities and Exchange Commission at its public reference room at 450 Fifth Street, N.W., Washington, DC 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, NW, Washington, DC 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference room.

CABG MEDICAL, INC.

(A Development Stage Company)

FINANCIAL STATEMENTS

Years Ended December 31, 2001, 2002 and 2003 and for the Period from

December 3, 1999 (Date of Inception) to December 31, 2003; and

for the Nine Months Ended September 27, 2003 (Unaudited) and October 2, 2004 (Unaudited)

Contents


Report of Independent Registered Public Accounting Firm			F-2
Statements of Operations			F-3
Balance Sheets			F-4
Statements of Stockholders’ Equity			F-5
Statements of Cash Flows			F-6
Notes to Financial Statements			F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

CABG Medical, Inc.

(A Development Stage Company)

We have audited the accompanying balance sheets of CABG Medical, Inc. (a development stage company) (the Company) as of December 31, 2002 and 2003 and the related statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2003 and for the period from December 3, 1999 (date of inception) to December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CABG Medical, Inc. (a development stage company) at December 31, 2002 and 2003 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 and for the period from December 3, 1999 (date of inception) to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Minneapolis, Minnesota

June 4, 2004

F-2

CABG MEDICAL, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS


		Period from
		December 3, 1999												Nine Months Ended
		(Date of
		Inception) to			Year Ended December 31,
		December 31,												September 27,			October 2,
		2003			2001			2002			2003			2003			2004


														(Unaudited)

		(In thousands, except share and per share amounts)
Revenue		$	—		$	—		$	—		$	—		$	—		$	—
Expenses:
	Research and development (note 9)		2,507			659			559			1,153			732			1,640
	Marketing, general and administrative		732			118			151			405			237			596

Total			3,239			777			710			1,558			969			2,236
Interest income			120			59			22			16			10			25

Net loss		$	(3,119	)	$	(718	)	$	(688	)	$	(1,542	)	$	(959	)	$	(2,211	)

Basic and diluted net loss per share					$	(0.09	)	$	(0.08	)	$	(0.17	)	$	(0.10	)	$	(0.23	)

Weighted average shares outstanding — basic and diluted						8,152,521			8,490,000			8,967,308			9,282,654			9,810,264

See accompanying notes to financial statements.

F-3

CABG MEDICAL, INC.

(A Development Stage Company)

BALANCE SHEETS



		December 31,
								October 2,
		2002			2003			2004

								(Unaudited)

		(In thousands, except share
		and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents	$	779		$	246		$	1,426
	Short-term investments		161			1,491			1,476
	Other current assets		10			30			36

Total current assets			950			1,767			2,938
Property and equipment, net			57			74			154
Other non-current assets			—			—			412

Total assets		$	1,007		$	1,841		$	3,504

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	10		$	74		$	614
	Accrued liabilities		27			84			121

Total current liabilities			37			158			735

Commitments and contingencies (note 3)
Stockholders’ equity:
	Undesignated stock (no par value) 6,000,000 shares authorized, none issued and outstanding		—			—			—
	Common stock (no par value) 54,000,000 shares authorized, 8,490,000, 9,352,294 and 10,322,975 shares issued and outstanding as of December 31, 2002 and 2003, and October 2, 2004, respectively		2,547			4,802			8,451
	Deferred compensation		—			—			(352	)
	Deficit accumulated during development stage		(1,577	)		(3,119	)		(5,330	)

Total stockholders’ equity			970			1,683			2,769

Total liabilities and stockholders’ equity		$	1,007		$	1,841		$	3,504

See accompanying notes to financial statements.

F-4

CABG MEDICAL, INC.

(A Development Stage Company)

STATEMENTS OF STOCKHOLDERS’ EQUITY

Period from December 3, 1999 (Date of Inception) to December 31, 2000,

Years Ended December 31, 2001, 2002 and 2003

and the Nine Months Ended October 2, 2004 (Unaudited)


									Deficit
									Accumulated
		Common Stock							During the
						Deferred			Development
		Shares		Amount		Compensation			Stage			Total


		(In thousands except share amounts)
Balance at December 3, 1999 (date of inception)			—	$	—	$	—		$	—		$	—
	Common stock issued to founder at incorporation, $0.01 per share, December 3, 1999		6,000,000		50		—			—			50
	Common stock issued to non-employees for research and development consulting services, $0.03 per share, May 26, 2000		525,000		17		—			—			17
	Common stock issued, $1.67 per share, October 16, 2000 (net of issuance costs of $11,000)		1,425,000		2,364		—			—			2,364
	Net loss		—		—		—			(171	)		(171	)

Balance at December 31, 2000			7,950,000		2,431		—			(171	)		2,260
	Common stock issued to laboratory facility for research and development services, $1.67 per share, April 1, 2001		60,000		100		—			—			100
	Common stock issued for employee stock option exercise, $0.03 per share, August 31, 2001		480,000		16		—			—			16
	Net loss		—		—		—			(718	)		(718	)

Balance at December 31, 2001			8,490,000		2,547		—			(889	)		1,658
	Net loss		—		—		—			(688	)		(688	)

Balance at December 31, 2002			8,490,000		2,547		—			(1,577	)		970
	Common stock issued, $2.65 per share, August 18, 2003 (net of issuance costs of $33,000)		862,294		2,252		—			—			2,252
	Non-employee stock options granted for research and development consulting services, $2.65 per share, October 1, 2003		—		3		—			—			3
	Net loss		—		—		—			(1,542	)		(1,542	)

Balance at December 31, 2003			9,352,294		4,802		—			(3,119	)		1,683
	Common stock issued, $3.25 per share, March 31, 2004 (unaudited)		477,258		1,551		—			—			1,551
	Common stock issued for employee stock option exercise, $0.03 per share, March 16, 2004 (unaudited)		16,500		—		—			—			—
	Non-employee stock options granted for research and development consulting services, $3.25 per share, March 31, 2004 (unaudited)		—		195		—			—			195
	Common stock issued, $3.25 per share, July 21, 2004 (unaudited)		476,923		1,551		—			—			1,551
	Deferred compensation (unaudited)		—		352		(352	)		—			—
	Net loss (unaudited)		—		—		—			(2,211	)		(2,211	)

Balance at October 2, 2004 (unaudited)			10,322,975	$	8,451	$	(352	)	$	(5,330	)	$	2,769

See accompanying notes to financial statements.

F-5

CABG MEDICAL, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS



		Period from												Nine Months Ended
		December 3, 1999
		(Date of Inception)			Year Ended December 31,
		to December 31,												September 27,			October 2,
		2003			2001			2002			2003			2003			2004


		(In thousands)

														(Unaudited)
Cash flows from operating activities:
Net loss		$	(3,119	)	$	(718	)	$	(688	)	$	(1,542	)	$	(959	)	$	(2,211	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation expense		39			10			12			15			11			15
	Stock-based research and development		120			100			—			3			—			195
Changes in operating assets and liabilities:
	Other current assets		(29	)		—			(2	)		(19	)		—			(7	)
	Accounts payable		74			9			1			64			77			541
	Accrued liabilities		84			14			5			59			(23	)		38

Net cash used in operating activities			(2,831	)		(585	)		(672	)		(1,420	)		(894	)		(1,429	)

Cash flows from investing activities:
Purchases of property and equipment			(113	)		(46	)		—			(33	)		(28	)		(95	)
Purchases of short-term investments			(3,341	)		—			(1,053	)		(2,288	)		(2,288	)		(1,476	)
Proceeds from short-term investments			1,850			—			892			958			459			1,491

Net cash provided by (used in) investing activities			(1,604	)		(46	)		(161	)		(1,363	)		(1,857	)		(80	)

Cash flows from financing activities:
Capital lease payments			—			(2	)		(2	)		(2	)		(1	)		—
Proceeds from issuance of common stock			4,665			—			—			2,252			2,251			3,101
Proceeds from exercise of employee stock options			16			16			—			—			—			—
Deferred stock offering costs			—			—			—			—			—			(412	)

Net cash provided by (used in) financing activities			4,681			14			(2	)		2,250			2,250			2,689

Net increase (decrease) in cash and cash equivalents			246			(617	)		(835	)		(533	)		(501	)		1,180
Cash and cash equivalents at beginning of period			—			2,231			1,614			779			779			246

Cash and cash equivalents at end of period		$	246		$	1,614		$	779		$	246		$	278		$	1,426

Supplemental non-cash disclosures:
Deferred compensation		$	—		$	—		$	—		$	—		$	—		$	352

See accompanying notes to financial statements.

F-6

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)


1.	Organization and Summary of Significant Accounting Policies


	*Organization and Business*

CABG Medical, Inc. (the “Company” or “CABG Medical”) is a development stage medical technology company seeking to improve the treatment of coronary heart disease, or CHD, by advancing conventional bypass surgery. The Company has designed its first product, the Holly Graft System, by leveraging the Company’s understanding of flow dynamics, material sciences and drug combinations to create an artificial coronary graft system that specializes in the development and commercialization of new technologies to treat diseases of the heart. The Company’s first product is the Holly Graft System, which is being developed for use in cardiac bypass surgery as an alternative to traditional graft harvesting from the patient’s legs and arms.

The Company was incorporated in Minnesota on December 3, 1999 and operates in a single business segment.


	*Interim Financial Statements*

The financial statements as of October 2, 2004 and for the nine months ended September 27, 2003 and October 2, 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the nine months ended September 27, 2003 and October 2, 2004 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or eliminated. Our fiscal quarters consist of a thirteen-week period that ends on a Saturday.


	*Cash and Cash Equivalents*

Cash and cash equivalents consist of cash and money market funds with maturities of three months or less when purchased. The carrying value of these instruments approximates fair value. The Company has not experienced any losses on its cash and cash equivalents.


	*Short-Term Investments*

Short-term investments are classified as “available-for-sale.” Available for sale investments consist of federal agency notes and mortgage backed securities with a maturity of greater than 90 days but less than three years. For the years ended December 31, 2001, 2002, 2003 and the nine months ended September 27, 2003, and October 2, 2004, the carrying value of these short-term investments approximated market value due to the short-term nature of such investments.


	*Office Furniture and Equipment*

Office furniture and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from three to seven years, using the straight-line method. Accumulated depreciation was $23,000 and $39,000 as of December 31, 2002 and 2003, respectively.

F-7

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)


	*Long-Lived Assets*

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.


	*Research and Development Expenses*

Research and development expenditures, including payments to suppliers, are charged to expense as incurred. The Company expenses amounts paid to obtain patents or acquire licenses as the ultimate recoverability of the amounts paid is uncertain.


	*Income Taxes*

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.


	*Stock Options*

In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (“SFAS 148”) was issued. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company adopted the disclosure requirements of SFAS 148 effective December 31, 2002. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value method of accounting prescribed in APB 25 and, accordingly, does not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant.

The Company accounts for options issued to nonemployees under SFAS 123 and EITF Issue 96-18 “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date on which it is probable that the performance will occur, which is typically the vesting date.

Adjusted pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method

F-8

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

of SFAS No. 123. The weighted average fair value per share of options granted during 2001 and 2003 was $1.02 and $1.57, respectively. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 5.18% and 3.71% for the years 2001 and 2003; volatility of 55%; dividend yield of 0%; and a weighted average expected life of the options of seven years. Volatility was calculated based on an analysis of the Company’s industry peers.

For purposes of adjusted pro forma disclosures, the estimated fair value of the options typically is amortized to expense over the vesting period.



										Nine Months Ended
	Year Ended December 31,
										September 27,			October 2,
	2001			2002			2003			2003			2004


										(Unaudited)

	(In thousands, except per share amounts)
Net loss, as reported	$	(718	)	$	(688	)	$	(1,542	)	$	(959	)	$	(2,211	)
Add: Stock-based employee compensation expense included in net loss		—			—			—			—			—
Less: Employee stock compensation expense determined under the fair value method for all awards		(22	)		(23	)		(44	)		(22	)		(67	)

Pro forma net loss	$	(740	)	$	(711	)	$	(1,586	)	$	(981	)	$	(2,278	)

Pro forma net loss per share — basic and diluted	$	(0.09	)	$	(0.08	)	$	(0.18	)	$	(0.11	)	$	(0.23	)

The pro forma effect on net loss for the periods presented may not be representative of the pro forma effect on operations in future years.


	*Net Loss Per Share*

Basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options. Diluted EPS is identical to Basic EPS since potential common shares are excluded from the calculation, as their effect is anti-dilutive. Historical outstanding potential common shares not included in diluted net loss per share attributable to common stockholders calculations were 765,000, 735,000 and 1,135,000 for the years ended December 31, 2001, 2002 and 2003, respectively, and 1,135,000 and 1,297,500 for the nine months ended September 27, 2003 and October 2, 2004, respectively.


	*New Accounting Pronouncements*

F-9

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

In November 2002, the FASB issued Financial Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations.


	*Use of Estimates*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.


2.	Development Stage Activities

The Company has operated as a development stage enterprise since its inception by devoting substantially all of its effort to financial planning, raising capital, research and development, and developing markets for its products. Accordingly, the financial statements of the Company have been prepared in accordance with the accounting and reporting principles prescribed by SFAS No. 7, “Accounting and Reporting by Development Stage Enterprises,” issued by the Financial Accounting Standards Board (FASB).

The Company has incurred losses of $5.3 million and negative operating cash flow of $4.3 million from inception through October 2, 2004. Although, the Company has been successful in raising funds in the past there is no assurance that any such financing or borrowings can be obtained in the future on terms acceptable to the Company. The accompanying financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts of liabilities and existing commitments that may result from the outcome of this uncertainty. Based on the Company’s current development activities, management believes the Company has sufficient cash to fund operations through April 2005.


3.	Commitments and Contingencies


	*Leases*

The Company entered into an operating lease agreement for its facility. Terms of certain lease arrangements include renewal options, payment of executory costs such as real estate taxes, insurance, common area maintenance and escalation clauses.

F-10

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

Annual future minimum lease obligations under our operating lease agreement as of December 31, 2003 are as follows (in thousands):


2004		$	84
2005			93
2006			95
2007			8

	Total	$	280

Rent expense was approximately $100,000, $95,000 and $108,000 for the years ended December 31, 2001, 2002 and 2003, respectively and $336,000 for the period from December 3, 1999 (date of inception) to December 31, 2003. Rent expense was $82,000 and $63,000 for the nine months ended September 27, 2003 and October 2, 2004, respectively.


	*Royalty Payments*

The Company is obligated to pay royalties on commercial sales of certain products that may be developed and sold under various licenses and agreements that have been obtained by the Company. To date, the Company has not incurred any obligations for royalty payments. Upon a change of control of the Company, certain royalty provisions could increase.


	*Legal Proceedings*

The Company is not currently engaged in litigation.

The Company is aware of certain patents that could apply to the current design of the Holly Graft System. The Company has approached the holder of the patents and is currently in discussions for a licensing agreement. There can be no assurance that the Company will be able to procure a license to such patents or that a license can be obtained on commercially acceptable terms. No assurance can be provided that any future infringement claims by third parties or claims for indemnification by the Company’s customers or end users of our products resulting from infringement claims will not be asserted, or that assertions of infringement, if proven to be true, will not materially harm our business.


	*Employment Agreements*

The Company has entered into employment agreements with certain key employees providing for an annual salary, stock options and such benefits in the future as may be approved by the Board of Directors. Certain agreements also contain change of control provisions pursuant to which upon a merger in which more than 50% of our voting stock is acquired by a third party, an acquisition of more than 20% of our voting stock by anyone other than Mr. Villafaña, the sale of substantially all of our assets, a liquidation, or a change in the control of our board, the applicable employees will receive severance payments equal to their monthly salary for 24 to 36 months.

On April 1, 2003 the Company entered into a consulting agreement with a director. The agreement provides for future annual compensation of $225,000 through April 1, 2008. For the year ended December 31, 2003, the Company paid $150,000 in connection with the consulting agreement. For the nine months ended October 2, 2004 the Company paid $162,000 in connection with the consulting agreement.

F-11

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)


	*Supply Agreements*

In January 2004, the Company entered into a supply agreement that requires the Company to purchase a minimum of approximately $191,000 of materials from 2004 to 2006.

In May 2004, the Company entered into a supply agreement with a supplier that requires the Company to support development costs of $700,000 during the first twelve months of the agreement. Furthermore, if products result from the supply agreement the Company would be required to pay a royalty on the revenue derived from the sales of the licensed products. The Company can terminate the supply agreement with 90 day notification.


4.	Other Non-Current Assets

Other non-current assets of $412,000 at October 2, 2004 consist primarily of offering costs that will be offset against the proceeds of such offering.


5.	Property and Equipment

Property and equipment consists of the following:



	December 31,
							October 2,
	2002			2003			2004

							(Unaudited)

	(In thousands)
Furniture and office equipment	$	22		$	29		$	32
Machinery and production equipment		48			52			141
Computers and technology equipment		11			32			36

		81			113			209
Accumulated depreciation		(24	)		(39	)		(54	)

	$	57		$	74		$	155

Depreciation expense was $10,000, $12,000 and $15,000 for the years ended December 31, 2001, 2002 and 2003, respectively, and $39,000 for the period from December 3, 1999 (date of inception) to December 31, 2003. Depreciation expense was $11,000 and $15,000 for the nine months ended September 27, 2003 and October 2, 2004, respectively.

F-12

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)


6.	Accrued Liabilities

Accrued liabilities consist of the following:



	December 31,
					October 2,
	2002		2003		2004

					(Unaudited)

	(In thousands)
Contract preclinical services	$	21	$	24	$	90
Marketing services		—		24		—
Accrued compensation		—		31		31
Other expenses		6		5		—

	$	27	$	84	$	121


7.	Stockholders’ Equity


	*Stock Split*

On March 15, 2003, the Company approved a 3:1 stock split of the Company’s common stock. All share and per share amounts have been retroactively adjusted to reflect the impact of the March 15, 2003 stock split.


	*Common Stock Offerings*

During 2000, the Company sold 1,425,000 shares of common stock at a price of $1.67 per share to various investors resulting in net proceeds of $2,364,000 to the Company.

During 2003, the Company sold 862,294 shares of common stock at a price of $2.65 per share to various investors resulting in net proceeds of $2,252,000 to the Company.

In March 2004, the Company raised approximately $1,551,000 through the sale of 477,258 shares of common stock to various investors at a purchase price of $3.25 per share.

In July 2004, the Company sold an additional 476,923 shares of common stock at a price of $3.25 per share to various investors resulting in net proceeds of $1,550,000 (unaudited).


8.	Stock Options

In December 1999, the Company adopted a stock option plans for employees, directors and consultants (collectively referred to as the Stock Option Plan), under which a total of 6,000,000 shares of common stock were reserved for issuance upon exercise of options granted by the Company. The Stock Option Plan provide for the granting of incentive and nonstatutory options. The exercise price of incentive stock options must equal at least the fair value on the date of grant, and the exercise price of nonstatutory stock options may be no less than the par value per share. The options have terms of up to ten years after the date of grant and become exercisable as determined upon grant, typically over a four year periods from the date of grant.

F-13

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

A summary of option activity is as follows:


					Weighted
		Shares Under			Average		Available
		Option			Exercise Price		For Grant

Options outstanding at December 3, 1999 (date of inception)			—		$	—		6,000,000
	Granted		1,935,000			0.06		(1,935,000	)

Options outstanding at December 31, 2000			1,935,000			0.06		4,065,000
	Granted		30,000			1.67		(30,000	)
	Exercised		(480,000	)		0.03		—
	Cancelled		(720,000	)		0.03		720,000

Options outstanding at December 31, 2001			765,000			0.17		4,755,000
	Cancelled		(30,000	)		0.03		30,000

Options outstanding at December 31, 2002			735,000			0.17		4,785,000
	Granted		400,000			2.65		(400,000	)

Options outstanding at December 31, 2003			1,135,000			1.05		4,385,000
	Granted (unaudited)		257,000			3.51		(257,000	)
	Exercised (unaudited)		(16,500	)		0.03		—
	Cancelled (unaudited)		(78,000	)		2.65		78,000

Options outstanding at October 2, 2004 (unaudited)			1,297,500			1.45		4,206,000

Exercisable at December 31, 2003			543,750			0.17

Exercisable at October 2, 2004 (unaudited)			841,000		$	0.62

At December 31, 2003, the exercise prices of the Company’s outstanding stock options are as follows:


				Weighted Average
				Remaining
		Per Share		Contractual Life
Shares		Exercise Price		(Years)

	675,000	$	0.03		6.25
	60,000		1.67		6.75
	400,000		2.65		9.75

	1,135,000	$	1.05		7.50

The weighted average remaining contractual life of options outstanding as of October 2, 2004 is approximately 6.8 years.

The Company has granted employee stock options that vest with the attainment of performance milestones. Upon a $15,000,000 equity placement, or upon a corporate merger or change of control, or on September 1, 2012, options to purchase 50,000 shares of common stock with an exercise price of $2.65 per share will vest and the Company will record per share compensation expense for the difference between the offering price and the exercise price. On the completion of the first implantation of the Holly Graft System in the United States, the Company will vest options to purchase 100,000 shares of common stock

F-14

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

with an exercise price of $2.65 per share, which will require recognition of compensation expense for the difference between the fair value of the Company’s common stock on the vesting date and the $2.65 per share exercise price.

On January 12, 2004 we granted options to purchase an aggregate of 22,000 shares of common stock at an exercise price of $2.65 per share, which approximated the fair value of our common stock on such date based on stock offerings with unrelated parties and accredited investors in arms length transactions in August 2003.

On July 21, 2004, we granted options to purchase an aggregate of 85,000 shares of common stock at an exercise price of $3.25 per share, which approximated the fair value of our common stock on such date based on stock offerings with unrelated parties and accredited investors in arms length transactions in July 2004.

On August 23, 2004 we granted options to purchase an aggregate of 50,000 shares of common stock at an exercise price of $5.00, which represented the low end of our filing range in our registration statement filed with the Securities and Exchange Commission.

For all stock option grants, the Company believes that the exercise price approximates or is greater than the fair value of the Company’s common stock at the grant date.

Variable Stock Option Grants (Unaudited)

The Company has granted options to an employee that vest with the performance of certain events such as the completion of a qualified financing of $15 million and the completion of a human case in the United States. Since the ultimate vesting of such milestones cannot be readily determinable, the Company has accounted for such option grants as variable in nature in accordance with APB No. 25. Accordingly, the Company remeasures the value of variable options grants at each balance sheet date and records the intrinsic value as deferred compensation. Upon the attainment of the above mentioned milestones the Company will recognize the intrinsic value of the options into expense. As of October 2, 2004 the Company has deferred compensation of $352,000.


9.	Stock-Based Research and Development

In May 2000, the Company issued 525,000 shares of common stock to non-employees for research and development consulting services. Concurrent with the initial organizational activities of the Company, the shares were recorded at the estimated fair value of $0.03 per share and expensed as research and development.

In April 2001, the Company issued 60,000 shares of common stock to the University of Minnesota for laboratory research and development services. The shares were recorded at the estimated fair value of $1.67 per share and expensed as research and development. The fair value of the common stock was based on the value of concurrent transactions with independent third parties.

During the first quarter of 2004, the Company granted 100,000 options to advisory board members to support the Company’s research and development activities. The options vested immediately and the Company recorded an expense of $195,000 in the nine months ended October 2, 2004. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 3.71%; volatility of 55%; dividend yield of 0%; and a weighted average expected life of the options of seven years. The fair value of the common stock was based on the

F-15

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

value of concurrent transactions with independent third parties. The assumptions are more fully described in Note 1 of the financial statements.


10.	Income Taxes

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



		December 31,
								October 2,
		2002			2003			2004

								(Unaudited)
		(In thousands)
Deferred tax assets:
	Net operating loss carryforwards	$	581		$	1,173		$	2,057
	Charitable contribution carryforwards		40			40			40
	Research credit carryforwards		30			85			101

Total deferred tax assets			651			1,298			2,198
Valuation allowance			(651	)		(1,298	)		(2,198	)

Net deferred tax assets		$	—		$	—		$	—

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2002, 2003 and October 2, 2004 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.

At December 31, 2003, the Company had federal and state income tax net operating loss carryforwards of approximately $2,934,000. The operating loss carryforwards will expire beginning in 2019. At December 31, 2003, the Company had federal and state research credit carryforwards of approximately $85,000. The research credit carryforwards will expire beginning in 2019. Under the Tax Reform Act of 1986, the utilization of these net operating loss and research credit carryforwards may be limited as a result of significant changes in ownership.

A reconciliation of the statutory tax rates and the effective tax rates are as follows:



	Period from												Nine Months Ended
	December 3, 1999			Year Ended
	(Date of Inception)			December 31,
	to December 31,												September 27,			October 2,
	2003			2001			2002			2003			2003			2004


													(Unaudited)
Statutory rate		(34	)%		(34	)%		(34	)%		(34	)%		(34	)%		(34	)%
State and local income taxes (net of federal tax benefit)		(6	)		(6	)		(6	)		(6	)		(6	)		(6	)
Change in valuation allowance		40			40			40			40			40			40

		0	%		0	%		0	%		0	%		0	%		0	%

F-16

CABG MEDICAL, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

(Information Pertaining to the Nine Months Ended September 27, 2003

and October 2, 2004 is Unaudited)

A summary of the Company’s deferred tax asset valuation allowance is as follows (in thousands):


Balance, December 31, 2001		$	408

	Additions		243
	Deductions		—

Balance, December 31, 2002			651
	Additions		647
	Deductions		—

Balance, December 31, 2003		$	1,298

F-17

5,500,000 Shares

CABG Medical, Inc.

Common Stock

(CABG LOGO)

PROSPECTUS

, 2004


Feltl and Company	Ladenburg Thalmann & Co. Inc.

Dealer Prospectus Delivery Obligation

Until , 2004 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS


Item 13.	*Other Expenses of Issuance and Distribution*

The following expenses will be paid by the Company in connection with the distribution of the securities registered hereby and do not include the underwriting discount to be paid to the Underwriters. All of such expenses, except for the SEC registration fee, NASD fee and Nasdaq listing fee, are estimated.


SEC Registration Fee	$	4,808
NASD Filing Fee		4,295
Nasdaq Listing Application Fee		100,000
Legal Fees		300,000
Accountant’s Fees and Expenses		200,000
Printing Expenses		125,000
Miscellaneous		115,897

	$	850,000


Item 14.	*Indemnification of Directors and Officers*

Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with respect to the Company, against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions if such person (1) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the Company, or, in the case of performance by a director, officer or employee of the Company involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the Company. In addition, Section 302A.521, subd. 3, requires payment by the Company, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the stockholders, or by a court.

Provisions regarding indemnification of officers and directors of the Company are contained in Section 5.1 of the Amended and Restated Bylaws (Exhibit 3.2 to this Registration Statement). The Company maintains a director and officer liability policy.

Under Section eight of the Underwriting Agreement, filed as Exhibit 1.1 hereto, the Underwriters agree to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act against certain liabilities.

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Item 15.	*Recent Sales of Unregistered Securities*

During the past three years, we have sold the securities listed below to accredited investors pursuant to exemptions from registration under the Securities Act. On March 15, 2003, we approved a 3:1 stock split of our common stock. All share amounts have been retroactively adjusted to reflect the impact of the March 15, 2003 stock split.

      1. In March 2001, we granted an option to purchase 30,000 shares of common stock at an exercise price of $1.67 per share to an employee pursuant to our 2000 Long-Term Incentive Plan.

      2. In April 2001, we granted 60,000 shares to the University of Minnesota.

      3. In August 2001, we issued 480,000 shares of common stock to a former employee at a price of $0.03 per share upon his termination of employment and exercise of an incentive stock option.

      4. In August 2003, we issued and sold 862,294 shares of common stock at $2.65 per share in a private placement for an aggregate purchase price of approximately $2,285,000 to a group of 39 accredited investors under subscription agreements.

      5. In September 2003, we granted options to purchase an aggregate of 375,000 shares of common stock at an exercise price of $2.65 per share to three employees pursuant to our 2000 Long-Term Incentive Plan.

      6. In September 2003, we granted options to purchase 25,000 shares of common stock to a non-employee at $2.65 per share pursuant to our 2000 Long-Term Incentive Plan.

      7. On January 12, 2004 we granted an option to purchase 22,000 shares of common stock at an exercise price of $2.65 per share to six employees pursuant to our 2000 Long-Term Incentive Plan.

      8. In March 2004, we issued and sold 477,258 shares of common stock at $3.25 per share in a private placement for an aggregate purchase price of approximately $1,551,000 to a group of 16 accredited investors under subscription agreements.

      9. In March 2004, we issued 16,500 shares of common stock to an employee at a price of $0.03 per share upon exercise of an incentive stock option.

      10. In March 2004, we granted options to purchase an aggregate of 100,000 shares of common stock at an exercise price of $3.25 per share to two non-employees pursuant to our 2000 Long-Term Incentive Plan.

      11. In July 2004, we sold an additional 476,923 shares of common stock at a price of $3.25 per share to seven accredited various investors resulting in net proceeds of $1,550,000.

      12. In July 2004, we granted options to purchase an aggregate of 85,000 shares of common stock at an exercise price of $3.25 per share to two employees pursuant to our 2000 Long-Term Incentive Plan.

      13. In August 2004, we granted options to purchase an aggregate of 50,000 shares of common stock at an exercise price of $5.00 per share to an employee pursuant to our 2000 Long-Term Incentive Plan.

The sales of securities listed above to employees upon the exercise of stock options were made in reliance upon Rule 701 under the Securities Act. The other sales of securities listed above were made to accredited investors in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering, or Regulation D of the Securities Act. The purchasers of securities described above acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act, or an exemption from such registration requirements. Except as specified above, no

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underwriting commissions or discounts were paid with respect to the sales of unregistered securities described above.


Item 16.	*Exhibits and Financial Statement Schedules*

(a) Exhibits. The following is a list of all of the exhibits filed as part of the registration statement. References to the company mean CABG Medical, Inc.


Exhibit
No.			Description

	1	.1	Form of Underwriting Agreement (with form of Underwriters’ Warrant attached)
	3	.1*	Articles of Incorporation and Articles of Amendment thereto
	3	.2*	Amended and Restated Bylaws
	4	.1**	Form of specimen certificate representing CABG Medical, Inc.’s common stock
	5	.1**	Opinion of Fredrikson & Byron, P.A.
	10	.1*	2000 Long-Term Incentive Plan and related forms of agreements
	10	.2*	Consulting Agreement with Manuel A. Villafaña
	10	.4*	Employment Agreement dated as of August 18, 2003 with John L. Babitt
	10	.6*	Letter Agreement dated June 17, 2003 with Manuel A. Villafaña
	10	.9*	Letter Agreement dated October 21, 2003 with John L. Babitt
	10	.10***	Supply Agreement dated January 1, 2004 with Bard Peripheral Vascular, Inc.
	10	.11*	Clinical Coating Agreement dated April 14, 2003 with SurModics, Inc.
	10	.12*	Material Transfer Agreement dated March 22, 2004 with Mayne Pharma, Inc.
	10	.13***	Technology Transfer Agreement dated June 5, 1996 between ATS Medical, Inc. and Manuel A. Villafaña
	10	.14***	Amendment to Technology Transfer Agreement dated June 3, 2004 with ATS Medical, Inc. and Manuel A. Villafaña
	10	.15*	Technology Transfer Agreement dated July 15, 2004 with Manuel A. Villafaña
	10	.16***	Master License Agreement dated May 14, 2004 with SurModics, Inc.
	10	.17*	Amendment to Clinical Coating Agreement dated June 30, 2004 with SurModics, Inc.
	10	.18*	Application for Supply of Materials Terms of Materials Transfer with Novartis Pharma AG dated July 19, 2004
	10	.19*	Amendment to Clinical Coating Agreement dated October 11, 2004 with SurModics, Inc.
	23	.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm
	23	.2**	Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
	23	.3**	Consent of Haugen Law Firm PLLP
	24	.1*	Power of Attorney (included on the signature page)
	99	.1*	Consent of Arch C. Smith
	99	.2*	Consent of A. Jay Graf
	99	.3*	Consent of Robert E. Munzenrider
	99	.4*	Consent of John L. Babitt

* Previously filed.

** To be filed by amendment.

*** A Confidential Treatment Request for certain information in this document has been filed with the Securities and Exchange Commission. The information for which treatment has been sought has been deleted from such exhibit and the deleted text replaced by three asterisks (***).

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Item 17.	*Undertakings*

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant further undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on November 8, 2004.

CABG MEDICAL, INC.

By /s/ MANNY VILLAFAÑA

Manny Villafaña

Chairman and Chief Executive Officer

In accordance with the requirements of the Securities Act of 1933, this Amendment No. 3 to this registration statement was signed by the following persons in the capacities and on the dates indicated.



Signatures	Title	Date


/s/ MANNY VILLAFAÑA Manny Villafaña	Chairman and Chief Executive Officer (Principal Executive Officer)	November 8, 2004

/s/ JOHN L. BABITT John L. Babitt	President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer)	November 8, 2004

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EXHIBIT INDEX


Exhibit
No.			Description

	1	.1	Form of Underwriting Agreement (with form of Underwriters’ Warrant attached)
	3	.1*	Articles of Incorporation and Articles of Amendment thereto
	3	.2*	Amended and Restated Bylaws
	4	.1**	Form of specimen certificate representing CABG Medical, Inc.’s common stock
	5	.1**	Opinion of Fredrikson & Byron, P.A.
	10	.1*	2000 Long-Term Incentive Plan and related forms of agreements
	10	.2*	Consulting Agreement with Manuel A. Villafaña
	10	.4*	Employment Agreement dated as of August 18, 2003 with John L. Babitt
	10	.6*	Letter Agreement dated June 17, 2003 with Manuel A. Villafaña
	10	.9*	Letter Agreement dated October 21, 2003 with John L. Babitt
	10	.10***	Supply Agreement dated January 1, 2004 with Bard Peripheral Vascular, Inc.
	10	.11*	Clinical Coating Agreement dated April 14, 2003 with SurModics, Inc.
	10	.12*	Material Transfer Agreement dated March 22, 2004 with Mayne Pharma, Inc.
	10	.13***	Technology Transfer Agreement dated June 5, 1996 between ATS Medical, Inc. and Manuel A. Villafaña
	10	.14***	Amendment to Technology Transfer Agreement dated June 3, 2004 with ATS Medical, Inc. and Manuel A. Villafaña
	10	.15*	Technology Transfer Agreement dated July 15, 2004 with Manuel A. Villafaña
	10	.16***	Master License Agreement dated May 14, 2004 with SurModics, Inc.
	10	.17*	Amendment to Clinical Coating Agreement dated June 30, 2004 with SurModics, Inc.
	10	.18*	Application for Supply of Materials Terms of Materials Transfer with Novartis Pharma AG dated July 19, 2004
	10	.19*	Amendment to Clinical Coating Agreement dated October 11, 2004 with SurModics, Inc.
	23	.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm
	23	.2**	Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
	23	.3**	Consent of Haugen Law Firm PLLP
	24	.1*	Power of Attorney (included on the signature page)
	99	.1*	Consent of Arch C. Smith
	99	.2*	Consent of A. Jay Graf
	99	.3*	Consent of Robert E. Munzenrider
	99	.4*	Consent of John L. Babitt

EXHIBIT 1.1

Underwriting Agreement

, 2004

Feltl & Company
A Representative of the Several Underwriters
225 South Sixth Street
Suite 4200
Minneapolis, MN 55402

And

Ladenburg Thalmann & Co. Inc.
A Representative of the Several Underwriters
590 Madison Avenue
New York, NY 10022

Ladies and Gentlemen:

CABG Medical, Inc., a Minnesota corporation (the “Company”), proposes to issue and sell to the several Underwriters as listed on Schedule 1 attached hereto (the “Underwriters”), for whom Feltl & Company and Ladenburg Thalmann & Co. Inc., are acting as the Representatives (the “Representatives”), 5,500,000 shares of its Common Stock, no par value (the “Common Stock”). The 5,500,000 shares of Common Stock to be sold by the Company are called the “Firm Common Shares.” In addition, the Company has granted to the Underwriters an option to purchase up to an additional 825,000 shares of Common Stock (the “Optional Common Shares”), as provided in Section 2 of this Agreement. The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the “Common Shares.”

The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-117580), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the “Securities Act”), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, is called the “Registration Statement”. Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the “Rule 462(b) Registration Statement,” and from and after the date and time of filing of the Rule 462(b) Registration Statement the term “Registration Statement” shall include the Rule 462(b) Registration Statement. Such prospectus, in the

form first used by the Underwriters to confirm sales of the Common Shares, is called the “Prospectus”. All references in this Agreement to (i) the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus or the Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) and (ii) the Prospectus shall be deemed to include the “electronic Prospectus” provided for use in connection with the offering of the Common Shares as contemplated by Section 3(k) of this Agreement.

The Company hereby confirms its agreements with the Underwriters as follows:

Section 1. Representations and Warranties. The Company hereby represents, warrants, covenants, and agrees with the several Underwriters, that:

(a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission’s satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission.

Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective, at the First Closing Date (as defined below) and at the Second Closing Date (as defined below), complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date, at the First Closing Date (as defined below) and at the Second Closing Date (as defined below), did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the “Underwriting” section of the Registration Statement, or of any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to the Underwriters furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed

as required. There are no material agreements or understandings affecting the Company that have not been reduced to writing and so filed.

(b) Offering Materials Furnished to the Representatives. The Company has delivered to the Representatives three complete manually signed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested.

(c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters’ distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement.

(d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.

(e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable.

(f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived in writing prior to the date of this Agreement, with copies of such written waivers furnished to the Representatives.

(g) No Material Adverse Change. Except as otherwise disclosed or described in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no adverse change, or any development that could reasonably be expected to result in an adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects of the Company that is, individually or in the aggregate, material to the Company, whether or not arising from transactions in the ordinary course of business, of the Company (any such change is called a “Material Adverse Change”); (ii) the Company has not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of capital stock or repurchase or redemption by the

Company of any class of capital stock, nor is there any agreement or understanding with respect to the same.

(h) Independent Accountants. KMPG LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or registered public accountants within the meaning of Regulation S-X issued under the Securities Act and the Exchange Act and as required under the Securities Act and Exchange Act.

(i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the financial position of the Company as of and at the dates indicated and the results of its operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth under the captions “Summary—Summary Financial Information,” “Selected Financial Data,” “Capitalization,” “Dilution,” “Management’s Discussion and analysis of Financial Condition and Results of Operations” and elsewhere in the Prospectus fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement.

(j) Incorporation and Good Standing of the Company. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Minnesota and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement. The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. The Company has no subsidiaries.

(k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption “Capitalization” (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all applicable federal and state securities laws. None of the outstanding

shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company other than those accurately described in the Prospectus. The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights.

(l) Quotation. The Common Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance.

(m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. The Company is not in violation of its Articles of Incorporation or Bylaws or in default (or, with the giving of notice or lapse of time, would be in default) (“Default”) under any indenture, mortgage, loan or credit agreement, note, contract, understanding, franchise, lease or other instrument or agreement to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (each, an “Existing Instrument”), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the Articles of Incorporation or Bylaws of the Company, (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, or require the consent of any other party to, any Existing Instrument, except for any conflict, breach, Default, lien, charge or encumbrance as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company, except for any violation that would not result in a Material Adverse Change. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. As used herein, a “Debt Repayment Triggering Event” means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company.

(n) No Material Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company’s knowledge,

threatened (i) against or affecting the Company, (ii) which has as the subject thereof any officer, director or employee of, or property owned or leased by, the Company or (iii) relating to environmental or discrimination matters, where in any such case any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement or by the Prospectus. No labor dispute with the employees of the Company or with the employees of any third party, with whom the Company has a material relationship, exists or, to the best of the Company’s knowledge, is threatened or imminent.

(o) Intellectual Property Rights. Except as otherwise disclosed in the Prospectus, the Company owns or possesses valid and enforceable licenses or other rights to use all trademarks, trade names, service marks, patent rights (including all patents and patent applications), copyrights, domain names, licenses, approvals, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, trade secrets, technologies, proprietary techniques (including processes and substances) and other similar rights (collectively, “Intellectual Property Rights”) reasonably necessary to conduct its business as now conducted and as currently contemplated to be conducted as disclosed in the Registration Statement and the Prospectus, free and clear of all liens, claims and encumbrances, other than as described in the Registration Statement and the Prospectus; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Other than as described in the Registration Statement and the Prospectus: (i) there are no third parties who have any rights in the Intellectual Property that could preclude the Company from conducting its business as currently conducted or as presently contemplated to be conducted as described in the Registration Statement and the Prospectus; (ii) there are no pending or, to the best knowledge of the Company, threatened actions, suits, proceedings, investigations or claims by others challenging the rights of the Company (or if the Intellectual Property is licensed, the licensor thereof) in any Intellectual Property owned or licensed to the Company; (iii) neither the Company nor (if the Intellectual Property is licensed) the licensor thereof has infringed, or received any notice of infringement of or conflict with, any rights of others with respect to the Intellectual Property; and (iv) there is no dispute between the Company and any licensor with respect to any Intellectual Property Right. The Company has taken all reasonable steps to protect, maintain and safeguard the Intellectual Property Rights for which improper or unauthorized disclosure would impair its value or validity and has entered into appropriate and enforceable nondisclosure and confidentiality agreements and made appropriate filings and registrations in connection with the foregoing.

(p) Title to Properties. The Company has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except as described in the Prospectus or such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company. The real property, improvements, equipment

and personal property held under lease by the Company are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company.

(q) Tax Law Compliance. The Company has filed all necessary federal, state and foreign income, employment and franchise tax returns and has paid all taxes required to be paid by it and, if due and payable, any related or similar assessment, fine or penalty levied against it. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined.

(r) Company is Not an “Investment Company”. The Company has been advised by its legal counsel of the rules and requirements under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company is not, and after receipt of payment for the Common Shares will not be, an “investment company” within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act.

(s) Insurance. The Company is insured by reputable institutions licensed to do business in the State of Minnesota, with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for its business including, but not limited to, policies covering real and personal property owned or leased by the Company against theft, damage, destruction and acts of vandalism. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. The Company has not been denied any insurance coverage that it has sought or for which it has applied.

(t) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Common Shares on the Nasdaq National Market in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(u) Related Party Transactions. No relationship, direct or indirect, exists between or among the Company, on the one hand, and the directors, officers, employees, contractors, stockholders, customers, distributors or suppliers of the Company, on the other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described.

(v) Disclosure Controls and Procedures. The Company has established and will maintain disclosure controls and procedures (as such term is defined in Rule 13a-14 under the Exchange Act), which (i) are designed to ensure that information relating to the Company is made known to the Company’s principal executive officer and its principal financial officer by others within the Company, particularly during the periods in which the periodic reports required under the Exchange Act are being prepared, (ii) have been evaluated for effectiveness as of the end of the fiscal quarter immediately preceding the date hereof and (iii) are effective in all material respects to perform the functions for which they were established. Based on the evaluation of the Company’s disclosure controls and procedures described above, the Company is not aware of (a) any deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or any material weaknesses in internal controls or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls. Since the most recent evaluation of the Company’s disclosure controls and procedures described above, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls.

(w) No Unlawful Contributions or Other Payments. Neither the Company nor, to the best of the Company’s knowledge, any director, officer, employee, agent, contractor, distributor or other persons acting on behalf of the Company, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus.

(x) Company’s Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(y) Compliance with Environmental Laws. Except as would not, individually or in the aggregate, result in a Material Adverse Change, (i) the Company is not in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, “Materials of Environmental Concern”), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, “Environmental Laws”), which violation includes, but is not limited to, noncompliance with any permits or other governmental

authorizations required for the operation of the business of the Company under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys’ fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company, now or in the past (collectively, “Environmental Claims”), pending or, to the best of the Company’s knowledge, threatened against the Company or any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company’s knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or against any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law.

(z) ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Section 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.

(aa) Brokers. Except as disclosed in the Registration Statement and the Prospectus, there is no broker, finder or other party that is entitled to receive from the

Company any brokerage or finder’s fee or other fee, commission or performance-based compensation as a result of any transactions contemplated by this Agreement.

(bb) No Outstanding Loans or Other Indebtedness. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers, directors, employees or consultants of the Company except as disclosed in the Registration Statement and the Prospectus.

(cc) Compliance with Laws. Except as described in the Registration Statement and the Prospectus, the Company: (i) is and at all times has been in full compliance with all statutes, rules, regulations, ordinances, orders, decrees and guidances applicable to the ownership, testing, development, manufacture, packaging, processing, recordkeeping, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Company (“Applicable Laws”), except for such non-compliance as would not, individually or in the aggregate, result in a Material Adverse Change; (ii) has not received any notice of adverse finding, warning letter, untitled letter or other correspondence or notice from the U.S. Food and Drug Administration or any other federal, state, local or foreign governmental authority having authority over the Company (“Governmental Authority”) alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (iii) possesses all Authorizations and such Authorizations are valid and in full force and effect and the Company is not in violation of any term of any such Authorizations, except for any failure to possess or violation of any Authorization as would not, individually or in the aggregate, result in a Material Adverse Change; (iv) has not received notice of any pending or threatened claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action from any Governmental Authority or third party alleging that any company operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge or reason to believe that any such Governmental Authority or third party is considering any such claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action; (v) has not received notice that any Governmental Authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge or reason to believe that any such Governmental Authority is considering such action; (vi) has filed, obtained, maintained or submitted all reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by all Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct on the date filed (or were corrected or supplemented by a subsequent submission), except for any failure to file, obtain, maintain, or submit, and any failure to be complete and correct as would not result, individually or in the aggregate, in a Material Adverse Change; and (vii) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post sale warning or other notice or action relating to an alleged lack of safety or efficacy of any product, any alleged product defect, or violation on any

Applicable Laws or Authorizations; the Company is not aware of any facts that would cause the Company to initiate any such notice or action; and the Company does not have any knowledge or reason to believe that any Governmental Authority or third party intends to initiate any such notice or action.

(dd) Regulatory Filings. As of the date of this Agreement and except as described in the Registration Statement and the Prospectus, the Company is not required to file or obtain any registration, application, license, request for exemption, permit or other regulatory authorization with the U.S. Food and Drug Administration (the “FDA”) or any other federal, state, local or foreign regulatory body or health care facility in order to conduct its business or pursue its laboratory preclinical and clinical activities as described in the Registration Statement and the Prospectus.

(ee) Regulatory Compliance. (i) The Company holds all clearances, approvals, registrations, authorizations, and orders of any governmental or self-regulatory body required for the conduct of its business, except where the failure to hold would not, individually or in the aggregate, have a Material Adverse Change. As of the date of this Agreement, the Company is in compliance with all applicable federal, state, local and foreign laws, regulations, orders and decrees, except where the failure to comply would not, individually or in the aggregate, result in a Material Adverse Change. Without limiting the foregoing, as of the date of this Agreement, the Company is in compliance with all requirements of the FDA, including, among other things, the provisions of the Federal Food, Drug, and Cosmetic Act (“FDC”) relating to drugs or medical devices, except where such noncompliance would not result, individually or in the aggregate, in a Material Adverse Change. Each regulatory submission for the Company’s products has been filed, cleared and maintained in compliance in all material respects with all Applicable Laws and Authorizations, including without limitation applicable federal statutes, rules, regulations or orders administered or promulgated by the FDA or other Governmental Authority, and all laboratory, preclinical and clinical studies, and tests have been conducted in all material respects in compliance with accepted professional scientific standards and all Applicable Laws and Authorizations in all material respects. No filing or submission to the FDA or any other Governmental Authority, intended to be the basis for any Authorization, contains any material omission or material false information, and the Company has not received any notices or correspondence from any Governmental Authority (including, but not limited to, the FDA) requiring suspension of any studies, tests, or clinical trials conducted by or on behalf of the Company. The Company believes it has submitted all reports necessary to be submitted in accordance with the Medical Device Reporting regulations, 21 C.F.R. Part 803.

(ii) The studies, tests and preclinical and clinical trials conducted by or on behalf of the Company that are described in the Registration Statement and the Prospectus were and, are being, conducted in compliance with all applicable current Good Laboratory Practices and Good Clinical Practices (as defined pursuant to the FDC) and the Registration Statement and Prospectus accurately describes the results of such studies, tests and trials. The Company has not received any notices or correspondence from the FDA or other governmental agency, foreign or domestic, requiring the

termination, suspension or material modification of any preclinical or clinical trials conducted by, or on behalf, of the Company or in which the Company has participated.

(ff) Statistical and Market Data. The scientific, statistical and market-related data included in the Registration Statement and the Prospectus are accurately based on or derived from sources that are credible and generally recognized as authoritative in the Company’s industry.

(gg) Suppliers. No supplier of products to the Company has ceased shipments to the Company or indicated, to the Company’s best knowledge, an interest in decreasing or ceasing its sales to the Company or otherwise modifying its relationship with the Company, other than in the normal and ordinary course of business consistent with past practices in a manner which would not, individually or in the aggregate, result in a Material Adverse Change.

(hh) MD&A. There are no transactions, arrangements or other relationships that are required to be disclosed in the Prospectus by the Commission’s “Statement About Management’s Discussion and Analysis of Financial Condition and Results of Operations” (January 22, 2002) that are not so disclosed or described as required.

(ii) Sarbanes-Oxley Act. From and after the Effective Date, there has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply with any applicable provision of the Sarbanes-Oxley Act, including without limitation Section 402 related to loans.

(jj) Patent Filings. The Company has duly and properly filed or caused to be filed with the United States Patent and Trademark Office (the “PTO”) and applicable foreign and international patent authorities all patent applications owned by the Company (the “Company Patent Applications”). The Company has complied with the PTO’s duty of candor and disclosure for the Company Patent Applications and has made no material misrepresentation in the Company Patent Applications. The Company is not aware of any information material to a determination of patentability regarding the Company Patent Applications not called to the attention of the PTO or similar foreign authority. The Company is not aware of any information not called to the attention of the PTO or similar foreign authority which would preclude the grant of a patent for the Company Patent Applications. The Company has no knowledge of any information which would preclude the Company from having clear title to, and complete ownership of, the Company Patent Applications.

Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Representatives shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters set forth therein. The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 5 hereof, counsels to the Company and counsel to the Representatives, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.

Section 2. Purchase, Sale and Delivery of the Common Shares.

(a) The Firm Common Shares. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the several Underwriters agree, severally but not jointly, to purchase from the Company the number of Firm Common Shares as set forth on Schedule 1 attached hereto. The purchase price per Firm Common Share to be paid by the several Underwriters to the Company shall be $* per share.

(b) The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the several Underwriters and payment therefor shall be made at the offices of Lindquist & Vennum P.L.L.P., located at 4200 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 (or such other place as may be agreed to by the Company and the Representative) at 9:00 a.m., Minneapolis, Minnesota time, on * , 2004, or such other time and date not later than 9:00 a.m., Minneapolis, Minnesota time, on * , 2004, as the Representatives shall designate by notice to the Company (the time and date of such closing are called the “First Closing Date”). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 11.

(c) The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase up to an aggregate of 825,000 Optional Common Shares from the Company at the purchase price per share to be paid by the several Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company, which notice may be given at any time within 45 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term “First Closing Date” shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the “Second Closing Date” and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, the Underwriters agree, severally but not jointly, to purchase the number of Optional Common Shares (subject to

such adjustments to eliminate fractional shares as the Representatives may determine) set forth in the notice from the Representatives to the Company referenced in this subsection (c). The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company.

(d) Public Offering of the Common Shares. The Underwriters hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representative, in its sole judgment, has determined is advisable and practicable.

(e) Payment for the Common Shares. Payment for the Common Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. It is understood that the Underwriters have been authorized, for their own accounts to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase.

(f) Delivery of the Common Shares. The Company shall deliver, or cause to be delivered, to the Representatives for the account of the Underwriters, certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, to the Representatives for the account of the Underwriters certificates for the Optional Common Shares the Underwriters have severally agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Underwriters shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in Minneapolis, Minnesota as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters.

(g) Delivery of Prospectus to the Underwriters. Not later than 3:00 p.m. (Minneapolis, Minnesota time) on the next business day, or such shorter period as may be required by law, following the date of this Agreement, the Company shall deliver or cause to be delivered, copies of the Prospectus in such quantities and at such places as the Representatives shall request.

Section 3. Additional Covenants. The Company further covenants and agrees with the several Underwriters as follows:

(a) Underwriters’ Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date

or such other date, as in the opinion of counsel for the Representative, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the “Prospectus Delivery Period”), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object.

(b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing of (i) the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b) and 430A, as applicable, under the Securities Act and will use its best efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission.

(c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Representatives it is otherwise necessary to amend or supplement the Prospectus to comply with applicable law, the Company agrees to promptly prepare (subject to Section 3(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.

(d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Underwriters, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Underwriters may reasonably request.

(e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Representatives to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or other foreign laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment.

(f) Use of Proceeds. The Company shall apply the proceeds from the sale of the Common Shares sold by it in the manner described under the caption “Use of Proceeds” in the Prospectus.

(g) Transfer Agent. The Company shall engage and maintain, at its expense, an independent, qualified and experienced registrar and transfer agent for the Common Stock.

(h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Underwriters an earnings statement (which need not be audited) covering the twelve-month period ending * , 2005 that satisfies the provisions of Section 11(a) of the Securities Act.

(i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall timely report the use of proceeds from the issuance of the Common Shares as may be required under Rule 463 under the Securities Act.

(j) Company to Provide Interim Financial Statements. Prior to the Closing Date, the Company will furnish the Representatives as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus.

(k) Quotation. The Company will use its best efforts to include, subject to notice of issuance, the Common Shares on the Nasdaq National Market.

(l) Agreement Not to Offer or Sell Additional Securities. During the period commencing on the date hereof and ending on the 180th day following the date of the Prospectus, the Company will not, without the prior written consent of the

Representatives (which consent may be withheld at the sole discretion of the Representatives), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of the Representatives (which consent may be withheld at the sole discretion of the Representatives).

(m) Future Reports to the Representative. For a period of five years following the date of the prospectus, the Company will furnish to the Representatives Feltl & Company, 225 South Sixth Street, Suite 4200, Minneapolis, MN 55402, Attention: John C. Feltl and Ladenburg Thalmann & Co. Inc., 590 Madison Avenue, New York, NY 10022, Attention: Robert Kropp (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders’ equity and cash flows for the year then ended and the opinion thereon of the Company’s independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock.

(n) Investment Limitation. The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Common Shares in such a manner as would require the Company to register as an investment company under the Investment Company Act.

(o) No Manipulation of Price. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.

(p) Existing Lock-Up Agreement. The Company will enforce all existing agreements between the Company and any of its security holders that prohibit the sale, transfer, assignment, pledge or hypothecation of any of the Company’s securities in connection with the Company’s initial public offering. In addition, the Company will direct the transfer agent to place stop transfer restrictions upon any such securities of the

Company, and will take steps necessary to enforce the same, that are bound by such existing “lock-up” agreements for the duration of the periods contemplated in such agreements.

(q) Upon written request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter an electronic version of the Company’s trademarks, servicemarks and corporate logo for use on the website, if any, operated by such Underwriter for the purpose of facilitating the on-line offering of the Common Shares, (the “License”); provided, however, that the License shall be used solely for the purpose described above, is granted without any fee and may not be assigned or transferred.

Section 4. Payment of Expenses and Underwriters’ Warrants.

(a) The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the several Underwriters, (iv) all fees and expenses of the Company’s counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys’ fees and expenses incurred by the Company or the Representatives in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or any foreign jurisdiction, and preparing and printing a “Blue Sky Survey” or memorandum, and any supplements thereto, advising the Underwriter of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Representatives in connection with, the NASD’s review and approval of the Underwriters’ participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, (ix) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement, (x) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the Common Shares, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged by the Company or the Representative in connection with the road show presentations, lodging expenses of the Representatives and officers of the Company and any such consultants, and all transportation expenses, in connection with the road show, (xi) a nonaccountable expense allowance payable to the Representatives equal to * percent (* %) of the public offering price of the Common Shares payable on the First Closing Date, and (xii) all expenses of the Representatives in connection with due diligence meetings with the investment community. Except as provided in this Section 4, Section 6, Section 8 and Section 9

hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel.

(b) On the First Closing Date, the Company shall sell to the Representatives for an aggregate of $50, the Underwriters’ Warrant entitling the Underwriters to purchase up to an aggregate of 550,000 shares of the Company’s Common Stock, at an exercise price of $* (subject to adjustment), which shall first become exercisable one year after the Effective Date and shall remain exercisable for a period of four (4) years thereafter. The Underwriters’ Warrant shall be subject to certain transfer restrictions and shall be in substantially the form attached as Appendix A hereto.

Section 5. Conditions of the Obligations of the several Underwriters. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions:

(a) Accountants’ Comfort Letter. The Representatives shall have received a letter on the date of this Agreement, dated the date of delivery thereof of KPMG LLP, in form and substance acceptable to the Representatives, confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that:

(i) in their opinion the financial statements audited by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations;

(ii) on the basis of a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that:

(A) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the company or, at the date of the latest available balance sheet read by such accountants, there was any decrease in net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or

(B) for the period from the closing date of the latest income statement included in the Registration Statements and the Prospectus to

the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year in the total or per share amounts of net income (loss)

(iii) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement and the Prospectus (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company subject to the internal controls of the Company’s accounting system or are derived from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter.

For purposes of this subsection, “Prospectus” shall mean the prospectus included in the Registration Statement, including any Prospectus filed pursuant to Rule 424(b).

(b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date:

(i) the Company, if required, shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective;

(ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and

(iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.

(c) No Material Adverse Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, in the judgment of the Representatives there shall not have occurred any Material Adverse Change, other than as described or contemplated in the Registration Statement and the Prospectus.

(d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Fredrikson & Byron, P.A., counsel for the Company, dated as of such Closing

Date, in form and substance satisfactory to the Representatives, the form of which is attached as Exhibit A.

(e) Opinion of Intellectual Property Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Haugen Law Firm, patent counsel for the Company, dated as of such Closing Date, in form and substance satisfactory to the Representatives, the form of which is attached as Exhibit B.

(f) Opinion of Regulatory Counsel for the Company. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of * , regulatory counsel for the Company, dated as of such Closing Date, in the form and substance satisfactory to the Representatives, the form of which is attached as Exhibit C.

(g) Opinion of Counsel for the Representatives. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Lindquist & Vennum P.L.L.P., counsel for the Representatives, dated as of such Closing Date in a form satisfactory to the Representatives.

(h) Officers’ Certificate. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the written certificates executed by the Chairman of the Board, Chief Executive Officer and President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsection (b)(ii) of this Section 5, and further to the effect that:

(i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change;

(ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date;

(iii) the Company has complied with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; and

(iv) certify (a) that any financial projections presented to the Representatives for their review were prepared in good faith and represent the President’s best estimate of the Company’s financial condition following the first Closing Date; and (b) that the net proceeds to be derived from the offering that is the subject hereof are sufficient to fund the Company’s operation for at least twelve (12) months following the First Closing Date;

(i) Secretary’s Certificate. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the written certificates executed by the Secretary of the Company, dated as of such Closing Date, in the form and substance

satisfactory to the Representatives, certifying as to (i) the incumbency and the signatures of those officers of the Company executing this Agreement and such other certificates or documents contemplated under this Agreement, (ii) the Articles of Incorporation and Bylaws of the Company, and (iii) the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and such other certificates or documents contemplated under this Agreement, a copy of such resolutions to be attached to said certificate.

(j) Good Standing. The Representatives shall have received on and as of the First Closing Date or the Second Closing Date, as the case may be, satisfactory evidence of the good standing of the Company in its jurisdiction of organization and its good standing as a foreign entity in such other jurisdictions as the Representatives may reasonably request, in each case in writing or any standard form from the appropriate Governmental Authorities of such jurisdictions.

(k) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from KPMG LLP, independent public or certified public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date and Second Closing Date, if applicable.

(l) Lock-Up Agreement from Certain Securityholders of the Company. On or prior to the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit D hereto from each director, officer and each beneficial owner of 5% or more of Common Stock (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a 180 day period shall be used rather than the sixty day period set forth therein), and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date; provided, however, the lock-up period for Messrs. Villafa#a and Babitt shall be one year (subject to the ability of Mr. Villafa#a to gift shares of Common Stock to members of his respective immediate family within such one year period, provided such donees deliver to the Representatives, in advance of such gift, an agreement in the form of Exhibit D with a term covering the balance remaining of the initial one year period and the Representatives are provided assurance reasonably acceptable to the Representatives that such agreement is binding against such donee).

(m) Certification of Implant. On each of the First Closing Date and the Second Closing Date, if applicable, the Representatives shall receive evidence satisfactory to them (as determined in their sole discretion) that the Holly Graft device described in the Registration Statement and Prospectus has been successfully implanted in a human patient, and in full compliance with all applicable rules, regulations, protocols and procedures of the applicable jurisdiction and health care facility, including a post-surgical implant angiogram * (* ) days after such implant demonstrating the success of the implant, together with correspondence from the patient’s

attending physician attesting to the post-surgical health of the patient and the successful functioning of the Holly Graft device.

(n) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Representatives shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained.

If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination.

Section 6. Reimbursement of Representatives’ Expenses. If this Agreement is terminated by the Representatives pursuant to Section 5 or Section 10, or if the sale to the several Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, (unless such failure to perform or comply is due to the material default of any Underwriter), the Company agrees to reimburse the Representatives, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges.

Section 7. Effectiveness of this Agreement. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act.

Prior to such effectiveness, this Agreement may be terminated by any party by notice to each of the other parties hereto, and any such termination shall be without liability on the part of (a) the Company to the Underwriters, except that the Company shall be obligated to reimburse the expenses of the Representatives to the extent required by Sections 4 and 6 hereof, (b) of the Underwriters to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination.

Section 8. Indemnification.

(a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers, directors and employees, and each person, if any, who controls such Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, joint or several, as incurred, to which such Underwriter, its officers, directors and employees or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by such Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) through (iv) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence, bad faith or willful misconduct; and to reimburse such Underwriter, its officers, directors and employees and each such controlling person for any and all expenses (including the fees and disbursements of counsel for such Underwriter chosen by such Underwriter) as such expenses are reasonably incurred by such Underwriter, officer, director, employee, or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that (A) the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by such Underwriter expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and (B) with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of such Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling

such Underwriter, if copies of the Prospectus were timely delivered to such Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if a court of competent jurisdiction shall have determined by a final judgment that the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and (C) in the event that the Company reimburses any Underwriter, officer, director, employee, or controlling person for expenses under this Section 8(a) and it is finally determined that such parties were not entitled to received payments for expenses pursuant to this Section 8(a), such parties will promptly return all sums that had been so advanced pursuant hereto, together with simple interest, from the date of such final judicial determination, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by U.S. Bank National Association. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company may otherwise have.

(b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees to, severally but not jointly, indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, or the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by such Underwriter expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) in the table in the first paragraph under the caption “Underwriting” in the Prospectus, and (B) in the commissions and expenses data under

the caption “Underwriting” in the Prospectus. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have.

(c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party’s election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party.

(d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by

Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding.

Section 9. Contribution. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the respective Underwriter, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the respective Underwriter, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the respective Underwriter, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discount received by the respective Underwriter, in each case as set forth on the front cover page of the Prospectus bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company, on the one hand, and the respective Underwriter, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, on the one hand, or the respective Underwriter, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim.

The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9.

Notwithstanding the provisions of this Section 9, an Underwriter shall not be required to contribute any amount in excess of the underwriting commissions or discount received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each officer, director and employee of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the respective Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company.

Section 10. Termination of this Agreement. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company’s securities shall have been suspended or limited by the Commission or by the Nasdaq National Market or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any federal, New York or Minnesota authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States’ or international political, financial or economic conditions, as in the reasonable judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, storm, accident or other calamity of such character as in the reasonable judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 10 shall be without liability on the part of (a) the Company to the Underwriters, except that the Company shall be obligated to reimburse the expenses of

the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) the Underwriters to the Company, or (c) any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination.

Section 11. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase the Common Shares hereunder on either the First or any Second Closing Date and the aggregate number of shares of Common Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares of the Common Shares that the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements satisfactory to the Company for the purchase of such Common Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Common Shares with respect to which such default or defaults occur exceeds ten percent (10%) of the total number of shares of Common Shares that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 12 (provided that if such default occurs with respect to Common Shares after the First Closing Date, this Agreement will not terminate as to the Firm Common Shares or the Common Shares purchased prior to such termination). As used in this Underwriting Agreement, the term “Underwriter” includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default.

Section 12. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement.

Section 13. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows:

If to the Representatives:

Feltl & Company
225 South Sixth Street
Suite 4200
Minneapolis, MN 55402
Attention: John C. Feltl

And

Ladenburg Thalmann & Co. Inc.
590 Madison Avenue
New York, NY 10022
Attention: Robert Kropp

with copies to:

Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Facsimile: (612) 335-3207
Attention: Girard P. Miller

If to the Company:

CABG Medical, Inc.
14505 21^st Avenue North, Suite 212
Minneapolis, MN 55447
Facsimile: (763) 258-8008
Attention: Manny Villafana

with a copy to:

Fredrikson & Byron, P.A.
4000 Pillsbury Center
200 South Sixth Street
Minneapolis, MN 55402
Facsimile: (612) 492-7077
Attention: Robert K. Ranum

Any party hereto may change the address for receipt of communications by giving written notice to the others.

Section 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term “successors” shall not include any purchaser of the Common Shares from any of the Underwriters merely by reason of such purchase.

Section 15. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.

Section 16. Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MINNESOTA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.

Section 17. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing signed by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.

Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act.

The respective indemnities, contribution agreements, representations, warranties, covenants and other statements of the Company and the Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Underwriters, the officers, directors or employees of the Underwriters, any person controlling the Underwriters, the Company, the officers or employees of the Company, or any person controlling the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement.

Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters’ officers, directors and employees, any controlling persons referred to herein, the Company’s directors and the Company’s officers who sign the Registration Statement and

their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term “successors and assigns” shall not include a purchaser of any of the Common Shares from an Underwriter merely because of such purchase.

[SIGNATURE PAGES FOLLOW]

If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.


		Very truly yours,

		CABG MEDICAL, INC.

		By:

				Manny Villafana
				Chairman and Chief Executive Officer

The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. Acting on behalf of themselves and as the Representatives of the several Underwriters:

FELTL & COMPANY


By:

		John C. Feltl
		Director of Capital Markets

And

LADENBURG THALMANN & CO. INC.


By:

		Robert Kropp
		Director of Investment Banking

SCHEDULE 1


	Number of Firm
Underwriter	Common Shares To Be Purchased
Feltl & Company

Ladenburg Thalmann & Co. Inc.


TOTAL		5,500,000

EXHIBIT A

OPINION OF COUNSEL FOR THE COMPANY

A-1

EXHIBIT B

OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY

B-1

EXHIBIT C

OPINION OF REGULATORY COUNSEL FOR THE COMPANY

C-1

EXHIBIT D

, 2004

Feltl & Company
A Representative of the Several Underwriters
c/o Feltl & Company
225 South Sixth Street
Suite 4200
Minneapolis, MN 55402

And

Ladenburg Thalmann & Co. Inc.
A Representative of the Several Underwriters
590 Madison Avenue
New York, NY 10022

Re: CABG Medical, Inc. (the “Company”)

Ladies and Gentlemen:

The undersigned is or intends to become an owner of record or beneficially of certain shares of Common Stock of the Company (“Common Stock”) or securities convertible into or exchangeable or exercisable for Common Stock.

The undersigned is aware that the Company proposes to carry out a public offering of Common Stock (the “Offering”) for which you are to act as the Representatives of the several Underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering.

In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not (and will cause any spouse or minor child or immediate family member of the spouse or the undersigned living in the undersigned’s household to not), without your prior written consent (which consent may be withheld in your sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of

D-1

record or beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the undersigned (or such spouse or minor child or family member), or publicly announce an intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions.

With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering.

This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned.



Printed Name of Holder

By:

		Signature


Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity)

D-2

APPENDIX A

FORM OF UNDERWRITERS’ WARRANT

UNDERWRITERS’ WARRANT AGREEMENT

WARRANT AGREEMENT dated as of , 2004 between CABG Medical, Inc., a Minnesota corporation (the “Company”), and the Underwriters listed on Appendix 1 (hereinafter referred to as the “Underwriters”).

WITNESSETH:

WHEREAS, the Company proposes to issue to the Underwriters warrants (the “Warrants”) to purchase up to an aggregate of 550,000 (as such number may be adjusted from time to time pursuant to Article 8 of this Warrant Agreement) shares (the “Shares”) of common stock, no par value per share (the “Common Stock”), of the Company; and

WHEREAS, the Underwriters have agreed, pursuant to the underwriting agreement (the “Underwriting Agreement”) dated , 2004 between the Underwriters and the Company, to act as Underwriters in connection with the Company’s proposed public offering (the “Public Offering”) of 5,500,000 shares of Common Stock (the “Public Shares”) at an initial public offering price of $[ ] per Public Share; and

WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the Underwriters or to their designees who are officers or partners of the respective Underwriter (collectively, the “Designees”), in consideration for, and as part of the Underwriter’s compensation in connection with, the Underwriters acting as Underwriters pursuant to the Underwriting Agreement;

NOW, THEREFORE, in consideration of the premises, the payment by the Underwriters to the Company of the aggregate amount of fifty dollars ($50.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Grant. The Underwriters and/or the Designees are hereby granted the right to purchase, up to an aggregate of 550,000 fully-paid and non-assessable Shares at an initial exercise price, as more particularly described on Appendix 1 (subject to adjustment as provided in Article 6 hereof) of $[ ] per Share at any time from , 2005 until 5:00 P.M., Minneapolis, Minnesota time, on , 2009 (the “Underlying Share Warrant Term”). Except as provided in Article 13 hereof, the Shares are in all respects identical to the Public Shares being sold to the public pursuant to the terms and provisions of the Underwriting Agreement.

2. [reserved]

3. Exercise of Warrant.

3.1 Cash Exercise. The Warrants initially are exercisable at a price of $[_____] per Share purchased, payable in cash or by check to the order of the Company, or any combination thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant Certificate(s) with the annexed Form of Election to Purchase duly executed, together

with payment of the Exercise Price (as hereinafter defined) for the Shares, at the Company’s principal office in Minnesota (currently located at 14505 21^st Avenue North, Suite 212, Minneapolis, Minnesota 55447), the registered holder of a Warrant Certificate (“Holder” or “Holders”) shall be entitled to receive a certificate or certificates for the Shares so purchased. The purchase rights represented by the Warrant Certificate are exercisable at the option of the Holder hereof, in whole or in part. In the case of the purchase of less than all of the Shares purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares.

3.2 Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at the Holder’s option, exchange, in whole or in part, the Warrants represented by such Holder’s Warrant Certificate which are exercisable for the purchase of Shares, into the number of Shares determined in accordance with this Section 3.2 (a “Warrant Exchange”), by surrendering such Warrant Certificate at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder’s intent to effect such exchange, the number of Warrants to be so exchanged and the date on which the Holder requests that such Warrant Exchange occur (the “Notice of Exchange”). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the “Exchange Date”). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor representing the Warrants which were subject to the surrendered Warrant Certificate and not included in the Warrant Exchange, shall be issued as of the Exchange Date and delivered to the Holder within three (3) days following the Exchange Date. In connection with any Warrant Exchange, the Holder shall be entitled to subscribe for and acquire (i) the number of Shares (rounded to the next highest integer) which would, but for such Warrant Exchange, then be issuable pursuant to the provisions of Section 3.1 above upon the exercise of the Warrants specified by the Holder in its Notice of Exchange (the “Total Share Number”) less (ii) the number of Shares equal to the quotient obtained by dividing (a) the product of the Total Share Number and the existing Exercise Price per Share (as hereinafter defined) by (b) the Market Price (as hereinafter defined) of a Public Share on the day preceding the Warrant Exchange. “Market Price” at any date shall be deemed to be the last reported sale price, or, in case no such reported sales takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the NASDAQ National Market System, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the NASDAQ National Market System, the closing bid price as furnished by (i) the National Association of Securities Dealers, Inc. through NASDAQ or (ii) the OTC Bulletin Board or successor trading market.

4. Issuance of Certificates.

Upon the exercise of the Warrants, the issuance of certificates for the Shares purchased shall be made no later than three (3) business days thereafter without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided,

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however, that the Company shall not be required to pay any transfer tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

The certificates representing the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chief Executive Officer or President of the Company under its corporate seal (if any) reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer.

Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares purchased, (the “Warrant Securities”), shall bear a legend substantially similar to the following:

“The securities represented by this certificate and the other securities issuable upon exercise thereof have not been registered for purposes of public distribution under the Securities Act of 1933, as amended (the “Act”), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available.”

5. Restriction on Transfer of Warrants.

The Holder of a Warrant Certificate, by the Holder’s acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold during the Public Offering, or sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Warrants for a period of one (1) year from ______ [Effective Date], except to the Underwriters or the Designees, provided that any portion of the warrant so transferred shall remain subject to the above restriction for the remainder of the restriction period.

6. Price.

6.1 Initial and Adjusted Exercise Price. The initial exercise price of each Warrant shall be $[ ] per Share. The adjusted exercise price per Share shall be the prices which shall result from time to time from any and all adjustments of the initial exercise price per Share in accordance with the provisions of Article 8 hereof.

6.2 Exercise Price. The term “Exercise Price” herein shall mean the

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initial exercise price or the adjusted exercise price, depending upon the context.

7. Registration Rights.

7.1 Registration Under the Securities Act of 1933. None of the Warrants or the Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the “Act”).

7.2 Registrable Securities. As used herein the term “Registrable Security” means each of the Warrants, the Shares, and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for subsequent public distribution of such security under Rule 144(k) promulgated under the Act or otherwise, or (iii) it has ceased to be outstanding. The term “Registrable Securities” means any and/or all of the securities falling within the foregoing definition of a “Registrable Security.” In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of “Registrable Security” as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7.

7.3 Piggyback Registration. If, within seven (7) years following the effective date of the Public Offering, the Company proposes to prepare and file one or more post-effective amendments to the registration statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form) (for purposes of this Article 7, collectively, the “Registration Statement”), it will give written notice of its intention to do so by certified mail, return receipt requested (“Notice”), at least thirty (30) business days prior to the filing of each such Registration Statement, to all Holders of the Registrable Securities. Upon the written request of such a Holder (a “Requesting Holder”), made within twenty (20) business days after receipt by the Holder of the Notice, that the Company include any of the Requesting Holder’s Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register (“Piggyback Registration”), at the Company’s sole cost and expense and at no cost or expense to the Requesting Holders (except as provided in Section 7.5(b) hereof).

Notwithstanding the provisions of this Section 7.3, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.3 (irrespective of whether any written request for inclusion of Registrable Securities shall have already been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof.

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7.4 Demand Registration.

(a) At any time within five (5) years following the effective date of the Public Offering, any “Majority Holder” (as such term is defined in Section 7.4(c) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the “Demand Registration Request”), to have the Company prepare and file with the Securities and Exchange Commission (the “Commission”) on one occasion, at the sole expense of the Company (except as provided in Section 7.5(b) hereof), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder) in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the Holders thereof. The Company shall use its best efforts to cause the Registration Statement to become effective under the Act, so as to permit a public offering and sale of the Registrable Securities by the Holders thereof. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold or (ii) the date the Holders thereof receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Act, under Rule 144(k) promulgated under the Act or otherwise.

(b) The Company covenants and agrees to give written notice of any Demand Registration Request to all Holders of the Registrable Securities within ten (10) business days from the date of the Company’s receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities included within ten (10) days of their receipt of the Company’s notice.

(c) The term “Majority Holder” as used in Section 7.4 hereof shall mean any Holder or any combination of Holders of Registrable Securities, if included in such Holders’ Registrable Securities, that hold an aggregate number of shares of Common Stock (including Shares already issued, Shares issuable pursuant to the exercise of outstanding Warrants) as would constitute a majority of the aggregate number of shares of Common Stock outstanding (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) that are Registrable Securities.

7.5 Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows:

(a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in any event no later than twenty (20) days following receipt of any demand therefor, shall use its best efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each Holder of Registrable Securities such number of prospectuses as shall reasonably be requested.

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(b) The Company shall pay all costs, fees and expenses (other than underwriting fees, discounts and nonaccountable expense allowance applicable to the Registrable Securities and fees and expenses of counsel retained by the Holders of Registrable Securities) in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without limitation, the Company’s legal and accounting fees, printing expenses, and blue sky fees and expenses.

(c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in the Registration Statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the Holders of such securities.

(d) The Company shall indemnify any Holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Act and each person, if any, who controls such Holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters as set forth in Section 8 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 9 of the Underwriting Agreement.

(e) Any Holder of Registrable Securities to be sold pursuant to a registration statement, and such Holder’s successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holder, or such Holder’s successors or assigns, for specific inclusion in such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Underwriters have agreed to indemnify the Company as set forth in Section 8 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 9 of the Underwriting Agreement.

(f) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise the Warrants held by such Holder prior to the initial filing of any registration statement or the effectiveness thereof.

(g) If the Company shall fail to comply with the provisions of this Article 7, the Company shall, in addition to any other equitable or other relief available to the Holders of Registrable Securities, be liable for any or all incidental, special and consequential damages sustained by the Holders of Registrable Securities requesting registration of their Registrable Securities.

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(h) The Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any Registration Statement filed pursuant to Section 7.4 hereof, without the prior written consent of the Majority Holders, which consent shall not be unreasonably withheld.

(i) The Company shall promptly deliver copies of all correspondence between the Commission and the Company, its counsel or its auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement to each Holder of Registrable Securities included for registration in such Registration Statement pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such correspondence and memoranda and to the managing underwriter, if any, of the offering in connection with which such Holder’s Registrable Securities are being registered and shall permit each Holder of Registrable Securities and such underwriter to do such reasonable investigation, upon reasonable advance notice, with respect to information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder of Registrable Securities or underwriter shall reasonably request.

8. Adjustments of Exercise Price and Number of Securities. The following adjustments apply to the Exercise Price of the Warrants with respect to the Shares and the number of Shares purchasable upon exercise of the Warrants.

8.1 Computation of Adjusted Price. In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution, the Exercise Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing:

(a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior to such dividend or distribution, by

(b) the total number of shares of Common Stock outstanding immediately after such issuance or sale.

For the purposes of any computation to be made in accordance with the provisions of this Section 8.1, the Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution.

8.2 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall

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forthwith be proportionately decreased in the case of subdivision or increased in the case of combination.

8.3 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full number by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price.

8.4 Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of all or substantially all of the assets of the Company, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of the Shares immediately prior to any such events, at a price equal to the product of (x) the number of shares of Common Stock issuable upon exercise of the Holders’ Warrants and (y) the exercise prices for the Warrants in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants.

8.5 Determination of Outstanding Common Shares. The number of Common Shares at any one time outstanding shall include the aggregate number of shares issued and the aggregate number of shares issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities.

8.6 [reserved]

8.7 Dividends and Other Distributions with Respect to Outstanding Securities. In the event that the Company shall at any time prior to the exercise of all Warrants make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the Holder of Warrants who exercises its Warrants after the record date for the determination of those Holders of Common Stock entitled to such distribution of assets as a liquidating or partial liquidating dividend shall be entitled to receive for the Warrant Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith) which would have been payable to such Holder had he been the Holder of record of the Common Stock receivable upon exercise of his Warrant on the record date for the determination of those entitled to such distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 8.7.

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8.8 Subscription Rights for Shares of Common Stock or Other Securities. In the case that the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights, warrants or options to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of unexercised Warrants on the record date set by the Company or such affiliate in connection with such issuance of rights, warrants or options shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights, warrants or options that such Holders would have been entitled to receive had they been, on such record date, the holders of record of the number of whole shares of Common Stock then issuable upon exercise of their outstanding Warrants (assuming for purposes of this Section 8.8, that the exercise of the Warrants is permissible immediately upon issuance).

9. Exchange and Replacement of Warrant Certificates.

Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender.

Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant Certificate, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof.

10. Elimination of Fractional Interests.

The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares.

11. Reservation and Listing of Securities.

The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on the NASDAQ National Market, or any successor trading market on which the Common Stock may be listed and/or quoted.

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12. Notices to Warrant Holders.

Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur:

(a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or

(b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or

(c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or

(d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or

(e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company;

then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale.

-10-

13. [reserved]

14. Notices.

All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested:

(a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or

(b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders.

15. Supplements and Amendments.

The Company and the Representative (as defined in the Underwriting Agreement) may from time to time supplement or amend this Agreement without the approval of any Holders of the Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Representative may deem necessary or desirable and which the Company and the Representative deem not to adversely affect the interests of the Holders of Warrant Certificates.

16. Successors.

All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder.

17. Termination.

This Agreement shall terminate at the close of business on , [ ]. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Warrants have been exercised and all Warrant Securities have been resold to the public; provided, however, that the provisions of Section 7 shall survive any termination pursuant to this Section 17.

18. Governing Law.

This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Minnesota and for all purposes shall be construed in accordance with the laws of said State, other than its conflicts of laws provisions.

19. Benefits of This Agreement.

Nothing in this Agreement shall be construed to give to any person or corporation

-11-

other than the Company and the Underwriter and any other registered Holder or Holders of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other Holder or Holders of the Warrant Certificates or Warrant Securities.

20. Counterparts.

This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument.

-12-

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.


		CABG MEDICAL, INC.

		By:

				Name:
				Title:

		FELTL AND COMPANY

		By:

				John C. Feltl
				Director of Capital Markets

		AND

		LADENBURG THALMANN & CO. INC.

		By:

				Robert Kropp
				Director of Investment Banking

		Acting on behalf of itself and as the Representatives of the several Underwriters

-13-

APPENDIX 1


Underwriters:		Shares:


Feltl & Company
Ladenburg Thalmann & Co. Inc.

Total :			550,000

EXHIBIT A

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.

THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.

EXERCISABLE ON OR BEFORE

5:00 P.M., MINNEAPOLIS TIME, , 2009


No. W-		Warrants

A-1

WARRANT CERTIFICATE

This Warrant Certificate certifies that or his, her or its registered assigns, is the registered holder of Warrants to purchase, at any time from , 2005 until 5:00 P.M. Minneapolis, Minnesota time on , 2009 (“Expiration Date”), up to fully-paid and non-assessable shares (the “Shares”) of the common stock, no par value per share (the “Common Stock”), of CABG Medical, Inc., a Minnesota corporation (the “Company”), at an initial exercise price, subject to adjustment in certain events (the “Exercise Price”), of $ per Share, upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of , 2004 between the Company and Feltl & Company and Ladenburg Thalmann & Co. Inc. (the “Warrant Agreement”). Payment of the Exercise Price may be made in cash or by check payable to the order of the Company, or any combination thereof.

No Warrant may be exercised after 5:00 P.M., Minneapolis, Minnesota time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void.

The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words “holders” or “holder” means the registered holders or registered holder) of the Warrants.

The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company’s securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement.

Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith.

Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants.

The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing

A-2

hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary.

All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement.

IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed.


Dated: ____, 2004	CABG MEDICAL, INC.

	By:

		Name:
		Title:

A-3

[FORM OF ELECTION TO PURCHASE]

The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase Shares of Common Stock and herewith tenders in payment for such securities, cash or check payable to the order of CABG Medical, Inc. in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of , whose address is , and that such Certificate be delivered to , whose address is .


Dated:				Signature:

				(Signature must conform in all respects to the name of holder as specified on the face of the Warrant Certificate or with the name of the assignee appearing in the assignment form, if any.)


				(Insert Social Security or Tax Indentification Number of Holder)

[FORM OF ASSIGNMENT]

(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)

FOR VALUE RECEIVED, hereby sells, assigns and transfers unto

(Please print name, address and social security or tax identification number of assignee)

this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint , Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution.


Dated:				Signature:

				(Signature must conform in all respects to the name of holder as specified on the face of the Warrant Certificate or with the name of the assignee appearing in the assignment form, if any.)


				(Insert Social Security or Tax Identification Number of Holder)

[CASHLESS EXERCISE FORM]

(To be executed upon exercise of Warrant
pursuant to Section 3.2)

To: CABG MEDICAL, INC.

The undersigned hereby irrevocably elects a cashless exercise of the right to purchase represented by the attached Warrant Certificate for, and to purchase thereunder, Shares, as provided for in Section 3.2 therein.

Please issue a certificate or certificates for such Shares in the name of:

and deliver such certificate or certificates to (if different from above):


Dated:				Signature





				(Insert Social Security or Tax Identification Number of Holder)

NOTE: The above signature should correspond exactly with the name on the first page of this Warrant Certificate or with the name of the assignee appearing in the assignment form, if any.

And if said number of shares shall not be all the shares purchasable under the attached Warrant Certificate, a new Warrant Certificate is to be issued in the name of the undersigned for the remaining balance of the shares purchasable thereunder.

EX-23.1 3 c86262a3exv23w1.htm CONSENT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM exv23w1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
CABG Medical, Inc.:

We consent to the use of our report dated June 4, 2004, with respect to the balance sheets of CABG Medical, Inc. as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003 and for the period from December 3, 1999 (date of inception) to December 31, 2003, included herein by reference and to the reference to our firm under the heading “Experts” in the prospectus.

/s/ KPMG LLP

Minneapolis, Minnesota
November 8, 2004

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M!Q%+^E86/Z>O^C;,^M;S^@PU6K./EXY?6IG[';D/""4E'AX/#P,#`2$A`SV5&NE MO(:''@,F*A`#H:(E5!PR0`0$_VDE)"@H=G75U7;8V=A_W-W;G MZ.36==OI[N_P\?+S]/7V]_CY^OO\_?[NXM8)%(?MSA\\=:15@P+E@`8;IY(Y M8/@*%ZX#@@850D1@D2(%-P)O'IMI#(`P06(0(`P8>*A!`<2)6BD`>+A:9T[6*41W,H5W+]YU*Z- M^TJVK-FS:-.J7.A@D@PJ)JW>H=1V^M2TYA&*-*U_.O+GSY\W?PF5'<&Y"%'89 M(2&HLHH$!B#,"7@`H)O$$9?0%D MYHDO#\@@2#+_S1(+>=Z5L)2`A1F"VX`$CJ*::4[*T.1K3A9R@`(:F/"2EJ*L MX@`)X4&AU8H#>3C6<^VDJ.>>?/;I9SITKM,B7=*$@1<)%D#_\(!GX8U''IDZ M(M+C#2"!Q$`"(+AP1@5'XH>?(96ARK>^>>QR":KK%E892/LLX)F@]4W89%@K048 M+"H(*S9:A,IK`G(4@H\^4AH``SLDP,`#G=3G"7X#1H3C8/L!V%J63*[)I"^7 M^0(K*:FA1N:!][[&P`@02*&E*;6T$HV&U4`<5UC0=N@5GGDNJ_'&''?L#5;! M45RQ0`I%6U`WU%A+P@\6+.JDH[=@!*XA0*`W+KD*!'`##!>LZY*2GPJH&L%= MXLOD)HA4H31EE.W+IGX`HY)3@6/^_Z"!`L4H:%I?)#`D<


(1)	Estimated solely for purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)	Previously paid in connection with the original filing of the registration statement.


	•	Larger Diameter: Our graft consists of a 6 mm diameter conduit compared to the typical 2-3 mm harvested conduit. The increase in size allows for increased flow.

	•	Healthier Conduits: The Holly Graft System provides surgeons with a plaque free, consistent and reliable source of conduit for grafts, which are free from disease. Patients suffering from CHD commonly have a build up of fatty deposits inside the arterial walls, or atherosclerosis, or other conditions causing marginal quality vessels (particularly those individuals with obese and diabetic conditions) that immediately threaten the patency of harvested SVGs and other vessels.

	•	Flow Limiter: The Holly Graft System utilizes a flow limiter which maintains pressure within the graft and creates pressure to feed the target coronary artery through the system’s vessel connectors.

	•	Drug Combinations: The vessel connectors used in the Holly Graft System are coated with the same drug combination that is used on certain prominent drug-eluting stents. In our animal trials, these drug combinations prevented the buildup of tissue proximate to the grafting site, which can result in post-operative obstructions or closures of vessels, or occlusions, in the same manner in which the combination prevents the recurrence of a blockage, or restenosis, in stenting procedures. Accordingly, we believe that these drug combinations will limit the risk of an interruption of the Holly Graft System. Obtaining a license to such a drug combination is critical to the commercialization of the Holly Graft System.


	•	Approved Materials: Materials used in the Holly Graft System and the drug combination we currently utilize have been approved by the FDA for other applications, potentially easing the safety testing the FDA deems necessary in the approval process. For instance, our expanded polytetrafluoroethylene, or ePTFE, graft material is commonly used as a peripheral vascular graft conduit and the titanium used in our vessel connector is approved by the FDA as an implantable alloy. Certain components of our drug combination are currently used in the coating on a stent marketed by Boston Scientific Corporation. Drug coated stents have been rapidly adopted by the medical community. Obtaining a license to such a drug combination is critical to the commercialization of the Holly Graft System.



	•	Physician Preference: Assuming our clinical studies prove that the Holly Graft System is as effective as SVGs, we believe many cardiac surgeons will readily accept and utilize the Holly Graft System in order to reduce operating time and avoid the patient discomfort, scarring and frequent complications associated with the surgery to remove the saphenous vein. Although endoscopic harvesting procedures can reduce the complication rate associated with saphenous vein harvesting, the training required to learn the technique is significant and proficiency is generally not obtained until a physician performs the procedure on numerous patients. To the best of our knowledge, no statistics on the usage of endoscopic procedures are available, but due to the above-mentioned factors, we believe that the preponderance of saphenous vein harvesting is performed by the traditional “open procedure” and that the majority of endoscopic procedures are performed at large heart centers that perform a significant number of bypass procedures each year. Additionally, endoscopic procedures still (i) require a second surgery; (ii) result in scarring; and (iii) only reduce the incidence of, but do not eliminate complications associated with saphenous vein harvesting.


	•	Ease of Use: We believe that the procedure involving the Holly Graft System is relatively easy to complete as compared to the SVG procedure. In addition, we anticipate that physician training for surgery employing our system will be relatively simple. The Holly Graft System is equally straight forward to use in both on-pump and beating-heart surgery (where no heart-lung machine is employed).

	•	Physician and Hospital Economics: Bypass procedures involving SVGs consist of a delicate surgery requiring 12-20 minutes per connection of a harvested graft to an affected artery in the heart, or anastomosis. While no human procedures have been performed to date, a bypass procedure utilizing the Holly Graft System is expected to require 2-3 minutes per vessel connecter. As a result, we believe that physicians and hospitals utilizing the Holly Graft System could perform additional bypass procedures.

	•	Patient Preference: If our human clinical studies demonstrate graft effectiveness at least comparable to SVGs, we believe patients may request that their doctors use the Holly Graft System rather than harvest vessels from other parts of their body. Aside from cosmetic considerations, patients generally report that the pain and discomfort from the graft site can be considerably worse than that of the primary surgery.


(1)	As adjusted amounts give effect to the issuance and sale of shares of our common stock at an assumed initial public offering price of $5.50 per share, the mid-point of our filing range, and the receipt and application of the estimated net proceeds of approximately $26.7 million from this offering, after deducting the underwriting discount and estimated offering expenses payable by us. See “Use of Proceeds” and “Capitalization.”

(2)	Includes the impact of 50,000 options that vest upon consummation of the offering. Such options will have no effect on total stockholders’ equity but, assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), upon vesting of these options common stock would increase by $24,000, deferred compensation would decrease by $118,000 and we would be required to record a total expense of $142,000.

(3)	Includes the impact of 100,000 options that vest on the completion of the first implantation of the Holly Graft System in the United States. Assuming the market value of the common stock is equal to $5.50 per share (the mid-point of our filing range), we would be required to increase deferred compensation to $285,000, which would be equal to the intrinsic value of the options.


	•	Successful completion of preclinical and clinical trials;

	•	Receipt of marketing approvals from foreign health regulatory authorities and the FDA;

	•	Establishing commercial manufacturing arrangements with third-party manufacturers;

	•	Launching commercial sales of the Holly Graft System at prices that exceed our costs;

	•	Acceptance of the Holly Graft System in the medical community and with third-party payors;


	•	Protection from competition provided by acquiring and maintaining patent protection on our technology; and

	•	Obtaining, on acceptable terms, licenses or other rights to key technologies incorporated in the Holly Graft System.


	•	The scope (and associated costs) and results of our pre-clinical and clinical trials;

	•	The timing of, and the costs involved in, obtaining regulatory approvals;

	•	The cost of manufacturing activities;

	•	The cost of commercialization activities, including product marketing and building a domestic direct sales force and an international distribution network;

	•	The costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;

	•	The costs involved in defending against any patent infringement actions brought against us by third parties;

	•	Our ability to establish and maintain additional collaborative arrangements;

	•	Advancement of other product candidates by us into development; and

	•	Potential acquisition or in-licensing of other products or technologies.


	•	Our partners may develop or sell technologies or components that are competitive with our Holly Graft System;

	•	Our collaborators may preclude us from entering into additional future arrangements;

	•	Our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;

	•	Some of our agreements may terminate prematurely due to disagreements between us and our partners;

	•	Our partners may not devote sufficient resources to the development and sale of our products;

	•	Our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;

	•	Our collaborations may be unsuccessful; or

	•	We may not be able to negotiate future collaborative agreements on acceptable terms.


	•	Results of our clinical trials or those of our competitors;

	•	The regulatory status of the Holly Graft System and our other potential products;

	•	Failure of any of the Holly Graft System, if approved, to achieve commercial success;

	•	Developments concerning our collaborators;

	•	Regulatory developments in the United States and foreign countries;

	•	Developments or disputes concerning patents or other proprietary rights;

	•	Our ability to manufacture products to commercial standards;

	•	Public concern over our medical devices;

	•	Litigation;

	•	Problems associated with products that use similar drugs, components or materials as the Holly Graft System;

	•	The strength of our balance sheet;

	•	The departure of key personnel;

	•	Future sales of our common stock;

	•	Variations in our financial results or those of companies that are perceived to be similar to us;

	•	Changes in the structure of healthcare payment systems;

	•	Investors’ perceptions of us;

	•	General economic, industry and market conditions; or

	•	Our ability to obtain licenses to key technologies such as drug coating technologies.


	•	20% to fund our clinical trials;

	•	15% to fund our investigation of drug combination and coating technologies;

	•	35% to develop our sales and marketing capabilities, promote pre- and post-commercialization physician education and awareness, and create product marketing programs, an international distribution network and a domestic sales team; and

	•	30% for general corporate purposes, including working capital needs, facilities expansion and potential acquisitions.


(1)	If the underwriters exercise their over-allotment option in full, our existing stockholders would own 62.0% and our new investors would own 38.0% of the total number of shares of our common stock outstanding after this offering.

(2)	The foregoing discussion and tables are based upon the number of shares issued and outstanding on October 2, 2004 and assume no exercise of options outstanding as of that date. As of that date, there were 1,297,500 shares of our common stock issuable upon exercise of options outstanding at a weighted average exercise price of $1.45 per share. Assuming the exercise in full of all our outstanding options, pro forma net tangible book value at October 2, 2004 would be $1.83 per share, representing dilution per share to new investors of $3.67 or an immediate decrease in pro forma net tangible book value of $0.03 per share. Also, if all options outstanding are exercised in full new investors would have contributed 75.7% of the aggregate capital but would own only 32.1% of our common stock outstanding after the offering and exercise of all outstanding options.

(3)	Excludes 550,000 shares of common stock issuable upon exercise of warrants issued to the underwriters in connection with this offering that will remain outstanding after this offering at an exercise price equal to % of the initial public offering price. Also excludes a total of 150,000 shares of restricted common stock to be issued immediately following this offering to the following individuals who have agreed to become directors of the company immediately following this offering: A. Jay Graf, Robert E. Munzenrider, and Arch C. Smith. See the full discussion regarding our Board of Directors in the “Management” section of this document.



	•	$150,000 increase due to the addition of John L. Babitt as our president in August 2003, as well as the addition of a part time administrative employee and an increase in salary for one existing employee


	•	$71,000 increase in compensation for our chairman and chief executive officer; and

	•	$54,000 increase related to audit fees for the company


	•	Pain and Discomfort;

	•	Infection;

	•	Edema; and

	•	Difficulty in regaining mobility in an acceptable period of time.


	•	Aortic Anastomosis. The surgeon sutures the ePTFE to the aorta, which provides a high flow source of blood for the target coronary artery.

	•	Venous Anastomosis. The surgeon sutures the ePTFE with a flow limiting restricter to the venus flow of the heart/circulatory system, typically the superior vena cava.

	•	Vessel Connectors Attached. The vessel connector is assembled on both sides of the ePTFE to provide a continuous flow through the entire graft. Note that multiple vessel connectors can be attached to the same graft, thus enabling the surgeon to treat multiple target vessels with attachments to the base Holly Graft System.

	•	Arteriotomy. A slight incision is made in the target vessel and the vessel connector is inserted into the artery. Two sutures are placed around the vessel connector to secure the device on the heart. The Holly Graft System has been designed to allow surgeons to implant the devices in both on-pump and off-pump procedures.


	•	Coordinate Clinical Studies to Maximize Commercial Potential of the Holly Graft System. We are devoting most of our current efforts to initiating the clinical trial and obtaining regulatory clearances for the Holly Graft System. We expect the first human implant of the Holly Graft System to take place in Brisbane, Australia, in the fourth quarter of 2004. We expect to initiate our human clinical trials in Europe during the second quarter of 2005, and the United States during 2005.

	•	Establish Cardiac Surgery Sales and Marketing Capabilities. We are in the process of establishing our international sales and marketing distribution network. Our management team has successfully implemented similar strategies for innovative cardiac surgery products, such as certain types of pacemakers and heart valves, throughout the world.

	•	Educate Physicians and Patients about our Holly Graft System Procedure. We believe education of physicians and patients about technology alternatives to traditional SVG and our procedure will be critical to our success. We intend to develop physician training and education programs, which will emphasize the clinical efficacy and ease of use of our Holly Graft System. We also intend to increase our use of patient-oriented marketing materials for use by physicians to inform patients of the availability and potential benefits of our Holly Graft System.

	•	Focus on New Product Technology and Product Enhancements. We intend to focus on new products and technologies, as well as on improvements to our Holly Graft System. We believe that our expertise in the design and development of technologies for minimally invasive, off pump technologies will continue to evolve and represent an opportunity for us.


	•	Compound A — We have entered into a supply agreement with a large pharmaceutical company for the evaluation of a FDA-approved oncology drug for use as the active component to mitigate the formation of new tissue on or in the Holly Graft System.

	•	Compound B — We have performed in vitro evaluation of an unapproved drug for use as the active component to mitigate the formation of new tissue growth on/in the Holly Graft System. We expect to begin porcine studies using Compound B by the fourth quarter of 2004.


(1)	Member of Compensation Committee

(2)	Member of Governance/ Nominating Committee

(3)	Has agreed to become a Director immediately upon completion of this offering

(4)	Member of Audit Committee


	•	The integrity of our financial statements;

	•	Our independent registered public accounting firm’s qualifications and independence; and

	•	The performance of our independent auditors.


	•	Reviewing and recommending approval of compensation of our executive officers;

	•	Administering our stock incentive and employee stock purchase plans; and

	•	Reviewing and making recommendations to our Board with respect to incentive compensation and equity plans.


	•	Identify and recommend nominees for election to our Board of Directors;

	•	Develop and recommend to our Board our corporate governance principles; and

	•	Oversee the evaluation of our Board and management.


	•	Our research and development programs;

	•	The design and implementation of our clinical trials;

	•	Market opportunities from a clinical perspective;

	•	New technologies relevant to our research and development programs; and

	•	Scientific and technical issues relevant to our business.


(2)	Exercise price is equal to the fair market value on the date of grant.

(3)	All options were granted on September 1, 2003. An option for 100,000 shares is exercisable to the extent of 25% of the shares on each of the first four anniversary dates of the date of grant; an option for 50,000 shares is exercisable upon successful completion of $15,000,000 in equity placement, or upon a corporate merger or change of control, or on September 1, 2012; an option for 25,000 shares is exercisable upon the first human implant or on September 1, 2006; and an option for 100,000 shares is exercisable upon the first clinical implant under a United States IDE or on September 1, 2012.


(1)	There was no public trading market for our common stock as of September 2, 2004. Accordingly, as permitted by the rules of the Securities and Exchange Commission, we have calculated the value of unexercised in-the-money options assuming an initial public offering price of $5.50 per share, the mid-point of our filing range, less the aggregate exercise price.


	•	Each person known to us to be the beneficial owner of more than 5% of our common stock;

	•	Each named executive officer;

	•	Each of our directors; and

	•	All of our executive officers and directors as a group.


(1)	Includes 75,000 shares that may be acquired upon exercise of currently exercisable options immediately following this offering.


	•	Beginning on the effective date of this prospectus, only the shares sold in the offering will be immediately available for sale in the public market; and

	•	Beginning 180 days after the effective date, approximately 3,355,293 shares of our restricted shares will be eligible for sale subject to the volume, manner of sale and other limitations under Rule 144.


	•	Beginning 365 days after the effective date, approximately 6,967,682 shares of our restricted shares will be eligible for sale subject to the volume, manner of sale and other limitations under Rule 144.

	•	Beginning 180 days after the effective date, approximately 2,493,000 shares of our restricted shares will be eligible for sale as unrestricted shares under Rule 144(k).


	•	One percent of the number of shares of common stock then outstanding, which will equal approximately 158,229 shares immediately after the offering; or

	•	The average weekly trading volume of the common stock during the four calendar weeks preceding the sale.


	•	Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short